The Finance Book Club

Entries are made on Monday. Engulfing candles pattern in 2 previous weeks bars. On Monday is already new week started - that current week bar cant be used for pattern detecting.

Thanks! Now I get it. Interesting that we both got similar results.

1. A scalping strategy
   1. Not recommended until you have ‘significant’ experience on longer TF
   2. Scalping tests you to the limit
   3. Start trading it in a demo, even if you have already started swing trading
   4. Limit your leverage because you will make mistakes
   5. Don’t focus on every trade but on implementing the strategy effectively
   6. A broker that doesn’t charge commission is needed (know one?) because even at $5.00 round-trip (which is low) if you make 100 trades you’d need to make an extra $500/month to break even on every $10k lot you trade.
   7. Trade only at the highest volatility times. He uses the example of ‘Canada’ with regards to NY, but Canada has six time zones, and if you live in Toronto, the largest Canadian city, that’s in the same time zone, so…
   8. Strategy is a trend-follower (scalper?)
   9. Wait for retracements to enter in the direction of the daily trend
   10. Expect 2-5 trades per day; but sometimes the setup will not materialize at all for the session
   11. These rules are for bullish trends so invert in a bear trend
   12. Check the news calendar - avoid events 2-3 hours before and after
   13. It’s better not to trade NFP at all
   14. Trade only London/NY ‘busiest hours’
   15. Find 1-4 of the highest liquidity majors (EU, UJ, UCAD, AU, NU, GU).
   16. Start with 1-2 until you are comfortable
   17. Check overall trend on D1 and only trade that direction; avoid choppy pairs
   18. Draw horizontal lines for ‘main’ resistance /support (boo)
   19. Plot a ‘20, 0 Bollinger band in a 5 minute candlestick chart; we are checking for a retracement ending;
       1. you can use keltner channels, fibos, pivots, or ‘whatever you feel more comfortable with’ but Langer had good results with Bollinger bands.

   20. Look for a long using a pending order when the retracement pierces the edge of the lower channel of the BB
   21. If price is ranging, wait for a breakout from the range to start looking for setups
   22. Wait for a bullish candle to appear and enter a pending long if price breaks through the last bullish candle high
   23. If your entry isn’t hit, wait for the next bullish candle after price has pierced the lower BB and enter a stop order again
   24. Place the stop above the significant low of the last few candles
   25. Move to break-even after 10 pips
   26. Let it ride using the previous third bar low trailing stop or exit at S&R
   27. You can also go for a fixed 20 pip target, which will increase winning ratio but miss ‘bigger swings’ (but are we scalping or not, Langer?)
   28. If this all seems complicated that’s because it is, but in fairness to Langer, scalping strategies are often difficult to put into words, as they are often much more about ‘feel’ and seeing how price is behaving prior to striking.

2. Here is a step-by-step example.
   1. EURUSD D1 chart 2015-05-31 shows a down trend, so we’re looking for bearish trades

1. 8:00 am NY time; 5 minute chart, with a 20, 2 Bollinger Band
2. The red vertical line is the session’s open.
3. After this line we can see the price moving right into the upper channel line and above it. That’s where we start looking for a bearish candle.
4. This candle comes right after the fourth bullish candle. We can enter our entry stop (short order) and place our stop above this bearish candle.

1. Spongebob Squarepants French guy voice: One candle later

1. The next trade must happen after price gets back above the BB again
2. Wait for a bearish candle
3. Place entry stop and stop loss

1. The trade triggers
   
   
   Attached Image (click to enlarge)

   
   
2. High probability, Langer says (how high?) I would ordinarily say we can find out but trying to backtest a scalping strategy is nearly impossible. So much of this depends on personal performance. Also since an element of this depends on support and resistance, which is difficult to define, it makes mechanical testing all but impossible. All I know is this system is not for me. If anyone wants to try it out and report back, that would be awesome.
3. Langer repeats his cautions to try this on demo, and to backtest this for at least a few months, before committing any money to it. Of course you should do this with any system, scalper or not.

1. Position Sizing - the Unexpected Holy Grail
   1. Single most crucial element
   2. After 4-6 months in a demo account and keeping a detailed journal you should know your expectancy
   3. You need to know these ratios
      1. Average Risk/Reward - how much you normally risk to win how much on average; for example 1:1 risking 10 pips to win 10 pips
      2. Winning percentage; even 30% can be successful
      3. Pro traders risk 0.5% to 1% but they rarely trade less than 100k
      4. If your system wins 60% of the time and R:R is 2:1, 20 pips risked to gain 40; then for every 100 trades you win 240 and lose 80, leaving 160
      5. For a $10,000 account, with 1% risk per trade:
      6. “ That will mean that 20 pips should account for 1% of your total account, in this case $100, so your position size has to be $50,000. So normally you will risk 1%, or $100, to make $200. After a whole round of 100 trades, you should have gained $16,000 if you kept your risk locked in 1% of $10,000.” Get that?
      7. With your journal, you should know how long it takes for you to make 100 trades so now you have an idea how much you’ll make in a certain time
      8. Take note of your worst losing streaks and be prepared for clusters of losses
      9. Position sizing should take this into account so if you lose 120 pips this isn’t an account buster
      10. 1% on a 10k account can lose $600, ‘not nice but far from catastrophic’.
      11. Tweak to your ‘risk tolerance’ but avoid more than 5% per trade
      12. Consider that a losing streak of 10 or more could happen every 1-2 years and at 5% you could lose half your capital; whereas a -$1000 loss (@1%) is recoupable after a few weeks of ‘focused trading’.
      13. Risk formula
          1. Your risk amount in $ divided by the amount of pips your stop is set to x 10,000
          2. If you are risking 2% of your $10k account, or $200 in this case, your formula will be 200/34 x 10,000 = 58,823

