Something is gonna happen soon... gbpusd

At the moment of writing, price is around 1.5840 and still presents sign of indecision.  Tomorrow's bar is beginning to conform and is showing some bullish momentum, although I would like to analyze based in today's closed candle.

Below is the weekly.  Even though the current bar is not closed yet, we are at the middle of the week, and it is an indecision bar.  We have to wait and see how it closes.  Note the previous bar has risen up to 1.5843 (friday 24th sep high) and found resistance in the way as expected.  If we analyze the daily chart we can see price formed a couple of indecision bars around that resistance zone, which represents a forming doji as the current week passes. Nevertheless, and again, we have to wait and see it at the close.  I have attached another resistance/support line that is worth to study.

In a closer look at the daily, for three consecutive days, price has struggle around this zone, reaching as high as 1.5856, but no bar has broken the resistance line.  We are really close to a breakout, but more than likely I'm thinking that could be a FalseBreakOut.  On the close of the September 30th candle we can analyze this more deeply. Even I really want to see this weekly's bar as it closes.  That could give us more clues.

Let's wait and remember, price is always right.
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Back to the gbpusd

Not too much to comment due the large timeframe plot.   Tomorrow Bernanke speaks so I would like to wait and see how much this affect the markets. Not beeing myself a fundamental analist, I could say that anyone understand that behind charts there are people, and people react to news events, therefore the charts reflects what's the general sentiment.  

Below is the weekly, it seems that price is in consolidation phase.  Price might break out the trend line to the upside and test previous highs, or find resistance and go lower to test the lower trend line drawn.  If we analize the stoch, it seems to be in a bullish direction so price could break to the upside.  If this is the case,  price could go to 1.64s zone to held structure (last resistance fib level from previous swing);  although if this level is broken, price could test previous highs @1.70s.  To me this pair is still bearish if we watch the movings averages.

In the daily price seems to me that it's going upward.  I have to wait and see what happens with these setup.  We had a previous swing high, then a retracement to the 0.618 fib zone which coincides with a previous resistance level around 1.5450/1.5500.   That's a 200pips range within price just was bouncing inside. Finally price decided and went north.

Some points of confluence: 0.618fib level held, also price has made a few closes above the 200 sma, convergence in MACD, stoch bullish stream.   By now, the 0.786 level is broken, so price should go up, I think, and maybe find resistance at the trend line. If broken, price could go further.  

An alternative scenario, if price finds itself struggling with the resistance of the trend line (around 0.236 fib level @1.5832 and 1.272 fib extension in 4H timeframe @1.5846), price could go down and test the other trend line in purple and if broken, then test the previous trend line around 1.45s

Don't get it wrong

I do say that EAs or other automated black box systems doesn't work.  I'm not saying that a mechanical trading approach doesn't work.

First... when you design your automated system, it's ok, you know what's happening, but if you buy something "magical" that it's going to do the work for you...  I shouldn't be so proud... or confident.   Using an EA or similar for automated trading seems risky to me.

I think that a system like this could be useful to generate signals rather than trigger the signals.  In that case the trader could make a valid analisys and go for it.   To me is just too much risk to let trades be trigger automaticaly.

Let's see a hipotetical scenario.  What could happen if a signal is automatic triggered... I suppose that a stoploss is immediately defined and also a profit target.  What happen if that open trade runs against the position towards the stop.  That shouldn't be a problem right? (due money management)  Here is the catastrophic scenario that I fear most... what if there is a gap through the stop order?  What would happen if you are not there?  In a less tragic scenario, in the positive side, that wouldn't be so bad... but actually it is. What's if your planned profit target is reached and there is no order to close the position?

That's one scenario.  Let's picture another one.  What would happen if market action is so fast that your automated strategy just can't get that stop order filled and just passed by?

As said early... this shouln't be considered as a complete discredit about automated systems but just a few things to think about.

