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The Pillars of Trading in Modern Markets – Part 5: Psychology of the Trader, August 22, 2014

Hello Traders,

This article completes the mini-series of 5 articles on the “Pillars of Trading in Modern Markets” I have focused on this week.

Yesterday I offered my view on the Psychology of the Market. Today I shift the attention to the Psychology of the Trader, not less important.

20140822_trader_psychologySo here follows a definition of Trader Psychology: it is the beliefs system that has to be in place for a trader to be successful in the markets. 95% of people lose money in the market not always because their trading method is flawed, but rather because they approach trading with a wrong set of beliefs. The common sense ideas and beliefs we bring from our everyday life do not work in the markets.

Note: This is the most important aspect for a trader to understand. If we as traders start with the right foot and question every impulse we have when we approach the markets, we put ourselves in a better spot to become successful in trading.

If, on the other hand, we just second our impulses and let ourselves react and take trades that are not in synch with the market psychology and current price structure, we create from the beginning a very negative energy associations with our trading experience. If you are a starting trader, avoid this at all cost!!

For instance, a lot of traders will initially fall in love with the concept of trading breakouts. This is basically entering the markets above recent highs (for longs) and below recent lows (for shorts). But although it can be successful this is not the best practice, for sure not for all instruments and for all time frames.

Note: The best way to trade the markets is to identify a new trend and then trade retraces before the price starts moving again in the direction of the identified trend.

But before new and experienced traders discover low-risk trades often hidden in price retraces, and learn to manage risk and obtain risk-free trade (another technique used to control and reduce risk even more), they “learn” to apply common judgment and common sense ideas to trading. A huge mistake! Totally wrong! Watch out!

For instance, in our daily life there is a widely accepted principle of “non-solution of continuity“. This has been probably borrowed and adopted from the law or physics or from nature. I am making reference to natural processes which when initiated, do not reverse quickly. For instance, before a process can be completely reversed, it will continue for a while.

Think of a body in motion like a car. If you hit the brake, the car will start slowing down, continue forward for a while, before eventually coming to a complete halt.

This is not true for market prices of EUR/USD or the S&P500 e-mini futures, and any other financial instruments for what matters. In fact, it is said commonly in the trading environment that “price can turn on a dime”. In the markets there can be events that suddenly reverse the process, as well as price direction.

Note: There may be possibly dozens of beliefs that we, as human beings, bring into trading from everyday life experiences. Most of these beliefs are what makes us losers in the markets. If you do not understand you need a ‘dedicated’ set of beliefs to function properly in the markets, you will not be successful. You need a ‘dedicated’ set of beliefs to be a successful trader- and that’s the bottom-line.

This article and the other 4 written this week pretty much cover the most relevant aspects involved in Successful Trading.

If you find any difficulty understanding any particular aspect- or have any other queries in general, leave a post in the related post or send your queries to my email address: fibstalker@gmail.com.

I will be glad to assist you with all your queries. I plan to have a Skype call one of these days, with all the followers. If you are interested, contact me at the email above.

I would be happy to hear from you your thoughts, ideas, feedback, or any other comments. Looking forward for your notes.

If you liked this series, please share it with friends and trading buddies on the social Networks! Thank you!

Have a great Friday and weekend.
Regards,,
Giuseppe, ~FibStalker

 

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The Pillars of Trading in Modern Markets – Part 4: Psychology of the Markets, August 21, 2014

Hello Friends,

Today I continue my mini-series of 5 articles with a new article. I will complete this series on Friday.

This week every day I am publishing a brief article. The focus of the series is on the “Pillars of Trading in Modern Markets”.

In Yesterday’s post I have written about Money Management.

Today’s topic is considered complex, difficult to master and somehow boring by traders. But remember that in life is very typically that the things we do not focus on are those we need the most!

20140821_bandwagonI am going to talk about Psychology. Psychology is paramount in trading. Some authors and traders bring this to an extreme saying that Psychology is 100% of trading.
Why? If you think about it, you can have a good method in place and risk and money management well honed, but still if the psychology you bring into the market is not okay you are still going to lose money. I do not think is 100% because you can somehow incorporate the market psychology and good practices into the method, but Psychology remains the most important element in trading.

First of all, how do I define the Psychology of the Markets? This is the response of traders and participants in the market, considered as an aggregate group of individuals. Market Psychology is reflected in price action and in price structure.

I am more concerned with the latter, price structure. In fact, I am totally convinced that price structure in modern markets is overwhelmingly dictated by the activity of some classes of algorithms, trading on all the major instruments characterized by very high exchange volumes.

Note: Entry levels, as well as support and resistance levels and areas are mainly identified by the interaction of classes of algorithms in the weekly, daily and 4-hour charts. When there are no planned or unplanned events that affect the psychology and emotional engagement of the market, prices are “quietly” driven into areas of target or resistance and support indicated by the algorithms. The proof is in price itself, when you learn how to spot the “footprints” of algorithms on price.

