barrett's notes

Hi,

Just doing some homework for the upcoming week and thought I would jot down what I'm watching. I'll highlight briefly what I think about each pair and then discuss confluence and correlation for all pairs listed, where relevant. I'll update outcomes at the end of the week. I haven't looked at any fundamentals and have yet to see how G8 turned out. Below is simply what the price is telling me.

SPX 500

Approaching 1.270 support and looking quite oversold. If we get a bounce I will watch for a retest before getting long. If we go through support I will look to see if it stays in 1.270 - 1.200 range. This will be the box to watch to see if it continues down or bounces.

AUD / CAD

Not one of my favourite pairs, but it shows potential to the long side nevertheless. It is at Sept '11 support and stochastics and macd look bullish. Will keep an eye on it.

AUD / JPY

Perhaps a counter-trend short term trade. Its currently at 77.80 and looks like it might retrace back to 79.80 and maybe suitable for range trading within those prices. One to watch in asian session.

AUD / NZD

Currently at March '12 resistance, which was previously tested resistance for a large part of Jan '12. Looking at this pair as a potential short. Again not one of my usual pairs, but has been pretty vertical lately and so likely to pullback to at least test 200 SMA.

AUD / USD

This pair looks oversold and all the lines I have drawn show that price is at or near quite a few areas of support; horizontal and angled. Does this mean that this might be a messy area for a bit? or will we get a vertical bounce once horizontal support has been tested. I don't consider a long for this pair to be ripe yet. Although, it is quite oversold so the test of support may happen quite sharpish.

EUR / JPY

We are at support level tested in Sept '11 and jan '12. We also see multiple levels of support and the pair is showing as oversold. I'm watching for a retracement to at least 102.

EUR / NZD

This pair has been in an up trend so far this year, but shows a reversal in March '11 that put the pair in a downward trend. This year might show a retracement. We are at channel resistance for the March reversal, which was only tested once in Nov '11. The pair is also overbought. Everything suggests a short and I'll be watching this pair quite closely at the open. Not a pair I trade very often, but looking like my favourite so far.

EUR / USD

The pair of the moment! There is no doubt that we are in a downward trend. We are at Jan '12 support and are showing as quite oversold. A long trade here would be counter trend and I would look at the inner upper channel line before considering whether we might go to upper channel line. Both upper channel lines have corresponding horizontal support. Considering trading this pair will depend on volatility for me. If I had to trade this pair I would be looking for a long but, I would keep quite a tight stop on it.

GBP / JPY

A very vertical drop and showing oversold indicates, to me, that we might expect a retracement. The yellow line is the area I would expect it to go near ( 1.27 ). Again, an extremely volatile pair so tread carefully.

GBP / USD

Another oversold pair I expect is due a retracement. It looks to me as 1.59 is a cap for this pair.

NZD / USD

This pair has been in a steep decline for the whole of May and so has been oversold for a while. Something has to give soon and I expect a retracement is due.

USD / CAD

We are at resistance reached in early Jan '12 multiple lines show we are at a reasonable resistance level. That combined with overbought signals indicates a pullback / reversal is eminent.

That's probably it for now. I haven't included any CHF pairs. EUR/CHF is the weirdest chart I have ever seen. SNB doing a propper prop up job.

Doing the above immediately told me EUR, GBP & NZD might go up, whilst USD might go down. This is supported by anti-correlation. For example EUR/USD, NZD/USD are showing as expectant longs, whilst USD/CAD is showing as an expectant short. As a matter of interest USD/CHF is also showing as a potential short.

What's interesting to me is EUR/NZD is expected to short thereby meaning NZD will gain on the euro.