Probably not terrible advice but after our recent MM studies this seems ...unsophisticated.

1. Black Swans
   1. A detailed description of the Swiss peg debacle that has been discussed elsewhere and in this thread too.
   2. Always trade with a stop loss
   3. Regularly move profits out of your account and into a more stable store of wealth

2. The importance of having a trading plan
   1. After a few chapters of tightly focused, useful content, it was almost inevitable that Langer would go off the path and get writerly. Half this chapter is an amateur history of Napoleon that masquerades as an allegory about overconfidence. Waterloo happened because Napoleon didn’t have a plan, basically? I dunno, I stopped paying attention. Wake me up when this is about trading again.
   2. Ok, the lesson is you need to have a plan, sounds good
   3. However now Langer goes into what I’m calling ‘question-mode’ where the author masks their lack of actionable advice by asking YOU what you need to ask yourself about. It seems plausibly helpful, maybe, by getting you to think about things you might not have realized you weren’t already thinking about. However in the case where you have thought about those things, it’s annoying, patronizing and useless. Question-mode is a common feature of any self-help book and especially common in trading advice books. Here’s an example of ‘question-mode’: “Please take a moment to do your trading plan according to your own trading style, your personal rules, and try to think on your limitations, what things make your trading go wrong? When and how are you chronically making mistakes? What are the strengths of your system? When and how is your system working at it’s best?” Well, these are your systems we’re working with, Langer, how about you feed us some answers and we’ll do the heavy lifting later?

3. Oh, he does!
   “This would be an example of a scalp-trading plan:
4. I will only trade the NY Session
5. I will close any open trades left before the NY session closes
6. I will not trade around important news events like the NFP
7. I will only trade pairs that are trending
8. I will only trade pairs that offer a spread of 5 pips or less
9. My position sizing will limit my loses to 2% of my capital every time
10. I will go for setups that provide at least a 2:1 opportunity
11. I will move my s/l to break even when prices moves 50% of the desired move (does this hinder your returns as much as it did the 'strong bears and bulls strategy'?)
12. I will only enter the markets if my setup coincides with the overall trend
13. I will enter only if so and so indicators and so and so setups are telling me to enter (here is where you state your trading system for finding entry setups)
14. I will enter a maximum of 5 trades a day no matter what
15. I will stop trading the day if I lose 3 trades in a row
16. After you have defined your trading plan you should print it and stick it right to your trading station, and of course check it every time before entering a trade.
17. The trading plan is:
    1. giving us clear rules on when to trade, avoiding stress and randomness
    2. It’s protecting capital by not letting our feelings get in the way when deciding position sizing and where to place stop losses and how to trail them

Ok, seems solid. It seems like Langer might be more of a scalper than a long-term trader. Maybe some scalpers will find this useful. Believe it or not we are already nearly finished the book.

1. Your 6-step blueprint to become a profitable trader
   1. This really just seems like an extension of the planning stage?
   2. 1. Write down your goals; realistic but motivating
   3. 2. Define how much you will have to earn
   4. 3. Define the type of trading you will do (swing, position, scalp)
   5. 4. ‘Define scenarios’ for achieving them.
      1. Example: “I need to make $300 a month from my $5,000 account swing trading 2 - 3 trades a week. I will aim for $100 in every trade or 100 pips with a risk of 50 pips. That will make my position $10k and risking 1% to make 2% of my account in every trade. If I make 12 trades a month, I can have up to 5 winning trades, 4 losing trades, and 3 break-even trades and still achieve my goal. Here you can confirm with your trading system expectancy and see if your goal is really possible to achieve.”

      
      

   6. 5. Open a demo and follow your strategy for at least four months, not more than six. Don’t tweak. Keep it consistent. Don’t take on too much; stay focused.
   7. 6. If your strategy is consistent, open a real account and start trading. Commit to going back to demo if you lose a certain amount of money, around 30%.