The algorithms that “govern” the markets are understandably monitored by mere mortals, i.e. human beings. These algorithms are taken down on Friday afternoons and stay inactive through Monday mornings. This is the reason for erratic, low-participation markets we see at the beginning and the end of the trading week.
Only decisions by Central Banks, significant macro-economic changes and geopolitical crisis or some other dramatic events do actually take price action away from the control of algorithms.
Algorithms then “readjust” pretty quickly.

In one of my trainings I demonstrated how modern algorithms have “internalized” the psychology of the Market. I prove this point by applying the rules that I use to study the effects of algorithms on price back to price data well before computers were invented! And do you know what happens? These rules work! They apply back to the 70s, 60s, back to the beginning of last century showing that they model something “fundamental” about the markets.

Note: I also believe this is the very reason why algorithms trading the markets are capable of flying “under the radar” and very few professionals are able to spot them. The reason is that they have incorporated “the way market works”, e.g. the price structure that is generated by the market psychology, the average reaction of market’s traders taken as an aggregate group. I find these considerations very fascinating. And these are not theories! I use these considerations every day in my practical analysis and trading.

You can find a recent example here.

See you tomorrow for the last topic.

Till then stay tuned, I will talk about the Psychology of the Trader.

Have a great day.

Giuseppe, ~FibStalker

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EDUCATION – HFT versus Program Trading, December 20th, 2013

Hello traders,

this article is the result of my studies of the effects of HFT, or High Frequency Trading, on price (you can review my articles on HFT on this blog and the research paper on HFT & Program Trading published for SIAT/IFTA on Feb 2013),  combined with the knowledge of how program trading algorithms enter the markets on the smaller timeframes.

If you read my personal profile, you will now that I am interested in and enjoy research, but being very practical, the objective is to add to my trading techniques and bottom line, and those of other people.

Trade setup disturbance

Trade setup disturbance

In fact, while I cannot deny the satisfaction I gain in exercising my intellectual curiosity and interests, I mainly study trading, algorithms, techniques, methods, psychology because I want to find new patterns and information I can use to improve my trading  entries, executions and continuously update my view of what is really going on in the market (.. and these days there is really a lot going on!). Indeed, this blog and article is not about me, but how YOU can exploit Program Trading to make money in the market, and how you avoid, and/or learn to read HFT.

What is High Frequency Trading or HFT? For those who do not know exactly what this class of trading algorithms is all about, I will offer one among commonly accepted definitions. There are several varieties of HFT algorithms and also the definitions vary quite a lot, however the following attributes are common to all the types of HFT algorithms:

  1. market positions are acquired and removed from the market very quickly, often hundreds or even thousands of time during a trading day
  2. orders transmission to the electronic exchanges take place with a very small latency (which requires dedicated computer appliances directly connected to the exchanges)
  3. algorithms manage a very small inventory of stocks, futures, lots or, generally, financial instruments
  4. every positions is typically closed in the space of few minutes or seconds
  5. rarely the position is carried overnight
  6. orders to trades ratio is very high, e.g. a very high number of orders is commonly canceled compared to the number of executed trades

In May 2013 I have presented a work on the effects of HFT on the markets and Program Trading (note: studying the effects of Program Trading on price and acting on the related observations is my trading edge) for SIAT/IFTA at the largest Investment and Trading event in Italy, the IT Forum of Rimini. In that occasion I have touched, among other things, on the way HFT negetively affects market structure of price. My speech on HFT and its dangers has been covered by “Il Sole 24 ore”, the most influential financial journal in Italy.

machinevsmachinesIn the present article, on the other hand, I want to touch on another important effect that HFT algorithms have on markets and, specifically,  how HFT represents an obstacle to other classes of algorithms like, for instance,  Program Trading on small timeframes (below 240min). Maybe you already start seeing the pattern here, are you? Yes, it is no more human versus machine, but rather machines trading, and fighting for profits, against other machines.

While this topic is certainly fascinating and intriguing, it should also suggest how dangerous and subtle HFT can be (and generally is!), and this is why there is so much attention around it. HFT is even more dangerous when considered in light of the potential evolutions foreseen for this and other classes of algorithms. In fact, cheap and cheaper technology and faster computers are enabling adaptive automated trading methodologies with  future generations of algorithms expected to be much more difficult to understand, explain, predict and control.

Leaving these worrisome considerations aside for a moment, I would like to show a recent example of  how HFT impeded or obstacled an otherwise well formed setup from Program Trading algorithms on the 15mins (and lower timeframes). If you want to learn more, you can search about Program Trading on this blog and also watch the videos in the sections: forex, futures and stocks & ETFs on this blog. What I am about to show is a classic example of a price move caused by HFT (plus emotional participation) that had the same effect of going to ‘fish for stops’. However, as you will discover, stops are not the typical stops found below recent lows but, in the case in discussion, stops are related to a well formed setup created by Program Trading on the 15min timeframe.

The below picture (click on the picture to enlarge) shows a first traditional measured move modeling Program Trading activity on the S&P500 emini 15min chart. The Fibonacci trace is from A to B, and the entry setup at around 1,770 (C area), is respected to the pip. Price then  moved higher and then again retraced towards the setup area but remained within the setup area (above the red line in D at 1,766.25).

