The FX Hustle described, or “kids, do not try this at home”
To all my aspiring, smart, pip-hungry newbie forex traders out there: READ THIS ARTICLE posted in the Financial Times this week. It describes a point by point IPO offering by GAIN Capital, or forex.com, a prominent market maker in the world of forex brokers, and just how they make money from the thousands, the tens of thousands of new investor/traders that are entering the forex trading world month after month. There are two very important points to take away from this article. First, GAIN Capital is a dealing desk broker, meaning, they take the other side of their clients’ trades, creating a very obvious conflict of interest. Compare to an ECN (electronic communication network) which is like an interbank broker, simply matching up trades immediately with other banks on their network. Most profitable traders that I know prefer ECNs to dealing desk brokers because they just do not trust a broker that is basically trading against you. The second and maybe the most important takeaway from this article is this: “Our customer base is primarily comprised of individual retail customers who generally trade in the forex market with us for short periods…” and “…If we are unable to maintain or increase our customer retention rates or generate a substantial number of new customers in a cost-effective manner, our business, financial condition and results of operations and cash flows would likely be adversely affected. For the year ended December 31, 2008, we incurred sales and marketing expenses of $29.3 million.” So, these brokers, all brokers, are willing to spend $30 million dollars on sales and advertising in order to get the newbie retail customers, the ones who are likely to jump into the market and under capitalize while over leveraging their trading accounts, and then quickly and quietly over trade and lose their entire account in a matter of months. This is why we see so many advertisements for “Low spreads, $50 to open an account, START TRADING NOW”. They depend on these type of newbie traders for their bread and butter. This is precisely why it is so important to start your trading account with at least $5,000, but $10,000 is much better. Otherwise the volatility in this market will eat your account alive. Do not be a broker’s delight, do not over leverage, give yourself the advantage by allowing plenty of room for the volatility to work IN YOUR FAVOR. The brokers will hate you, and you will love it. Cheers.
How’s your batting average?
I am not a baseball fan. I am a New Yorker. These two statements are mutually exclusive and cannot be uttered aloud on the streets of New York during these final moments of the post season play as the NY Yankees play the LA Angels tonight to secure their 40th World Series, far more times than any other baseball team, ever. They are pretty awesome. Even I have Yankee fever. I have likened forex traders to poker players before, but a forex trader can certainly also be compared to a baseball player, especially when it comes to the hitting, and maybe even more so. It is astounding the amount of statistics held on each of these hitters: percentage of hits for each time at bat, percentage of hits when against a lefty pitcher, percentage of hits against a righty pitcher, home runs per at bat, runs batted in, on base percentage… and on and on and on. So when Alex Rodriguez approaches home plate and he is sporting a .285 batting average it is fairly easy to guess that he may hit during this time at bat. Let’s compare how batting stats can be attributed to trading. Its all about probabilities and helping your confidence. I keep my weekly and monthly percentage of winning trades and my weekly and monthly profit ratio. But if you trade more than one strategy then it is important to track each strategy separately. You may be profiting 80% of the time using your intraday trend following strategy, and profiting 65% of the time using an intraday contra trading strategy. Similarly you may be profiting 71% of the time using a swing trading strategy. Or, if you trade more than just one session per day, you should track those separately also. For example, you may be 79% winning trades during the NY session and only 54% winning during Asia trading. Hey, this is fun, let’s not stop there! Do you trade more than one currency pair? Then you gotta track those separately too. You may find that you are 52% winning on the EURJPY trades but 86% on the EURUSD trades. How about percentage of trades reaching ultimate profit target vs. trades hitting break even or an early taking of profit. Do you trade NFP each month and how’s that working out for you? Certainly each week and month varies as we move through different cycles of the year. I thought I was already being thorough with my statistics on my trading but this baseball thing has got me thinking… I have some more work to do. In the meantime, GO YANKEES!
