Probabilistic Thought Process In Currency Trading

This is a trading week that can objectively  exemplify how one can trade using probabilities. With just four (now 3) trading days left, many currency pairs have above average monthly trading ranges.

Lets take EURUSD as an example. The EURUSD pair has completed around 65% of its average monthly trading range already. Therefore, there is still a good probability that EURUSD is going to complete its average monthly trading range towards one side or the other (expanding above the high of the month or below the low of the month). By mere observation, one can tell that the pair has a bullish principal move. It has been moving north(bullish) for the most part of the month. It shouldn’t be hard to observe that. By making another observation we can tell that, as of now, price is sitting way closer to the top of this months range: just grab your fibo tool and connect it from the bottom of the month towards the top of the month and see how price is related to 50% of the range.  With the notion that price has a tendency to fulfill an average range for any given time (day/week/month/year), that there is still time (short amount of time) to fulfill its monthly range, that price is clearly trending up for this month and that price  is currently sitting much closer to the top of the range, it’s easy to assume that the EURUSD pair has an above average probability that it will expand above the high of the month.

As a currency trader, I will be looking only for long trades. I will also be only seeking those trades that truly have the potential to take out the high of the month and expand above it. It simply would make no sense to take short trades because it would mean that I would be trading against the odds previously established by the statistic and probabilistic observations. It would also be regarded as senseless to take trades that had little or no potential of expanding the range. This would mean range trading or trading inside what is regarded as trading inside the noise.

I want to make it very clear that by only taking long trades on EURUSD doesn’t guarantee that all the long trades that are taken will be successful. However, it does mean that you will be taking positions with the odds in your favor: where does price have a higher probability to move to?

I would like to ask the reader to perform the same analysis/observations on the USDCAD pair. How much of the average monthly trading range has the pair covered? Is the main move of the month bullish or bearish? How far price is sitting in relation to the top/bottom of the monthly range? Does the average daily range for USDCAD provide a viable intra day trade that would mean a future monthly expansion?  Once you have answered the previous questions, do the final analysis: Which direction does USDCAD have a higher probability to expand? Should I take LONG or SHORT positions or it doesn’t matter?

Try to do the same with different pairs.

Also, try to fit this thought process with the ‘boat exercise’ posted previously on this blog. A trader, just like the captain of the boat,  must be able to combine as much elements(wind direction/wind speed/distance/timing… etc.)  in his/her favor to have a true edge.

Thinking in probabilities, is an invaluable asset for any trader.  I truly see it as an edge.

You don't really need to draw a single line on your chart to make smart trading decisions. ;-)

Hope you have a blast!

Tossing a Coin and Trend Following

Following on the topic of probabilities, I thought on making a post regarding the relationship between tossing a coin and a trend following system.

Many authors have addressed this particular subject, and I will try my best to share my view on the issue.
The event of tossing a coin is a classic example on how probabilities can be explained.

Every time someone tosses a coin there's 50% chances for head and 50% chances for tail. Nothing new.

The first interesting conclusion is that they are totally independent events.

This simply means that even after tossing a coin 10 times and getting heads in all of these attempts, the next time you toss the same coin ( the 11th attempt), there will be a 50%-50% probability of getting either head or tail.

Now, what is the relationship between these statistic events of tossing a coin and trading?

The act of tossing a coin and analysing its outcomes is what makes the foundation of a sound trend following trading system. For that matter, it is also the foundation for mean-reversion systems. However, for the purposes of this blog, I will focus on trend following systems.

Coming back to the coin toss issue. Whenever we toss a coin repeatedly, the outcome wil not always be H(head) or T(tail) perfectly alternating like the following distribution:

HTHTHTHTHTHTHTHTHT: 50% H - 50% T

In a sequence of 20 tosses, we could have sequences such as:

HTTTTTHHTHTHHHTHTTH: 50% H - 50% T

THHHHHHHHHTTTTTTHHT: 50% H - 50% T

TTTTTTTTTTTTTTTTTTHT: 5% H - 95% T

HHHHHHHHHHHHHHHHT: 95% H - 5% T

The only thing we really "know" is that in the very long term, the distribution will be approximately 50% H - 50% T in average. This is a statistic observation called "The Law of The Large Numbers".

However, it's close to impossible to predict what will be the distribution of events in the very short term. This is why there's a tendency for novice traders to observe short term technical patterns that fall in the statistic observation called: "The Law of The Small Numbers". For example: If a currency pair, for the last two weeks had breakouts on the 30min. bar chart, than, the novice trader, turns this into some kind of law and thinks he has found a true gold mine. Big mistake.

I don't want to get away from the main subject. So lets get back to it.