"HFT versus Program Trading on S&P500 emini 15min timeframe", December 18th 2013

“HFT versus Program Trading on S&P500 emini 15min timeframe”, December 18th 2013

After printing a new low in D, price remained above 1,766.25 and started moving higher. It is then when the “hell” came in, as soon as the FOMC minutes and news hit the wires and subsequently the markets (and you will see similar price dynamics for every type of planned and unplanned news event), there was a very quick spike lower. Everything happened in the space of one minute or so, as I will be clear when we will study the other chart, for the 1min timeframe below.

During that one minute or so, price has been pushed below the 1,766.25 stop level, violating the setup of Program Trading in the 15min timeframe. Before we get into the smaller timeframe let us keep studying the 15min chart above. The fist reaction to the FED has been a spike that caused prices to move marginally under 1,766.25 stopping Program Trading out, only on the 15min timeframe. Notice that Program Trading is active on all timeframes. After that, the orders supporting the “real“ and “logical“ direction of the market after FED announcement, i.e. tapering resulting in a reduction in $10B in monthly US bonds buyback, started flowing into the market.

Notice that I purportedly used quotes for the words real and logical, because what makes sense and appears the logical way to go is not always the best way to go, or the way price chooses in that specific market juncture. In the years I have seen hundreds of time the market moving in the direction opposite to what logic or common sense would have suggested. If you read my eBook “Key Concepts to Correct Trading Behavior” you will learn how strongly I discourage, new and experienced traders, in trading the news.

The order flow that set in after causing some troubles to Program Trading (by piercing the 1,766.25 stop in area D) pushed price higher and, not surprisingly pushed prices into first and second targets of the original ABC setup, in area C (with a long above 1,770, a stop below 1,766.25). The 1st target was at 1,793.75 and the second right at highs at 1,806. Both of them were hit. As we can see on the 15min chart above, although HFT algorithms managed to “break” the  Program Trading 15min setup, when price was pushed higher Program Trading regained control. The proof is in the fact that market halted right at that 1,806 high and 2nd target, where Program Trading started taking profits out, thus stopping the move higher in an environment where HFT algorithms had faded out already.

Who wins? HFT always wins in the short term on the short timeframes. But once Program Trading,regains controls, in absence of news and HFT algorithms, it becames again the force that drives markets, in all timeframes. Before moving on to showing the exact levels of price and time when Program Trading regained control on the S&P500 emini, I want to elaborate a bit on where the S&P500 emini could be moving in the coming day (I took me 2 days to think and prepare this long, but hope interesting article and S&p500 has already made its move and it is now trading in extensions on the 15min chart, very aggressively!).

After touching highs at 1,806 there were two options for the S&P500 emini on the 15min chart above. The first one to retrace into the following setup in the G area, traced from highs in B to highs in F, or a so called extension long. So in this case Program Trading (and traders that use the Program Trading modeling edge) would enter this market at around 1,796.50 with a stop below 1,794. This is the next setup long with targets in the high 1,800s and above.

Those traders and analysists, like the author, who follow Program Trading footprints on price of the S&P500 emini know that this market likes to trade in traditional longs. So option two that must be considered could be, after piercing the 1793.75 level on the downside, a move of price into the 1,784 area H, for a bounce and a continuation higher. Knowing the main rules Program Trading uses on S&P500 emini futures can also help in objectively establishing when the possibility is there and probability is high for a complete reversal of the price move generated by the FED during the FOMC day (I saw that happening several times, too). In the case of the example being presented, that failure level to watch is the 1,778 level (area I).

In the following I want to comment and try to show you the other face of the coin. What Program Trading did after the 15min setup failed, due to HFT pushing prices below that 1,766.25 stop level? We cannot say if Program Trading on the 15min has attempted to trade the short side, after that failure. In fact, very often Program Trading is not active on certain timeframes during planned news announcements, to exactly avoid tricks by HFT and emotional behavior (there are also other times of the day and days of the week when Program Trading is characterized by a very low activity, or is deactivated, even on larger timeframes).

But on the 1min timeframe (click on the below chart to enlarge) it can be shown that other instances of Program Trading have tried to regain control of the markets, as soon as they could. After the first trust higher into the high in B (please refer to the below 1min chart), we witnessed profit taking into C and some programs apparently tried to pick price there. We could only observe it, after the fact, as programs used the anchor around the A area and traced to highs in B to obtain the new setup in the C area (entry above 1,780.75 with a stop below 1,778.75). The setup eventually got into the first target at 1,792.75 in the Cx area, for a 12 points gain over a 2.5 points risk, almost a R/R of 5. Again, there is no way this setup could be traded because the anchor A was only known after the fact.

The disciplined trader using the Program Trading footprints edge would have then traced from lows in C, previous setup area, to highs of the swing move in area E. That would have produced a setup area well below the F area, where price stopped and reversed and where the next long setup actually too place.

