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I don't know why I agreed to put ads on this blog, but it looked bad so I killed them all. And in the last two years I made $1.58 hahahaha.

Two mindsets

My response to someone who was talking about what trading is: I think you can think about trading two ways (not the usual ways): I prefer to think of it as "doing business"... You are willing to buy and sell your wares at the market (it just so happens that in this case your wares is money). If you are a good business person you will buy and sell at the right time most of the time. Sometimes you won't sometimes you will, but most times you do. This is why good traders call losing trades "the cost of doing business", because you have to expect a certain amount of losses just to be involved.

The other way is to gamble. Most people think that they are trading the first way, when in fact they are trading the second way. If there is any emotion involved at all then you are gambling - why? Because you are hoping every punt is a winner. Losses mean a failure of some kind.

Its a long hard rode to switch mindsets. It has to be beaten into you, if you are around that long.

Financial Crisis Explained

Brilliantly done short explination of the Finanical Crisis...

http://www.youtube.com/watch?v=Q0zEXdDO5JU&feature=channel

http://www.youtube.com/watch?v=iYhDkZjKBEw&feature=channel

S

Thoughts on the current financial climate

A few thoughts after a chat with a friend who is trying to trade stocks in the current market and getting whipsawed by the sound of it. Here's what I think - look at the chart above, which is a monthly chart of the DOW going back into the mid 80's...

What drives a bull market like this? In my opinion, it is a technical innovation that could be called 'revolutionary'... In the above chart we see the greatest bull market in the history of the world that more or less terminated in early 2000... At the time we had in the 80's the invention and proliferation of the home / office computer which changed and created thousands of businesses and new industries around the globe. It literally changed the world. Following on from that the invention of the Internet which created a bubble which burst horribly around 2000 when everyone realized that half the companies out there were based on thin air...

Then there was a correction, and after that the world recovered... The rally that took us up after that was possibly mostly technical due to the breaks of the 2000's highs, and in my opinion wasn't really based on anything as fundamentally sounds as the rally that preceded it (optimism flowed again - and perhaps the invention of the mobile phone could also be a part of it).

Finally the financial crisis hit as the genius fund managers had been very clever with their exotic option spreads etc and had created wealth out of nothing. One fine day - *POP!*

The bounce from those lows at the end of the crisis, in my opinion, was purely stimulus inspired (and bargain hunting of course). The governments around the world injected trillions into the system to prevent a catastrophic crash. Here in Australia, the government simply gave every citizen some money and said "Go buy something - ANYthing!!!"

And now we are... where? Hanging like over-ripe fruit... No reason to rally at all. No major innovations around changing the world (yes the Ipad is cool, but it wont change the world).

The current sentiment is horrible - our belief in the genius fund managers is shattered...

Its a BEAR market.

Message for Spammers

Dear Spammers,

Just letting you know that ALL comments here are moderated, and so unfortunately for you not one of your posts will EVER be let through. Damn frustrating ain't it? You may consider going on with your campaign in the hope that I'll slip up and let one through by accident - but I'm afraid its totally hopeless. I have full control - you have zero control. What can you do? Nothing... The war is lost.

Brokers question

Gustavo was recently asking about brokers, which I use and what problems I've encountered. I have to say that all of the problems that used to be common when I first got into this (broker monkey business) seems to have faded away.

I have used Oanda, FXCM, FXDD, InterbankFX... All with no trouble. I think I caught the tail end of the stop hunting and general bucket shop practices (also I imagine that in the early days the brokers were beset with technical problems too. Many's the time the platforms would lock up or drop out during high volatility news announcements etc)...

As long as you use a decent well known broker you really won't have much trouble. I think also in part traders that are losing hand over fist will look for an external to blame, and the broker is an easy target.

Any of the ones mentioned above are good. I don't think you need an ECN broker unless you are trading big volume (in fact my understanding is that you can't trade with ECN's unless you are using 100K lots, but that may have changed). Also as far as I know, companies like FXCM can switch you over to "no dealing desk" (i.e. ECM) once your volume is big enough.

Until you can trade and make consistent profits this issue is basically irrelevant.

Effects of position sizing

Here are a couple of tests from my current system using a standard lot all the way through compared to the effects of fixed fractional position sizing. The trades themselves are identical

Interesting that the profit factor actually goes down but the % gain is still bigger. It also has the effect of flattening down the equity curve when losses and gains are similar, but capitalizes on a good run taking you up to a new level (the volatility in the equity curve goes up too because you are swinging a bigger line (to quote Livermore...)

An increase in maturity

I have noticed a change in my behaviour over this expanse of time which I could only put down to gaining a more mature and realistic approach to this subject. In particular it shows up in my unwillingness to trust the results of even extensive backward and forward tested data without running the same tests through many different markets and time periods. In the past by contrast, if the method showed three winning trades in a row I was a full believer and ready to trade it in the live market. Ha! What folly...