   
   

2. Final thoughts
   1. Langer outlines an account management plan (recall the sad lesson of Livermore - don't leave too much money with your broker)
   2. If you have $10,000, start with $2,000, leave the other $8,000 in your savings account
   3. After some months you grow to $3,000 and enter another $2,000 from your original $8,000 left.
   4. Now you will trade with $5,000, then after another few months when you reach $7,000 top your account with another $3,000 and make it $10,000.
   5. Now you will be trading $10,000, but your risk will be very limited because $3,000 of that came from your own winnings. After you get to $15,000, enter your money left and trade with $18,000 and enter your full position. From there, even in a very bad scenario, you can lose up to $8,000 and still have your initial capital.
   6. If you get to $30,000, withdraw $5,000 from the Forex account. Then, after taking the remaining $25,000 to $40,000, withdraw another $5,000 and take all the risk from your account and recoup the initial investment.
   7. From there, every time you reach some milestone you determine, you will withdraw a portion to enjoy your profits and, at the same time, keep growing your account.
   8. If your trading stops working and you lose 30% of your capital, you should go back to demo for at least 4 months

My 'final thoughts' on this book
Langer’s so-called Blog is nothing but ghost-written ‘forex for newbies’ articles. The title is ‘Honest, proven and profitable Forex trading advice’ but there is absolutely no proof anywhere. Langer doesn’t seem to keep a public trading record.

It would be hard for any act to follow Penfold after his excellent book, so I have to keep in mind that my disappointment is probably due partly to some kind of anchoring effect. Also it’s inevitable that after a high quality offering there should be some reversion to the mean.

Joyny and I checked one strategy and we both found it to be woefully incompetent. I didn’t feel like checking the second one as it’s similar to the first. The scalping strategy probably will work for some people, probably. Almost certainly, with some added house rules to stay safe. I personally have never found scalping with bands to be very effective. It does work brilliantly sometimes, but it can also be terrifyingly ineffective, especially since the market is reactive, and your order, depending on how tantalizing it looks to other traders, can actually affect the outcome, initiating a breakout at the worst time. It also seems to me that unless your scalper is automated you are putting all your faith in yourself acting like a good robot, treating every situation identically. That will surely appeal to some. However I would prefer to scalp with an EA and this system isn’t quite mechanical enough to turn it into one...or is it? You could dispense with the S&R check and just trade the Bollinger touches. I am going to guess that it is mostly a random signal though. The daily trend will help only if you are willing to suffer wide stops.

Having said that, this book doesn’t seem to stand out in any way. We are given a few strategies, a few well travelled bits of wisdom. Nothing terribly unique or useful. So I'd compare this to 'Naked Forex' and ehh, maybe it's because I read that book first, but this doesn't seem as strong.

Hi all, I just discovered this nice thread. I'm gonna share my fav book by Dr. Elders, he is a true legend, if you like the book please purchase from the stores.

Thanks Mashfx - I will add it to the reading stack.
But please remove the PDF file as I don't want the thread to get shutdown for a copyright issue. I already skirt the ragged edge of disaster as far as that goes. I'm sure everyone can figure out how to get a copy of the book.

The next book is
Ryan O'Keefe's Making Money in Forex
Trade Like a Pro Without Giving Up Your Day Job

My first thought is that what distinguishes a pro is that they don't have the need for day jobs. I'm sure many would disagree.
Trying to find out anything about Ryan O'Keefe is difficult. His website appears to be offline. He doesn't promote his book through Quora as Paul Langer did, which is how I found his blog.

Preface

1. When Ryan O’Keefe (ROK from now on) started trading the internet was young and barriers to entry were high
   1. $100,000 lots
   2. Account minimums

   
   

2. ROK kept a day job and studied in his spare time
   1. Trading during working hours didn’t work out
   2. Tried getting up earlier, staying up late
   3. Tried using a mobile device

   
   

3. Day trading isn’t an option for someone stuck in a staff meeting while the market is roaring

Reasons not to trade for a living (now this is a refreshing change. Some day I hope to see a book that is entirely devoted to this topic)

1. ROK admits he doesn’t trade for a living
   1. Too risk averse to rely on trading income
   2. Tough business with no shortcuts
   3. Most trading gurus have other interests or work for dealers
   4. Investment gains are not linear

   
   

2. Regulatory changes have made trading more difficult
   1. CFTC Reauthorization act - allows the CFTC to “enhance the Commodity Futures Trading Commissions' jurisdiction over off-exchange currency trading”
   2. CFTC has wasted no time enacting new regulations through the National Futures Association.
   3. (NFA) enforced two new rules significantly altering the way some traders conduct business.

   4. 1. First-in/first-out (FIFO) order execution forced some dealers to eliminate the availability of stop and limit orders on individual positions.
      2. The NFA also eliminated the ability to hedge currencies in a single account.

