Winning in Todays Hottest Marketplace_6 doc

A Trader’s Toolbox The Nofri Congestion Phase Method This simple but useful idea was presented by Eugene Nofri in Success in Commodities (Success Publishing, 1975). It is out of print but sometimes available on www.eBay.com or www.abebooks.com. Nofri was a floor trader in the corn market, but like most technical trading ideas this one is applicable to FOREX. There are 32 total formations, but the simplest one is to watch for two trading units when price goes up or down followed by two trading units when prices go down or up but remain inside the range formed by the first two units. The prediction is that the fifth price unit will be in the direction of the first two units (see Figure 12.10). This can be used as an entry signal or as a short-term trading method. Pugh Swing Chart Formations This is a simple but effective charting method. The formations were identified by Burton Pugh, a famous grain trader of the 1930s and 1940s. There are only four basic chart formations: Bull, Bear, Inside, and Outside. Highs and lows are always referenced to the previous data unit. (See Figure 12.11.) The four types 149 FIGURE 12.9 Return Setup—Matrix and Swing Source: TradeviewForex www.tradeviewforex.com and www.metaquotes.net Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 149 THE TOOLS OF THE TRADE 150 FIGURE 12.10 Basic Nofri Formation FIGURE 12.11 Pugh Chart Formations Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 150 A Trader’s Toolbox cover every possible price action over a set time frame. Combinations of Pugh formations create not only all the classical chart patterns but interesting and unique ones as well. A Pugh formation is always in reference to the preceding formation’s high and low. A. Bull Formation Higher high and higher low from preceding formation B. Bear Formation Lower low and lower high from preceding formation C. Outside Formation Higher high and lower low from preceding formation D. Inside Formation Lower high and higher low from preceding formation Trends tend to be series of Bull Formations (uptrend) and Bear Formations (downtrend). Consolidations tend to be combinations of Inside and Outside formations. The famous Head and Shoulders Top and Bottom is actually two sequen- tial Bull (or Bear) Formations followed by a Bear (or Bull) Formation. In fact all conventional bar chart formations shown in Chapter 11, “Technical Analysis,” can be reduced to a Pugh series. I keep a running notation of Pugh formations and look for patterns in the series. You may use 1, 2, 3, 4 for the four formations. I use “1” for a Bull, “0” for a Bear, “11” for an Outside, and “00” for an Inside. A vertical line “|” is used to separate them. You might also use brackets “[ ].” A notation might look like this: 1|10|10|00|11|1|01|10 Use “bathtub analysis” described in Chapter 18, “Improving Your Trading Skills,” to study charts using Pugh formations and series—and to find new ones, as well. A Moving Average and Oscillator Battery A battery is a combination of indicators. When the indicators in a battery are combined to generate buy and sell trade signals via a set of rules, it is referred to as an expert advisor. A battery or an expert advisor could be used as a primary trading method or as a check on the primary method. All trading platforms 151 Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 151 THE TOOLS OF THE TRADE 152 offer moving averages and oscillators. See Chapter 11, “Technical Analysis,” for details on moving averages and oscillators. A moving average typically works when a market is trending in one direc- tion or another. An oscillator is most effective when a market is moving sideways. Look for points where: • A market is above the moving average line but the oscillator is falling sharply or below the zero line. This can indicate that a market is still in an uptrend but in a buying range because it has lost some downward velocity, at least temporarily. • A market is below the moving average line but the oscillator is rising sharply or above the zero line. This may indicate that a market is still in a downtrend but in a selling range because it has lost some of the down- ward velocity, at least temporarily. (See Figure 12.12.) TIP: Remember, trends and trading ranges are relative to the price scale you are using. A trend on an hourly chart is probably made up of a number of five-minute mini-trends and trading areas. Use scales for your moving averages FIGURE 12.12 A Simple Indicator Battery Source: TradeviewForex, www.tradeviewforex.com Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 152 A Trader’s Toolbox and oscillators in harmony with the scale of the price chart you are watching. Do not use a 10-day moving average on a 10-minute chart; you will see essen- tially nothing but a straight line. The smaller the parameters you pick the more signals you will generate. The trade-off is this: You will get in earlier on good trades but you will also get in on more bad ones. More sophisticated tools attempt to filter out at least some of the bad trades with additional indicators or trading rules. It is possible to computerize and automate an indicator battery with a set of rules determining when they generate a buy or sell signal. Most of the plat- forms mentioned in Chapter 14, “Retail FX Platforms,” have this capability. Such programs are called Expert Advisors or EAs. Contrary Opinion At the old Peavey commodity office, around 1975, I befriended a trader who successfully traded using nothing but a Moving Average-Oscillator tool in con- junction with contrary opinion. Contrary opinion states that if a large majority of traders thinks a market will rise, it will fall. If a large majority thinks it will fall, it will rise. The reasoning is that if everyone thinks a market will go up, they have already bought, and there is no more buying power to maintain the trend. R. Earl Hadady wrote a book on contrary opinion. Again, it was for the futures markets, but it would be a good read for any FOREX trader. Take a look at Contrary Opinion (Hadady Publications, 1983). Contrary opinion theory, while well developed and quantified in futures, is less so in FOREX. Jay Meisler’s www.global-view.com does a weekly trader poll. Archer’s www.goodmanworks.com will soon offer a FOREX contrary opinion tool. More on this subject in the section “Going Against the Crowd” in Chapter 18, “Improving Your Trading Skills.” Trolling the major FOREX forums once a week will give you a good idea of trader sentiment on the major currency pairs. Volume and Open Interest These are two exceptionally useful technical analysis tools. Although available to the futures trader, they are not currently available to the FOREX trader. Without a central clearinghouse it is impossible to collect this information directly although it may be calculated indirectly by reverse-engineering from other data and statistics. 