The fact that price stopped before, around the F area, respecting a long setup that would have been identified by using an anchor in D (and not C), i.e. tracing from D to highs in E, shows that Program Trading had to change anchor and means that my interpretation is that it did not yet regained control on the market.

"Program Trading regain controls on 1min timeframe", December 18th 2013

“Program Trading regain controls on 1min timeframe”, December 18th 2013

In fact, again there was no way to anticipate that algorithms would have used D instead of C and where exactly, the actual setup would materialize. Had we had a way to trade the setup in F (entry at 1,790.75, stop below 1,789.25), we would have witnessed our trade to successfully hit the first target at 1,798.50 (Fx area), again another 5 R/R trade. An again I want to stress that there was no way to trade that observing Program Trading activity.

But at the next setup things start changing, Program Trading clearly regains control over the market on the 1min timeframe (Note: Program Trading works well on high volume markets and the 1min timeframe is a very high volume chart during an FOMC day, which makes it great for trading after HFT fades out, but it is also an ultra-fast market to trade, which makes us more prone to mistakes). How do we know Program Trading is now in control?

Likewise before, let us observe where the next setup is projected by Program Trading by tracing from F to G (new highs), which gives us the entry at H. This setup (entry at 1,795.75 and stop below 1,794), could now be traded, because price actually retraced into it. This would have allowed both Program Trading and professional traders to take a position at those levels for a ride into the first target at 1,803 (Hx area) for a 7.25 points gain.

I have represented the arrow pointing at the long setup in the area indicated with H in green color, symbolizing Program Trading regaining control on the market. On the contrary, the other arrows pointing to the previous long setup areas in C and F are colored in yellow/orange, symbolizing the class of Program Trading not yet back in control of the S&P500 emini futures market.

The following setup long in the sequence should now be evident and its presence should not surprise the reader. After hitting the target in the Hx area and printing a new high in correspondence to the area tagged with I, price retraced into the new long setup, indicated by the area L. This long setup could be identified in advance by tracing the Fibonacci study from H to I. By looking right well before price got into the L area, the trader could have been inputted a limit order for a long entry at 1,800.75 with a stop below 1,799, or a 2 points market stop order, and reap a 5.75 points gain (almost an R/R of 3) at 1,806.50, in correspondence of the target area indicated by Lx.

Before I close this long, and I hope also interesting post, I want to briefly discuss two points:

  1. what can we take away out of this long discussion?
  2. how do we actively and practically use this information as traders?

As per point 1) abotake awayve, the recent example that presented on December 18th, 2013 shows how disturbing  an effect HFT algorithms can have on price. It has been proven that, not only HFT changes market  structure, but it can be driven to be of obstacle to Program Trading on smaller timeframes.  In the above example I showed how HFT can provoke a failure in an otherwise well formed Program Trading setup. One of the characteristics of Program Trading is to help driving the natural flow of the markets and, differently from HFT which subtracts liquidity from the markets, Program Trading injects liquidity at certain points (which can be foreseen on all timeframes, similarly to what has been showed on the 1min chart above) thus contributing to maintain an high level of market efficiency or, more generally, an “healthy” price structure.

Such price structure somehow adheres to or is produced by what I call the “common psychology of the market”, or more precisely the psychology of market traders taken as a group. In fact, the overall behavior of the average trader who brings his/her own “every day” psychology into the game, produces the same effects on price than those enforced by Program Trading.
This is one of the reasons very few know or speak about Program Trading. This powerful class of algorithms results “invisible” to the majority, due to the fact that it works along and accompanies the natural flow of the  markets, the flow implied by the traders group psychology. I showed that during important planned news event, like the FOMC meeting on December 18th, 2013, HFT programs can produce spikes that temporarily produce a failure in a sequence of price measured moves under the control of  Program Trading.

I have also showed how Program Trading, which controls markets characterized by high volume (e.g. major indexes, forex majors, highly traded commodities, etc.), can regain control over price after news (and HFT algorithms) fade. The evidence has been showed on a smaller timeframe (1min), but that actually happens regularly on all timeframes. HFT algorithms can have  negative impacts on Program Trading setups, but only temporarily. Program Trading is the real force in the markets, which is continuosly being applied to them. While HFT affects Program Trading temporarily on the smaller timeframes, news events related to market fundamentals, e.g. FED decision or economic downturn with effects on the USD Dollar and forex majors or significant geopolitical changes (e.g. China and Japan trading directly with one another without using the US Dollar reserve currency), can affect price on the larger timeframes (daily and weekly). However and whenever that happens, Program Trading will quickly adapt and then move forward into the driving seat again. Therefore, I believe that learning to spot Algorithmic Trading and, especially Program Trading  footprints on price, represents probably the best edge a retail trader can have in modern markets, where 80% of volume is traded by machines and algorithms.