A complete different story is a mechanical trading system.  And that's what I'm focused on.  Make rational and inteligent decisions based in technical analysis.  History tends to repeat itself.  When a setup is met, act based on the system, period.

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EAs... a not quite short review

Ok... my previous post was a little too short but that I was feeling to say at the moment.  Reviewing my own experience with expert advisors, I could tell that a year and a half ago, I was surfing the web when suddenly I found a web page with some amazing something automated something... something.  I thought: ok... let's see... ok...  keep reading... ok...

So, as always I wasn't convinced about what they were claiming but I just was curious about that new topic to learn.  At that time, I was just used to the propietary platform from my broker and didn't have any idea about anything else.  I read about these amazing forex robots and automated strategies that work in a super platform called metatrader4 or mt4;  I thought, ok let's try to get that amazing platform and study if it has more technical tools or so.   I downloaded it and played with it to get used to it; it was really different of my other program but it has several other indicators and tools to play with.  Something useful that I found was fib extensions and projections, which I don't have in my broker's plattform yet.

Back to de EAs...  because of the incredible results of these "robots", a few thoughts ran through my mind at the time...  basically, if they do work, how is it possible that nobody is billionaire?, if those algorithms are bulletproof, why are poverty in the world? If is that easy, why an economic crisis is hitting the world that moment in time... and so on... and so on... 

Seriously, if a EA works so well, and it produces tons of money... why should they sell it?  even if it is incredible profitable, how much do you think that it should cost? why they are selling it for a few bucks? a few houndred bucks?  They might be earning money not for the work of the "robot" but for selling the EA instead. 

Well, with all these questions around my head, I said, let's try to write one by myself... I don't have a strong coding and programing skill, I just know the basics.  At that time, I wrote some code based on the examples that metatrader has, changing variables, using some indicators, trying to use conditionals like if... then...
Because I'm a mechanical engineer, or more appropiate term could be manufacturing engineer,  I have some math basis and have struggle with some programing in the past.  Not in c++ but vb and even my texasinstrument89 calculator.

With a few algorithms written by my own, I did some back testing in the platform.  And have some mixed results.  I tweak a little and a lot my strategies when I suddenly have incredible results in my automated backtesting analysis.  I remember have seen to the ceililng and said... "finally, I didn't thought that it was that easy".  My backtesting resulted in several trades without any loss during a defined period of time.

Then I started to analyze more in depth... and I didn't like what I saw.  That algorithm had a flaw, actually a lot of them.   Metatrader allows to plot in a chart every trade triggered by the EA when backtesting, and I started to analyze every single of them when it hit me...  That just didn't work at all.   First of all, I was more concern in entries and exits when coding, not in protection stops or money management.  I saw those triggered trades in the backtested chart and watched some of the trades worked out, but almost every trade ran against the position, and not just enough,  way to much.  That shocked me bad...

It's not difficult to have an amazing backtesting result in MT;  just try this...  just remove from the algorithm the protective stop in every order and run the backtesting.  That could result in two different scenarios:  a complete success and a complete failure.  I had the first one and I got excited when it happened, but later the cold reality hit me. 

With that in mind, I started to test this algorithm again, and again, and again... different timeframes, different pairs... etc.  And as expected, in some times it performed really well, and in others just blown the account. I tweak the algorithm for a conservative stoploss and what a different result.  I could say that almost every time that I've tested it, the result was a drawdown in the account, a margin call, maybe a breakeven.   I tested other strategies but neither seemed to work.  And basically that was it.  I expend a lot of time learning something that I shouldn't.  Obviously I don't regret that experience though, because I learnt other things along the way about technical analysis.

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EAs... a brief review.

They don't work!
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An aproach to a mechanical system

Nothing is more true in markets... You should use a mechanical trading system.  Nevertheless, I'm not saying you should use an EA or an automated "black box" system.  That's other theme that I would like to comment in the future.  EAs or another magic box, are just rubbish.