   5. Many traders chose to move their trading accounts overseas, where the rules do not apply.
   6. “As I write this, the CFTC is proposing new restrictions on margin requirements that will impact traders using leverage greater than 10:1. The proposed leverage restrictions have the potential to force many retail currency traders into overseas accounts, where margin restrictions are not as strict.”
   7. The CFTC has an (unwritten) mandate to bring all forex trading under their purview and they will not stop until all the unregulated/offshore brokerages that cater to US residents, and eventually, global residents are under their control. None of their regulations are about protecting individual traders

   
   

3. Taxation changes also make things more difficult
   1. H.R. 1068 is currently working its way through the House of Representatives. Conveniently titled “Let Wall Street Pay for Wall Street’s Bailout Act of 2009,” the legislation seeks to impose a 0.25 percent tax on any financial transaction “subject to the exclusive jurisdiction of the Commodity Futures Trading Commission.” Retail currency transactions are now directly under the jurisdiction of the CFTC, therefore it isn’t a stretch to imagine taxes imposed through currency dealers
      1. Hasn’t happened yet, but may only be a matter of time and it will kill retail trading for any but the wealthy

4. ROK believes in diversification
   1. Many pro traders are content with their day jobs

5. This book is written with casual traders in mind, those who want to trade while keeping their jobs
6. ROK is a trader, not an analyst
   1. Interested in reducing risk
   2. Making money

7. He does not care about
   1. Market correlations
   2. The Big Mac index
   3. Central bank speculation
   4. Detailed analysis of each currency pair
   5. Effects of commodities on currencies
   6. Traditional TA
      1. Technical patterns
      2. Elliott Wave Theory
      3. Gartley patterns (whatever the heck they are) (LOL! Yes, they are ridiculous)

8. ROK is a bargain hunter
   1. Other traders chase breakouts
      1. Sell resistance
      2. Buy support

9. Demand the best of every deal- not just cars
10. Sounds good! Let’s begin

of course, sorry about that. just removed it

Chapter 1 - Exploring the Currency Market
If you’ve read BabyPips or most other forex beginner books you’ve already read this chapter and if you read my summary of ForexHero’s beginner course then you’ll know what’s in here - basics on the

1. history,
2. participants,
3. differences vs the stock market,
4. pairs,
5. transaction costs,
6. trading hours,
7. trade mechanics,
8. pips,
9. long vs short,
10. understanding currency quotes,
11. order types,
12. margin and leverage,
13. interest,
14. brokers (dealers),
15. trading platforms,
16. regulation,
17. capitalization, etc.

If any of these terms are alien to you (especially the bolded terms) then my book thread is not for you - please start with a beginner forex book or three (not BabyPips) and then come back.

Of course, it’s always good to refresh your knowledge of the basics, and there’s so much info to cover that ROK can’t really do much but sample the most general data in a few pages, so this chapter will not be enough to get you started if you don’t have some years of experience already. If I were writing a ‘how to trade’ book I would either split it into two parts (beginner/advanced) or omit this chapter entirely and tell people to read someone else’s book. To be fair, ROK does warn us that some topics have already been covered ad nauseum.

Chapter 2 - Principles of a Bargain Hunter

1. Every discretionary trader should have a set of guiding principles that defines the type of trader they wish to be
2. Five principles of a bargain hunter
   1. Live your life
      1. Trade to live, don’t live to trade
      2. Balance time and personal time

      
      

   2. Learn to read price action
      1. Not knowing how is like a musician who can’t read music
      2. It’s all support and resistance (once more -boo hiss)
      3. Indicators give a false sense of security (worse than being wrong)
      4. No such thing as OB/OS markets (Livermore!)
      5. The trend is subjective and dependent on time frame

      
      

   3. Never pay full price
      1. Again, with price action

   
   

I have to admit I don’t get what he’s saying here with these charts even after reading the chapter but maybe it will make sense later?
Ok, he's saying you should buy after waiting for price to retrace - a bit of the 'last kiss' idea. Impractical in a fast moving market though.

1. Manage your risk

A classic trading book chart

1. Manage your profit
   1. Don’t play the ‘what if’ game
   2. Plan when to take profit (yeah)
   3. Look for R:R ratios greater than 1:3

   
   
   

Chapter 3 - Reading Price Action

1. Supply and demand is mentioned but no attempt to explain why it would be relevant to currencies
2. Fundamental strength - measured by the health of a country’s economy
3. ROK creates a ratio for every country!
   1. Currency Strength or Weakness Ratio (CSOWR) - the ‘sour’ ratio
   2. Collect fundamental data for that country - ROK warns us this is not the same as news trading
      1. Central bank interest rate
      2. Gross domestic product (GDP)
      3. Consumer Price Index (inflation)
      4. Retail sales
      5. Employment
      6. Trade balance
      7. Seriously, the busy real-job casual trader does all this busy work? I smell the distinct whiff of bullshit.

      
      
      

   3. Load the raw numbers for things like trade balances, and retail sales into a spreadsheet
   4. Load each value individually and keep historical data
   5. ROK posts his CSOWRS freely on his website! (he says)
      1. But ohnoes ROK hasn’t had a website since 2010, the same year his book was published. He didn’t even believe in his own book enough to keep a website going to flog it?
      2. However even after scouring his archived site’s site map I can’t find anything about CSOWR, so what is this, the third time a trading guru has promised that you could find something on their website and you can’t? It’s almost like trading gurus are unreliable or something?