Stress free New York session: avoiding econ news trades
It is often said that patience is the hardest thing to master for traders, but it is truly your ace in the hole to wait for the right entry and then wait some more for your profit target to be reached. As I have mentioned, I am an intraday forex trader: I get up around 06:30am New York time to start my trading day. I am rarely in overnight trades. I decided early in my trading career that patience was hard for me, so the quicker intraday trades made more sense for my style. But the noise associated with the smaller time frames of intraday trading, especially around economic news releases can be stressful and easier to make mistakes. My favorite days to trade the New York session are when there is little or no economic news releases scheduled. When there is no news to move the market, then the market looks more to the overall technical bias for its direction. Mondays are typically non econ release days, and since it is the start of the week, it is a good bet that the previous week’s bias will continue on a Monday. On average there are two days during any given week that will not contain economic news during the New York session. I can usually pick off about 50 pips on each of those days on the GBPJPY trading the prevailing trend. If you can have the patience to not trade unless it is a non news day, averaging 100 pips per week ain’t bad. I went back and reviewed my non news day trades for the past 3 months and I have shown 94% profitable trades just on those. Remember, this thing of forex trading is not a sprint, but a marathon of patience and emotion-free execution of your strategy. Taking some stress out of the mix could certainly help to keep you on track and avoid the noise of the news. Good trading!
Trading naked
Ever hear about naked trading? It ain’t what it sounds like. “Naked” trading is the medthod of using candlestick price charts without all the indicators: no MACD, no or very few moving averages, no stochastics, just price — pure and simple. Price is king, and when you have the courage to take all the flim flam of indicators away you can actually see what is occurring to price much easier. Afterall, technical indicators are all lagging indicators, and while they can help the trader in different ways, if you can dumb down your charts to the bare minimums, life and trading can actually get easier, especially for beginners, because many tech indicators can confuse the situation. When I trade naked, eh hum, I still plot my trendlines. Trendlines are my most important thing to have on the charts, price is attracted and repelled by these lines, perfect for entries and exits. Trading naked really forces the trader to learn what the candlestick patterns are telling him, since there isn’t much else to look at. Attached is a 5minute USDJPY chart that I trading this evening during Asia open. USDJPY remains in a very strong down trend for months now, important to know the overall trend before drilling down to less than a 1 hour chart. As the Asia session got going, it is easy to see how price respected this minor supporting trendline for many candles, about an hour. I waited for a break of this line to enter a short trade on this pair. This was a very typical break, then retrace up, then break and break of the last low. Entry was at 89.40 and a stop placed above this line at 89.60. In just 30 minutes I was able to book 30 pips. I like to look for wicks to confirm hesitations in price. Here is a great site to hone your candlestick pattern skills at www.babypips.com. Good trading.
USJPY wick wick
What a spectacular wick forming on today’s daily candle on the USDJPY pair, after Asian stocks has a troubling time of it pushing yen stronger, the action in the US and European markets helped this pair recover to nearly the same level as it began - - a doji. But before we get too excited about reversals for this super strong down trending pair, let’s do some investigation. Friday’s daily candle was a massive red down candle, closing outside the lower Bollinger Band. With today’s down move and subsequent retracement back inside the Bollinger Band, it stands to reason that we need to take a fib measurement of these two daily candles, the high at 91.34 to the low at 88.22. Today closed just underneath the 50% retracement at 89.79. And, the 61.8% retracement level is up at 90.15, which consequently is also a previous support level from Sept. 16, to the pip, along with the daily 5ema. I would guess that this level will be hard to break above, for now, and thus should be a good place to place short orders - I am placing mine at 90.00 with a stop at 90.45. Now, why wouldn’t this be a reversal candle with such a big wick? It could end up being the beginning of a morning star reversal candle pattern, actually. The confirmation will be with tomorrow’s candle closing higher than the 50% of the large red candle, at 90.41, which will also then close above the daily 5ema. For the short trade target I will be looking for a revisit to the low at 88.22. It is a good risk/reward trade. Let’s see how it plays out. Good trading!!