153 Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 153 THE TOOLS OF THE TRADE 154 Heuristics Every chess player worth his salt uses a heuristic with every turn to move. A heuristic is typically a set of ordered questions that must be answered before making a move. A heuristic can be simple or complex, resulting in a critical path flow chart. The new FOREX trader would be advised to develop a simple heuristic for every contemplated trade. The more involved your trading method, the longer will be your heuristic. I recommend simplicity and clarity in all aspects of trading. Your final heuristic should include both money management and psychol- ogy parameters. For the previously mentioned KIS trading program a bare-bones trading method heuristic might look like this: • Is there a GSCS formation worth considering? • If yes, which one? • What are the Pugh formations and series forecast? • Is there a Nofri formation? • Do all of these occur in the same time and price zone? • Does the Moving Average-Oscillator battery confirm the trade or antic- ipated price direction? Begin with your primary tool and work through the others. Optimally each tool will identify a trade or potential trade at the same price and time level. TIP: You want to go from general to specific. Find “something interesting” on a chart then drill down with your toolset and see how well it is qualified to be a trade candidate. The heuristic to find a trade candidate should ideally be a subroutine in your overall trading heuristics. Be patient; there are many opportunities and it pays to wait for top-notch trading candidates. It is far better to under trade and miss a winner here and there than to over trade and accumulate losers. Summary “Technical analysis is a sea in which a gnat may drink and an elephant may bathe” to paraphrase an old chess proverb. No matter how involved your trading method is, remember the markets can only go up, down, or sideways. And side- ways does not count unless you are trading options. Complications do not make winners—being correct about the trend does. Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 154 A Trader’s Toolbox For a more comprehensive discussion of developing both a toolbox and a trading program, see Getting Started in Forex Trading Strategies (John Wiley & Sons, 2007) by Michael D. Archer. There are many worthy books on technical analysis. Enough, I am sure, to fill a small library. See Appendix F, “Resources,” for some books I have found of value. Of the three components to trading, trading techniques get the most pub- licity—perhaps because they are easier to communicate. Traders have hundreds of tools to trade although most are variations of a few general types. The com- position of toolboxes also varies enormously from trader to trader. But almost all successful traders share the same psychological attributes and basic money- management rules. 155 Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 155 Chapter 12_[141-156].qxd 2/24/10 10:12 PM Page 156 13 The FOREX Marketplace T he rapid expansion of retail FOREX trading has spawned a large online marketplace of products and services. Sorting through this vast labyrinth of information is a daunting task; services come and go rapidly, changes and upgrades are frequent, and the sheer volume is constantly increasing. Most of the material can be divided into these categories: • Portals and forums • Broker-Dealer Reviews • Charting and technical services • FOREX education • News and calendars • Live data and APIs • Historical data • System development tools • FOREX managed accounts • Advisory services • Online reference guides • Spread and binary betting • Periodicals—in print and online • Books Broker-dealers partner with third-party vendors though not as often as at one time. More and more brokers are providing a full suite of services under their own name and/or in their own trading platform. The exception is the 157 Chapter Chapter 13_[157-178].qxd 2/24/10 10:12 PM Page 157 THE TOOLS OF THE TRADE 158 growth in the number of brokers offering one of the primary third-party trading platforms—typically integrated with the broker’s data feed and order process. See Chapter 14, “Retail FX Platforms,” for more on this development. The selection and reviews in this chapter are intended as a sampler of what is avail- able. The inclusion of a web site should not be considered a recommendation of it, and the exclusion of another should not be considered disapproval. Space is limited. My editor works on a one-martini-lunch budget, and I am reminded of it constantly. Reviews of all the services now offered would require a complete book—a large one. I have generally omitted categories not pertinent to begin- ners whose charter is to be self-directed traders, such as signal services, so-called Expert Advisors, and automated order-entry tools. The emphasis is on web sites with content for traders who intend to do their own thing, although we have included a section on money management for those who wish to explore the option of having a professional trader work currency markets for them. I have endeavored to exclude web sites with annoying