      
      
      

   6. The CSOWR is not meant to be a perfect science
      1. cheap/easy
      2. Not an indication to trade on its own
      3. Simply average the values collected from the fundamental data
      4. “Using the data in Tables 3.1 and 3.2, we can clearly see that the CSOWR favored the Australian dollar over the U.S. dollar through most of 2009.”
         1. Why? US employment numbers were increasing and Aussie trade balance was worsening. The only number that mattered was the interest rate. Why even consider anything else?
         2. “Clearly, the fundamental strength was on the side of the Australian dollar, whereas the United States slashed its central bank rate, shed jobs and retail sales fell.” (clearly. Pfft. You know why the AUD rose through 2009? Because it fell throughout 2008, that’s why.)
         3. Is he talking about comparing the total values at the tabulations at the bottom of these charts?? Those are raw figures - of course the US numbers are always going to be vastly larger than the AU ones, so when they’re negative they’re going to be way worse.
         4. Still this is an interesting approach that I haven’t considered and can be tested going forward. Obviously the scale of these numbers needs to be normalized though.

Next: measuring institutional interest

Measuring institutional interest

1. Wouldn’t it be nice to know if the big guns were on your side?
2. Every Friday the Commodity Futures Trading Commission publishes the Commitments of Traders, or COT, report online at www.cftc.gov/marketreports/commitmentsoftraders/index.htm (outdated)
3. Here's’ the actual current URL at the time of this summary https://www.cftc.gov/dea/futures/financial_lf.htm

1. Non-commercial traders are speculators in the futures market
   1. These are the big dollar institutions driving supply and demand
   2. Without volume info this is as close as forex traders can get to figuring out what the big dollars think about a currency pair

2. compare the non-commercial short contracts with the non-commercial long contracts.
   1. The CFTC have changed the names for everything; now it’s dealer-intermediary; asset manager/institutional; leveraged funds and other reportables
   2. The commercial side is now dealer-intermediary and the non-commercial side is split up into the other three groups. I guess asset-manager/institutional and leveraged funds is what we’d want to pay attention to now. The thing is dealers are usually ‘wrong’ because they’re selling to the ‘dumb money’ and asset managers are usually ‘right’, since they’re playing the tune, but in no way does this help you detect the switch between trend directions or pick tops/bottoms. There is just as much waffling between long/short among institutions as there is among individuals and price is the conductor leading the band.

3. The COT Flip
   1. “Monitoring the Commitments of Traders data weekly allows you to determine the direction institutional traders are headed with their contracts.
   2. For example, if you knew every week that non-commercial traders were reducing the number of long contracts and increasing the number of short contracts, it could be a signal that interest is shifting to the short side. You will also know the precise moment when institutional investors have switched from being net long to being net short. For trend traders, the information is especially useful to determine whether the trend they are trying to trade is with or against the institutional bias for a currency.”
   3. These days you don’t need to rely on something like the COT raw data - check out tradingster’s free tool here. It has charts, historical data, the works. The thing is, if you have all this info, what does your competition have?

Nicely cherry-picked, but here’s an actually useful chart that compares historical price to the net positions of dealers and leveraged money.


NZD dollar - source: tradingster.com/cot/futures/fin/112741/
Does this help you see where price is going to bottom out or peak? We can definitely see places where dealer/asset interests were diverging and converging and price moving with it, but if you wanted to be sure the bear trend was going to continue say, May 2012, would the cross up of dealers becoming net long and leveraged money becoming net short early in the month have helped you?
Quite the opposite as it quickly shifts back at the end of the month and a bull trend begins. Now if you want to know if the bull trend is going to continue can you depend on the COT figures? Look at the edge of the graph. Is leveraged long interest decreasing and dealer long interest increasing? Looks like it. So that means the NZD will fall, right?


Nope. The convergence was temporary and NZDUSD continued to rise through 2013. Of course this is just one chart, but check it out for yourself. Try to find a reliable method of gauging price direction using smart money positions. The only thing I can say about smart money is that they will change their minds instead of waiting for a reversal forever which is what dealer interest generally does. However both sides lag behind what price is actually doing and it all seems fairly random to me.

What about using historical high volumes of interest to gauge turning points? This seems like it could work sometimes


Historical high interest for leveraged money around 30k and price dipped. You can see it again in July 2015 where dealer interest was historically high at 30k and price (eventually, after some lagging) rises modestly through 2016. Imagine it’s August 2016. Leveraged interest is again at that 30k high. And it looks like it’s dropping. A good time to go short?


Mmmaybe? There was a drop to the end of 2017. However now interest is regularly reaching 30k on both sides and price is ranging. Now it’s mid 2018.


Time to go long, right? Dealer interest is at that historical level of 30k, in fact, beyond it.


Oh sweet summer child. You have much to (un)learn.

ROK will protest and say, “look man, I told you that this was not for taking trade entries but just to see if your trade is on the side of institutional interest!” But that’s just it. You don’t know. You won’t ever know (for sure).