As per point 2) above: how do we apply the awareness and knowledge presented in this article? Besides the importance of learning how to recognize algorithms footprints on price and understand what program trading is doing on the different timeframes, I am a proponent of learning to guard ourselves and our trading from HFT. This point is especially important for those traders who like day trading using very small timeframe. However if you want to get very good or stellar R/R even up to 100 (and this can surely be obtained on long currency pair stretches), you can and will need to time your swing setups
in small timeframes too. Thus even if you are a swing trader, you may not be immune to the effects of HFT and you should master anyway how to deal with this class of algorithms .

The best advice I can give to readers is to not trade during planned news events. In fact, we do not know how emotional  traders and HFT algorithms are going to interpret and react to the next piece of news. Neither we should assume  that, if a 15min Program Trading setup is in place, the effects on price will necessarily be those showed in the above example. As mentioned, I have witnessed hundreds of news events where price went to the opposite direction of what logic and common sense would have suggested. Sometimes, maybe, just to reverse the very next day or during the subsequent days, and stat a move in the direction where common sense would have initially expected the price to go to.

If you are a daytrader and you are compelled to trade during news events (?), you can apply different strategies to deal with the presence of HFT. In the case of the above example, for instance, a trader could have reentered long after price moved above the highs of the one minute  bar just before the red “incriminated” bar in the 1min chart I discussed above. The incriminated red bar is the one that broke the Program Trading setup identified on the 15min chart. The stop of the hypothetical trade would have been below recent lows on the 1min chart.  This is not a strategy that I would necessarily prefer playing or recommend, because traders can still make lots of money in the markets even just taking setups “inspired” by Program Trading on the daily or 4 hour charts, as I show since April 2012 on this blog. But by executing this strategy, the trader might have enjoyed a R/R of 4 to 5, in a very volatile day, by just waiting for the end of the day.

What I actually hope you will take away from reading this article is that modern markets are much more complex and “crowded” than we would expect and, although coming from the right perspective price is not difficult to read and understand (note: spotting Program Trading footprints is not difficult, but rules and timing have to be learned), price cannot be studied and interpreted, as well as, effectively traded using traditional technical analysis or methods that do not take into account the  overwhelming participation from algorithmic trading.

If you like this article, and you think it brings something new into the picture, please do not simply share it with friends, readers and fellow traders. Make it VIRAL! 🙂

Thank you (use the buttons below the article). Sharing is caring…

Notice that price projections in my method are not from/to random levels and do not follow Elliot Wave, DiNapoli levels or other methods, but rather a proprietary way to frame price based on modeling the effects of Program and Algorithmic Trading on price. My method helps “level plain” the trading game showing what banks, institutions and big hedge funds are actually doing (and not what they are saying they are doing). Follow me to learn how to spot the Algorithmic Trading footprints.

I send a free Newsletter in the weekend and provide updates throughout the week. The newsletter typically includes 3 video reviews for (1) EUR/USD, Dollar Index, S&P500 e-mini and Gold e-mini; (2) the Japanese Yen majors, i.e. USD/JPY, EUR/JPY and GBP/JPY; (3) the other majors: GBP/USD, AUD/USD, USD/CAD. Please, register here to receive the free weekly newsletter.

On the other hand, if you want to receive my videos and daily and weekly reviews, you can subscribe my free newsletter.

Should you decide to operate based on this information you are invited to do your own due diligence, consult a registered trading professional, as well as, understand the risks involved. This information is for educational purpose only. Please read the Disclaimer and accept all involved risks.

Have a great day.

Till the next post

Giuseppe Basile, ~the FibStalker

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Filed under Articles, Education, English language, High Frequency Trading, Program Trading, S&P mini futures setups and trades

EDUCATION – A trader’s Journey, December 17th, 2013

Hello traders,

this article sparkled from the comment of a fellow trader and follower and provides some information useful for your trading journey.

http://www.youtube.com/watch?v=M8ZN4L5p-pY

A trader’s journey

Trading is easy but not simple. As most of you have already realized the main problem is the education we go or went through, or we are obliged to go through and, especially, the lack of mentors who.

Finding a good mentor is not only a matter of luck, but also putting efforts into it and researching the internet wide and large, ask people, buy monthly services, etc.

Then there are the skills: 1) trading methodology, 2) money/risk management; 3) psychology.

I rate them as follows, in terms of importance:

  1. 10/15%
  2. 10%
  3. 75/80%

1) Trading Methodology: There are a different methods available: traditional technical analysis (?), price action (?), there–is–an–other–in–the–universe (cycles, Elliot), band trading (?), strategy trading, sentiment trading (?), program trading ().

You have been there and, maybe, tried different options, but do they really provide an edge? It is 50/50%, so people who make money with the majority of these methods do it because of superior MM and psychology and because they stick to the winners when they have good trades. Low reliability, high expectancy also due to large occasional R/R with a small, controlled risk. This is the secret for low reliability methods, you know it already. I deeply respect traders who can make consistently money using these methods. They are not a lot, though.

If you know my work a bit, you also know that I am a proponent of observing Program Trading (a powerful class of algorithmic trading) and guarding against HFT (especially in entries on 15min and lower). I have got into it before joining SIAT/IFTA and studied and researched it for a long period of time.

