Psychology, Price Action, Correlation, and COT

Welcome, Patrick, good to have you on board!

Moonshot: I have never heard of that website. My suggestion is to buy Trading in the Zone for $50 and read it 10 minutes a day, underlining what you find important, or what rings true to you. After you are done the first time, go back and read again - 10 minutes a day. This (and all future) re-reading you can do it faster, paying more attention to underlined text. I am on my 9th reading so far, I think.

After a while you will start asking questions that the book does not seem to provide the answer to. Then you can find a lot other books on similar topics. It is important to understand that trading psychology is not special in some way - all we need to do is to learn to better control our incessantly thinking brain and emotions. There are many ancient books (as well as modern) on spirituality that will help possibly even more than modern psychology. I believe it is beneficial to combine ancient wisdom with modern science (especially neuroplasticity).

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Here is GBPNZD review.

Thank you AnatoliyS, I will take a look at it plus others. Also thank you for the valuable information. I actually thought the the website was well known, and that is why I was considering it. Nonetheless I will have a look at a couple more before finally making my final decisions. Also, other mates you are welcome to provide insights if any.
Thank you and Happy Trading All!

Now we are starting to look at CAD currency and will go through its crosses.

Starting with USDCAD.





Moonshot: I looked more into that website and seems that the guy is legit. He is actually going through the same information I recommended, starting with neuroplasticity, combining it with modern psychology and then adding "ancient wisdom" in form of trading meditation - very important. So I think that all the topics he outlines in the contents are essential, but still I cannot say if he goes in them in enough detail and what is the overall quality of the material, since I did not take the course.

In the end I am sure you will make the decision for yourself. The important part though is that you follow through with your initial decision and take action. Here is an advice that worked well for me: if you skip as much as one day learning due to hesitation/procrastination, consider yourself a failure. Sounds extreme, but that's the only attitude that worked for me after 9 years of going in circles. We are creatures of habit, so doing it (the learning) every day consistently for a month feels the same as doing it for a year, and then 5 years - you get used to it and the resistance is largely gone. But a skipped day will quickly be repeated with another, and the more you skip the harder it is to get back to work. And remember: 10 minutes a day for a year is much better and easier than cramming for 5 hours on the weekend.

It may take years to fully ingrain all this information in your brain until it is part of who you are. Good luck!

Eurcad

Busy week, forgot to post!

Here is the next pair - GBPCAD.

Audcad

Interesting thread. I'm new to Forex and I've been trying many strategies recently in order to find out how to execute orders with a great precision. Although I did good in some cases but I felt unsatisfied at the end. finding myself a lucky person with winning trades. Now, I'm focused on price action as the only pure way of reading the market. trying to fully understand the supply and demand and how the market behaves.

Good work, looking forward to read more.

Hi Anatoliys,

Could you please make a report on XAG or XAU ?

Thanks,

Welcome Fariid, good to have you around! "Trying to fully understand the supply and demand..." is a journey of a lifetime and hopefully we can get closer to that goal with more experience. What I am doing right now is just the start of the journey, as I am relatively new to Price Action myself, having used many other trading methods in the past.

Patrick: I am planning to include Gold, Silver and some other commodities in the future, thanks for the idea! At this stage, however, I am not really doing analysis that is intended to be traded. It is only exploratory phase where I am trying to see what works and what doesn't. Speaking of which, I will be changing a little bit how I do my analysis - paying more attention to the price itself and understanding COT behavior from Price Action, instead of trying to understand Price Action through COT.

For now I continue posting the analysis from my archive, while I am exploring some new methods to develop the thread further.

Here is NZDCAD.

Here is USDCHF

Here is EURCHF

Here is AUDCHF:





I also updated the COT 2015 data file in the first message. If you are using indicators from this thread, update the COT file.

Gbpchf:

I have updated the COT data for this week in the first message. Anyone using the COT indicators from this thread, please download the new data file and re-compile your data.

No amount of market knowledge or analysis will replace the proper trading mindset. Let's do a short reading break.

