The 10 pips challenge

Hi Bug
I too am a behind the scenes type of trader but wanted to say that your posts are of interest to me. Thank you for the heads up on the suggested reading materials. Belated Happy Holidays.

Good to hear. I'm going to be posting more stuff soon. In the meanwhile you can check my previous useful stuff threads, you'll find lots of interesting reading material.

Decision fatigue (published July 30, 2013)

A few days ago I wrote about bad trading habits and what to do about them. Habits are an important part of trading, but there are other things that influence your decisions, including the time you spend trading. A lot of traders have experienced deterioration in the quality of trades they take during stretched-out trading sessions. But it's not just traders who are faced with this challenge, this is something that affects everyone regardless of their field of expertise. After scientists ran a few experiments they confirmed the validity of observed phenomena and even gave it a name - decision fatigue. As defined by Wikipedia:
From the New York Times:
Those two types of behavior are familiar to a lot of traders. I've experienced both - becoming reckless and mired in apathy. Usually it happened after having traded for hours without rest or having come back from my day job, tired and stressed out. Decision fatigue can have a detrimental effect on your trading if you let it. Although I'm not sure it's enough to explain over-trading fully, it certainly is a part of the picture for individuals who stay behind the computer for long stretches of time, trading all day long.

What to do about it? NYT has the answer:

Why does glucose work? NYT again:

You can improve the quality of our decisions by having a quick but small sugary snack. Although sugary snacks aren't the best way to replenish blood glucose levels, it can be a temporary help. Food that takes longer to break down, providing a steady supply of glucose, like fat, protein and sugar from fruits, can help us make better decisions for longer stretches of time (fruits contain fiber which slows down the digestion of glucose, providing a stable supply of glucose unlike candy, which causes a spike and a subsequent crash in your blood glucose levels). Having a balanced breakfast is not only important for your health, but also your trading, especially during the morning hours. Of course, if you trade the afternoon sessions, you'd want to have a balanced lunch as well instead of gobbling down half a dozen doughnuts and washing it down with Cola.

So there you go. Your trading influences your diet. Who would've thought? You can do some further reading by visiting these pages:

* New York Times: Do You Suffer From Decision Fatigue?
Decision fatigue at Wikipedia
Ego Depletion at Wikipedia

Thinking, Fast and Slow - a book by Daniel Kahneman (published August 2, 2013)

Daniel Kahneman is one of the best known behavioral economists and his recent book, Thinking, Fast and Slow is, unsurprisingly, a New York Times best seller. Although the book wasn't written with traders specifically in mind, it contains a lot of information on scientific discoveries that are particularly interesting to me from a trading perspective. The New York Times and a lot of other media outlets who make their money reviewing books have already had a go at the book, as well as numerous reviewers on Amazon, so I'm not going to try and compete with them. Rather, I'm going to give you a little taste of what you can find in the book as well as some personal notes I wrote down for my own use (page numbers are from the paperback version).

Intuition is nothing more and nothing less than recognition. (p.11)

Basically this means that you can train yourself to make snap decisions while trading if you do enough good quality (demo) trading with the strategy that you're going to be using.

Systems 1 and 2 are both active whenever we are awake. System 1 runs automatically and system 2 is normally in a comfortable low-effort mode, in which only a fraction of its capacity is engaged. System 1 continuously generates suggestions for system 2: impressions, intuitions, and feelings. If endorsed by system 2, impressions and intuitions turn into beliefs, and impulses turn into voluntary actions. When all goes smoothly, which is most of the time, system 2 adopts the suggestions of system 1 with little or no modification. You generally believe your impressions and act on your desires, and that is fine – usually. (p.24)

This is something that I discussed in the post about habits. It explains why someone would keep on adding to losers, keep blowing up his account etc. Through evolution we have evolved to expand as little energy as possible and automating our actions saves quite a bit of energy, so delegating tasks to System 1 makes sense. It's only when we automate ineffective or downright deleterious actions that we invite trouble, either to our lives or to our account as traders. More on that in the post mentioned above.

The defining feature of system 2 is that its operations are effortful, and one of its main characteristics is laziness, a reluctance to invest more effort than is strictly necessary. As a consequence, the thoughts and actions that system 2 believes it has chosen are often guided by system 1. (p.31)

This means, once again, that it is necessary to spend time creating good trading habits.