pop-ups, but always beware; a reliable pop-up blocker is recommended when cruising the Internet. Many of these web sites have advertisements; some of them are quite obtrusive and distractive. Welcome to Capitalism 101. TIP: The web sites in Appendix F, “Resources,” are intended to offer the new trader a self-guided tour of the FOREX landscape. Organizing Your Bookmarks There are several good programs for organizing your web site links, all more robust than the native Favorites in Internet Explorer. Bookmark Buddy, www.bookmarkbuddy.net Most FOREX web sites offer content on more than one of the subjects listed earlier. I have found Bookmark Buddy to be superior for cross-referencing this infor- mation with its Category/Sub-Category/Bookmark arrangement. LinkStash, www.rosecitysoftware.com A new flavor, the social book LinkStash, http://www.xrayz.co.uk/linkstash/ Very customizable, cross-platform compatible. A new flavor, the social bookmark, assumes that someone else can surf the Web better than you, a thousand surfers are better than one, and that somehow they know exactly what you are seeking. www.del-icio-us.com is just one of a dozen of them now. Portals and Forums These sites offer link lists (directories) as well as FOREX services, products, learning articles, and tools. Most sites also provide reviews of broker-dealers. Chapter 13_[157-178].qxd 2/24/10 10:12 PM Page 158 [...]... offering integrates TradeStation with Oanda www.esignal.com www.dukascopy.com; www.cqg.com Here, also, the integrated trading platforms now offer extensive historical data as well as back-testing and simulated trading capabilities System Development Tools Somewhere over the rainbow is the perfect trading system; I hope you find it! Some of these systems are also integrated trading platforms, reviewed in. .. example, trading a mini-account with $1,000 A significant issue is how your charts will integrate into your trading platform If you are using a live chart service, the data stream may be different from the data stream on which you enter orders with your broker-dealer It is best if you can integrate your charting service into your trading platform or at least your broker-dealer’s data stream In Chapter... Calendar Source: Global Viewpoint, Inc., www.global-view.com Do not get involved with this unless you are an experienced programmer Integrating data I/Os and caching algorithms are not for the squeamish The integrated trading platforms in Chapter 14, “Retail FX Platforms,” have gone a long way toward making this particular process obsolete www.gaincapital.com www.mbtrading.com The FOREX Marketplace 167... spent time on the Internet realizes, there is enormous cross-pollination of links If you find one or two good directories or link lists on a subject, they will lead you to many others The key is keeping everything organized so you are not constantly backtracking or cruising down dead-end cyber alleys Forum Dos and Don’ts Do carefully read the forum rules before subscribing Read your posting over once or... diligence before offering a new service His current program is based on the technical analysis work of Joe DiNapoli Perhaps your accountant will 164 THE TOOLS OF THE TRADE approve expenses for a trip to Hawaii for one of his excellent seminars Aloha! www.FOREXtradingandeducation.com Tutorials, coaching, and mentoring www.FOREXtrainingworks.com The author offers instruction on the Goodman trading methods on... technical indicators and methods is weaker than TradeStation’s EasyLanguage The web site is difficult to follow, and we found sales support poor It is also one of the independent trading platforms reviewed in Chapter 14, “Retail FX Platforms.” 162 FIGURE 13.3 The FXTrek Charts Source: Intellicharts, Inc., www.FXtrek.com The FOREX Marketplace 163 www.4xcharts.com A division of Trading Intl, www.tradingintl... postpone the programming headaches of an API Most charting and testing platforms also offer historical data A strong correlation with your broker’s data feed is not as important for systems testing—if you use a sample including a wide range of market environments www.disktrading.com Clean data, price is right, and customer service is excellent Formatted for all the major platforms including NinjaTrader and... trading and a FOREX data feed (through Gain Capital) For system developers, their EasyLanguage script is well developed and documented Support is excellent It is also one of the independent trading platforms reviewed in this chapter www.dailyfx.com Online charts in a Java environment www.barchart.com Offers stock, commodity, and FOREX charts EOD and historical The web site is confusing, but the charting... Chapter 14, “Retail FX Platforms.” With so much integration of features and 168 THE TOOLS OF THE TRADE FIGURE 13.6 Disktrading Historical Data Source: www.disktrading.com capabilities—charting, indicators, order-entry, system development—the line of demarcation has become quite thin www.ninjatrader.com NinjaTrader is a free application for advanced charting, market analytics, automated strategy development,... Thus, a trader can make trading decisions on history, manually test trading ideas, and monitor trading results in the form of trading statistics and equity line All in all, a useful product But this class of tools is losing ground to those that offer live broker connectivity www.tradestation.com TradeStation’s EasyLanguage is well developed There is a significant amount of documentation and literature, . obsolete. www.gaincapital.com www.mbtrading.com 166 05/10/09 05/10/09 05/10/09 05/10/09 05/10/09 05/10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 06/ 10/09 07/10/09. for points where: • A market is above the moving average line but the oscillator is falling sharply or below the zero line. This can indicate that a market is still in an uptrend but in a buying. will soon offer a FOREX contrary opinion tool. More on this subject in the section “Going Against the Crowd” in Chapter 18, “Improving Your Trading Skills.” Trolling the major FOREX forums once