The summary,

spx 500 - long
aud/cad - long
aud/jpy - long
aud/nzd - short
aud/usd - long
eur/jpy - long
eur/nzd - short
eur/usd - long
gbp/jpy - long
gbp/usd - long
nzd/usd - long
usd/cad - short

Lots going on and promises to be an interesting week. I'm not looking for a lot of trades this week so my next step is to apply further analysis to the above to double-check confluence. The above doesn't determine that I enter anything immediately. I will only enter when I receive a valid signal based on my trade plan, but it is helpful to try and understand the state of play in terms of price alone. Too many opinions floating about at the moment and will only lead to confusion and doubt.

Have a good week.

shawn

Hello,

A chart I saw on facebook made me a bit nostalgic about South Africa. I grew up there and moved to the UK in 1995. I don't trade ZAR, but thought I would post what I think about its technicals in relation to GBP, EUR & USD.

Firstly when I loaded up the symbols I saw the spreads! GBP = 431.6 spread!...and then I looked at the chart. It has been in a 3000 pip range since 6th April 2012. That's a lot of pips.

...And then I looked at the USD/ZAR chart. It's pretty similar at just over 3120 pip range for the same period back to 05 April.

Without too much analysis, it seems as though the correlation is similar to the USD crosses (EUR, GBP) in that it appears that the GBP/ZAR pair is a leading indicator for the USD/ZAR. I have never seen such volatility and actually, as a carry trade, the USD/ZAR might be worth investigating.

A quick look at the charts,

GBP/ZAR - Daily

We're at 12.8285 resistance. A break above and with any other pair I would look for a pullback before going long. This pair is so volatile it might just zoom up to 13.0000. It has been sitting on the 200SMA (red line), which has been acting as strong support after breaking through 100SMA (purple). We have been in a short term upward trend since March and in a longish term upward trend going back quite a way. This chart shows the trend going back to Jan 2011, 

Looks like it will go to upper channel line, which acted as support from September - November. It is likely that the current range is congestion / consolidation before it goes higher.

USD/ZAR - Daily

If we are to consider GBP as a leading indicator for USD, then it is probable that USD will follow suit. We are also on the bottom of a channel. With GBP I might wait to see what happens with the current resistance level. The range has been contained between 100SMA and 200SMA. I haven't drawn it in, but if you draw a line up the centre of the grey channel, you'll find a smaller channel. We are the top of that channel now so the price may range up to the 8.0200 level, where more decisive action can be taken. We may get another pullback to the bottom channel line.

EUR/ZAR - Daily

The EUR is also contained within the 100SMA and 200SMA, thereby showing good correlation with USD. It is also at a strong level of support. This gives more confidence that it will go higher. Especially as this level of support coincides with the bottom of the channel.

With all the above charts, the yellow lines would be areas to keep an eye on.

I don't know these pairs and don't have a clue about their fundamentals, but technically they look good to go higher.

ps. I have just kept the simple lines on the charts and have removed other technical analysis algorithms I use as they would create too much clutter.

Would these pairs be worth trading in the future for me? I only trade G7 currencies and keep an eye on G20. Never considered ZAR. £12.5K with a 50:1 leverage on GBP/ZAR would make each pip worth £1.96. If I was to catch a 3000 pip one-way move on the range (if it continued), that would be £5880 profit (less the spread of course). Considering it can move that quickly in 1-2 days! mmmnnn...and looking at USD as a carry trade, might make things more interesting.

I'll definitely do more analysis on these pairs. Their volatility makes them dangerous, but perhaps with sound risk management they might be viable to trade.

Anyone with experience of trading these pairs please chime in.

Also, as always, please bear in mind I know nothing about these pairs and the above is a quick 30 minutes analysis and my opinions only.

take it easy

shawn

Hello,

A while ago I posted about my experiment to see if it is possible to trade with a small balance (http://svb70.posterous.com/see-final-pl-for-2000-account).

I like the idea of watching someone else trade and so that was was one of the reasons I did it. When you put your trade journal out there it puts a bit of pressure on you. You could lie if you don't do well, I suppose, but what's the point. So I'm interested in seeing how other traders get on.

