Learning to Trade

I'm ready to give Forex another go. First some background and general thoughts.

I've done a fair amount of reading over the years about stocks and trading in general. Books like The Intelligent Investor (Graham), Trade Your Way to Financial Freedom (Tharp), Common Stocks and Uncommon Profits (Fisher), High Probability Trading (Link). I have had some success with buy-and-hold stock investing, mostly in buying good companies after the market unfairly drags them down (I'm sure you can think of a few examples of this since 2008).

Specific to forex, I've put in quite a few hours developing, coding, back-testing, and optimizing MT4 EAs. Nothing too complex, but it was enough to show me how brittle automated systems can be, and the problems with optimizing for the past. I laster ran across the James16 thread, and tried manual demo trading the weekly/daily charts looking for price action around PPZs. I dropped it after 2-3 months because I only got a few entry signals, often with too low R:R to use. That was about 6 years ago.

I'd love to be able to trade forex as my primary income, but I'm still skeptical how likely that is. I guess I still see the markets as mostly random, which erodes any confidence I might have in gaining a trading edge. In the spirit of optimism however, I'm going to give this business another try.

I return to full-time work in 2 weeks, so will be limited to evening (MST) trading. In the mean time, I would like to build my trading plan and start trading it in a demo account.

I'm currently working my way though the Babypips school (just finished the High School level). I'm pretty sure I've done it before, maybe with less content, but it's still a good refresher. I'm also looking at some trading threads on here, but the best ones are hundreds/thousands of pages long making it hard to extract their critical nuggets of wisdom.

I haven't fleshed out my strategy yet, but know that whatever I do needs to make SENSE and fit into the underlying buying and selling of the market. Most indicators fail this test: they're just hiding information behind statistics. Price action, candlestick patterns, and SR lines/zones make sense to me, so will be my focus. I'm sure as my understanding of the underlying market matures and as I'm exposed to new ideas, I'll find more strategies that fit in with these.

Going through some threads that were suggested reads, I'll put some of my thoughts and learnings here. I definitely appreciate any feedback/clarifications/corrections.

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Hanover replies to PMs - hanover

Includes general thoughts on what makes a good/bad system, and gave links to more reading material.

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Behind Price - Orderflow - skfx

I found this interesting, thinking back to the basics of what we're actually seeing on a bar chart: the net result of the bids and asks. New buy orders consume open sell orders, and if there's enough buy volume to consume the ask level, the price moves up, otherwise it stalls there. Vice versa for sell orders. Price reaching certain levels can open more orders (pending or stop entries), or stop losses being triggered (new sell orders as price goes down, new buy orders going up), or buy/sell orders can stop coming in (limit orders). If you can identify the levels the market (ie. the large speculators) has its stops, you might have an edge in predicting how price will react to moves.

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Money flows: Trading the strongest / weakest major currency cross - unknown4x

The price movement of a pair only tells you how those 2 moved relative to each other, nothing about the rise/fall in their absolute strengths. One side might be driving the change, or both together. What I took away from this is that you should be aware that the currency pair you get a signal in may not be the best play. You can look at each currency in the pair and compare with all others, to find any that are relatively weaker (than the sell side) or stronger (than the buy side). Basically, if you pair the strongest against the weakest currency signalling a trade, the result should be a smoother and more definite price move since you're following the biggest net money flow.

This also encourages watching other financial assets (gold, equities, commodities), as money may be flowing between USD and them rather than to other currencies.

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Trading with Deadly Accuracy - wmd

Breakouts above a resistance level often retrace to retest that level as support (and vice versa for breakouts down through support). You can trade aggressively on the break, which will get you stopped out more often but won't cause you to miss the big moves that never retest. More conservatively, trade the retest. SR trading allows tight stops on the other side of levels, since the level (and reason to trade) failed the retest if it breaks through.

I'm still not sure about trendlines or channels as S/R. They're not as obvious as price bouncing off of established levels, as it's adding in the time dimension. A constant slope (say, downwards) would require resistance levels to be dropping at a fixed rate over time. Whether as a natural phenomenon, or big players intentionally scaling down slowly, it seems like the trendline S/R would only be valid on a shorter time frame. Horizontal S/R makes sense that price can leave for a while and return to respect the S/R level, but once a trendline is out of play I don't see any reason for price to respect it when it returns in the future. Unless it's another case of self-fulfillment due to popularity (like MAs, Fibs, etc).