All markets are connected
Today’s market action could be signaling a changing in the guard after the Federal Open Market Committee’s rate decision and accompanying statement. It is such a perfect example of how all markets are connected in some fashion: whether it is oil, gold, EURUSD, the Dow, or the Hang Seng. It is also a perfect example of why intraday traders need more than one screen to trade from, there’s so much going on to pay attention to. First I’d like to say, I never trade an FOMC statement. But it was spectacular to watch the reversal today after this bit of news, or non news, came out. Today’s price action in most markets were quietly awaiting the FOMC decision, minus crude oil prices. Oil had already dropped nearly $3 this morning when I turned on my computer. Consequently, the US dollar was showing signs of resilience against the euro, yen, and aussie, after reaching new highs in the euro and aussie during Asia last night. That spike last night certainly caught my eye, creating some serious negative divergences in those pairs today. Putting all this together I was starting to guess that the dollar was starting to reach some sort of bottom, if only temporary. So after the 2:15pm FOMC decision and price spike, (look how beautiful the double tops in EURUSD and AUDUSD!) it was not too surprising to watch the Dow also spike up, but all of these stalled after just 20-30 minutes and the US dollar came back strong to lead the EURUSD, AUDUSD, and the Dow down in a big way. The Dow made a 160 point swing to close -81 points down. Nice volatility, just like the old days. There has been quite alot of talk about the US dollar being the new carry trade, and that is probably why we have not seen “normal” market correlation with the dollar and the yen, and oil, in respect to the Dow. My good old trading strategy of Dow/yen correlation has not worked for many months now, but just selling the greenback against anything has been the trade of the year. Wouldn’t it be interesting now if we see more dollar strength, ushering in some risk aversion? Did the Dow get close enough to the magical 10,000 level (she hit 9906 today during the FOMC spike) for sellers to get in the game? Are the institutional traders back and in the swing of moving this market?? So many questions, so many pips. Good trading.
Summer trading volume means $$$
It is summertime. Stock traders often say “sell in May and go away”, betting on the light trading volume that summer brings to slowly grind stock indices down over the slow summer months. But not so for day trading currency traders, who can be raking in the big pips and big bucks if they play their cards right. Here’s some tips for light summer volume forex trading to keep the summer blahs away:
1. Range trading is king. With light volume often comes less ability for market makers to move currency pairs much outside their current ranges. But this is not 100%, if there are less players in the market, then it will also take less players to move the market. Moves can be sharp, so you have to be quick on the draw. Typically currency pairs will move in beautiful wide swings, perfect for day traders or swing traders.
2. Use your fibonacci tool. For some reason the fib tool extensions seem to work even more precisely during the summer, maybe because the big money institutional traders are out of the market (they are all at the Hamptons), so us little traders can push a pair exactly to where we want it to go. I enjoy fibbing the most recent 2 or 3 hour range ending at 7 am EST and then taking the trade to the 261% fib extension.
3. It is summer, take your profit then go to the beach. For intraday trading, my trade target is usually hit within 2-3 hours. If I can be in the money by the time London closes at 11am EST, then I take the profit and shut it down. Why waist more time waiting for the next trade set up when you can outside enjoying summer? Take the money and run. Tomorrow is another day.
Summertime is perfect for intraday and swing traders to rake in the big pips, due to the typical large swings that currency pairs are making. Just be sure to be on the right side of the market’s current move and you can easily make +100 pips per day. Rake it in now during the easy months before the big money traders come back into this market and mess everything up! Good trading.
Yens shorting finally worked out
The head and shoulders pattern that I identified several days ago on the GBPJPY finally broke through its neckline on Friday and the selling continued through Monday to the target. From neckline break near 147.00 to the target at 142.00, a cool 500 pip trade. Since the break happened on Friday, I shorted at 146.90 but price just ranged down and up until the close of the day. I chose to close my trade prior to the close of the day and week, it is one of my rules not to hold trades over the weekend. So Sunday evening I re-entered the trade and took a quick +100 pips. The AUDJPY also had a beautiful head and shoulders pattern on the 4hour chart, so I sold that pair at the break of its neckline at 70.39, taking +100 pips profit. Another clue to the potential break of the AUDJPY was the inside daily candle on Friday, breaking the low of that candle Sunday I figured it was quite likely that price would continue south. Monday continued the selling, I again sold the GBPJPY at 143.54 for another +100 pips. The GBPJPY trade was tricky: the original head and shoulders pattern that was first identified about 10 days ago actually failed when price bounced up off the neckline and broke above the right shoulder, near 149.00. But just two days later a completely new head and shoulders pattern developed, and this is the one that finally broke and gave up all the pips. Sometimes you gotta be flexible and patient to cash in on these patterns, especially when they are on the bigger time frames: 4hour and daily. By the way, am I upset that I did not keep my original sell trade and get all 500 pips? Nope. +100, +100, +100 = +300. That is just fine. Good trading!