Central Bank Influence

1. “Central banks are active participants in the currency market, and their actions have a direct impact on supply and demand within the marketplace.” Hard to disagree.
2. Discount rate
3. Federal funds rate
4. LIBOR - plagued by scandal and does anyone really understand it?
5. Carry trade - when traders buy higher yielding currencies and sell lower-yielding currencies (pretty dead at the moment as every country desperately tries to create inflation, but now that inflation is here, will anyone blink and raise?)
6. World events can cause extreme (but temporary) price shocks
7. “The battle lines between supply and demand are drawn visually on our charts as barriers called support and resistance. The terms support and resistance are synonymous with demand and supply.” (though I have yet to see it demonstrated to my satisfaction. The gauntlet is cast, ROK!)

Identifying Support and Resistance

1. Use trend lines
   1. Only as a guide due to their subjective nature
   2. The generally accepted practice to draw trend lines is by connecting three or more consecutive price points without the trend line being broken by price. (it doesn’t matter how you draw trendlines. They are just lines!)

2. Use horizontal lines
   1. Support drawn across consecutive lows
   2. Resistance drawn across consecutive highs
   3. Lines, I tell you!
   4. Don’t sell at resistance in an uptrend or buy support in a downtrend (because trends are real and lines are imaginary. So just ignore lines, right?)

   
   

Gosh, it’s amazing how often support works in this uptrend.



I fixed your chart for you. You can’t draw resistance lines wherever you damn please, oh well, you can and look what it gets you.

1. Support becomes resistance and vice versa
2. “The challenge many traders face is determining which horizontal support and resistance levels have the highest probability of holding price versus which will fail.” (quite a challenge)
3. Using round numbers (bullshit)
   1. Used to identify ‘key zones’
   2. Particularly effective near the open of a major trading session
   3. ‘Stop gunning’
      1. Market makers do it to move price
      2. If they want to move price lower they initially move it higher by ‘triggering stops’
      3. Except it’s not market makers that do this it’s traders themselves - big retail feeds on small retail. Market makers don’t care where price goes as long as it moves, and dealers don’t care as long as it moves a lot and then comes back to even out inventory.

4. “If the market is trading near a round number and you believe it may be gunned at the open, place your orders 10 pips above or below the round number. In my experience, when a round number holds after it is gunned, the market rarely moves more than 30 pips higher than the round number before continuing in the opposite direction. When this technique works, it offers a high-probability entry with extremely low risk.”

“September 10, 2009, GBP/USD was trading just above the round-number price of $1.6500 before the London open. Shortly after the open, GBP/USD traded down to test the round number and reached a low of $1.6479 before continuing to rally higher.”

Almost testable, in fact maybe I’ll pause and do that, as it’s definitely more interesting than what we’re ‘learning’ now.

The Round Number Gunner Test
Ok,so now you have as much info as I do about this ‘stop gunning’ method that offers ‘high probability entry with extremely low risk’.
Since ROK’s definition of the method is typically vague, here's how I’m going to set up my test.

1. I’m putting aqua lines at every round-number price which I interpret to be the first two digits after the decimal. So it doesn’t matter if you’re using 4 or 5 digit prices, a round number is 1.29 not 1.295, 1.3000, not 1.305
2. I’ll start with Cable (GBPUSD), because why not?
3. Notes about timing:
   1. I’ll start at the start of 2020. I like to use arbitrary ‘round’ dates to test things so I can’t be accused of favoritism or pessimism by cherry-picking a good or bad time to start. I would have used 2021 but with a daily system that’s not really enough data. I’ll end at the year’s end or if I feel plucky, keep going to present time.
   2. I’m checking using the H1 timeframe so we can see how price is hitting these levels
   3. but I’m primarily interested in the opening hours of each session. ROK mentions only the London and NY sessions, but for now I’m going to take every trade that crosses a level (keeping only one trade per level and session active at a time) for a maximum of 3 simultaneous trades per day. I can prune ‘invalid’ trades that started during a ‘wrong’ session or time, later if I wish. For reference the broker I’m testing on is a standard GMT+2 starting time broker which makes the LON session open 09:00 and New York sesion open at 14:00.
   4. I’m going to gently enforce an opening time limit if no trades have yet been opened as I would prefer to trade than not trade. Let’s say around 19:00 is too late to start with this daily open strategy, but before then anything is fair game? Once a trade has been opened for NY, if I get a chance to re-enter I won’t, as that’s clearly not part of the daily open, as specified.
   5. For now the test will open trades if they’re triggered and leave them open until there’s a result. No premature closing at the end of the day. However we’ll only open one trade per level per session as stated.

4. If I have interpreted ROK’s instructions correctly the main idea is that the round number levels will act as support or resistance. So whether price is above or below the round-number level before it touches is critical. With that in mind I think the rules are:
   1. price should cross a round-number level first,
   2. and ‘gun’ away to hit my trade entry level 10 pips away,
   3. and then reverse to trend in the opposite direction before it moves away from the level by 30 pips. I’m using this interpretation based on the chart above and the description beneath it.
   4. In this case we should go long when price touches from above and short when it touches from below.
   5. ROK doesn’t mention exits but let’s be satisfied that the trade was a success if it moves 30 pips away from the level in the correct direction. For a real trading system you could incorporate some kind of break-even and trailing rule after this minimum requirement.
   6. With a stop 30 pips away from the level this ensures a better than 1:1 RR actually 2:3 RR even if the method’s chance of success is random.
   7. I noticed later that I also needed to clarify when a trade can be taken when price is ‘stalled’ over a level. Without this rule you might take dozens of trades on days when price is clearly not trending.The rule is that a bar must rise up and clear the level (no part of it touching the level line) before it can touch the level again and trigger an entry.

