On retail trading

[arabianights]

I had a conversation. Thought it would be useful.

arabianights says: (22:39:12)
basically you need to think about how efficient a market is
arabianights says: (22:39:18)
forex is less efficient that spx
arabianights says: (22:39:26)
because of who trades it and why
Other Chap says: (22:39:39)
well its based on what you said ages ago, for the two ways to trade
Other Chap says: (22:39:49)
trend following and mean reversion
Other Chap says: (22:40:21)
for trend following i get a day chart, and look for a uptrend, then for a rally to start in the uptrend
Other Chap says: (22:40:43)
then go down to 4 hr chart, so the rally on day = trend on 4 hr
Other Chap says: (22:40:55)
wait for a retrace to 10ema
Other Chap says: (22:41:04)
then go down again to 1 hour or 30 minute chart
Other Chap says: (22:41:10)
and pick the reversal with a divergence
arabianights says: (22:41:19)
at this stage I have no idea about how effective it would be
arabianights says: (22:41:22)
the main point is
arabianights says: (22:41:26)
forex trends for sure
arabianights says: (22:41:28)
but
arabianights says: (22:41:34)
say you've a period of 3 months
arabianights says: (22:41:45)
and a random currency, is say 1.4000
arabianights says: (22:41:51)
and the trend will take it to 1.0000
arabianights says: (22:42:03)
so that's 4000 pips
arabianights says: (22:42:09)
during that
arabianights says: (22:42:14)
(at a random guess)
arabianights says: (22:42:27)
you've got say 10 movements a minute
arabianights says: (22:42:36)
600 movements an hour
arabianights says: (22:42:54)
14400 movements a day
arabianights says: (22:43:16)
5 days a week = 72000 movements a week
arabianights says: (22:43:59)
936000 movements during the 3 months
arabianights says: (22:44:09)
to move 4000 pips
arabianights says: (22:44:10)
so
arabianights says: (22:44:12)
the average move
arabianights says: (22:44:17)
is 4000/936000 pips
arabianights says: (22:44:53)
0.005 pips downwards, roughly
arabianights says: (22:44:56)
assuming it were random
arabianights says: (22:45:09)
but you have a spread of, at best in retail, 1 pip
arabianights says: (22:46:17)
so assuming the market were moving randomly, but towards that target
arabianights says: (22:47:03)
each tick would be 99.5% random
arabianights says: (22:47:34)
and that's assuming you know for sure where it's going
Other Chap says: (22:47:50)
ok
Other Chap says: (22:47:56)
whats it all add up to in laymans terms lol
arabianights says: (22:48:06)
what I'm saying is
arabianights says: (22:48:17)
you have a choice of
arabianights says: (22:48:42)
trading longer term timeframes so that randomness cancels itself out which requires very long term trading
arabianights says: (22:48:46)
(at least by my standards)
arabianights says: (22:49:00)
or it means being seriously in touch with the market, and making it pretty much full time
arabianights says: (22:49:41)
and obviously a move of that magnitude, about 30% is actually a ****ing large move in most currency pairs in 3 months
arabianights says: (22:50:13)
now markets are calming down you'd be lucky to get more than about 5% in the majors I do believe
arabianights says: (22:50:16)
well, maybe 10
arabianights says: (22:50:43)
so if you want to trade short term
arabianights says: (22:51:01)
you need to know what is moving the market in any given day, or at the very minimum have a good idea where the market wants to go
Other Chap says: (22:51:32)
rite
arabianights says: (22:51:51)
I dunno how you do that in forex, it's not my expertise, but I would suggest the best way is to talk to bank FX traders
arabianights says: (22:52:09)
hear where the flow is
arabianights says: (22:52:52)
the alternative, figuring out the flow by price action and so on, is certainly possible (within reasonable levels of uncertainty) but I would be shocked if someone can do it reliably off a chart
arabianights says: (22:53:28)
or indeed with any level of confidence (in the statistical sense)
Other Chap says: (22:53:41)
ok
Other Chap says: (22:53:46)
so i should stop doing the chart thing
arabianights says: (22:54:00)
well I'm not sure what else you can do, apart from the chart
arabianights says: (22:54:23)
the chart will be better than nothing so long as you don't get sucked into believing it too much, I think
arabianights says: (22:55:58)
the first thing you need to do... know the players
Other Chap says: (22:56:32)
how do you do that
arabianights says: (22:57:34)
that's where it comes to research
arabianights says: (22:57:54)
I have a pretty good idea who the main day to day users of my markets are but I can never be sure who will suddenly come in
arabianights says: (22:58:00)
I should imagine it's the same in forex
arabianights says: (22:58:16)
a lot of the moves that folk on t2w claim to predict
arabianights says: (22:58:24)
are purely because someone needs to do something
arabianights says: (22:59:36)
a recent example, and I'm sure there are ones much more recently but as I say I know very little about forex, RIO had to cover a couple of yards in either cable, EURUSD or maybe EURGBP (see how little attention I pay!)
arabianights says: (22:59:56)
so the size they had to do inevitably moved the market
arabianights says: (23:00:17)
and that... again it's who you know... certainly I didn't know anyone to do with it, nor would there be any reason to*
arabianights says: (23:00:18)
but
arabianights says: (23:00:38)
as I say that size had to move the market
arabianights says: (23:02:51)
this was during the period when it was possible blinky mc****nut (as I say I feel like putting this on t2w, as I find it so much easier to talk in terms of a conversation than a post... so I'll say otherwise known as gordon brown) may be resigning... or it was something like that. I may remember incorrectly. Perhaps it was something different like he was about to sack half his cabinet... in fact*
arabianights says: (23:02:54)
to be perfectly frank
arabianights says: (23:02:57)
I don't really remember
arabianights says: (23:03:05)
anyway the point is
arabianights says: (23:03:13)
that rumour, WHATEVER IT WAS, was spread around
arabianights says: (23:03:39)
and the movement, in that currency pair (and by that point it was affecting all GBP pairs) was exagerrated then by others joining in and trading upon that rumour
arabianights says: (23:04:06)
and then trend following hedge funds, some, or probably most, of them trading entirely or majorly algorithmically joined in
arabianights says: (23:04:27)
that was all market chatter and it unfolded within minutes
arabianights says: (23:05:05)
and it was big enough people like me trading things entirely unrelated were hearing it from various sources
arabianights says: (23:05:17)
and that's where knowing the reasons for the movements comes in handy
arabianights says: (23:05:56)
you have to react differently to that kind of move in GBP crosses to how you would react to precisely the same move happening for other reasons
arabianights says: (23:07:20)
your only hope is your system can differentiate between one type of move and another... and I believe it is possible to create such a system, for sure. In fact in the markets I am familiar with there are algorithms that do so. But it is unlikely a retail person could do it in forex, in my relatively unknowledgeable opinion
Other Chap says: (23:07:43)
kk
Other Chap says: (23:07:46)
this is fascinating
Other Chap says: (23:07:58)
would u be telling me this if you wern't buzzing your nut
Other Chap says: (23:07:59)
$__$
arabianights says: (23:08:16)
probably not, not because it's secret, just because I wouldn't have the energy
Other Chap says: (23:08:23)
ha
arabianights says: (23:09:09)
so... you need to find a way of knowing what's driving the market, before it's too late
arabianights says: (23:09:42)
and "too late" differs for different time scales
Other Chap says: (23:10:21)
how does a retailer do that
Other Chap says: (23:10:30)
chats or something
arabianights says: (23:10:41)
that's where we post this on t2w (changing our names) and ask, perhaps?