The most surprising discovery made by Baumeister's group shows, as he puts it, that the idea of mental energy is more than a mere metaphor. The nervous system consumes more glucose than most other parts of the body, and effortful mental activity appears to be especially expensive in the currency of glucose. When you are actively involved in difficult cognitive reasoning or engaged in a task that requires self-control, your blood glucose level drops. The effect is analogous to a runner who draws down glucose stored in her muscles during a sprint. The bold implication of this idea is that the effects of ego depletion could be undone by ingesting glucose, and Baumeister and his colleagues have confirmed this hypothesis is several experiments.(p.41)

I've written about this as well, have a look at the previous post on decision fatigue.

Loss aversion is built into the automatic evaluations of system 1. (p. 269)

So it's not a 'newbie trader' disease after all? So that's why we all dive into losses on week two of trading...wow. This is a really fascinating topic and the author explains it very well. I can't possibly copy and paste two pages of text into this post as much as I'd want to so I really suggest you buy it. This is all I could post here without crossing the fuzzy line between posting paragraphs from the book for reviewing purposes and infringing on copyright law. However, if you ever decide to read the book, read the whole book. Don't half-ass it like a lot of people do. Read it from cover to cover, it's worth it. I dare you.

You are more than just a trader (published August 8, 2013)

A few years ago I was reading a great article about procrastination and to my surprise I discovered the article had some golden words about trading performance. Here are the two paragraphs that I have in mind:

If you value achievement, you are likely to do what you value. The way you value your performance colors self-valuation and self-valuation colors performance in the manner of a dog chasing its tail. Here is one of the fleas on this dog's tail. You could hinder yourself from acting according to your achievement value by measuring your "self" against your performances.

This self-performance value vision builds beliefs, such as "I'm only as good as my last performance" and this clogs the mental channels related to your habitual valuation of achievement. Locked in this mind set, when your performance falls short of what you expect, you may think you are a failure, not just that you had an undesirable performance.
Your self worth shouldn't be based on your trading performance. If at all, it should be based on your ability to consistently adhere to your system, to build and maintain good trading habits and avoid the mental pitfalls that are associated with bad trading decisions. All of that will eventually lead to great profits.

But even if you have reached the point where your trading success is enough to cover your expenses you should have more going for you than just trading. Trading should be a means to an end, not an end in itself. Enjoying movies and books, being a good friend/husband/wife/parent, exercising, achieving something everyone else thought you couldn't, pushing the boundaries - these should be the things to base your self-worth on. You're going to have bad weeks in trading regardless of your actions, so there's really no point in downgrading yourself for that. The market doesn't love you, it doesn't hate you, it generally doesn't care at all. Stop being your own whipping boy and go find meaning somewhere else than the markets.

You are more than your recent performance, there's more to you than just a trader - you're a friend, a work colleague, a parent a husband/wife to someone. Close the trading platform, read a book, drink wine with your friends, have a life outside of trading. Don't look for the dollar figure to define your worth as a human being. You will find life has a lot more to offer than trade setups. This is something that has helped me a great deal and I'm sure it will help you as well.

Wise words indeed, thank you for sharing them Bug.
Regards,
Paul.

Thanks Bug, keep the posts coming they're very insightful. Please ignore the people that criticise you - every thread written by a successful trader gets trashed by unsuccessful traders who are threatened by the successful trader's success.

I don't mind criticism if it's backed up by insight and knowledge. I do mind criticism that adds nothing or leads to dead ends, like to stuff about 10 pips not being a large enough target. If I'm trading a 1 or 5 minute chart who in their right mind would consider 50 pips a better target than 10? Anyway, as I said earlier, I don't want to discuss this particular topic anymore. Thanks for the cheers.

New post:
What is the best time to trade? (part 1) (first published August 14, 2013)

There are good times to trade and there are bad times to trade. Obviously as traders you're interested in trading during the good times and avoiding the bad times. To do that, you need to know what the good and bad times are.

Good, liquid markets look like this:

1. high liquidity = normal spreads,
2. no sudden price moves
3. price movement respects established support and resistance areas, trends often appear on even low time frames
4. market orders get filled without slippage

Difficult to trade, illiquid markets look like this:

1. low liquidity = widened spreads
2. gaps and sudden price movements possible, support and resistance areas are not always respected
3. economic data and geopolitical events can have major impacts on price with little to no retracement before liquidity conditions improve
4. choppy price movement before an important news release (pre-GDP, pre-NFP etc.)
5. slippage possible

Highly volatile and highly illiquid markets are very difficult to trade, so unless you have a lot of experience or a system that can handle these conditions, you'd want to avoid trading during those times and do something else, clean out your folders or go for a run for example, just stay away from the charts. Of course, some of the characteristics of an illiquid market can be observed during an otherwise normal, liquid trading session. During liquid markets, price is not always going to respect S&R areas, but by and large price is more likely to pause for a minute at those areas during liquid times than illiquid times.