What I'm trying to say in this post is that everybody needs a true mechanical system for trading.  A system that really analyzes the market and provides a valid entry or exit point, keeping any kind of emotion out of the equation. Letting almost all subjetivity aside. Why I said almost?  If you remember, I said before, and still convinced... the trader just has to know if a position would work out or not, or a "feel for the numbers" as I've read in some book.  Due market is really mercyless, this is really difficult for a beginer and specially if real money is on the line.

How a trader can be positive about some system?  It's not quite easy.  The only way that I could figure it out is by paper trading or backtesting... in multiple timeframes and pairs, for several months.  When a system has reached our expectations about its performing, we can test it in a real account which should be small, and the trader should be aware (or willing, I would say), to burn it.  Always with proper money management; without emotions, though.

How a trader can be comfortable with a system?  I could say that with several months of testing that system.  My personal point of view is that a trader should feel good and comfortable with a system if it was developed by himself. And that's what I'm trying to do.

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Reminiscence from june 29th

I would like to post a few charts here.  Just as a reminiscence about my previous aproach to technical analysis.

First the weekly...   the 23.6 fib ret @1.4337 held extremely well and price took off northbound.

Does it mean that we are in a bullish stream?  I'm not quite convinced.  As told before, I'm not really convinced in patterns or elliot wave theory, but, we had a 5-wave downward movement completed at the 23.6 fib ret @1.4337 with a beautiful confluence of numbers; and here is when I get confused.  If we see the bigger picture there is always something that contradicts the previous analysis.  We had a massive 5-wave upstream from mid 2001 to nov 07, then a sharp decline till jan 09.  I assume that everybody knows why the "Sharp", but since then, it seems that we are in a bullish pattern. First leg from jan09 to aug09; second wave a retracement up to 23.6 fib level in may2010.  That could mean that we are in a wave three?  Not quite sure because price stalled in aug2010 and by now is heading southbound.  That could mean that we are not in a uptrend wave-3, rather starting a 3 of a massive (3) downward wave. If we analyze different MAs we can see that we are still in a bearish market.

In a closer look, on the daily, price pass through the 1.5500 level and it's heading southbound.  Price should go lower to test previous lows, maybe the 1.4800 zone with some resistance in between, more than likely around the round numbers and fib levels.  What if price finds support and head upwards?  Price should at least try to reach the 1.27 fib extension @1.6479.  That's quite a lot from here.

Final thoughts for today.  Although this kind of analysis seems to be accurate enough, it doesn't provide a valid entry point.  Oscilators and technical analysis indicators are not as useful as beginers might think.
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Other considerations...

I should change my broker...  I've read on the internet that traders usually forgot that the broker works for them, and usually a lot of traders just work for the broker.

With just a few math work, you can see how much money you have made for your broker depending on how many trades you take for month and how wide the spread is in each pair.  Plus, how much help your broker offer for a beginner?  In my case, slim or none, as you may know if you have read my first posts.

With that considerations, I have to say that I should change my broker.  Nevertheless, I kind like their platform and the average service is not really bad.   I just have to reorganize how I could make more with the tools that I have at hand.   One option is to trade less...  That represent a little less cost for you if you planned well your trades.  That means less cost per trade through the spread.  A scalper could go broke with my broker.

This is the thing.  I'm only going to trade these pairs and only one at a time:

Instrument                              Spread
 AUDUSD                                  4
EURCHF                                    4
EURGBP                                    3
EURJPY                                     4
EURUSD                                    3
GBPUSD                                    4
NZDUSD                                    5
USDCAD                                    5
USDCHF                                    4
USDJPY                                     3

And that's it.  There are other brokers that offer spreads as low as 1 pips in the majors, maybe 2, even 0! (I have no idea how that could be possible!)  But as I said before, I have to work with what I have at my reach.
Other pairs are just crazy high, as much as 120 in spread!!!  They called them exotic pairs but...

Well, maybe would be logic to trade only the 3pips-pairs so that would help to reduce my SL and increase a little bit my PT, due a less spread value to cover.  If the opportunity arrives, I would consider to place a trade in the "expensive" 5-pips pairs.

