At SMB we get a lot of emails from traders of all levels. Much of the time they are from aspiring traders who are very passionate about the markets and their work. And all of us here make every effort to respond and provide some insight into the world of professional trading. So in this article, I am going to feature an email from an aspiring trader from Australia. It is clear she is very passionate about trading and I hope my answers offer some valuable insight to her and anyone else who can relate.
So here is the portion of the email the we received from this passionate trader from Australia:
“ I trade FX intraday, and have designed my own method which backtested well – I can’t program/code, so I did it manually which means there is the possibility (probability) I made errors – this nibbles at my confidence when I have to sit through a bunch of losers. It’s a technical set-up, and in my testing I didn’t take price action into account at all. So my job now is to filter all the trades so I can see my A+ trades.
I’m yet to see the backtested results in my trading account, so I’m also working on being more aggressive in adding to winners. I never let my losses get big, so I think the key has to be reducing the size/frequency of the losers that fail off the bat, and working out what they look like so I can put them in a sort of anti-playbook 🙂
Anyway, questions.
You mention that you look at SPY when adding to/entering/exiting equity positions. This makes sense to me, and I was wondering if your traders use a similar idea when trading FX. I’m looking at the USDX (all my pairs are USD crosses) and can see how it might work, but wanted to know if your guys are doing that at all, or if they’ve tried it and dismissed it as a waste of time.
Also, I had a question about how your traders use ATR in their trading. Currently I use it to gauge how far a pair might move in a given day, and set my targets toward the extreme based on how far price has moved from it’s intraday low. Is that pretty much on track with your traders? If price has already moved significantly intraday, would that make your traders think twice about entering a trade, or trade the set-up with smaller size? I imagine a 1:5 would be hard to come by late in the day, unless you’re fading a trend.”
To answer your questions:
1. In the spot forex world, correlations can play a role in your analysis, but they are mostly for confirmation and not the primary focus of the trade. Also correlations tend to be unstable much of the time and eventually change. Using the Dollar Index against your dollar crosses is ok if you are using it for pattern confirmation. Our forex traders learn how to do that, but they are observing very specific patterns and correlating them. This relationship is much different when it comes to the S&P and related equities. In the stock world you are looking for evidence of relative strength. Since currencies are affected by a much more complex process, it will be harder to find these relative strength situations when comparing dollar index. Remember the dollar index is a basket of currencies against the dollar and each currency has the ability to do its own thing without the dollar reacting much.
2. As far as the ATR is concerned, it has its role amongst system traders from what I understand but when it comes to the methodology that we use when trading forex and futures at SMB, the ATR is irrelevant. The methodology we use is more concerned with market symmetry and watching for signs of trader’s who are overreacting to conventional market signals. We wait for exhaustion points and confirm that traders are caught and must get pushed out of their positions. Those situations repeat, but not every 5 minutes. And sometimes this concept doesn’t play out as planned, so we take a stop.
If you are looking for perspective on the markets, you will not find it with conventional methods. Trend following is nice when there is a clear trend. What we do is unconventional. We have no problem being part of a trend, but we will not enter at prices that are obvious. And when markets become range bound, that is where our opportunities emerge the most. Everything you have learned so far in your effort is good in the sense that you have learned the basics of conventional trading. You now need to learn how to exploit the weaknesses of such trading. The obvious is your worst enemy unless you know how to capitalize on it’s flaws in the world of professional trading.
I hope this helps. If you want to really get a sense of how to listen to the market, you need to spend your time focussing on price action related tools and information. Candlestick analysis, price action analysis, and order flow techniques are where you will find much more valuable information. Comments? Feedback? I would love to hear from you.
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Marc Principato, CMT,
*No Relevant Positions