Three aspects of trading
In post 2 we explored three parts that in my opinion make up a successful trader. The most general assumption is that trading is about analyzing the market and predicting where the price will go. As we discussed, being an analyst is important you do need a plan to execute in the market. However, thats where most traders are stuck finding a method they believe will make them rich, taking a couple trades that do not work out and then jumping to another method, assuming that they do not have sufficient knowledge about the market and therefore cannot open the right trades. The belief that I found to be groundbreaking in my own trading, however, is that there are NO right trades. There are simply trades offered by your method of market analysis and you have to take them all, before you make any judgments.

Therefore, the most essential addition to the set of skills of any trader, who desires to make profit consistently, is his ability to execute the trades with no hesitation, trade the plan exactly as his rigid rules are saying to trade it. The plan might as well be faulty and simply not provide the trading edge necessary to win, but without executing a sequence of flawless trades (not from the profit/loss perspective, but in terms of absolute discipline in following the systems rules) you will never know that and very likely will switch to another Holy Grail only to find yourself with another set of potentially good rules that you cannot follow.

Five or even ten trades is not enough to judge any trading method. Your edge is not going to be visible and such a small set of data bears little to no statistical significance. Imagine a casino operating a slot machine with 4% advantage (meaning that they win 56 times out of 100 on average) calling a mechanic to repair the machine, or suing the gambler for somehow rigging it, just because after 10 customers the casino is in net loss. Changing the machine after each 10 customers if their gambling produces a loss is just as absurd as changing your system after you have a couple losses in a row, especially if you jumped the gun on half the trades.

Mastering trade execution and getting a method of analyzing the market that provides you with some consistent edge are essential for any good trader. However, there is another aspect to trading we briefly discussed in the previous issue and arguably it can be even more important because unwillingness or inability of learning that aspect can help you decide pursuing a career elsewhere, long before you leave your life savings in the market.

Trading is a business
Like in any business, in trading it is most important to stay in control of what you do. First of all it implies having control over yourself, getting your mindset right and acting appropriately on each trading opportunity the market is offering. But when we see that opportunity and ready to enter in our direction, what do we really control in that trade?

I prefer to think of the trader as a small business owner. Anyone can open a small shop as a pursuit of having more freedom in ones life, but interestingly enough 50% to 80% fail in the first 3 to 5 years. In trading I would argue that the failure rate is closer to 90%. My belief is that the reason for their failure (in business or trading) is defined primarily by the attitude they start with.

As we discussed before, the entrepreneurial freedom NEVER implies freedom from responsibility. In fact, starting out on your own increases the responsibility in almost all areas of your life:

1. Your level of income
2. Your medical insurance
3. Your taxes and book keeping
4. How you manage your time
5. Your own development

It is my opinion that the understanding and full acceptance of this responsibility is what defines you as a success or a failure in business or indeed in trading.
In this issue we start our detailed discussion of managing your trading like a business. Being in business means being in control and yet I find that most traders have none often unknowingly giving up the only thing they have true control over in trading.

Being in control
If you are a small store owner and you are just starting out you can control quite a few things. First of all you control the stock in your store. You decide how you spend your initial investment. In trading that is your starting capital and in turn you control your Money Management and decide how many positions you can hold simultaneously.

In the store, when you spend $1000 to stock up, how do you know what your returns are going to be? Well, you know for a fact:

1. The rent you are going to pay this month
2. The salary to your employees
3. You know the average bills you have to pay
4. The advertising costs to attract the customers to your store

It is obviously an oversimplification, but it will do for our comparison. With that information on hand you add it to $1000 you just spent and now you know the amount of money you need to make in order to breakeven. Lets say it is $1500. Everything above that is your profit (dont forget the best part the taxes!). Now, if you want to get $500, you have to sell your stock for $2000.

At that point youve already done your research and know that compared to your competition it is a reasonable price tag and given your location you should have no problem selling it at that price point. If (and its a big if) everything goes well, you just figured out your profit for the month.

Now, in trading you have some benefits, such as:

1. No additional rent is needed (unless you like working in the office)
2. There is no one to pay the salary to
3. The bills are the same as if you would be living your normal lifestyle
4. You have no product to advertise

In other words, you dont have that extra $500 minimum you need to make this month just to get out in breakeven. In fact, the only thing you need to do in to order to stay breakeven is to do nothing!