Trend following strategies 'believe' that the distributions do not alternate perfectly towards the mean as HTHTHTHTHT, on the contrary, these strategies look out for discrepancies in the distribution concentrated in one direction or the other relative to the mean. This is what we call trend.

Therefore, trend followers observe imbalances in events of price they being random or not. Therefore, whenever there's a discrepancy, trend follower jump into the trend until the trend reverts back towards the mean thus invalidating the original trend according to one criteria.

It's up to one's criteria to determine, as a trend follower, to observe these distributions and its imbalances as to guide on: where to enter the market, where to cut losses and where to take profits.

As previously mentioned, I will try my best to post my criteria for trend following trading.

Best,
M.

#EURJY Trade Idea

Just like EURAUD did last Friday, EURJY has been short term trading down. Just have a look at your M15/M30 charts for this pair and you should see it. Therefore, it could provide a nice entry(short) on the pullback close to the high of the day. Lets just hope the market reaches the entry level.

EURJY m15 chart: It seems pretty clear to me that a donward move has better chances.

#GBPUSD & #AUDUSD Trading Idea

Cable has encountered tough resistance @1.6165(as observed on daily) and seems to be unable to continue its upward move at the moment. 1.6165 is also the high of October 2011. I wouldr love to see the main move of the week be changed to down (break of 1.6075) and therefore be able to enter intraday shorts or even an intraweek short. We are almost at month end and so we should see how this pair behaves into next month. There is also some confirmed bearish MACD divergences on M30/H1 targeting 1.6020 at least.

AUDUSD has a potential entry on the pullback (short) while it reaches out close to the weekly high. There is also a trendline right into that vicinity. Lets keep our fingers crossed.

GBPUSD resistance on the daily chart.

Divergence observed on the H1 TF. Also observed on the M30 TF.

#EURUSD

Hi there folks,

As previously posted, the Euro continues in a very strong long term down trend movement. Actually, it is slowly moving down inside a very well defined channel observed on the daily chart.

In last few weeks, the pair has actually been consolidating and my opinion is that it will recharge its downward move once it reaches the upper trend line of this channel. It has encountered strong resistance and doesn't seem to have the strength to take out the 1.32 level at the moment.

There is a pragmatic support @ the 1.30 level which will most likely be taken out once price gets the bounce from the channels upper trend line.

I would favor short entries on this pair at the moment.

EURUSD inside a very clear decending channel. 

#EURUSD Short Term

It seems like EURUSD has been travelling inside a descending channel observed in the daily chart. Notice that it is a very symmetrical pattern where we have two touches already there on both sides. From the looks of it, it seems like price could reach as much as the 1.35 level if the secondary (recent/shorter term) bullish trend is fast enough.

RSI has clearly been making  lower highs thus confirming the trend direction for now. I'd be worried if RSI takes out its 67.87 level on the daily chart.

Long term: there's a KEY trend line that extends all the way back to 2001. The next encounter price has with this particular trend line will most likely represent its kiss of death and price will take an accelerated plunge towards and below parity.
Needless to say that a fully formed diamond top can be observed on the monthly chart thus ending a bullish channel that dates back from 1998.

EURUSD Daily chart: Price inside a descending parallel channel. If secondary uptrend is fast enough, price could reach as much as the 1.35 level.

Pullback Setups

I'd like to share with you a kind of setup that I use on my day-to-day basis. This type of setup happens almost every single day.

Even in low liquidity days like today, one is able to squeeze a few pips here and there.

I will demonstrate two setups (GBPUSD & GBPJPY) that I actually took today. Both of these fell into the optimal conditions state that is to be satisfied by trend, average daily range size, stop loss proximity and timing.

There was a potential third trade I chose not to take because it violated one of these optimal conditions requirements: timing. In order to take the GBPCHF trade, I would have to open a position after or right after or at London close. Therefore, it violated my own set of rules eventhough it would be a profitable trade after all.

Here are the trades:

Pound Dollar - the vertical line breaks the market into daily sessions.

Pound Yen - Much alike the previous day, all conditions were present.

GBPCHF - The pattern repeated itself once again. However, timing was an issue.

I usually take profit at around 80-84% of the average daily range of the particular instrument or a few minute prior to the end of the trading session (NY close). However, it's not necessary for a trade to reach TP every single time in order for a trader to be profitable. As mentioned before, this pattern occurs ina a day-to-day basis. The combination of small profitable trades like these, will surely add-up in ones monthly statement. A mechanical/systematic approach will also provide a very stress-free way of trading.

All the best to you all.

Types of Traders - Some Parody

During my rather short trading career, I have come across all types of traders.