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Strategy analysis

Not quite exposure rather than analysis.    I need to remember the KISS strategy as a guideline. 

Basically this strategy is quite simple.  Almost like a MA crossover.  Sounds stupid, isn't it?  It has a little twist, though. 

All my previous posts used to show fib extensions and retracements and I'm not forgeting this.  That could give me a bigger picture sight.  Somewhere I read that you should have or develop a "Feel for the numbers" as a filter, so you can either take or not a trade.  I agree.  It's just too subjetive. Hopefully I'll do it fine.

In this strategy, the ATR defines the risk and potencial gain.  Basically with a 3:2 ratio.  In most places I've read that 3:1 should be considered but what the hell.


With a rigid StopLoss and ProfitTarget, that could remove the stress from any trade I make.  If I use 1 ATR as a SL that could be just not enough space away from the market and could be stopped out to soon, so a 2ATR could be more suitable.  But analyzing my previous post, if I trade one half-minilot in a 15 min chart with a maximum of 28 pips ATR, that would be 56 pips and my max risk is 86 so I could take just one trade at a time.

That's fine for me, but I'm making the consideration of a max ATR in a 171 (or so) period rather than the ATR in the spot.  So,  when I trade, I should consider the actual ATR instead the previous high ATR.  That could give me some space. Also I have to consider that 86 limit is with a half-minilot and no one minilot.

Knowing how much I'm willing to lose, the profit target is rigid too.  1 ATR for a first half position, and 2ATR for the other half.  If I'm trading half-minilot, that means 5k positions, I should open One minilot position (10k) and close the half position when it reachs the 1ATR level. Then as a general rule for any strategy, I could move up my SL to break even in the second half, or trail the stop just below the previous bar low for the rest half-position.

That's it.  Simple isn't it?   Now, how the &#$% to enter the trade.  That's what I'm working on...

Next post...
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I'm serious from now on...

September.   I've been staring at charts and it's weird...  I'm not feeling so comfortable...  what's happening?... What happened to me?

I'm serious about my trading.   So I'm going to test a strategy that I paper tested a long ago and had quite nice results.  Let's see how good result in live trading.  One of the most difficult part for me is the entry point.  Timing is essential as for my previous experience.  Sometimes I was late and almost every time I was early, so let's see if with some practice I can overcome this issue.

Well then, I'm going to start with the most important thing -I think-, money management.   So as a rule I've read in many, many places, books, saw in videos and go on, that nobody should risk more than 3% of equity.  That's really true and something that I'm aware from a while now.  Other people says that 1% should be the number rather than 3%.  It depends on the trader's personality so I feel comfortable with 3%.

I'm not going to talk in money numbers, but pips instead.   With my actual account, if I'm willing to risk 3%, that should mean that my stop order should be aroud 43 pips if I trade one minilot.

Due my broker has a incredible over leverage of 200:1, I realize that I'm undercapitalized.  "Luckly"  I can trade half minilot as minimum position, so that means I could risk till 86 pips in all open trades.  I could open two-halfsize minilot positions risking 40 pips each, 28 pips in three positions, or just 86 pips in just one trade. 

Because of this undercapitalized account, I would have to trade in smaller timeframes because the stops would be more that likely close to the market.  I would love to trade in bigger timeframes as my previous updates suggested, but due lack of money, I have not other option.  In bigger timeframes the stop loss would be greater than my 3% risk limit.

So, as a conclusion:

Risk adding all open trades= 3%   or 86 pips

         1 open trade with 86 pips stop loss,  or
         2 open trades with 43 pips SL each, or
         3 open trades with 28 pips SL each.

Timeframe to trade:  (Difficult to say but analyzing the ATR, I would say...)

          15 min chart  --- max avg true range= 28
          1H chart --- max atr= 38
          4H chart --- max atr= 81

Next post I'll discuss my strategy...

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