Caution: Math Geek at Work

The account was up 0.7% this week, mainly due to my short USD/TRY carry position. I've got some pending buy orders sitting above the current prices of GBP/CHF and CAD/JPY as well as a small long position in CAD/JPY. More on those in the next post.

I've added some refinements to the approach I'm using now.

1. My method for identifying opportunities is the same. I compare the actual relative strengths of the major currencies based on oil buying power with their fundamental strengths based on news releases and find the greatest divergence. For example right now, the GBP has the best FA reading and the worst performance, while the CHF has poor FA readings but is very strong. So I'm looking for a long GBP/CHF opportunity when the market "catches up" with my analysis.

2. New addition: Now when I've got the pair and direction identified, I begin placing orders behind the price as it continues to move in the opposite direction. This is like the method I was using earlier in the year with the EUR/JPY with two major differences:
a. I now have stops set on each order, and they're pretty close.
b. Each order is the same size; they don't increase without limit anymore.

3. I'm using a new Excel tool (still working on refinements) that incorporates some of the Market Profile ideas. It basically just creates a distribution of price and volume activity from each week's hourly bars. I then use the "Point of Control" lines to see how price reacts at those levels. Just a tool for helping with order placement levels.

Here's a chart of the GBP/CHF with my current orders above the price and some POC lines drawn on.

In addition to my longer term trades, I've been doing some intraday trading this week in EUR/JPY using the Market Profile stuff as a backdrop. So far those trades have a net profit of about 0.9% of my equity in two sessions.

I won't reproduce the details here. They're in this post:

http://www.forexfactory.com/showthre...80#post2441780

The account was down 2.9% this week. Much of that was due to a turn in the USD/TRY position which I exited.

The account was up 1.0% this week on profits from my long GBP/CHF position.

Based on my TA strength vs. FA strength tool, my focus pair has switched as of yesterday from long GBP/CHF to long GBP/USD. Long AUD/USD and NZD/USD are also on the watchlist.

Here's a typical trading setup for me. I've got multiple buy orders lined up above the price, one of which has filled. Each order has a stop at 1.4400, and each is sized differently to make their individual risks equal to about 1% of my account equity. Thus, the orders at lower prices are for larger amounts which tends to keep my average position cost lower.

In the worst case scenario, all 8 orders would fill, then the price would crash back to my stop. In this unlikely event, my loss would be about 8% of my equity.

If the price rises and begins to fill the orders, my analysis may indicate higher levels for the stop, so I would trail it higher in that case. The lines on the chart are based on Market Profile concepts.

I'll try to post detailed info on this trade as a means of refining and clarifying my thought process regarding this method.

While I have identified a pending opportunity (long GBP/USD) by using my FA/TA divergence tool, that's only half the battle. The next part is determining timing for entry, and then managing the trade through to exit. In this post, I'll focus on the timing aspect.

Although I'm going to continue with this trade, I'm not confident the time is ripe just yet. What I really should be looking for is evidence that strong buying has entered the market at a certain point, which would form the basis for my stop loss value, but I haven't seen this evidence yet. More specifically, I look for price areas where there is a higher percentage of volume than time expended. I call this "volume density." An area of high volume density at a price extreme indicates that large longer-term traders have taken positions.

My stop loss of 1.44 is located at a point below a "value area" (a Market Profile concept) of GBP/USD during the previous week. However, this isn't nearly as strong an indication of S/R as high volume density would be. So my timing on this trade looks a little sketchy. I'll continue to monitor it this week and see how it develops.

Yeesh! Just when I've begun buying the GBP/USD this week, my TA/FA divergence tool has shifted focus to long NZD/USD. We seem to be in some kind of period of flux here.

Anyway, I'm sticking with my GBP/USD trade, but will begin monitoring NZD/USD using Market Profile in order to spot high volume density areas that may indicate a bottom.

The GBP/USD trade has two filled orders now and is fluctuating around the B/E area.

Three of my orders have filled on this position, and I'm currently up 142 pips from my average position.

I've entered a small long position on NZD/USD based on some volume density in the 0.5300 - 0.5400 area. My stop is at 0.5200 and I entered at 0.5453.

Nice application of MP in your trading! Makes really good sense.

Wish you many pips on it!

Thanks! You guys have a really great thread going; keep up the good work over there! I'm not one to hop on the bandwagon very easily when it comes to trading methods (I'm usually the skeptic in most threads, LOL), but the MP concepts are really helping a lot. I've been meaning to stop by with a more detailed post on how I'm using the volume density idea.

The account was down 3.9% this week. Oddly enough, I'm not quite sure why that is, since I don't remember taking any big losses and my two open positions are both in the green. I think I need to start recording individual trades again, taking into account my multiple entries.

I have something to say. Something that I've been thinking for a long time. Here it is.

Some so-called "trading wisdom" and "trading rules" are just pure crap.

A lot of these oft-repeated "rules" even contradict other pieces of common "wisdom" and I think someone illustrated this in a funny post on FF somewhere. Anyway, here's a case in point (and yes, it's case IN point, not case AND point which certain posters persists in saying...sigh ).