In response to my above post I received a message from a fellow trader who explained that he is posting his trades. I took a look at his trade posts and his site and would say that it is well worth a look.

His site,

http://forexnovicetrader.weebly.com/the-strat.html

His trade updates,

http://www.traderslaboratory.com/forums/forex-trading-laboratory/11475-2012-forex-trading-journal.html

To the above trader, good luck, keep focused and don't give up.

I will post links to any traders I happen across that have information to offer and are not trying to sell you something.

Also, If you are interested in social trading check this out,

I am a beta user of OpenTrader (http://opentrader.com/home.aspx). It is basically a plugin that enables OpenTrader to access your trading activity. Your activity is made public. The idea is that you can find like-minded traders who are successful and follow them. Or, be a successful trader and have other traders follow you!

take it easy,

shawn

Hello,

I've been trading for a while now. I'm comfortable with my trading plan and I know what time frames suit my personality. Although I am primarily a technical trader and may analyse around 25 pairs, I generally only trade 1 pair at a time. I like to get in tune with a particular pair and ride it until it's time to be on the sideline. Doing this means I can concentrate more effectively and get to know my chosen pairs very well.

So all sounds good, my account is still intact and actually I feel like I'm doing quite well.

Even though I follow my plan almost religeously I do go through periods where I am simply not in tune with the market. It feels as though it is a force of nature rather than anything I am doing. Remember even with the best plan in the world it is a game of probability and sometimes the probabilities are vehemently against you! You know when you are in sync and when you are not.

Simply, how you handle bad periods will determine whether you blow your account or not. They can very likely cause you to deviate from your plan and expose your trading psychology maturity for what it is. Bad decisions you might make during these periods may even occur on a sub-conscious level. After the fact you may say "Why did I do that?!"

One thing is certain. You will go through bad periods where nothing you do works.

I have just gone through such a bad patch. Here are what the losses look like in terms of account % profit & loss,

Dec 28 - 0.8% loss

Dec 28 - 0.4% loss

Dec 28 - 4.1% profit

Dec 29 - 2.6% profit

Dec 29 - 0.8% loss

Dec 30 - 3.2% loss

Dec 30 - 3.8% loss

Jan 03 - 0.5% loss

Jan 03 - 5.6% loss

Jan 05 - 22.4% profit

So 7 losses & 3 winners. 15% loss and 29% profit. If we ignore my Jan 05 winner I am looking at 15% - 6.7% = 8.3% loss for this short period.

Above I said "I have just gone through such a bad patch.." I said this because I now feel more in the zone. Yes, trading should be methodical, but I feel it is important to at least acknowledge when things are going your way and when they aren't. I believe these periods are innate and out of our control, we just need to be aware. In the same way that prices never move in a straight line, nor does your P/L.

So, although I had 7 losses with 5 in a row, I am happy. I have managed to not only survive, but came out in profit. I currently have a decent winner that is still live, profit is currently at 14.5% profit with my stop moved to protect my profits.

It is uncomfortable to trade when you know you are in a bad patch. Two obvious options are to stop trading and give yourself a cooling off period or to reduce your position sizes and stick to your plan. I prefer to trade with reduced position size. My psychology is ok so I am unlikely to get flustered and I believe I gain more experience by trading. Each to their own in this regard.

I'm happy because I stuck to my plan, reduced my position size, cut my losses and kept cool. Of course it's not perfect and I will now analyse my losers and how I handled them to improve the outcome next time it happens, which it will.

I can guarantee that a few years ago those 5 losers would have blown my account or really messed with my head.

Hope you have a great trading year!

all the best

shawn

Hello,

So, a great day so far. I've been dipping in and out of multiple pairs, which I tend not to do too often, but the opportunities are there.

Over the course of the day I have been working within 2 channels and have taken profits on 2 x £$ trades so far, but still have 2 in play, with my stop loss adjusted.