5. If I don’t believe in the power of round numbers (and I don’t) then this would be the method I’d prefer as then you’re sticking with the initial trend:
   1. Price should move a certain distance (20 pips) to cross a round-number level first
   2. And if it continues 30 pips in the same direction, take a profit
   3. If it moves 20 pips away from the entry, take a loss
   4. This does the opposite of what we’ve been instructed, going long when touching from below, and going short when touching from above. Let’s call this the ‘skeptical version’ of the round number gunner test. I aim to do both tests for comparison.

Now let’s begin.

This is the first trade of the original flavour test. I’m using rectangles to check the distance to the trade trigger, the stop and the take-profit levels. In this case the round-number level did not provide support and the trade drops to 30 pips distance from the level.

Attached Image (click to enlarge)

I’ll make successful trades blue and failed trades magenta, as per my usual modus operandi.

Attached Image (click to enlarge)

This trade failed to support price in the London session but now that price is beneath the round-number level it appears it will act as resistance?

Attached Image (click to enlarge)

It does but price doesn’t ‘gun’ far enough to trigger a trade entry. Bummer.

Attached Image (click to enlarge)

The next day price tests the same level during the London/NY overlap. Does the resistance hold? It does not, and price blasts through our stop.

Here’s an example of a trade I did not take as it was too late in the day. One failed trade had already been opened, and it’s already nearly the end of the NY session before we get the signal. It would have failed anyway.

Attached Image (click to enlarge)

Attached Image (click to enlarge)

Sometimes due to the fortunate (or unfortunate) placement of the 10pip trigger zone a series of winning (or losing) trades could be taken if we are allowing more than one trade per session? In this case I’m allowing it because this method needs all the help it can get. Update: I’m now adding a rule that prevents this - a bar must ‘clear’ the level line before a new trade can be entered.

Attached Image (click to enlarge)

Other times, during a heavy trend it was not so kind to allow it to take multiple trades in a day. I assume this will all balance out.

Ok, so what’s the tally at the end of 2020?

It’s as bad as it looks.
228 total losses for -4560 pips

136 total wins for 4080 pips

Produces a deficit of -480 pips before taking into account trading costs.

If I remove the Asian session trades it makes no difference

209 losses for -4180 pips

122 wins for 3660 pips

Notice that the losses are nearly exactly ⅔ of the total as you’d expect for something that is ⅔ more likely to happen owing to its 33% closer stop. If the zones were equal I’d expect wins and losses to be roughly 50% as you would with coin flips or any other completely random process.

Attached Image (click to enlarge)

Looking at the chart it’s very plain to me that price doesn’t give a damn about our magic round number lines and it does not ever reliably reverse or respect a level except occasionally by chance.

What does this suggest?

1. Round number lines didn’t produce reliable support or resistance
2. Trader ‘psychology’ doesn’t move the market
3. There is no unusual ‘gunning’ near the session opens
4. The 30 pip distance chosen by ROK is completely arbitrary and gets annihilated in high volatility
5. This method doesn’t work
6. ROK doesn’t look smart casually suggesting something that is supposed to produce a ‘high probability entry with extremely low risk’ when in fact it seems to do exactly the opposite.
7. So either he didn’t check, isn’t careful enough to realize he’s trading randomly, or he’s just having a laugh at our expense
8. Of course, maybe market conditions have ‘changed’ and this method used to work in the past (ca. 2010) and now it doesn’t. I highly doubt it though. Price just doesn’t give a crap about things humans think are important, like round numbers.

What about the skeptical version of this system? Let’s call it the ‘anti-gunner’?

The ‘anti-gunner’?



Here’s how I’m trading it. Same R:R as before, 30 pips for a win, 20 for a loss. The only edge I get is if the price hits the round number line from one direction I figure it will continue to move that way more than it will reverse, most of the time.

Attached Image (click to enlarge)

I got tired after a season, but you can visually see the difference.
83 losses and 92 wins so far.

I estimate the win/loss ratio should be just over 50%, and since we earn 30 pips with every win and lose 20 with every loss, this system should be profitable if trading costs are reasonable, and on the daily chart, they should be (about ⅓ profits). This system actually has a chance of being profitable unlike ROK’s nonsense. Maybe I should stop reading and start writing a trading book, but according to Clemmo’s Conjecture, it would be the worst-selling book in history.

What have we learned?
1. Reading trading books is a waste of time 1/10 of the time
2. Clemmo is continually giving us winning systems that we will ignore at our peril
3. Clemmo is worth his weight in trading books or about 9 gurus at today's exchange rate, depending on what he had for breakfast.