Your broker platform may be skimming your pips
There is alot of talk in the retail forex trader world that some brokers are scam artists, stealing pips from their trader clients during each trade entry and exit that they make. How can they do this exactly and how can you know if your broker is doing this to you? I suggest you trade with a second price feed open on your desktop so that you can casually watch to see the difference in spread at any given moment during your trading day. I like to use Alpari’s mt4 free demo charts. So I have the Alpari open and also my broker’s trading platform seperately. Most of the time the two match pip for pip but there are times when there may be a 1 to 3 pip difference between the two price feeds. I have also tried other brokers’ platforms, with live trading accounts and truthfully, I have seen occasional small or even large pip differences (more than 15 pips) in price spread. Tt will make a difference whether you are trading with a fixed spread broker or a variable spread broker. With a variable spread you can often see huge differences in what one broker can offer vs. another broker’s price. So there are times when you the trader are in a trade position and attempting to close your trade in profit but as you are clicking the EXIT button you may see your broker’s price 1 or 2 pips different than what your other price feed says, and this very well may be in your broker’s favor. So not only did your broker just make the usual spread of, say, 3 pips for your trade you just exited but maybe an extra 1 pip occasionally will find its way into their pocket. Isn’t this unfair? Not really, and let me explain why. ALL brokers except for some true ECN brokers with variable spreads and true pass through ability have the ability to manipulate the spread that they offer at any given time. It is a fact. It is part of their business model. It is not illegal. Read your broker’s terms and conditions and you will find a line that discusses this. Afterall, brokers are in the market in order to make money, while providing you, the trader, with a good and easy service and trading platform that allows you to also make profit in the forex market online. But here is the trick: some brokers do this much more than others. So it is important for you to pay attention, have a second price feed going while you trade, so that you can be AWARE that your broker is doing it and how often they do it. It is your duty to act in your best interest when you trade which means, dear trader, that you should report to your broker that you noticed 2 times this week that their price was manipulated. It would be interesting to know how your broker responds to this kind of call or email. But as you and your broker know, there are many good forex brokers out there that will be happy to get a new trading client, if your broker is really a good one, they will not want to let you go.
Candlestick patterns do work
Using candlestick patterns in technical analysis when trading the foreign exchange markets can certainly be a worthwhile strategy when looking for both entries and exits for your trades. It is definitely one of the tools in my trader toolbox. Different traders incorporate candlestick analysis in different ways with their entries and exits but here is a strategy that I like to use. When trading a currency pair that is in a strong trend on the daily chart, look for price to retrace against the trend and begin looking for an entry to trade with the trend, preferably also in conjunction with a fibonacci retracement level or major support or resistance level. A reversal pattern on a smaller time frame, like the 30minute chart, can make a good confirmation for your entry into the prevailing trend. There are 6 major reversal candlestick patterns that I use regularly: harami, engulfing, evening star, morning star, dark cloud cover, and piercing. You can go to www.babypips.com to view the specifics about these patterns and how to define them. I look for these patterns in all time frames, but I really like to find them on the 15minute, 30minute, or 60 minute for my intraday entries. It is important to wait for the candle to close before confirming the pattern. Then, once confirmation is given, it is safe to enter. Stop can then be placed on the other side of the pattern. A good example of using a candlestick pattern to confirm an entry is on the EURUSD pair. On the 1hour chart today during the New York session the EURUSD retraced from the highs near 1.3730 down to 1.3500. This level was important a few days ago, a resistance level. At 11am NYT a harami formed on the 1hour chart, an inside candle, closing back above the important 1.3500. At 12pm I saw the confirmed pattern and entered a BUY trade, in the same direction as the trend on the daily chart. The stop was placed at 1.3469, below the low of that pattern. In about 2 hours the trade completed +100 pips and I exited. Nice trade with the short term trend. Good trading!
Jennifer Shotts
Casey Stubbs has been trading for 14 years. He started trading in the stock market and moved to Forex. 
Richard draws from his extensive experience trading to write insightful trading articles for both fundamental and technical analysis.
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