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I do like how order flow analysis fits in with the S/R strategy. The levels are a natural result of higher order volume at certain prices, and stop orders will tend to accumulate around these levels the more they're tested and respected.

More threads I have bookmarked:
Building an equity millipede - pipEASY
james16 Chart Thread - james16
No Brainer Trades - BillyRayVal
TRD - TheRealDeal
Extracted Thread - CrucialPoint

A thought about winning and losing trades for different systems:

For any given system, some trades will win, some will lose. A different system might have given the opposite signal for one of the losing trades (making it a win), BUT this system will have its own set of winners and losers. If you keep combining or adding to your system in an attempt to eliminate losing trades, you'll just end up with conflicting signals.

Embrace the losing trades along with the winners! Assuming you're on point with everything else, of course.

Take a look at my thread. It might interest you. Every trader has their own style so find whatever makes you feel comfortable with. I personally don't trust EA's and indicators.

Thanks JAKammus. I don't think I'll be doing the same style of trading, but you did a great job laying out your trading plan and rules. I'll try to be as thorough, because leaving those things unwritten will undoubtedly lead to inconsistent decisions.

I've been doing a lot of reading and watching webinars on Supply and Demand trading. Thankfully I came across Kenneth Lee's PDF in his B.S. Trading with Kenneth Lee thread, as he did a great job in compiling the details of S&D trading and presenting it in a straightforward way. Unfortunately him and that thread have become inactive (though it still has about 290 pages for me to go through!), so I'll have to seek out feedback elsewhere but will include my own chart analysis in this one.

Like most people I have to go work in an office, taking up about 9 hours a day, so my trading hours will be limited. I can either start in the evening, about 2 hours after the Tokyo open, or get up extra early for the first 1-2 hours of the New York open. Since there's a lot more liquidity during the NY than Tokyo session, I'll try adjusting my schedule to make it work. I'll still have the option of more trading in the evening, maybe using it to plan for the next morning.

I'm down to 1 week of freedom left before I have to return to work, but I see it as a positive: work will cover my expenses and help build up a large enough trading account so that by the time I'm able to successfully trade a live account, I won't have to worry about being undercapitalized.

Next steps:
- Continue reading through chart analysis in S&D threads.
- Watch some Sam Seiden S&D videos on areas I need more details.
- Complete initial trading plan.
- Practice identifying and drawing zone bases which meet the criteria for a tradable level. Include chart pics here!
- Make some trades on demo account if anything presents itself.

I was actually getting a bit frustrated by Metatrader's drawing capabilities, so spent most of yesterday coding an indicator to streamline drawing S&D zones. With it I can just click 1 of the 4 buttons, then click on a bar, and it will draw a rectangle of that color from the candle bottom to high (supply) or low to candle top (demand), starting from the candle to either current time, or whichever bar closed above (supply) or below (demand). They can be manually adjusted after if needed.

Here are the zones I came up with for EURUSD across various time frames:

Weekly:


Daily:


4-Hour (using the lighter color here):


1-Hour (again, lighter color for lower time frames):
The most recently consumed demand zone has flipped into a supply zone, and has already move over 2:1 from the zone height. I see a potential trade off the bounce of the fresh DZ that price is approaching at 1.1026. With a few pips padding, it would be about 4:1 R:R to the bottom of the limiting supply zone above.


Here's the scaled-out H1 to show the higher time frame zones:

Here's more detail of my setup analysis:



Green dotted line is 3 pips above the DZ top for the entry price (1.10288), and the red dotted line is 3 pips below for the stop (1.10174). The Fib retracement shows R:R values based off the entry and stop. The green bar's low was at 1.10291, so it missed by 3 pipettes. It's possible my zone wasn't drawn wide enough, or price just hasn't dropped to it yet. Even if it was drawn too tight, the zone remains fresh and ripe for more action.

I'm going to place the order, with a profit target at the bottom of the SZ above. Since there are stacked supply levels, that will limit how high price can move up.

If price keeps dropping and a new SZ forms, that will present a new opportunity as there are no nearby DZ below.
If price rises from here, there will be a chance to short the first test of that zone.

So it took me 20 minutes to:
- log into broker's web trader
- talk to live chat for help getting all pairs to show up (fast!)
- figure out position sizing on the AUD account for EURUSD (just used the calc here http://www.babypips.com/tools/forex-...sitionsize.php)
- get all the numbers in and order placed

This is what the chart looks like now:
<accidentally deleted this screenshot - price briefly spiked down to my desired entry level>

My order *would* have been triggered if I'd got it placed quicker. Lots of improvement to be made there! We'll just have to see how price behaves now.