If you have time and are interested, watch a few videos on this blog, and you will get an idea of what I am talking about. Notice that the method only works on high volume instruments: forex majors, indices and commodities and high volume stocks. This is a very important point, because we need to make sure that Program Trading is active on the market we analyze and trade.

It is a brand new approach that attempts to spot Algorithmic Trading footprints and incorporates the traders` group psychology, so it makes it easier to trade with the natural market flow, which also means it is more difficult to trade, and it has certainly been for me at the beginning, because we all are mentally wired in a way very different from that required to be successful following Program Trading footprints. Program Trading is the way to go for me, it gives very good results and, as a matter of fact, methods based on algorithms are getting a lot of coverage on FXStreet.com, one of the largest global Forex portals, that has also recently awarded my efforts in this area .

2) Risk/Money Management: If you have good risk and money management (MM) in place you can can do well, provided you are disciplined, but if you want to do very well you have to have a good trading method too, with high reliability. Generally MM is not an issue. There are two aspects of it:

  1. having MM right for the market you trade and in relation to the type of entry you use (I have 4 classes of entries, on different timeframes, with variations that take into account all the cases that can actually materialize in price action);
  2. having an MM in place that allows you to grow your profits faster. I have studied this second aspect deeply in one of my research paper, which is available for free on this blog (browse the eBook & Papers section of the blog).

While the research paper focuses on the links between MM and trading goals, it shows two important things in the process:

  1. a rigorous methodology on how to study and simulate your system with different MM techniques, provided you know the trades results distribution (and you have more than 30 trades in it, but the more the better)
  2. a showcase on how to use market money techniques to boost profits. Nothing complicated in fact, which demonstrates that part 2 of MM above (i.e.having a way to grow profits faster) is not a big deal; however part 1 must be in place and done in the right way, which requires a method to firmly frame price dynamics.

3) Psychology: is the cat to skin. This is the real deal. We are wired to not perform correctly in the markets as we only want to get involved when we are sure about it (e.g. breakouts?), while we should get involved when the risk is minimal (e.g. on retracements). This requires acting when the fear is highest and confidence is lowest. Risk acceptance is key. Some people even propose to trade without a stop, in which case I do not understand how they do define their unit of risk, which is also fundamental to calculate the trading method’s expectancy . More power to them if it works for them (I doubt): it does not work for me.

Then we need to accept the principles and truths of the market (well explained in “Trading in the Zone”), which requires not just reading the book, but thinking a lot about it, relating its content to actual trading, taking notes, coming back after weeks, months and years, appreciating the changes, noticing what must be done still, and so on. This is the only way I know to internalize good psychology and behavior. I did this exercise, also studying other material, for more than 2 years. And I keep doing it.

This, and a lot of other work, must be done to undo and build the right psychology (e.g. study Van Tharp`s “Peak Performance Course”), but I still believe that the majority of success in managing our psychology in the right  way is just related to building confidence in a method that works (again, high reliability) and learn to stick to it. Much of the psychology work we need is related to “undoing” or “unwiring” our trading from what we would naturally do, or what we have learned in the past.

Do you want the proof?

Give a newbie a method that works and rules to trade it and manage risk properly and she will do exceptionally well! That will be the only way she will know how to trade as she will not have in her mind non–useful beliefs. She will probably be among the elite 5% traders in the world. I wish I had this benefit when I started.

Some readers asks for mentors` names. The following people helped me actively in the past or I have been able to get their attention:

  • Toni Hansen
  • Ivica Juracic
  • Van Tharp
  • DR Barton
  • Eugenio Sartorelli
  • Andrea Unger

It is difficult to find good mentors, but it is not impossible!

Finally, just study as much as possible in this blog. It also contains a lot of original research I have been doing on the markets. There are almost 400 videos with reviews and method explanation and I also share some of my research articles.

Hope this post will help you.

Notice that price projections in my method are not from/to random levels and do not follow Elliot Wave, DiNapoli levels or other methods, but rather a proprietary way to frame price based on modeling the effects of Program and Algorithmic Trading on price.

My method helps “level plain” the trading game showing what banks, institutions and big hedge funds are actually doing (and not what they are saying they are doing). Follow me to learn how to spot the Algorithmic Trading footprints.

I send a free Newsletter in the weekend and provide updates throughout the week. The newsletter typically includes 3 video reviews for (1) EUR/USD, Dollar Index, S&P500 e-mini and Gold e-mini; (2) the Japanese Yen majors, i.e. USD/JPY, EUR/JPY and GBP/JPY; (3) the other majors: GBP/USD, AUD/USD, USD/CAD. Please, register here to receive the free weekly newsletter.

If you like this article, please share it with your friends and fellow traders. Thank you (use the buttons below the article). Sharing is caring…

If you want to receive such videos, please subscribe my free newsletter.

Should you decide to operate based on this information you are invited to do your own due diligence, consult a registered trading professional, as well as, understand the risks involved. This information is for educational purpose only. Please read the Disclaimer and accept all involved risks.

Have a great day.