Some come around as newbies wanting to learn and focusing on a single strategy. Others have diverted to all kinds of books and other nuances to a point where there is no way that trader will follow a single line of thought as to identify or deploy and effective trading method.

I have come across the successful trader. The one that is indeed profitable and has no need to boast his ideas. I have come across the scammer who is able to sell his product without the convincing numbers. I have come across the professional trader who is proud of what he does and actually try to help people.

I have come across the fundamental trader. I have come across the technical trader. I have come across the artistic trader, whose trend lines are real pieces of work!

But the trader that probably 'bothers' me the most is the "dummy account/technical/forex thread bully trader". This trader profile is simply surreal.

Lets see a few of the characteristics of such a player:

1) Most-likely hides behind a broker dummy account and trades money that he doesn't have. A second option, is that he/she has funded a real account but FAILS to pull the trigger even when the most perfect setup shows up;
2) Is able to predict the future;
3) Doesn't like to be criticized;
4) Has the most beautiful drawings and explanations about those drawings. And based on that, is able to anticipate setups. But... chickens out when it comes to execution time.
5) Has a thread of his/her own and posts the most perfect drawings and setups but in reality never took one of those setups;
6) Through the thread he/she tries to promote a GOD_LIKE aura of him/herself;
7) The results of the drawings or the drawings itself are posted AFTER the fact. Never before.
8) This trader profile has another interesting characteristic: He bullies around those who criticize his drawings, methods or results.
9) Usually, one has no idea of the real results of such a 'GREAT' trader. Most-likely, he will never come up with numbers;
10) Last but not least: This type of player claims to have tons of experience. However, he/she has failed to pulled the trigger even once. Statistics and backtesting is far from his/her reality. As a matter of fact, his/her self proclaimed art/experience is way more valuable than numbers/statistics/backtesting.

With such an extensive profile list, it shouldn't be hard to identify such a trader next time you come across one of these...

;-)

USDx and Majors

It seems to me that the USD has a short-term bearish outlook.

The USDx is consolidating inside a potential diamond formation that has 77.82 as the next supportive level. Price  will most-likely bounce up from this key-level thus completing the formation. It shall than drop towards the 76.50 level before it resume its uptrend. There is also a MACD bear divergence pointing towards 76.50.

Likewise, the pound has a bullish divergence pointing towards the 1.5931 minimum target level. Therefore a correction for the pound is also guaranteed.

The Euro also has a few MACD bull divergences pointing towards 1.3644 at first and the other one towards the 1.3867. Both are confirmed minimum targets.

Therefore,expect a short-term bearish buck for the next few days.

Cheers.

USD Uptrend Correction

 Following previous posts, I still maintain that the USD uptrend will resume sometime soon. Next wave should, most-likely, begin next week or so.

 I insist that the moves are somewhat easier to predict while timing is more difficult.

 Last week was a consolidation period for the USD against many currencies. Mainly the majors. Both the Euro and the Pound, broke a diamond formation to the upside. Needless to mention that a consolidation is known to be somewhat a market hesitation/indecision on what to do next. More than that, it shows that those who went in short begin to book profits making prices go up to a satisfactory level where a second wave of sellers are willing to jump in.It works exactly like a department store giving out discounts. There are those who only jump in when there is a clear trend. 

Therefore, the minimum targets for the Pound and the Euro respectively are: 1.6085 and 1.4091. Swissey will most likely be the greatest gainer against the USD and could probably reach 0.8445 due to a H&S formation observed on the daily chart. Gold could well reach 1770.00 @ short term.

 Thel USDx has a minimum correction target of 75.70. From this level on it becomes too risky to sell the buck IMHO.

As posted before, DJI has reached the minimum target of 11700 and it should keep going up for a short period of time before it makes another drop. Oil WTI has also surpassed the 90.55 minimum target and will keep going up for a while, but should also take another plunge soon.

The USD should keep going up with world economy risk being off thus generating the end of the carry trade bonanza. Next post I will talk a little bit about the Carry Trade itself.

I had made this post on Oct. 22 in my Facebook page (personal) but only for those who can read in portuguese. I apologize the delay in placing this post here.

All the best to all.

Perfect Price Action #USDJPY

Every now and then, the market throws a straight opportunity at us. It is up to us to read these and take action.

The PA provided by USDJPY for the last few days, gave us an excellent opportunity for a LONG entry in the direction of the weekly move.

After price made a consolidation on Friday and again yesterday, late on the day (Monday), PA provided a higher high. Then, today, price went to have a look at the earlier lows, this time around, it made a higher low, which provided an entry with very tight stop loss.

Have a look at the chart.