The bad news though is that you have no expectancy for the amount of money you are going to make this month. On the one hand, you know your statistical results over the past months and if you are extremely consistent they can give a good average expectation for your profit (or loss). While the store owner can try to increase his sales in numerous ways by expending more money into advertising, introducing new services, etc., we can only do trades, and usually trying to trade more actively than our system allows will not increase the income by the end of the month quite on the contrary, you stand a good chance to lose what you earned while following your system as it is.

When a customer enters into our hypothetical store, we dont know what he is going to buy, if anything. He can go away empty handed or leave half his savings with us. We do know, however, that on this day we already invested ~$500/30 (our monthly expenses divided by the amount of days in this month) into our business in bills alone. We never know how this money is going to come back to us.

When you start your trade, similarly you have no idea what it produces. Yes, your edge provides you with statistics, saying that 12 trades out of 8 will make money, but you can never know the exact winners before they are closed and cashed in.

In reality, when you open your trade, there is one and one only variable that you have certain control over: how much money you are willing to pay the market in order to find out if the trade is going to work. In other words, your risk on that trade. You put your stop and you know where you get out if the trade doesnt work. Everything else is only your expectation.

Giving up the control
Imagine that in our little store we decide to cut the costs on the salary by declining the medical insurance to our employees and instead paying the direct costs for any accidents they have. Yes, we are happy to know that we saved $100 extra every month but now we never know the costs of doing business. Another unfortunate day a fridge falls down and crashes our clerks leg, resulting in $100 000 hospitalization costs and ruining our business, all our savings our car and the house taken away in addition.

Trading without a SL is exactly the same. If you give up control over the only variable you have in your hands in the market, you are going to do fine until one day you lose it all.

To emphasize the point, I offer this quote by Larry Hite in his interview in Market Wizards:
"I will tell you another story. I have a cousin who turned $5,000 into $100,000 in the option market. One day I asked him, How did you do it? He answered, It is very easy. I buy an option and if it goes up, I stay in, but if it goes down, I dont get out until I am at least even. I told him, Look, I trade for a living, and I can tell you that strategy is just not going to work in the long run. He said, Larry, dont worry, it doesnt have to work in the long run, just till I make a million. I know what I am doing. I just never take a loss. I said, OK
In his next trade he buys $90,000 worth of Merrill Lynch options, only this time, it goes down, and down, and down. I talk to him about one month later, and he tells me he is in debt for $10,000. I said, Wait a minute. You had $100,000 and you bought $90,000 in options. That should still leave you with $10,000, even after they expired worthless. How could you have a deficit of $10,000? He said, I originally bought the options at $4k. When the price went down to $1k, I figured out that if I bought another 20,000, all it had to do was go back to $2k for me to break even. So I went to the bank and borrowed $10,000.

Summary
The difference between any entrepreneur (traders included) and usual paid worker is in the acceptance of the risk and the responsibility. Most people prefer to live in the comfort of some assurance in life that they get a pay check every month as long as they follow the rules and in the current economy that assurance is very tiny indeed. Any entrepreneur accepts and embraces the risk, giving up that assurance in exchange for control over his or her life.

As traders we can learn a lot in regular business. The costs of doing trading business must be defined as rigidly as possible.

We can:

1. Set our monthly loss limit
2. Set our daily loss limit
3. Given the expected activity of our trading system, work out the amount of money we can risk in each trade, so that we do not exceed our daily loss limit after we fail a couple signals in a row

We cannot:

1. Set a rigid profit expectation for every trade
2. For every day
3. Even for every month

Unfulfilled expectations will lead to frustration and mental disturbance, undermining our success in trading.

Here is CADCHF

Sir, I have done precisely as you said. installed all the data on the MT4 but still the indicator just wouldn't show up! I don't know where have I done wrong. here's a screenshot. I'd be glad if you could help me here.

Hello Fariid,

Did you follow these steps as well? These 2 scripts have to be run in order to prepare the data.

These steps must be done any time you update the data (first installation and later each week when you load new data file):

1. In /MQL/Files/ folder run erase_cot.bat file - it will delete any data that was created before.
2. Open your terminal and run "Meta COT Script Build" script on any chart
3. Run "Meta COT Script Concatenate" script on any chart
4. Restart terminal

Great thread. And one that shows what someone serious in this *business* have to do to get any success. The analysis you do is the type everyone has to think about.

Please keep posting as you get time. I know it is effort to do this but really think you will get people to participate once they see it for sometime.