I'm also going to have to think more about the position sizing and leverage.

20,000 AUD
2% risk on a 11.4 pip stop on EURUSD
AUDUSD: 0.7698
pip value: 10 USD / 0.7698 = 12.99 AUD
EURUSD lots: 20000 * 0.02 / (11.4 * 12.99) = 2.70 lots

270000 / 20000 = 13.5:1 leverage

I don't have any guidelines for max per trade or total account leverage to use. A smaller zone (stop risk) allows for a larger trade, but that's the "happy case" risk. The "unhappy" case is when price blows past my stop, magnifying the risk beyond acceptable levels. Looking back to this week's open, there was a ~55pip gap down, which if it were to gap that much past the above trade's stop, would be 5.8x more loss than the intended risk (almost 12% on the trade!).

I also didn't take into account spread. So many details to remember and execute on!

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Ok, here is how I will incorporate the spread: widen stop by the spread.

Since we buy at the ask and sell at the bid, the market needs to move (entry - stop + spread) before you get stopped out. A good stop level is the point where your reason for entering the trade is proven wrong, and has nothing to do with spread, so you really want the market to move (entry - stop) before you get stopped out.

Stop adjustments:
Long: stop -= spread
Short: stop += spread

This would have made the above trade (spread was 6 pip at the time):
20,000 AUD
2% risk on a 17.4 pip stop on EURUSD
AUDUSD: 0.7698
pip value: 10 USD / 0.7698 = 12.99 AUD
EURUSD lots: 20000 * 0.02 / (17.4 * 12.99) = 1.77 lots

177000 / 20000 = 8.9:1 leverage

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With the wider stop this trade was under 3:1 R:R, so I closed the pending order.

I also spent a few hours today updating my indicator. It's more like customizing the trading environment than an "indicator". A few hours spent streamlining tasks that take seconds or minutes, but will be performed countless times, is time well spent.

It now adds a 3-pip (+ spread on stop) buffer around the zones for the entry and stop lines, top and bottom zone prices, zone height (may not be of use), the pip-value of the chart in my demo account currency (AUD), and moved the buttons to the empty corner.

US Presidential Election - sounds like a good day to avoid the markets!

I've been using a Google Sheet as my journal. Unfortunately my first demo account expired after 30 days, losing all orders and history (my new one they set to not expire).

So far I've had about 12 open trades off the 1-hour chart. They have all been losers, but at least they were for no more than the 2% I planned on risking. Some pending orders I cancelled since the price moved away from the zone without being triggered. A few trades started out positive, but didn't get anywhere near my take-profit level before reversing. Most however, just didn't respect the level I was trading off of. There have been a few cases where I missed a trade that occurred while I was at work, like Oil bouncing nicely off the DZ I had marked around 42.6.

I've reviewed Sam Seiden videos and feel I'm identifying zones correctly. There does however seem to be some differences between his teachings and some of the S/D threads on here (which aren't all consistent amongst themselves either). I've only taken trades when there was a fast move away from a level, for at least a 1:3 move away, where price stayed away for a decent time frame (days or weeks), and returned to the zone without much churn (so there is no opposing zone blocking my desired move) for at most the 2nd time. Pending orders were placed with entry/stop +/- 3 pips around the zone, with a take profit at the near side of the next opposing zone, and only if the R:R from that setup is at least 2.5:1.

I do feel only being able to check the charts and trade in the morning (NY open) and evening is a problem. I either miss out on trades, or my POs have to be set too early leading to weaker setups before being triggered. Perhaps the rule of thumb should be to only trade timeframes that you're able to monitor the close of every bar for. Trading for 2-3 hours a day, I miss out on roughly 90% of the hourly bars!

Example of a losing trade:

EUR/USD H1



2 Rally-Base-Rally demand zones established Dec 5. On Dec 8, the first was blown through, and while price bounced slightly off the second (where I opened a long position at the arrow), it soon broke through this level as well.

I wasn't able to get profitable on the demo account, and after going back to my full-time job realized there's no way I can make trading worthwhile if I only have 1-2 hours a night for it. With my coding skills, I'm better off building a few failed startups until one takes off. That would be true wealth generation, versus trading/leveraging up current capital. I just need to approach each project like a potential trade setup, knowing some need to fail for any to succeed. Then instead of having 1 homerun trade giving a huge % return, 1 homerun project could be worth orders of magnitude more.