Till the next post

Giuseppe Basile, ~the FibStalker

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EDUCATION: My free eBook “Key Concepts to Correct Trading Behavior” is available…

… so if you have not downloaded it, do it now (keep reading).

This book is a guide to key concepts for successful trading in the modern markets. As most of you may know, modern markets are governed by High Frequency Trading (HFT) and Program Trading, two classes of modern Algorithmic Trading (AT) that has an overwhelming presence is today’s markets.

While HFT can hardly be relevant for retail traders (like us!) because it’s too fast to allow a reaction (so I suggest you don’t even try to trade during BCE or FED days, unless you know what you are doing), Program Trading is a more silent, less visible but very powerful class of automated trading. It is very important to know what Program Trading is doing on different timeframes.

Don’t miss the eBook! This eBook has the potential to turnaround your trading or start you with a the right step if you are a new trader (click on the below image to download).

Key Concepts to Correct Trading Behavior” eBook

(click on the above image to download)

Key Concepts to Correct Trading Behavior – A guide to relevant concepts for trading success in a market governed by High Frequency Trading (HFT) and Program TradingeBook published in May 2013 and available for free at: www.fibstalker.com

Abstract: Are you interested in trading or a seasoned trader but still not part of that elite 5% of consistent traders? Do you want to be a successful trader regularly extracting profits out of the markets? If so, it is important you start thinking of trading from a different perspective, as well as, start doing something differently.

One thing could be to re-focus on those key concepts that truly describe, explain and affect price behavior. If you are a new or inexperienced trader you will benefit from the content of this book much more than more experienced ones. The reason is that you have a unique opportunity to shape up the right beliefs and mindset about trading from the very beginning. Traders with experience will need to work a bit more to change or slightly modify their current beliefs, as needed. But if they face the effort they will be able to quickly turn around their trading.

The key concepts presented in this eBook help understanding the psychology behind price moves, mainly driven by emotions in a way that rationalizing market behavior is not relevant and even counter-productive for successful trading. For instance, all the hype on market news and on its interpretation is misleading. News can and will only affect price on the smaller timeframes like 15min and 4-hour, but very often (if not always) it will have no effects on price patterns already in place, neither will on the outcome of well-formed daily and weekly setups.

In trading perception is much more important than facts and their rational interpretation in relation to how price could and will be affected, i.e. what is the anticipated traders’ reaction after a key event. An introduction to each of the five concepts that are paramount for trading success will prepare the trader to build the needed beliefs or help shifting the existing beliefs in order to (re)learn how to trade successfully.

If you have been in the trading system for some time, you will have realized that trading success requires useful and focused beliefs and the right psychology. The concepts presented in this book are counter-intuitive and challenge the widespread ‘truths’ of trading. Probably this is the reason why it is meaningful to analyze and study them carefully. A deep understanding of key concepts will also help understanding where the real profit opportunities lie.

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Article: Professionals Trade People’s Psychology Not the Markets

This is the fourth of a series of four articles titled “Key Concepts to Correct Trading Behavior – A guide to relevant concepts for trading success in a market governed by High Frequency Trading (HFT) and Program Trading”,  focusing on the most important concepts any trader should internalize in order to show a correct trading behavior, in a world where the majority of trading volume is generated by computer programs.

I have written an introduction to the series and the first three parts of it, titled respectively “The Bandwagon Theory” and “The Dangers of Asking “Why?” and  “Facts and “Truth” Do Not Make Money“. This week I present the fourth and last part titled: “Professionals Trade People’s Psychology Not the Markets”. I will keep working on the other sections of the eBook. Notice that I am also working on the most important section that illustrates a practical application of  the Bandwagon Theory, using the daily chart of the EUR/USD forex cross (the section ‘The Psychology of Trading: the Bandwagon Theory illustrated’ will only be included in my free eBook that I will make available on this Blog). This series of articles is introduced here.

Trading-PsychologyIt should never be forgotten that professional traders  trade people not financial instruments. As strange as this sentence may sound, it represents a correct assessment and critical point novices and more experienced traders often fail to comprehend. The outcome is typically confusion as of the why a market often contradicts rationality and all sense of reason. Futures, forex and stocks financial instruments cannot do anything in and of themselves; their prices are determined by the perceptions of people which, in turn, are completely determined by emotions. It is these emotions, primarily greed and fear that often cause a market to extend too far upwards or downwards, well beyond reasonable levels. Financial instruments do not behave according to neat, simple mathematical measurements of value. Rather they oscillate frequently from over depressed states to overextended ones, without rest. This behavior is what creates opportunities in larger, as well as, smaller timeframes. This is what keeps new people coming in, and the old beaten ones leaving the markets.

The professional trader, understanding this behavior, builds his or her skills around knowing when one emotional state is about to give way to another. This is trading success in a nutshell. Success is not knowing what will a futures FX currency contract reaction be to a central bank announcement or trying to guess if and when a company will announce a new product. Trading is all about people and their emotions, that is why chart reading is so important. Fundamental data contained in balance sheets, income statements and other information sources represents elements from a picture of the past, a time to which market players have already emotionally reacted to. On the other hand, price and technical analysis serve as a living map, built trade by trade, of players’ current emotional state. These are important tools for the active short-term and swing trader or those who want to time position trades or even longer-term investments.