Thank you Stt, I appreciate your encouragement. I am certainly planning to continue with this thread. I paused posting for a while as I was trying to figure out a couple parts of the system before I go on. On the other hand, I guess I can post my thinking process as I am developing it, instead of trying to perfect it first.

The amount of work we need to be ready for is certainly big. The analysis that I am preparing and posting in this thread is only the tip of the iceberg - it's only the daily exercise to analyze historical prices to improve my understanding of the market. At the same time there is trading diary with potential trading pairs, trading log where every single trade is organized and analyzed and of course constant reading and learning from others (books, forums).

There is a small article I wrote on that topic I would like to share.

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Trading Accountability

Handling complexity
In his book The Checklist Manifesto Atul Gawande shows how very costly mistakes are avoided using simple paper checklists. He provides a very detailed account that we can learn a lot from.

The truth about modern life is that it became way too complex for most people to handle by keeping information in their heads. We cannot account for all the variables of the modern life. The doctor is not able to concentrate on everything anymore, the modern operations are way too complex. The pilot cannot control a modern airplane and keep all the details in his head, no matter how good he is at remembering things.

It is not by accident that all modern pilots are required to go through simple paper checklists. In the midst of all technical complexity of their cockpit, they have to take a simple paper checklist and go through it for virtually every single procedure they are doing. Similarly, a nurse can stop the surgeon before the operation and remind him that some simple check has been missed in a checklist that nowadays is a requirement in most modern hospitals. No matter how good the surgeon is, a simple piece of paper has proven times and times again to be better in avoiding crucial mistakes that cost lives.

In trading we can exercise the power of checklists like never before.

I was always a big proponent of simplicity of trading. I was always defending the position that a mid to long term trader can simply spend an hour a day checking the entry conditions, taking the trades and then calling it a day. To be fair, the analysis and placement of the orders really does take a couple hours but somehow I was never able to make it to consistency by doing just that. The answer is that I was never a trader and I certainly never managed a trading business. I was an analyst at best, a market hobbyist at worst.

Analyzing the market and then trading your plan are two very important parts that we already discussed before but they are only that two parts of the whole, only two elements of your trading business. A surgeon who learned the anatomy of human body and how to use the scalpel and stopped right there will never be allowed to work in any hospital. He must understand the management, the paper work, preparing reports, planning the operation, have critical thinking to decide the best course of action.
Whether you make money in trading or lose depends on how you manage your trading business as a whole. That consists of your monthly accounting and review, weekly goals and limits as well as review, daily plan, analysis schedule, trade management, recording all your trades in a diary, gathering statistics for different types of entries, timeframes, pairs, etc. As you can see, the problem is not in the complexity of a particular trading method but in the amount of work that has to be conducted regularly to maintain trading as a successful business.

More importantly, besides regular daily life of a trader, there is another crucial part to it. Just like in any other business you must advance in order to stay on top. You cannot start an endeavor in any competitive segment of the market and hope to make it, if your knowledge base always stays the same, if you never learn and never improve. Trading, being extremely competitive, is where one must advance every single day.

Do you know the problem areas of your trading business? If you lose money, do you have a clear picture HOW exactly you lose it? Is it a certain mistake you repeat times and times again or a trading timeframe you can never get right? If you are making money with a certain degree of consistency how do you know it will stay the same tomorrow? What can you improve to stay on top of the market even better?

There are stages to development of a trader: you are first oblivious to these questions, then you ask them and then you try to answer. After you find some answers all youve really done is built a theory on how to improve a certain aspect of your trading. The next step is to put that theory to practice and see how well it works in real life.

The real simplicity of trading

When you created a system of accountability for yourself in form of trading diary, log and various process checklists, you have made a big step towards consistently. If we have no clear idea what to do in our business we can still work hard and stay busy every single day, spending countless hours, but in the end we can only reach consistency by being extremely lucky.

Here is why creating an accountability system is so powerful: it lets you know clearly if you are doing your job or not. In the end of the day you look back and see your diary entries, trading log, start of the day checklist, daily summary checklist and you know what you accomplished today and where you fell short of ideal.

When you have a trading system with clear rules and accountability system with clear rules, all that is left is to follow them every single day. At this point, the trading is still not easy because of the amount of work you have to do, but now it became simple in a sense that you clearly know every step that needs to be done every trading day. When you are not satisfied with the results of your trading, you can always look back and analyze what can be improved. You can make a couple changes and then see how well they work after another couple weeks.