I am keeping a close eye on the USD/JPY pair and have executed 3 trades there, but only have 1 live trade now,

So far, so good...

shawn

Hi,

Risk management is, I believe, the most fundamental ingredient in a successful trading career. You really need to be on top of it to enable consistency in your trading. If you aren't then you are trading with the odds against you and effectively you are gambling.

Gambling - Trading with the odds against you. For example, buying a lottery ticket.

Trading - Speculating with the odds in your favour. Good technical and/or fundamental analysis

One simple algorithm that has been around for decades and still used by hedge funds to determine risk exposure is the Sharp Ratio. It is a simple formula, but when explained by a maths genius can come across as rather complicated.

I will attempt to explain how I use it in real terms.

Most times when I see it explained, it is done so in terms of an annual calculation. What if you haven't been trading for a year? I'll show how you can calculate it daily, monthly and yearly.

The terms described that are included in the calculation,

Actual Return of the Portfolio (%) = The profit % you made in the given time period

Risk-free Rate of Return (%) = The profit you would have made if you had simply put your money in a savings account (or any other risk free investment).

Standard Deviation of the Portfolio (%) = A percentage of how much your accounts performance deviated from its average performance. This is the one that I believe causes people confusion or even that the Sharpe Ratio is not useful to them. In this post I explain how I use it. Once you see the examples, you may then decide how you like to apply this variable. I do find it subjective. I like to hope that my accounts average performance is always positive. I apply the most strict possible variable here by submitting my highest unrealised P&L %. This is where some people have a problem with the Sharpe Ratio as it does not account for periods of volatility. I'll expand on why I disagree with this in Scenario 1.

The formula,

Actual Return of the Portfolio (%) - Risk-free Rate of Return (%)

________________________________________________________

              Standard Deviation of the Portfolio (%)

The sharpe ratio is effective at validating risk in a portfolio that has multiple instruments. It is even easier in forex as you effectively have 1 instrument. You may trade multiple currency pairs, but I don't think it is necessary to treat each pair as a separate instrument. You could I suppose, if you wanted metrics on risk / pair.

Scenario 1

A new trader has £1000, which he started trading with 1 week ago. He is a clever little trader and wants to manage his risk. He decides to apply the Sharpe Ratio to his weekly activity to see how he has done. The Balance at the end of his first week is £1100, a 10% profit. Before he started trading he looked at high interest savings accounts. The best offer he received was an annual rate of 3.5%. To get our weekly rate (risk free rate of return) we divide by 52; 3.5 / 52 = 0.067. During the week he made 10 trades and his biggest UNREALISED drawdown was 25%, based on 1 trade i.e he allowed 1 trade to go 25% of his account into the red before it turned around. He uses these figures to calculate his sharpe ratio,

(10 - 0.067) / 25 =   0.40 (rounded to 2 places)                                     

He compares his result against the Sharpe Ratio key,

Ratio > 1 = good

Ratio > 2 = very good

Ratio > 3 = excellent

and decides although he is in profit, if he doesn't manage his risk more effectively he will give his profits back and probably more.

The only way he can do this is to research how he can improve his Standard Deviation of the Portfolio (%). 25% unrealised drawdown % means that if that 1 trade had gone south his £1000 account would now be worth less that £750. He is a new trader and so the psychological games might start (he decides he needs to gamble trades in order to get it back, he trades too large, he aborts his plan, he overtrades, goes into all or nothing mode etc.) The outcome...account balance = 0.

He revisits his plan to work out how to reduce his risk.

He blames volatility as the reason why he went 25% down. "Its the markets, I knew it would come back...it was obvious by what was happening in the news"

If you know the markets are volatile you reduce the position size. To let your account reduce by 25% on 1 trade is not good business. The other option is to stand aside until you have a better entry point. To keep letting you account deplete on volatile trades means eventually you will get burnt. If you are willing to let your trades go down before going in your favour means you are getting in at the wrong time and you should revisit your trade strategy.