On certain days, price movement can be choppy just ahead of the important event. Sometimes there are slow moves but sudden price shifts are quite often momentary and reverse very quickly (NFP for example). If you don't know what you're doing it's best to avoid these days as they can be extremely volatile. Some of the most dangerous days to trade are:

1. US NFP: first Friday of every month = volatile
2. US GDP: last day of quarter
3. FOMC rate decisions and FOMC minutes
4. ECB rate decision
5. other central banks' rate decisions
6. bank holidays

The list above covers just two of the biggest currencies, which doesn't mean that other central banks' rate decisions aren't important, they are, I just didn't want to make the list too big. With any currency, you have to keep in mind that the central bank is the one with the deepest pockets. If the central bank's mandate covers keeping employment high, you have to keep an eye out for unemployment figures as well. But central banks aren't the only ones in town who can make the markets move. The types of days listed below can witness some above average moves, but these can be handled quite well with care:

1. last day of each month = re-positioning possible
2. last day of every quarter = huge re-positioning possible
3. options expiration, third Friday of every month
4. futures expiration, third Friday of every third month
5. expiration days are notorious for stop hunting, the Thursdays just prior to expiration are volatile too
6. NB! options + futures exp days = quadruple witching Friday

You can read more about re-positioning or month-end /quarter-end flows from ForexLive: here, here and here. Check back for part 2 to read about the best time of day to trade.

I've been really busy studying for exams these past few weeks so that's why I haven't been that active on this thread. I'm having my last exam in four hours and after that I plan on finishing posting the old posts from my blog. As soon as that's done, I'm planning on opening a new account to resume trading. Now, I know there's been a lot of talk about 10 pips - that's because Strategy 10 was my inspiration for getting my trading house in order. It helped me a great deal. When trading a 1 or 5 minute chart, setting a small goal such as that can really do wonders in terms of limiting one's horizon (think of it like this: have you ever had trouble coming up with a topic to write about when you had to present an essay to someone? Isn't it the case that often it's much easier to come up with something when you only have a limited number of topics you can write about? Well, that's sort of how I viewed the 10 pips challenge. So there you have it.) I'm still a fan of low timeframes, but my targets aren't set in stone (again, 10 pips was the starting point). I will be posting about my money and trade management criteria soon enough, but for now, I'll continue with the blog posts (still a few to go). Hope you're all doing fine.

Hi bud, I thought more people would of responded to this thread.
Yesterday and day before I actually started scalping to prove a point in another thread I visited (i am actually a retired trader) even though I caught approx. 150 pips in lots of small trades no one responded lol. The thing is I was aiming for 10 pips per trade. Getting back to your thread and your posts this trading went well together, some of my trades I made a snap decision that market was moving fast so I stayed in the trades to gather maybe 20 or 30 pips so for the sceptics it isn't just 10 pips we are after, be good trade well

I have been scalping again. I have tried this and thought I would share..
example, enter trade with 12-15pip take profit if it keeps going keep in the trade if it drops to 10 pip profit close trade, so now you have your 10 pips BUT with a possibility of gaining more..
I tried something like this when I was trading in the past with oil, sometimes you get a massive spike (hundreds of pips)

What is the best time to trade? (part 2) (published August 17, 2013)

In the previous post I described the worst types of days to be trading based on the EURUSD currency pair, but this time I'm going to cover the best and worst times of day to be trading. Currency markets are open 24 hours a day, but that doesn't mean you should be trading all the time. It is good to know that you can close your trade any time of the day, especially when you've got a day job, but actively trading outside major trading centers' daylight sessions isn't such a good idea due to low liquidity and the lack of participants willing to push price one way or the other.

What are the most active trading sessions?
According to the most recent and soon to be updated* Triennial Central Bank Survey by the Bank for International Settlements on the FX and derivatives market:

Banks located in the United Kingdom accounted for 36.7% of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

London has historically been the major currency trading hub, so it is only logical that currencies move the most during the London session. Late in the UK afternoon, bonds and currencies start trading across the Atlantic in New York, the overlap in trading sessions is a prime time to be trading as traders based in London will be closing out their trades for the day, sometimes accepting prices that are quite a bit away from where they were when New York opened. The European-US overlap is also the time when important economic data is released in the US, which can be an additional catalyst for movement.