In a sense, when developing or testing a trading system, I now seem to spend more time trying to BREAK it than prove that it works (thats all I'm trying to do in fact), such as seeing what happens to it if I run a test through the 2008-2009 financial crisis period. I try to disprove that the system works. After testing on recent data, I might see how it performs on data from the 1990s... I'll do the same again on different markets; I'll test it on the majors and the crosses. I'll run it through historically unusal market behavior, low and high volitility.

What I'm looking for is something that still comes out of all this alive and showing similar results to other data from different conditions. If it does, it quite possibly has something. One thing I've noticed with a truely interesting system is that the drawdown, profit factor and so on will always be uncanily similar despite what you put it through. The system is in a sense seperate from the market you run it on - it behaves with a degree of consistency on data that is totally unpredictable. THAT is the true magic and genius of trading really...

Also, I am happy with a system that gives me a profit factor of 1.5 or even less, providing that it seems to be able to withstand my running it through many different types of market behavior and shows the kind of robustness mentioned above. Such a system is worth running on the live market in a series of forward tests, but they have to lengthy - I run tests now in blocks of 100 trades. Then I compare blocks, as many as I can get. By the way, this process is work and it is time consuming - hence the phrase "trading is a business." I now see that this statement is a truism, not just a piece of friendly advice relating to keeping a neat record of past trades.

People that talk about 90%+ winning systems and no experience necessary is now laughable to me. Truly laughable. And its not because I'm a bad trader, its because in these cases I just see simple curve fitting and snake oil.

PS: Here is my new website: http://www.c21simonhart.com.au/

2010

I thought that today would be a good time for a recap of the things I learned in 2009. Despite my posting being down, 2009 was an important year for me on the trading front, in particular because I finally began to understand (and utilize) the following:

1) Trading - Speculating - Gambling - In the eyes of the vast majority, these things are blurred together, and very many things that the herd get up to in the name of "trading" is really either speculating or gambling. To that end, much of the advice published on the subject of trading can equally be as confused.

But not to real traders; real traders know the difference and are very clear that what they are doing is neither speculating or gambling. Just because you can know your risk per trade when speculating or gambling does NOT mean you are trading. Every game at the roulette table you can know your risk. Think about that...

2) Real traders create and trade systems. They follow the rules exactly because they know that to break the rules is to break the fundamental expectation of their system which immediately throws them back into the speculation/gambling camp. Oh by the way, casino owners do not gamble; they trade. Think about that too...

3) True systems can be rigorously forward and back tested and withstand shifts in the market, or at least behave more or less as expected as the market switches between trending and non-trending, high volatility and low volatility.

4) Real traders take every trade, even when their systems are getting a hammering. Why? Because they know that the next trade could be the turn around, and that their system can weather the storm. Again, to tinker with the system is to immediately be back to speculating and gambling.

5) All systems experience drawdown. Real traders know this, and they weather it without emotion. You can be flat or in drawdown for an extensive period, but they keep on following the rules. It's a part of the business.

Those five things are the difference between real traders and the mass herd of people that lose their capital. They seem like a fine line, but they are worlds apart.

Irrelevant Indicators

If you've been grappling with the forex market for some time now, no doubt you've come to realize that its movements are mysterious to say the least. It fails to conform, especially to technical indicators. Over the three years or so that I've been trading it, I've come to believe that all of the indicators available (the thousands of indicators) are mostly useless.

Last week I was reading an article that made me realize that the market today is not the market I read about in all the books. It talked about an investment firm that traded heavily in the forex market that was being investigated for unfair practices. The core of the article explained that this firm was about 70% I.T programmers, and about 30% actual traders. They had custom built trading software that would place orders into the interbank market at the speed of nanoseconds so that orders could be placed and withdrawn in order to test the reaction from other institutions automated trading software.

This was called "bullying up the market"... Regulators were questioning whether this had left the realm of trading and was into something else but the investment firms hit back that they were not breaking any rules as such - they were just more sophisticated, and should they really be penalized for that?

At a more macro level the point was that trading is becoming now more of a battle between programmers than a battle between traders. Welcome to the future. The programmer is now more important than the pit trader.

Consider then that most of the indicators you have at your disposal and attempt to apply to this ultra-modern maket were invented in the 80's and 90's when were were all using Sinclair Spectrums and Commodore 64's... And the plethora of new indicators being dreamed up on the forums are usually derivatives of these old indicators or fancy graphical depictions of the same.

To the modern forex trading firm, this stuff is about as relevant as the skills needed to fix the wheels on a horse and cart. The average independant forex trader is fully locked out from certain levels of market sophistication and so trying to use technology (especially old outdated technology) is unlikely to produce results. To quote H.G.Wells, your MACD and RSI are "bows and arrows against the lightening".

However some things still work - bigger fundamental things, classic trading rules that will last for all time. Go back to those and try to fathom their inner meaning.