A perfect entry towards the direction of the weekly move was provided today.

Automated Trading Experience

Experience sometimes brings us to some intriguing conclusions. Throughout my trading career I have come across many different types of trader and trader profiles. By trader profiles, I mean the different characteristics that 'build' a trader. I have seen boastful traders, proud traders, cool traders, anxious traders and even those that are very calm. However, I have been able to separate a wider sense that encompasses many of the trader characteristics: psychology.

I have personally observed a few traders with great potential fail simply because they could not handle the decision making process of a trade. They would fail to take a trade. They would rush into trades. They would close trades too early either by not letting their profits run or they would move their stops to brea keven with no logic behind it.  They could not simply follow the plan.

I myself have made many mistakes as such and still make them from time to time. 

The idea of lack of discipline is widespread in the trading industry and is one of the main reasons why most traders fail. 

I have never been a big fan of automated trading. The thing about the widespread majority of automated systems, EAs, Robots or however you like to call it is that they are composed of complicated math formulas rather than a well thought mechanical system in which, from time to time, there can be human intervention. Most mathematical formula based EAs, have a breakpoint and cannot be regarded as a healthy investment means in the long run.

On the other hand, if one has a sound trading plan, has logical places as to place the SL, where/how/when to enter the market as well as a TP level and all this can be translated into an automated system, than I tend to believe that one might get the upper hand: the discipline and psychological aspects of trading will be left out.

The market has artificial intelligence and no place for emotions or sentiment. Period. Be on the wrong side, lose money and the market will not be merciful on you: It will take your money and won't give it back to you.

Therefore, the counter weapon for that is to also use artificial intelligence through a sound trading plan thus leaving all kind of emotions outside.

Also, I came to a personal conclusion that trading is game of averages. You will win some, loose some. However, if you can land an average high  enough so that profit is sufficient as to counter the risk involved, than you are in business. I believe that automated or semi-automated systems can help us achieve these goals and with less stress.

By this, I don't mean that you don't have to do your work every day. On the contrary, this means that you have extra inputs as to provide extra room for improvement in your own trading system. Also, some decisions are there to be made such as: reversing a position or not? Should I be in the market during heavy news days? If I am in the market during te news, is it prudent to reverse?  and so on...

Cutting it short, I decided to 'migrate' 4 of the trading systems I use into automated systems. The first one is up and running but filled with small bugs. Therefore it is still not fully operational but operational enough as to provide a general idea.

The system has been up and running (forward testing) from the 24th and it was down for a day (the 28th). It has been able to rightfully increase a $100k account by more than 1% just in these last few days (actually just 4 actual trading days) . Needless to say that backtest on the system provided impressive results as well.

If you are interested in following the beta version of the system just click on the link below:

http://www.myfxbook.com/members/maurosandrade/ftt-18-4-stand-set/154655

Too early to congratulate my programmer or the system itself. However, I can call it a good start.

Cheers and Happy trading to all.

#ES and #EDJI Technical Pictures

It seems like we are going to see some more slide in the equity markets pretty soon.

The S&P 500 e-mini is showing the index inside a triangle formation in the 30-60 min time frames. The main diagonal is pointing up. Therefore it suggests it being a continuation pattern.

Pretty much the same can be said abot the e-DJI. We could see the future index as low as 9750 points sooner than expected.

I wouldn't be surprised to see further yearly expansion south since the Dow changed the main move of the year to down last week. A good extension is expected.

The e-DJI consolidation: 9750could be within range pretty soon.

ES 30 min chart: further slide is also expected.

#AUDUSD Long Term Outlook

This pair has perhaps the most exciting technical picture at the moment.
After reaching historic highs, the aussie reached and bounced from a trend line (to the pip) observed on the weekly/monthly charts. Just draw a line connecting the highs of 2004/2008/2011. On the other hand, I also ask you to draw a descending TL extending from the lows of 2004/2008 and projecting on. This should be enough to give you the idea of a broadening triangle that most-likely will turn into a diamond in the future.
There is an RSI divergence on the weekly chart that only confirms a MACD divergence that has a must-reach target of 0.9536. However, we should see this pair trading much lower in the following years.

On the daily/weekly chart, PA broke an ascending channel formation and now found support at a very interesting trend line that can be drawn from the low of 2007, the low of dec. 2010 , the low of the current year + yesterdays low. A next approach to this trend line will most-likely mean the kiss of death and the aussie will resume its path down.

So I guess it's very likely that we shall see an Australian Dollar, much, much lower in the following years.

Once again, time will tell.

The daily chart showing the rising channel as well as the trendline that extends from the low of 2007. Price stopped its temporary descent right @ this trend line.