Scenario 2

The above trader has learnt from his mistakes and has been trading for 3 months now. He wants to know the Sharpe ratio for his latest month of trading.

His 3rd months opening balance was £1000. He has been lucky to break even after his first 2 months. At the end of his 3rd month his balance is £1300 giving him a 30% profit. His monthly risk free rate of return is 3.5 (annual %) / 12 = 0.29. His maximum unrealised drawdown was 19%.

(30 - 0.29) / 19 = 1.56

Much better, but still room for improvement. 19% unrealised dradown is not great. Even though his average unrealised drawdown was around 12% it only takes 1 trade to lose 19% of his account. He realises that there is still much work to do.

Scenario 3

He has been trading for a year and his trade plan is effective. His £1000 is now £5500. A decent return for his first year, all things considered. After his first month he stuck to his guns and never let his unrealised drawdown to get anywhere near the 25% he initially suffered. Unfortunately this must still be the figure used to calculate his yearly Sharpe Ratio. His yearly risk free rate of return is 3.5% and his realised profit is 550%

(550 - 3.5) / 25 = 21.86

In a savings account £1000 @ 3.5% annual rate = 1035.

Scenario 4

A really good year and he considers himself experienced.

It's Friday morning and the euro is in dire straits, the news is reporting that the euro is dead and that it's going to tumble. It's a sure thing and he trades a large position. Because he is trading large he doesn't want silly volatility to cause his stop to be hit only for the trade to then turn in the direction he is sure it will. He decides that this is such a sure thing he doesn't need to place a stop. He forgets his plan and doesn't even set a take profit limit because he doesn't want to lose out on any extra profit.

He goes to lunch in good spirits, proud of himself already. He gets back in the afternoon and to his horror finds his unrealised drawdown is 45% He can't get out, he is emotionally attached and decides to sit it out. Based on the news it's bound to turn around, surely? he's glued to the screen and the news, stressed, hoping...

Unfortunately its not good news and the euro is saved by China who intervenes and clears everyones debts. Greece is fine, Italy is fine. Kazakhstan joins the euro and Borat takes over as president of the ECB

He loses his account because he never musters the strength to exit the trade. It becomes all or nothing...

Again, this is how I use the Sharpe Ratio and perhaps in a subjective way that may not fit your needs. Hopefully, at least, it will make you consider risk as the most important part of your trading strategy and apply whatever methods suit you to enable you not to blow your account. It only takes 1-3 rash decisions to lose all your hard work.

shawn

Hello,

I started a £2000 account a few months back. I traded it to £10 000 before deciding to publish the P/L for this account (last P/L post is here http://svb70.posterous.com/trade-update-a-bipolar-market).

I was doing this excercise to show that you don't necessarily need loads of money upfront to be successful. If your trade plan trades on percentages and you are patient, you can make money.

I started publishing my P/L on 15 August with the closing balance at £11 705. It took me 5 weeks prior to this to get from £2 000 to £11 705.

I am now publishing the final P/L for this account. I think it proves what I set out to show and I need the time to focus on my core account. 

In the above equity curve I show the entire curve going back to August 8, when I started logging my equity curve. The curve completes on 5th October, when I stopped trading this account.

My last entries in my trading platform's activity log,

Summary

Starting out with small capital and growing your account to a reasonable size IS doable. If your account is small, don't gamble and remain patient. As you can see from above it doesn't take that long. Once you are trading with £10 000, you can make enough money to live off, but you have to be consistent and that is probably the main reason why you won't be able to give up your day job. You can blow your account in 1 day if you are not careful. If your account takes a knock and you are dependent on profit, you will make mistakes when trying to get back on track.