EURUSD - the most active pair

You can see from the charts above and below that the average hourly range during the Asian session is pretty timid. Activity lights up when London opens - large banks, global businesses and institutional investors all flock together, exchanging over a trillion dollars worth of currencies. This activity continues throughout the early hours of the New York session, peaking at roughly 4 times the range witnessed during the Asian session, finally the range starts fading after markets close in Europe.

Of course, not all of the trading activity takes place in London or New York. Currencies domiciled in Europe trade most actively during the European trading session, that is a given. Some currencies like the Japanese yen can see large moves during the Asian session, but due to the global reach of Japanese businesses, the European and the American sessions are very active as well. As a general rule, the sessions with the biggest hourly ranges are London and New York. However, when trading cross-pairs it is best to check the data yourself in lieu of guesstimating based on another currency pair. A pair like AUDJPY has a different volatility profile than EURUSD - it is most active during the Australian/Asian session and starts winding down after London opens and Tokyo closes.

There are two ways you can determine the best time to trade for any given pair: the easiest way is to add the average true range indicator to an intraday chart (I used the 30 minute chart), but you can also check the average hourly volatility from ForexTicket (the number of weeks used in the calculation can be changed, make use of that). If you're not sure what trading session is active at any given time, you check this website or you can download an indicator that plots session times on your chart.
*The preliminary results for the new survey are out, but as far as I know, the details are still being compiled.

Sometimes when someone decides to print their thoughts it can produce an interesting read...enjoying it so far...

going to tag along if that's okay bug..

There is another way to determine the best time to trade for any currency you want. The attached files will tell you the best day and hour to trade any currency pair based on historical data. You set the time parameters. These are for metatrader 4.

I'm done with published posts from the blog but I have one or two drafts that I will finish and post here.

Money management/trade management
Currently I've refunded my account. During the time that I was blogging, I did demo-testing and funded my account to go live. I went live but I risked too much of my account and I didn't have enough free time to analyse charts and news (due to uni). I closed the account mid-September but now I'm back and I'm taking this slow.

1. Maximum risk per trade is 2%. I base my trade size on the number of pips to stop loss (so if the SL is 15 pips away, that 15 pips will be 2% of my account balance). I plan on taking few trades and keeping diligent records.
2. I have a pre-flight checklist and I'm not going stop trading for the week after a 10% drawdown.
3. I'm going to stay away from NFP, FOMC and other high impact releases and cut back on trading on slow days like today (US bank holiday).
4. Stops are based on recent highs/lows
5. Targets are based on liquid/illiquid zones (consolidation areas and extreme tops/bottoms)
6. I'm willing to consider taking a loss or profit before the target if circumstances call for it (change in signal is one good sign)

I specifically didn't want to create too many rules for myself to allow for flexibility. However, if you have any questions that these points didn't answer please fire away.

This week was pretty good for me as I managed to make 14% (each and every day was profitable ranging from 1 to 4 per cent a day). I have a lot of free time at the moment as I've finished all my exams and around two weeks until classes start again (for some students this time is spent re-taking exams that they failed). This means I've had enough time to prepare for trading, analyze the markets and trade. As soon as classes start I will focus my attention on studying, which means less time spent trading and probably smaller profits as well (I'd be very happy with 2-4% a week). Of course there's a possibility of losing too.

This week I've spent my time reading books, going through old bookmarks and refreshing my trading checklists (pre-trading checklist and intraday checklist). One of the books that I've picked up was The Chimp Paradox (which is one of the books that CrucialPoint recommended I think). It's offers a very fresh approach to trading and life in general (it's basically about two parts of your brain - the rational and the irrational, emotional and how the irrational will have the upper hand if you let it). I've also ordered a Kindle so that I can purchase books cheaper as I'm an avid reader. I haven't had time to write anything new for this thread but maybe I'll get to it during the weekend. Cheers to anyone out there celebrating. TGIF.

Hey Bug,

Just seen this thread and I have always valued your posts.

http://www.forexfactory.com/showthread.php?t=294277

This thread is probably one of the best I've seen and really inspired me. I just wanted to drop something into the discussion. I read this
thread a while ago and have been teaching myself how to use R ever since. I'm no pro but I can get by at the moment.

http://www.forexfactory.com/showthread.php?t=163611

I tried to replicate a few of the charts produced in the thread and noticed that the distribution of daily ranges has changed since this thread and also that the charts you posted above maybe slightly out on timings. If and when I get chance I will post newly revised ones here for you to see.

In the meantime best of luck.

Mean hourly ranges in UTC from 1999-12-07 to 2014-01-10.

Wouldn't want to share would you?

Thanks