Book of LITE

This is meant to be a trading journal for a synergy of personal trading techniques whose unique combination is proving highly profitable for me. I want to keep this journal clean and personal, for easy future references.

Last trade taken in December 2013.

EURAUD Counter-Trend Trade for 90pips.

1. Playing EUR weakness against AUD strength.
2. Trend is UP on Daily TF, so trade is taken in counter-trend context.
3. Obvious Supply coming into the market, so waited for pullback to SELL HIGH.
4. Stop 40pips.
5. Target 90pips. Obvious demand zone. Could have held on for more depth into the zone, but last day of the year, low volatility,etc...

Sell trade initiated on AUDCHF.

1. Playing AUD weakness against CHF strength.
2. Trend is DOWN on Daily TF. So trade is taken in a pro-trend context.
3. Supply beginning to come into the market. Selling 'High' on first pullback.
4. Emergency stop. 30pips.
5. Target. 113pips obvious demand zone.

Similar corresponding buy setups (trend trades) taken on EURAUD and EURJPY.

1. Had a losing day yesterday after quite a while. Made a couple of deadly rookie errors. But lesson learned.
2. We are at the dangerous market situations when Daily Time Frame Trend seems to be tilting or changing.
3. To be expected after such a long trend riding period, but volatility still caught me by surprise.
4. Have to scale down on my risk profile(only high on demo though for testing purposes, but still...)

After yesterdays moves, my longer term strength/weakness currency profile for the next couple of weeks or more, looks like this...

1. -GBP
2. -CHF
3. -EUR
4. -NZD
5. -USD
6. -CAD
7. -AUD
8. -JPY

(1 = strongest; 8 = weakest).

Trading Plan for next week Mon. 6th Jan - Fri. 10th Jan 2014.

1. Entries to be made only after Asia session on Tues. 7th Jan commences.
2. No trades to be taken after Asia session on Fri. 10th Jan closes.
3. Play GBP strength against JPY weakness.
4. Play GBP strength against AUD weakness.
5. Play CHF strength against JPY weakness.
6. Play CHF strength against AUD weakness
7. Take note of various high impact/ volatility news most especially ADC NFC on Wed 8th, and NFP on Fri. 10th.

Just saw this somewhere and couldn't agree more...note to self...
Making money in trading is the easy part, but KEEPING it...the hard part!
Once you cross that line of keeping your profits (withdrawing it on consistent basis) then you've crossed the line between what it really means to be profitable vs. just making some profitable trades.

For now GBPJPY topping the list of highest probability pairs to trade this year based on my strength analysis and profiling.

GBPAUD next on the list...

Followed by AUDCHF...

..and lastly but most interesting of all...CHFJPY...

Note to self...
The Puzzle

I'm a wealthy and generous man, and I want to hire you to work for me for one month. Since I'm also flexible, I give you a choice: you can choose to be payed the entire month's salary up front on the first day of your employment, or, I will pay you 1 cent the first day and I'll double your pay every day for the rest of the month, but you won't get the money until the last day of the month. So on the first day you'll work 8 whole hours and you'll have 1cent coming to you. But on the second day you'll earn 2cents. Hold on, it gets better, the 3rd day with me you'll have earned 4 cents, the day after that 8 cents and so on. Saturdays and Sundays are included just to give you a chance. Oh, by the way, if you take your pay all at once on the first day I'll give you a million bucks ($1,000,000.00) cash. Seems like an easy choice, doesn't it?

Well, you decide for yourself . Now let's look at how much the individual who picked the penney-a-day plan are going to have at month's end. Remember, on the one hand $1,000,000.00. On the other hand:

Day Amount

1 $ 0.01
2 $ 0.02
3 $ 0.04
4 $ 0.08
5 $ 0.16
6 $ 0.32
7 $ 0.64
8 $ 1.28

Hey folks, it's day eight, you're up to $1.28 and you only have a month. Maybe you are better off taking the one shot deal, the million dollars.

Let's see what happens:

Day Amount

9 $ 2.56
10 $ 5.12
11 $ 10.24
12 $ 20.48
13 $ 40.96
14 $ 81.82
15 $ 163.84
16 $ 327.68
17 $ 655.36
18 $ 1310.72
19 $ 2621.44
20 $ 5242.88

By the way, did any of you ask me what month of the year we're in? Is it February with 28 days, or leap year with 29 days, or September with 30 days, or December with 31 days? You should realize that it's going to make a difference. Do you want the million dollars? Ask your kids again which they would choose?

Let's continue:

Day Amount

21 $ 10,485.76
22 $ 20,971.52
23 $ 41,943.04
24 $ 83,886.08
25 $ 167,772.16
26 $ 335,544.32
27 $ 671,772.16
28 $ 1,342,177.28
29 $ 2,684,354.56
30 $ 5,368,709.12
31 $ 10,737,418.24

If you work for me in September with 30 days you make over $5,000,000. In December it's over $10,000,000! I have never met the child who didn't leap at the $1,000,000 on day one. This is because human brains think arithmetically, not exponentially. You might say that we are hardwired to think in this linear way, that the software in our brains compels us to think about progressions as being simple arithmetic ones. Luckily though, how we think about things, our prejudices, our attitudes, and our mindsets, can all be changed and worked with. We can update the software! We can consciously change the way we think about numbers, money and investing by absorbing new information, namely, that when you make your money compound you can get rich sooner rather than later.

addendum
BTW, I would expect to be paid around $21.25m for the months work as you said I would be paid 1c on day 1, 2c on day 2 etc.
That means on the 30th day you would pay me $5m, and on the 31st $10m.
Adding up all the individual days would actually amount to about $21.25M!