Guaranteed you will go through bad patches when nothing you try works. This is usually followed by a period when you can do no wrong. In a blink of an eye, your account is gone. I know this from experience trading practice accounts.

take care

shawn

ps. I am currently developing a free online trading journal that you may use to practice discipline whilst trading, so will update you when it is complete

Hello,

Simple Moving Average (SMA) indicators may be perceived as many as to simple or lagging, but I use them a lot in my technical analysis. Too often, the correlation between SMAs and support and resistance levels are too coincidental.

In this example I am using the current USD/JPY 15 minute chart. Although it is a fairly short term chart the SMA channel goes back 24 hours. I see this time and time again. I quite often trade an SMA level on a 5 minute chart that rides for 1-2 days.

The channel starts yesterday morning and is fairly contained between 200 SMA & 400 SMA. These are pretty significant SMAS.

Then notice at 10 pm last night the channel moves to 200 SMA and 50 SMA.

This morning, for the last 2.5 hours it has been contained within 200 SMA and 14 SMA.

So that's quite interesting. This is even better,

If we look at the time spent in each channel we roughly get,

200-400 SMA = 12 hours

200-50 SMA = 8 hours

200-14 SMA = 3 hours

3/8 = 37.5

8/12 = 66.6

Not quite fibonacci, but hope you found it as interesting as I did.

ciao

Shawn

Hello,

We have a diamond pattern formed in the NZD/USD daily chart. This signals a potential breakout, which is usually to the downside.

Looking at the channels and horizontal resistance, we look like we might have further confluence that we may be heading south.

My indicators are also showing potential sell signals. My RSI is at 70%, which has acted as support & resistance going back to July.

My MACD is nearly there. One more day might provide my required confirmation. My short term charts are showing weak buy signals and so we may be looking at another retest of .8000. The 4 hour chart is showing a nice reversal candle, providing further confluence to sell. The RSI on my 4 hour chart is showing as overbought.

.8000 support was broken on sept 22. It has only been tested once, which was sept 27. 

So I am keeping a close eye on this one and am expecting .8000 resistance level to hold.

I will remain flat for now, especially as market sentiment expects this pair to move higher. I think the test of .8000 is key, as is seeing how this diamond pattern pans out.

take care

shawn

Hi,

My trade strategies employ trading in multiple timeframes. That doesn't mean that if I am trading a 15 minute chart I need to look at all time frames to be sure that my direction is correct. In fact, looking at too many time frames can be detrimental depending on your trading term. If you are a day trader trading 1M charts, you're probably not interested in any chart longer than 1 hour. If you are a medium term trader trading 4 hour or 1 day charts, you probably don't want to be glued to any chart shorter than 1 hour.

It is always good to be aware of trends in all time frames. Channels are a good way to do this.

I'll use the EUR/USD in it's current state and show you what they look like in 3 time frames. These charts will also show another interesting pattern.

So, let's start with a 30 minute chart,

Great so we can see that in the very short term we are in an up trend. This channel along with horizontal levels of support and resistance can be used to enter trades in time frames less than 30 minutes; 1M, 5M or 15M. Notice anything interesting?

Next, here is the same pair charted in a 1 hour time frame,

Ok, now we see our short term up channel is contained within a channel to the downside. Just 2 very simple channels immediately gives you some hugely beneficial information. No horizontal support & resistance charted yet. No complex indicators. Do you see the same interesting pattern realised in the previous chart in this chart?

Finally, a daily chart,

Confused? this channel is to the upside, but has been broken.

I'm sure you have noticed the interesting point in these charts. The coloured lines drawn are simple moving averages. In this instance the purple SMA (200) is mirrored in the channel and actually in the first 2 charts the 200 SMA acts as a channel line.

Drawing channels can, in some cases, be quite subjective. I expect peaks to break through the channel lines when I draw them. Channel lines are lines of support and resistance and so are tested just as horizontal levels are.

Try and think how you might use the information derived from thes simple charts above. Look at what each channel is doing. A break out in 1 channel might equate to a retest in another channel. Use this information to know when to enter, when to wait and when to cane it!

Happy trading

Shawn