Friday, April 18, 2008

USDJPY Hidden Divergence 4/18/08 - Asleep During the Big One

Well you can't always have your head duct taped to your monitoring screen and this beautiful trade setup is a proof of that pudding. Triggering at about 3:00 a.m. PST I was sound asleep. Too bad. What a beauty. Classic Hidden Divergence.

Initial entry 102.72
Stop 102.20
Projected min R:R 3:1
Open Position profit: 2.7R


Thursday, April 10, 2008

The Importance of Keeping a Log

How many times have you read a book or a post telling you to keep a trading log. But you don't. Or it isn't consistent or some other excuse.

The reason I believe that most traders don't keep a log (remember most traders don't make money either) is because it requires discipline. And it requires that you confront your trading - warts and all.

I've posted a copy of today's trading log for the ER2 and YM. You'll notice that there are 2 trades that shouldn't have been taken at all! Also you'll note I calculate my average winner, average loser, and my winning %. That tells me my expectancy. Also all my profits and losses are denominated in R values (that's risk values) not ticks or dollars. This keeps me honest. If I risk 20 ticks to make a 2 tick trade then I don't get "rewarded" for that. However if I make a 20 tick trade with a risk of only 2 ticks then I do.

By the way thanks to "Ontariodave" for the inspiration for the grading system you see on this trading log. The idea is that for each of my trading components: 1) signal, 2) mechanics, 3) Position Sizing, 4) Trade Management, 5) and Exit mechanics I get a grade - just like school. Depending on how I handle each of those components. So at the end of the day I can quickly evaluate where my weak points were. Today I had trouble identifying valid signals. It was tough - we were in a trending market most of the morning (and this is a methodology that looks to fade breakouts).

Another thing I'd like people to note (just as Brett Steinberger says in his book "Enhancing Trading Performance" is that good traders will take that 5th attempt at something even though they've had several losers in a row. Inevitably, that is when I have my biggest winner (note the 5R winner at trade 8 after being -4R on the morning).

Good luck with your trading and I hope this inspires you to keep a trading log or improve your existing trading log.


Monday, April 7, 2008

USDJPY Trade Closed

From the previous post I had placed a short USDJPY trade before NFP. Well the NFP didn't matter too much in the grand scheme of things. Sunday night I was very quietly taken out at my ATR trailing stop.

Entry: 102.49
Stop: 102.68
R: 19 pips
Exit: 102.52
Result: -.2 R


Friday, April 4, 2008

Do Non-Farm Payrolls Scare You?

Last night I put on a short USD/JPY trade. Most traders wouldn't put on a trade hours before Non-Farm Payroll. However, the market is going to go where it's going to go. Obviously right now I am still holding onto that trade and ANYTHING could happen. However, I know that my methods put the expectancy in my favor. So why wouldn't I trade before NFP?

Entry: 102.49
Stop: 102.68
R: 19 pips
Target: 101.45
Risk to Reward: 5R


Wednesday, April 2, 2008

Understanding your Strengths and Weaknesses in the Markets

After talking with some traders last week and this week, I thought I would talk a little about understanding yourself and how this can help your trading.

I recently spoke with a trader who asked me why I switched using from using a particular trading method. His assumption was that it was not profitable.

Actually, it was quite profitable - however, it did not meet my personal requirements. These requirements dictate that I look for methodologies that are low risk, tend to win less than half the time, and have high R multiple gains.

So why do I have these requirements in the first place? Because of my strengths and weaknesses as a trader. Any method I trade must maximize my strengths and minimize my weaknesses.

It may seem that I am being rather "fussy" not trading an approach that "works". However, it is my firm belief that you cannot successfully trade an approach that does not psychologically and financially meet all of your requirements.

When one is first testing systems either discretionary or mechanical it is very difficult to see that there are multiple ways to be "right" in the markets. Of course for every 1 correct way there are 100 incorrect ways to do things.

My original trading journey took me down the path of backtesting ideas (first by hand and later by computer). Eventually, I realized that my strength in the real world is not programming computers. Rather it is the macro understanding of how systems work. I am not a detail oriented person in the real world - but I am very good at sensing the general pattern of things.

Summing this all up I came up with a list of my trading strengths and weaknesses:


1) Good at seeing the overall pattern (technically and fundamentally).
2) Good at reacting quickly (played lots of video games as a kid).
3) Good at risk management (know a lot about risking a little to gain a lot).
4) Good at understanding market psychology (I know that most traders have a strong desire to be "right" but don't understand magnitudes of risk)


1) Poor at predicting market direction (I'm usually wrong most of the time)
2) Poor at programming computers (not detail oriented enough)
3) Poor at understanding complex derivatives (not going to be trading options any time soon).

Based on these strengths and weaknesses I have built a methodology that plays to my strengths while minimizing my weaknesses. Furthermore, any methodology that I consider must play to those strengths while minimizing the weaknesses.

If I had done this first (instead of just pursuing the holy grail systems that every beginning trader does) I would have been profitable long before I was.

Lord Tedders

Type rest of the post here


Tuesday, April 1, 2008

Monthly Trade Analysis March 2008

Because of the quantity of trades I take on a monthly basis I'm going to focus just on my Forex trades in this monthly analysis.

Date Pair Setup Timeframe R Target Result
3/5/08 USDCHF Hidden Divergence H1 26 84 +6R
3/10/08 USDJPY Divergence M5 9 42 +3.5
3/11/08 EURUSD ABC Reversal M5 14 39 -1R
3/12/08 USDCHF Hidden Divergence H4 60 132 +2.07
3/19/08 USDJPY Hidden Divergence M5 22 63 -1R
3/27/08 EURUSD Hidden Divergence H1 42 127 -1R

Monthly Net Results: +8.57 R

Now I want to point out a couple of things. First most people aren't that excited about this type of trading since it is longer term than most day traders like (typical holding time was 1-5 days). Secondly, with a winning percentage of only 50% it is hardly "glamorous" trading. However, it is quite profitable. This particular setup tends to average about 5-10R (i.e. percent per month) with no more than a 10-12% max drawdown and about a 40% win ratio. If only hedgefund managers could match results of 50-120% per year ROI with a 10-12% max drawdown.

Some of you might be thinking that this is based on some "awesome" entry perhaps a really complicated Neural Network or something of that nature. Actually, it has almost nothing to do with the setup (divergences of course) but all about the fact that I risk a very small amount to attempt to capture very large R multiples.

After all do you want to be "right" or be "profitable"? Good trading is boring.