 

[N Rothschild]

tldr

 

[Masquerade]

Short answer: Sentiment + bias + key levels

Long answer: tl;dr

 

[virtuos0]

To pick up on your point about knowing what is driving the market. It all comes down to experience. Even if you get the information quickly you need to be able to assess a few things before you can trade it:

1: Which markets will it affect
2: How much will it move the market
3: Does it change the overall outlook of the market

For example take the Dubai thing that obviously drove the market for a few days last week. Its effects rippled across several different asset classes (primarily equities and currencies) so the first thing you had to judge was how to play it. Secondly there was another tough decision to make whether this was the fabled 'event' that will cause the double-dip or just a side story. So the first factor will tell you what to trade and the second will tell you how long to hold and in what size.

So I suppose what I'm saying is that even if you know WHO is moving the market (people with exposure to the middle east in any way, people that are heavily invested in assets perceived to be risky), WHEN they are going to do it (immediately) and WHY (because they are fearful), there are still decisions to be made that only experience (in my opinion) can help you with.

 

[Paul71]

Dave,

I agree with what you say, apply this logic to an 'easy money' type market, and it's 'interview with Schwager time'. Nice trading mate.

 

[robster970]

Short answer: Sentiment + bias + key levels

Long answer: tl;dr

Took me a long while to figure that out.