...and another one...

There is a story about an Emperor of China who was so excited about the game of chess that he offered the inventor of the game one wish. The inventor replied that he wanted one grain of rice on the first square of the chess board, two grains on the second square, four on the third, eight on the fourth, and so on, through to the 64th square. The unwitting emperor agreed to the modest request. But two to the 64th power is 18 million trillion grains of rice - more than enough to cover the entire surface of the earth. The Emperor, realizing that he had been duped, had the inventor of the game beheaded.

THE PARADOX

Everyday the turkey is not killed is a reaffirmation that it will not be killed; consequently, the confidence level of a turkey with respect to the trend of not being killed is highest the day before Thanksgiving.

If I enter too early without enough datapoints to establish a solid trend; then I have very low probability that it is a trend.
If I enter later; after enough datapoints establish a trend, the likelihood of that trend ending just after entering increases exponentially with increases in data points.
So kind of you are screwed if you enter early, and you are screwed if you enter late. The goal of course is not to get screwed.

PRACTICALITY

We are not in a stupid 'prettiest charts' contest. Never lose sight of the goal. Are your naked charts making you any money? Only use what is essential to help you MAKE MONEY.

CONCLUSION

So,(One of) the secret to trading is basically this:

1) Make sure you have a statistical advantage.
2) Make sure you do the exact same thing every time(rules permitting), so you will, in the long run, match the statistics
3) Play as often as you can(rules permitting), so you will in the long run, match the statistics
4) Have good Money Management.

Entries and exits do not make a system. If you have an entry method, and an exit method, you DON'T have a system!! This is probably the BIGGEST problem most have. A system has entries, exits, position sizing, money management, trade management, risk management, etc.. But all YOU have is entry and exit?

Most place emphasis on the "entry", but in reality, the exit is just as important if not more important. How you react to the market will determine your exit, and it is this determination that will lead you to one of the most overused but under-utilized phrase in all of forex, and that is:
Cut your losses and let your profits run.
You will note, there are two parts to it:
1) CUT YOUR LOSSES <-- That means if you are wrong, hack it off! Kill the position. This is CRITICAL as it is equity protection. You can't win the game if you aren't in the game. And you aren't in the game if you don't have the money to play.
2) Let your profits run <-- This means not taking early profits. This is absolutely critical. I will say it again, this is critical.


There are components involved that a system needs:
1) Win%
2) Payrate in R
3) Frequency

Of these, Frequency is the most important, followed by payrate, followed by win%.

1) Winning % ~ If you tell people that your system yields 35% winners; most will feel that you are actually saying that you're a 65% LOSER. The problem is, this number means very little outside of its context. if I win 35% of the time, but everytime I win, I win $100 but everytime I lose, I lose $10... Well, the system sounds pretty darn spiffy to me!! So a high winning percentage, on it's own, means little. But this and a "good entry" is what most seek... As King Solomon said,...it's chasing after the wind..

2) Payrate ~ I like to think of payrate in terms of R, or "Risk Unit". 1R = 1 Risk Unit. Now you can then define your payrate. If I'm willing to risk 25 pips per trade, then 25 pips = 1 R. If everytime I'm right, I'm right for 75 pips, well, that gives me a 75:25 reward vs risk or reduced, I have a 3:1.
Expectancy is what I can expect when I am done with one "set" of iteration.
(35% * 3) - (65% * 1) = .40 cents.
That means for every dollar I spend, I expect 40 cents ROI. I have a positive expectancy. That means this is a good system if I'm getting 35% and 3:1.

3) The KICKER though is Frequency.
Question: Do you want choice A or B?
Choice A) $5
Choice B) $2
Of course you'd want choice A.
Now we try it again, but this time, we add frequency to it.
Choice A) $5 per month
Choice B) $2 per week
Which would you want? Of course you'd want choice B.
We keep focusing on the amount, but the frequency is perhaps more important.
If you have a positive expectancy, then increasing the win% has a MINIMAL effect on your profitability. Increasing your payrate will have a bigger influence, BUT, increasing the frequency (yes, even at the cost of profitability in percentage as well as payrate) is going to influence you the most. This is why you really need to understand this stuff.

Frequency is BY FAR the most important aspect of the 3 elements discussed here. Add Money Management to it, and it will become like a money factory for you...

Reading list

1) Van K. Tharp - Trade Your Way to Financial Freedom
2) Ryan Jones - The Trading Game
3) Larry Williams - Long Term Secrets to Short Term Trading
4) Phantom's Gift

Trying to "prove" your success to others is a waste of time, it won't gain you anything except maybe an ego boost, which, if you truly are that successful, you don't really need.
People will always have self-imposed limitations. Besides, this is a zero sum game. Scratch that. This is a negative sum game. If you have an edge in the market (be it in the form of a new working system/algorithm, or whatever), it is in your best financial interest that the majority of others continue to have no such edge. That's just the reality of this game.
Secrecy is one of the keys to success.