"Never let a profit turn into a loss." This is sometimes stated as "Never let a large profit turn into a loss."

Wow, really? Because if indeed "the trend is my friend" and I should "let my profits run" then I ought to be letting profits turn into losses all the damn time. Why? Market noise. Try looking at a real trend and checking to see what your stop loss would have had to be in order to keep you in that trend for its duration. Most times, you'll see that the stop would have had to be VERY wide indeed, and that your profits would have frequently been turned to losses for short periods, or at least drawn down by a considerable degree on each retracement.

What does this have to do with my current GBP/USD trade? Let's take a look.



See my big huge 2.5% (of account equity) profit? I was on-screen during that period, and you can bet your bippy that I was sorely tempted to push my stop way up to the most recent minor low. But then I thought to myself, "self," I thought, "that's the same dumb thing you do all the time, and every time the market noise knocks you out of what would have been a stellar trade. And it's all because of your weird belief in a bogus piece of market "wisdom" that says not to let a profit turn into a loss."

Furthermore, the Market Profile concepts I've adapted came to my aid. I identified an area of high volume density that was forming just below where my average price was; in the LOSS area. But this area looks poised to form the next higher area of support for what may be a fundamentally supported long term up move in the GBP/USD.

So I let my profit turn into a loss for a little while as it moved down into this area of high volume density. And guess what? It didn't even hurt much. The pair penetrated a little way into the area I identified, found some buying, and started back up. By the end of the week I was back to a slight profit.

Let's see what happens next. Was I right in not grabbing for the profit before my longer term plan told me to? Or was I indeed foolish to "let my profit turn into a loss?" Time will tell. Stay tuned!

Remember that method I was using earlier in 2008 with EUR/JPY? I was placing buy orders above the price as it dropped and sell orders below the price as it rose. This was in preparation for the inevitable reversal of whatever price leg we were in. In that method, I was using statistical data from a study I did to determine the median length of each leg based on the previous one, and I would begin placing the contrary orders after price had passed this median point into what I called the "exhaustion zone."

But now I have Market Profile and the idea of volume density. This gives me much more insight into where the market is likely to turn than that old statistical method did. Look at the chart in the last post. See the solid yellow line near the top of the price peak? I didn't draw that after the fact. That line was already there. It represents a peak in volume density that occurred earlier in the week (or in the previous week; I'm not sure). So as price was bouncing around near that line, I was already thinking that I may be in for a decline, which is exactly what happened.

So how do I put this together with my old method of position management (which has an elegant logic to it that I really like)?

What I should have done was used that high volume density area as a trigger to start placing sell orders below the price to liquidate at least part of my position during a decline. I could have used 1.5000 as my "baseline" and done the same thing I did with my stop at 1.4400; namely set my position sizes so that (size x distance to baseline) is always approximately equal to a a constant percentage of my equity. This causes me to buy more at lower prices and to sell more at higher prices.

Considering that I have a fundamental price bias, I could use a smaller equity percentage value for the liquidating trades than I do for the entries. For example, on GBP/USD all of my buy orders are sized so that if they hit the the 1.4400 stop, they each would lose 1% of the account equity. So I could have set my sell sizes in such a way that (size x distance to 1.5000) is always about equal to 1/2% of my equity.

If I had done that, my position would have been reduced in this case to about 20% of its peak size, and I would be well positioned to replace those two buy orders in the sequence above the price. I'll incorporate this position management method into my overall trading strategy and see how it goes.

If I go back to my "position management" method, this means I can't track the P/L of individual trades as I said would start doing a few posts ago. Position management means that I'm scaling in and out of positions, and it would be a nightmare to keep track of individual "round trip lots." So I'm back to just looking at weekly changes in my open equity.

So here's the general outline of my trading method:

1. Identify which pairs to trade and in which direction. I do this using my FA/TA divergence analysis tools. Currently my main focus is on finding long opportunities in NZD/USD and I am still managing a long position in my prior focus, GBP/USD. A full explanation of how I identify these pairs and directions is on the front page of my site: www.market-geeks.com (there's nothing for sale there but it's ad-supported).

2. Use Market Profile concepts to analyze the pair. I look for value areas, S/R, and likely turning points, using a concept I call "volume density." Do a search for "Market Profile" on ForexFactory to find info on this. I will provide more detailed posts on my analysis methods later on.

3. Manage the position through its lifecycle. I use the "Position Management" techniques that I described extensively in this journal starting in February of 2008. Also, when the FA/TA divergence picture starts showing a bias in the opposite direction from my position, I adjust my position management rules to allow for more aggressive liquidation of the position.

Here's an annotated chart showing the current situation with NZD/USD. I've placed a couple of buy orders above last week's value area and below the first volume density peak.

Bleh. This pair has now dropped to sixth place on my focus list, so I'm not actively looking for new entries now. Here's how it went:



Several posts ago I talked about how I wasn't all that confident in this trade because I hadn't seen a significant area of high volume density below the price to serve as a bottom. There is such an area up around the 1.4900 area that acted as resistance though. Anyway, I guess the lesson is, if the trade isn't there it isn't there, so don't act as if it is. Oh well, on to the NZD/USD!