The Learning Curve
After years of dabbling with the usual assortment of penny dreadful miners from Australia, occasionally scoring a win and often a loss I decided late last year to make a serious attempt at trading for a living. It has been an expensive hobby ever since the tech wreck, but being a maths grad the never ending stochastic sequence they call the market has almost limitless appeal. Anyway just looked at the calendar and realized that three months in and I still haven’t made any more than a couple of trades – and they were all of the small dabble your toe in the water kind.
It is interesting and possibly instructive to think back over the process to date to understand just how hard this actually is. Perhaps my marathon will help someone else cut some corners.
Which Market?
I initially decided to trade SPI200 (Australian 200 Cash Index). Why: – dollars per point risk and reward appeals. Leverage is huge at 100 to 1 which means you don’t need to tie up any more capital than you are prepared to risk per trade. Having a 24 hour market means no nasty overnight gaps when Wall Street sneezes. And finally at a 1 point spread, costs are low.
Problem: I am not nocturnal.
After weeks of following my penny dreadful habits of getting up early, getting my head across the US market, looking at the commodities news etc for a couple of hours and then settling in for market open at 10:00 am, it became apparent that the bloody Australian Index doesn’t do a damn thing during Australian trading hours. It simply trades sideways – occasionally kicked along after lunch if the Hang Seng is having a good day. But generally all the action is after midnight my time when the US trades. A couple of weeks wasted here working this little home truth out.
China Maybe?
OK lets try the Hang Seng and bypass the middle man. Starts at lunch time by my clock and trades fairly smoothly. Mmmm better but the spread is much bigger and then the Chinese government chose that particular time to piss on the parade. This pretty well took the exuberance out of the party and the Hang Seng resorted to making its moves US time. Once again we are back with a flat market when I am awake. Another couple of weeks wasted.
Lets trade index futures nights then. Sounds good, but apart from the insurmountable problem of rotating my body clock to wake up at 10:00 pm, the spread goes up making each trade much more expensive.
How about increasing the stop loss distance and reducing by dollars per point at risk. Same at risk amount, but lower probability of being hit. That would allow a buffer for overnight adverse swings. Problem – my risk is lower, but now so is my reward based on the normal trading range. Putting these two together and we lose anther couple of weeks.
How About Currencies?
Aha! How about currencies and not Indexes. At least the spread costs are more consistent over a 24 hour period. And lo and behold! they have most of their trading activity UK hours rather than US hours. At least this means there are a couple of trading hours when the sun is more or less above the horizon.
Cool. That’s settled, we will trade Forex and to keep it simple make it the EURUSD pair. High liquidity, not too volatile and responds well to London open.
Blow fly in a bottle.
Problem: Have you ever seen a forex chart? I have been charting for years and thought I knew a Stochastic from a Standard Deviation. But these damned things are all over the place. The more indicators I have on the screen the worse it gets – arrrrgh!. Less is definitely more when it comes to these monster markets.
The realization hits that forex traders are all trading off different time scales. Now with good old daily charts everyone is getting more or less the same signal at the same time. Not so Forex. Not only are people’s days starting at different times, but they are all using different periods. 1 hour, 15 minutes, 5 minutes, single ticks. This means that when one person is getting a buy, someone else is seeing a sell. I have absolutely no hope at all of predicting a buy or sell. It is just absolute chaos.
Solution: Definitely use London Time for forex and get your brain around the fact that the London stock market starts at 8:00 am their time. So they are at their desks before that. Find indicators that are independent of time scale. In other words use Pivot Points. Throw a set of pivot points up on the screen and all of a sudden that mad blow fly in a bottle motion settles down to a more or less orderly bounce between predictable resistance and support levels. A couple of more weeks wasted working this out, but finally I can now look over the days data and see a buy or sell occurring where you would expect them to.
Chaos almost cracks.
Armed with this, methinks I have it cracked. Wait for the EURUSD to pull back to a support level and enter. So we wait, and wait and wait, nature calls, we get back and have missed it. Day after day the same thing. I either miss the signal or to make things worse, it bounces off what appears to be a hidden resistance level. Later I later work that out to be the 200, or 288 tick moving average. It varies methinks. Computers or at least their programmers would think about the average price over the last 24 hours – hence 288 on a 15 minute charts, but humans use a 200 no matter what chart because that is what they have been taught.
After a couple of weeks of this the realization sinks in that a one or two trading signal per day strategy simply will not work. A fifteen minute time scale also doesn’t help. It is amazing how much a currency can move in fifteen minutes. More time wasted.
Mmmm what does tick by tick data look like? Oh shit! there is a an awful lot of it, that locked up the lap top. After a restart we discover that a 5 tick per candle time scale works and doesn’t blow up my hardware. My stop loss distance is relatively large with respect to the per tick motion. It moves fast enough to maintain my focus, but slow enough to react. Feeling good here.
What Signal?
Problem. What to use for an entry signal? A stochastic, MACD or RSI on 5 tick data is just impossible to read. The Pivots are still good, but most of the time it isn’t on them and there are a lot of opportunities between support levels.
Solution: Good old resistance and support levels with a bit of help from a slow stochastic. I mean really slow. You know the normal 14, 5, 3 stochastic? Well mine is sitting on 200,100,50. My MACD is 400,200 and 50 instead of the usual 26,12,3. But hey it works. The really slow stochastic – remember I am on a 5 tick per bar time scale which is really fast – provides a good picture of the underlying trend. That means I can finally read this. Add in a 400 bar moving average along with the pivot points and at last after months I can finally call entry and exits as they scroll across the screen more or less consistently. A few false signals and a couple of wiggles beyond my stop loss, but that is par for the course. Lots more entry opportunities a day
The current problem.
Well at least its not a problem making sense of the market. The main problem is the original one. The optimal time to trade is the London session. For the same risk, the market moves a LOT more. Reward to Risk is about 3 to 1 during the Asian session and can be about 10 to 1 at London open. The key issue is being alert late in the afternoon. Not as easy as it sounds. And worse if you have been at the screen all day.
The second problem is choice of markets. Focusing on the EURUSD sliding sideways while the AUDUSD pair is flying is not good trading.
Not so easy.
The lesson here is that if you think you are going to get rich quick, have a rethink. If you can find a mentor to cut corners you may get a leg up. But my gut feel is that it will take months of hard and consistent work with little or no money coming in while you get yourself around the learning curve to the point that you are trading and not gambling. And that assumes you have a good understanding of charts, you understand margin, risk management and have good money management skills before you start.
You could be throwing money at the market while your “L” plates are on, but remember that this game has a 90% failure rate. Most of which I would think happens during the first few months.
You have to be in it to win it, but that doesn’t mean you have to act like you are at a casino. This game is a business and like any business it takes a lot of personal investment.
May 20 2010 | Trading | No Comments »