The weekly chart: a bounce towards much lower levels is expected. This broadening formation might turn into a huge diamond.

#EURUSD Outlook (Diamond Pattern)

After some time drifting up and down, it seems that the Euro has finally shown its face. The pair is inside a diamond formation that will most-likely break south and will double it current short-term downtrend.

It took some while to form this one, but all the other formations seemed to be too obvious.

Also, price is currently trading very close to the lower border of an ascending channel that extends from the low of June, 2010. A break (very likely) will send this pair towards the 1.2300 area.

I still maintain my projection for an EURO below parity for the following years.

#ES and #EDJI diamonds

The e-mini futures for September for both the S&P 500 and for the Dow Jones have very similar pictures.

They both have been trading for some time now inside a diamond formation that can be observed on the daily/weekly charts.

The ES one demonstrates it has penetrated the lower right side and will most-likely head down with a minimum objective target @ 1127 points. However, I truly believe it will head much, much lower.

The EDJI has not been broken yet, however it will probably take out the right side lower trend line very soon. The minimum objective target for e-DJI is @ 10376 points.

The e-DJI is also developing what could become a huge diamond on the monthly chart. In this case, this index could go down towards around 9000 points in the following years before it picks up some  long-term bullish momentum again. For this level to be reached, it could take some 2.5-3 years. But it seem a very  likely scenario

Here are the charts.

The ES showing the diamond formation on the daily chart. The MOT is around the 1127 area. However, it could go much lower.

Similar picture at the e-mini DJI. MOT is the dotted line. Prices could go as low as the 9000 points in a few years time.

#USDJPY Small Diamond

After providing downtrend action during this week, it seems that we will see some bullish action for the Yen.

Spotted this one earlier today and was witing for confirmation. Lets see what happens.

A diamond on the hourly charts. Some bullish action could be seen sooner than later.

#USDx Outlook

Contrary to the widespread pessimistic views surrounding the buck, I still believe we will see the Dollar much higher in the upcoming years.

The daily chart demonstrates price action inside a broadening triangle formation. If one were not to follow the right sequence of moves, but only consider higher highs and higher lows, than one can assume that price is also inside a rising channel.

It's interesting to see price inside a sideways channel on RSI containing the broadening formation as well. A break on any of these two red lines will turn into the driving force. Whichever way it choses to break. There is also a flat line that extends from last October that contrasts with the lower highs and lower lows made until may of the current year.

Needless to say that a MACD bull divergence points to a must reach target of 75.85.

Once again, time will tell.

#EURUSD Trade Options

A good opportunity of taking a LONG in the direction of the monthly/weekly main move just presented itself during the ASIA session. A position could/should be established in the direction of the main move of the week/month (uptrend) in an attempt to take out the weekly average range.However, I truly believe this low of the week won't hold because the average monthly range was taken out this week. Therefore, we should see monthly range trading until Friday (last trading day of month) thus having higher probabilities of expanding the weekly range (currently around 62%) south of the weekly low.


In case those stops are triggered, a second option would be to take a position on the break (SHORT) of the low of the week. In this case, a the position will be backed up by the main move of the day and the NEW main move of the week. However, in this case, the position will require a bigger SL (above the days high).


A third option would be to skip the break of the weekly low and wait for a pullback towards the daily high where a more acceptable number of pips @ risk will provide a better R:R trade.


Fiber has just encountered a supportive trend line clearly seen on 4h or 5h time frames. On these time frames, a potential H&S formation could be in the makings. In this case, it could be worth trying to catch the top of the projected right shoulder with a very tight stop loss.


Let see what happens.


Cheers.

The 300 min. chart: a possible H&S formation could be in the makings.

A chance to go LONG presented it self as price closed in towards the low of the week when the monthly trend is up and the weekly trend is also up. However, a SHORT position can be established at the break of the low of the week.

#GBPUSD Long Term Technical Picture

The pound has a very interesting technical picture. The weekly chart shows that price reached a resistance trend line that extends from 2008 yesterday.

A short position could be established with a very tight stop loss. This would be a very discretionary trade as the monthly trend is up as well as the weekly trend. It would be based on R:R. By looking at price action added to the closer proximity to the low of the year, it was a clear opportunity to get a possible extension of the yearly range south if it actually happens.

Interestingly enough, both RSI and MACD demonstrate a very discrete but confirmed divergences.

While actual price action shows price making higher highs and higher lows, RSI shows action inside a sideways parallel channel. A break of  of the lower line is expected thus drawing down force pressure.

While chart price actio is inside a rising channel, RSi is clearly showing a sideways channel: divergence. Price reached a key trdline earlier this week.