However not all Technical Analysis (TA) tools are useful to build a living map of players’ emotions. In the days of Program and Algorithmic Trading (AT) and High Frequency Trading (HFT) the majority of Technical Analysis tools are not adequate. When TA works it provides signals too late with a sensible lag, or it does not provide signals and setups at all. Besides the lag, trade setups indications from TA are more subject to stop-losses, as well. Moreover the majority of TA tools only provide a point in time when it seems reasonable to enter a trade, often not indicating where the stop-loss should be placed and, more importantly, where profits should be taken. Thus the construction of a complete trading plan would require the use of a coordinated set of TA techniques which often provide readings that are in contrast with one another.
The author’s belief that it is very difficult to make money with traditional TA is comforted by the fact that the majority of people (more than 95%) lose money in the markets. If you don’t want to be one of them and to be part of the 5% of consistent traders it is important and necessary to start thinking and doing things differently.

Most new traders are attracted into learning classical technical analysis (TA) but to make it work strong discipline and a rounded psychology are needed. Typically a trader will focus most of his/her time and resources on the trading method while seasoned traders know that TA requires a better grasp on money management and psychology. While psychology is probably the most important aspect of trading success, the trading method is probably the less important, although critical. Time learning a good trading method is well spent, but it is better to spend time on a method that works and helps the trader to build its emotional capital, i.e. allowing managing his/her emotional state with a sound trading psychology, while providing a complete trading plan. A good trading plan is made up of 8 to 10 different elements (depending on whether you trade one or more markets) which classical Technical Analysis (TA) is not able to identify without the need of resolving contrasting readings from different TA tools.

A trading method that helps avoiding this issue is the method of Measured Moves which helps modeling price structure without the need of using TA tools. This method limits the use of TA tools because it is based upon the observation of the effects of modern Program and Algorithmic Trading on price. Computerized programs do not have an emotional component, but repeat the trading rules continuously at every setup and opportunity. When Program Trading is active price dynamics are purely based on cause and effect, because trading rules themselves are based on price levels although, as already noticed, market news and other events can temporary modify price structure on the smaller timeframes.

Trading rules used by Program Trading were born and improved upon from the analysis and observation of price subdued to the actions provoked by human emotions (mainly fear and greed) and having the effect of dynamically altering the balance between demand and offer. Such rules became very efficient with time and, with the continuous rising of technology and computer-based trading in the stocks, forex and derivative markets, as well as, the increased trading volumes, they bring about price behavior that materializes in a truly self-fulfilling prophecy. This is what happens on the markets nowadays and it is somehow similar to what happens when price approaches some important moving average (like the 100-day or the 200-day moving averages), i.e. there is always some sort of reaction. When measured moves are applied backwards to price data going back to the last 100 years (for instance using Dow Jones end of day data) it is disconcerting to see how well the related trade setups work, offering valid entry and price target areas. This is a very significant fact because it shows that the logic of computerized programs, which was initially derived from the study of the psychological response to price dynamics of average traders’ groups, evolved in a direction that correctly manages money, risks and profits while taking the important psychological aspects into account. Moreover the application to market price of the method of Measured Moves (largely employed by Program Trading) shows that the basic rules implemented by computer algorithms nowadays worked before computer technology was even invented.

In conclusion, not only Professionals trade people’s psychology but nowadays also Program Trading does that. Program Trading and Algorithmic Trading (AT) along with High Frequency Trading (HFT), are conquering more and more volume on the stocks and futures markets. A recent research shows that more than 30% of the UK stocks market volume is traded by HFT; same figures reach more than 70% in the US markets.

Please let me have your feedback. Thank you

If you think this series of articles is of interest please share it with your friends and fellow traders. Thank you!

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High Frequency Trading and Market Illiquidity – Introduction (English Language)

Dear all,

a few weeks ago I have started a series of articles with the intent of studying and reporting on the effects of High Frequency Trading (HFT) on Market Illiquidity.

computer_algorithms_HFT

The series focuses on some serious and dangerous effects HFT has on the market quality. The series is made up of the following four articles:

If you are in the trading business for some time, you have already realized that High Frequency Trading and Program Trading are modifying the process of trading. It is important to keep an eye on the evolution of HFT and its impacts on the quality of the markets. The trading method should also take into account the overwhelming presence of HFT, between 30% and 50% in the European equity markets and above 70% in the American equity and futures markets according to recent researches. Indeed, some futures and stocks are literally “ran” by Program Trading and Algorithmic Trading, so you want to know how they trade the markets.

For this reason you may also want to read the mini-series related to ‘How Program Trading is relevant to my trading and can be in yours‘.

If you like this work, please, let me have your feedback and share it with friends and fellow traders. Thank you.

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Filed under Articles, English language, Newsletter, Program Trading, Trading Plan, Trading Psychology