Of course you shouldn’t trust me at all and you should carry out an exercise like this on your own to be sure you’ve caught any details I may have missed.

Daily and Weekly Ranges

1. The next fanciful notion of ROK’s is that weekly highs and lows ‘offer key support and resistance levels for traders, just as daily ranges do’.
2. I’m just going to go ahead and hypothesize that they don’t.
3. But let’s see what ROK has to say about these levels

1. ROK says we can look at the 4H chart to see if the weekly resistance/support is holding. “The long wicks on each four-hour candle illustrate strong selling pressure in that area as price rallies higher, only to be sold back down again.”
2. Sure, but long wicks with accompanying buying pressure could show up at any time to trounce that idea.
3. “The longer the time frame you are looking at, the more likely it is that the support and resistance level will be respected by price.” (Negative. It will just take longer to find out you’re wrong. Keep this in mind when we look at 'Bird Watching in Lion Country'.)

Trading Price Action

1. Identifying S&R is only half the battle
2. It isn’t a ‘perfect line in the sand’ (nor half as useful as a simple line)
3. “Locating a support or resistance zone is done by finding the price range immediately preceding a turn that takes price in a new direction. The range could be near a round number, at a daily or weekly range, or preceding a major breakout in price.” (nah)

 

1. “Strong rejections are visual tools to support the idea that a strong support or resistance level may have formed near the price that was the source of the rejection.”

A “turnabout”. Give me a break.



“Bargain Days” so basically dips in a trend.

And that’s about it! Do you feel like you now know how to trade ‘price action’? I don’t. Do you think support and resistance weekly levels are real?
If so I made a chart just for you where I drew a level on every major (no I lied - it is every swing, not every major one - the key question is how to distinguish between them and does it even matter? My trading journal speculates about this a bit but I could go into much more detail later, if anyone's curious) swing high and low on the weekly chart.

As you can see there are not many ‘zones’ where price hasn’t turned around at some point in the past (and I missed a few). Price visits and rests at almost every single ‘level’ and it does so haphazardly, with as much logic as a water bug. By sheer chance, some levels have been visited by price as much as three or four times, and sometimes over long time distances. However there is hardly any major swing low or high that is at exactly the same level. Keep in mind this is the weekly chart where even a small move could wipe out a large account.

S&R does not give you an edge. However if I haven’t convinced you yet then likely nothing will.

Chapter 4 - Managing Risk
Nothing new here but solid advice probably

1. Always use a stop order
2. Beware of overtrading
3. Reduce transaction costs
4. Think of losses in real money terms, not pips
5. Manage risk through position size
6. Use Micro accounts for small capital
7. Manage risk consistently
8. Use conservative trailing stops
9. Enter and manage a trade on the same timeframe (don’t get confused)
10. Use a 1:4 risk/reward ratio
11. Take a break when losing

Risk isn't linear

Chapter 5 -Managing Profit
This chapter might be interesting

Breakeven

1. Moving a Stop to Breakeven
   1. Not recommended
   2. “Trading involves risk, and if you calculate your risk appropriately before you enter a trade, you should be comfortable maintaining that level of risk throughout the life of the trade.” (agreed)

2. Sometimes you have to let winners turn into losers
3. Possibly worth it when a trade is nearly at the target (which is why I like 80-85% BE)

Scaling Out

1. closing a portion of their overall trade size as the trade becomes profitable and continues to profit target
2. Not recommended
3. Closing ⅔ and running ⅓
4. Using two profit targets (the double tap)
5. The problem is the final profit is rarely equal to the risk that was assumed when the trade was opened
6. Imbalance in risk ratio requires a higher success rate as a losing trade can erase profits from multiple winners

Profit targets

1. Identified with support and resistance
   1. “Traders have no idea which support or resistance levels will be respected by price and which will not be reached until the market actually tests them. (no kidding)
   2. Look to use the first major support or resistance barrier as the target
   3. Look for 1:3 RR or better

2. Fibonacci retracements
   1. “It is hard to deny the theory of Fibonacci’s golden ratio of 61.8 percent. I don’t believe in voodoo, but when it comes to pulling profit targets out of thin air in a systemic, mathematically based way, I’ll take all the help I can get.” (dripping with irony!)

Admittedly I haven't really spent any time debunking Fibonacci retracements, and there might even be some evidence for a 50% retracement average for some markets/conditions. I just tend to think of it as more TA voodoo since I don't think it can be relied upon.

1. ROK connects a (random?) swing high or low to the entry price of his trade
   1. Not interested in how others use fibs
   2. Method is good for retracements but when market is trending you must use extensions

Or you could just guess, because that’s what you’re doing.

Trailing stops

1. Yet again S&R is the key to determining how to do anything - including using trailing stops
   1. The key is to wait for ‘the turn’ - a pullback followed by continuation
   2. No set profit target

Automating Profit with Limit Orders



I don't really see how this is automating anything besides giving your broker some awesome data.