One of the main reason why the traders are so rarely reaching consistent success, in my opinion, is that there is little to none consistency in their approach. Some are inconsistent in their life habits: waking up at the same time to start trading day, analyzing the market at the same time, following healthy sleep regimen to stay alert and concentrated during work hours, eating properly to have enough energy, etc. Others are inconsistent in their trading approach: jumping from one trading system to another, constantly modifying their trading rules, not following the rules in the first place. Finally, I think most traders are not consistent in doing proper accounting of their business: market analysis is not systematically recorded, the trades are not logged and analyzed for mistakes, studying the market may be done sporadically and so on.

Having the discipline in all these areas is extremely important. As I keep stressing, being a trader is, first of all, being a businessman. A business owner is completely accountable for everything he is doing. The problem, however, is that he is accountable only to himself which makes it easy to avoid in the short term, destroying all chances for success in the long term.

Accountability system

There are 2 elements of accountability system that I think most important to trading success: morning checklist and evening checklist. These simple lists will guide you throughout the day, always making sure that you are on the right track.

Next, I suggest setting up 2 separate journals: Market Diary and Trading Log. I use Market Diary to record any interesting trading pairs, trade setups, trading ideas, etc. The Trading Log is used to record each and every trade that was taken. First of all I write all data about the trade: trading pair, direction, size, time, price, etc. Then I describe the trade setup the signal that I used to open this trade. Finally, the most important part of the trading log, is to record my psychological state upon entering the trade. I write if there was any hesitation to pull the trigger, what was my state of mind, any distracting thoughts, etc. I repeat all the same steps when the trade is closed. A screenshot of the chart is also added upon entering the trade and later showing how the trade has been closed.

Now that the basic setup is done, all is left is to make sure that the work is done properly every day:

1. All market analysis and trade setups are recorded in Market Diary
2. Trading Log keeps every single trade that was opened and closed along with psychological analysis

Next, we make sure that we advance in our understanding of the markets:

1. We spend at least 10 minutes a day reading a market related book;
2. Along with current market analysis, at least one historical setup is reviewed to ensure that we learn something new about the market.

We hold ourselves accountable to do this work consistently by following the checklists. In the morning we check:

1. Wake up at the same hour, before everyone else, to create a productive and distraction-free start of the day;
2. Re-read Market diary from the previous day to get into the right mindset first thing in the morning;
3. Review any trades in Trading Log that were taken yesterday and document any trades that were closed since yesterday.

In my opinion getting into the habit of waking up at the same time every single day (including the weekend) is one of the most powerful things we can do to our success. By waking up before everyone else around, you create a distraction free environment that can become the most productive time of the day. When the day has been started with positive action advancing you in life, it will be much easier to keep going in the same fashion for the whole day.

Next, we follow through our market analysis checklist, which is created specifically for our trading system. The main goal is to look for all trading setups of our system on all trading instruments that we watch and record all this information in Market Diary as a clear trading plan.

Now we are ready to go through the Take Action checklist. This list is designed to help us pull the trigger and open the actual trades. Here we check:

1. What trade setups we have available and clearly described in our Market Diary if there is no plan put on paper, we dont trade;
2. Check our risk allocation for today (following the guidelines discussed in the previous issue);
3. Place the trades according to plan, making sure that we use only allocated risk;
4. Document the trade entry in the Trading Log.

Depending on trading timeframe and trading system, it is possible that market analysis will need to be done more than once daily. In this example we use swing trading on Daily charts, allowing us to analyze and place trades only once a day, thanks to the fact that there is only one new Daily candle available.

In the end of the work hours it is very beneficial to use Daily Summary checklist:

1. Check once again that all analyzed signals were taken and everything was documented;
2. Do all necessary paperwork preparations for the next trading day;
3. Clean the workspace, ensuring that the next day can be started without any distractions.

Of course, we looked only through a very basic example here. It simply provides an idea how one can organize his working day. Every trader should prepare detailed checklists for his particular method of market analysis.

Trading is definitely not easy, but it can and should be made simpler. The checklists help to cut through all the guesswork and instead manage the work each day with absolute clarity, knowing that nothing important is missed.