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Date: Friday, 25 Jul 2014 09:03

Had an email come in the other day from a book reader named Patrick. He said:

“John, I reviewed your book. My honest impression is that it is the most practical book on trading I ever came across. I’ve read several good books on forex, but found that I could hardly apply whatever I learned. My impression is that your book will be as good as a coach on call 24/7.  I sincerely believe it will shorten my learning curve.”

It’s great to hear readers still find The Essentials of Trading helpful even though at nearly 10 years old it is probably considered dated by many people’s standards. While admittedly some of the examples could be freshened up, the book was written based on a set of common, consistent principles – not the latest hot fad in trading.

Author: "John" Tags: "News & Updates"
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Date: Friday, 31 Jan 2014 16:30

As those who have followed my work over the last several years are aware, I have done some research into so-called “seasonal” patterns in the foreign exchange market. This was motivated by observing a tradeable pattern in one of my favorite pairs and using it to make a fair bit of money. Out of curiosity, I did a review of other pairs to see if there were any other patterns worth trading. I really didn’t expect to find anything, so it was quite a surprise when I found them all over the place.

That initial research ended up going into a report I published in 2006 titled Opportunities in Forex Calendar Trading Patterns. Over the years since I have expanded and updated that report a handful of times. Recently, I brought it up to date with data through the end of 2013. If you’re interested, you can get a copy or learn more about it at www.forexseasonals.com.

I recently had someone ask me why I don’t just trade the information, and presumably horde the knowledge for myself. This is akin to one of the questions myself and others addressed in Trading FAQs. It also assumes there is only one way to trade using this sort of information. That is most definitely not the case!

Seasonal patterns in forex operate in different time frames, just like traders. As a result, there are opportunities to apply the knowledge of such patterns in multiple ways, depending on how you trade the markets.

Author: "John" Tags: "Trader Resources, foreign exchange, Fore..."
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Date: Wednesday, 29 Jan 2014 09:03

I had this question come in recently:

Strategy A has better risk-adjusted returns (measured by Annual returns/Max Drawdown, aka the MAR ratio), but lower expectancy than strategy B. It manages to achieve this by having a larger number of trades, even though the backtest period is the same for both.

Which of the two performance measures should I rely on in choosing one strategy over the other?

When dealing with expectancy it is important to not just look at it in terms of per trade figures. You must also account for the frequency of trades. In other words, it will often be best to think in terms of expectancy on time basis rather than a trade one. For example, you could think of monthly expectancy to figure out what kind of returns you would expect to see in a meaningful time frame for your trading. This would be the better way to compare two systems or strategies.

Author: "John" Tags: "Reader Questions Answered, development, ..."
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Date: Tuesday, 23 Jul 2013 14:16

A book about convertible bonds may not strike one as being particularly related to trading. There are aspects to it, though, which definitely fit. That’s why I decided to have a look at Beating the Indexes by Bill Feingold.

The first part of the book is a bit scatter shot. It has the primary focus of outlining the problems with indexing – not so much investing in an index fund as the practice whereby fund managers attempt to match their performance to and index. To that end there are definitely some interesting points made and discussion topics mentioned. It’s just a bit of a mixed bag overall, with the author wondering down a few varied paths along the way.

For example, there’s a chapter which walks the reader through the author’s experience in the convertible bond market. It’s meant, in some ways, to present the key ideas in a case study fashion. I’m not entirely sure it’s successful, though. I think that will largely depend on the reader.

There is a really good chapter which reviews all the key nomenclature, concepts, metrics, etc. involved in bond market investing in general and convertibles in specific. That is smack in the middle of the book and from there on the text becomes much more direct and focused.

Chapter 8 is titled “Enough Already…How Do Convertibles Actually Work?”. This is pretty much exactly how the reader may be feeling at that stage having waded through the first several chapters. Thankfully, the author does get on with it and goes into different types of convertible trading/investing approaches and what to look for in them. This is that part of the book I think most readers would be buying the book to get.

So I guess the bottom line is that this is a book with some quite good parts, but with a lot of stuff which is likely of minimal value.

Make sure to check out all my trading book reviews.

Author: "John" Tags: "Trading Book Reviews"
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Date: Monday, 22 Jul 2013 11:59

It’s taken me about a year, but I’ve finally gotten around to having a look through the 3rd edition of Bernard Baumohl’s book The Secrets of Economic Indicators. Now that I’ve done so, I really which I’d dug in sooner.

This book answers the question a lot of new and developing traders have in terms of what economic indicators are important and where to go to get information about them. It comprises only 6 chapters, despite being over 400 pages long in print format. They are as follows:

Chapter 1 – The Lock-Up, which looks at how indicators are released and lays the groundwork for what’s to come.

Chapter 2 – A Beginner’s Guide: Understanding the Lingo, which is a brief look at what does into economic data and the interpretation of releases.

Chapter 3 – The Most Influential US Economic Indicators is the bulk of the book (over 300 pages). It goes through each of the major releases (and not so major) with a quite thorough discussion. That starts with a quick reference on

  • Market Sensitivity
  • What Is It?
  • Most Current News Release on the Internet
  • Home Web Address
  • Release Time
  • Frequency
  • Source
  • Revisions

That is then followed by discussion sections

  • Why Is it Important?
  • How Is It Computed?
  • The Tables: Clues on What’s Ahead for the Economy
  • Market Impact

Lots of information here, for sure.

Chapter 4 – International Economic Indicators: Why Are They So Important? follows a similar pattern to Chapter 3 in looking at the major non-US data releases.

Chapter 5 – Best Websites for U.S. Economic Indicators is several pages worth of useful websites to find fundamental information and news.

Chapter 6 – Best Websites for International Economic Indicators is the same as with Chapter 5 for international data.

I can’t imagine a better, more complete resource on the subject of economic indicators. If you’re looking at using fundamentals in your trading, you’ll definitely want to give The Secrets of Economic Indicators a look.

Make sure to check out all my trading book reviews.

Author: "John" Tags: "Trading Book Reviews, book review, econo..."
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Date: Monday, 25 Feb 2013 14:30

I received the following note the other day with the subject “I am desperate”:

Dear John. Thank you very much for your services, – you are doing a great job! The reason that I am writing you right now is that I am desperate to loosing a half of my modest $2000 option trading account after my subscription of one of the options gurus, JC. I did trust them and I lost. Those people have so much money that they do not care how much one can loose in a trade. Anyway, I need at list to restore my account to the starting point and I am looking for some advice what should I do?

First of all, let me address the comment about the guru not caring about how much one can lose. I don’t know who this guru is or anything about their service. Assuming they are legit and worthwhile (and even if they aren’t), I would suggest that risk management is the responsibility of the trader doing the trading. While the guru may offer up suggestions about where to put stops or otherwise limit the losses on a given position, they cannot (and should not be expected to) tell you how big to trade, or indeed whether you should even be doing a given trade. They simply do not have the proper information. That is your responsibility as a trader to sort out for yourself.

In this particular instance, I can’t help but wonder if the trader in question was simply not financially capable of following the trades of this particular guru. It may be the case where the guru has several positions on at a given time, expecting the odds to work in their favor by maximizing the opportunities for them to do so. If a trader is not sufficiently capitalized to do the same, they risk not matching the guru’s performance because they are trying to cherry pick.

As for making the account whole again, I would tell a trader in this situation to put that out of their mind. Either add more funds to the account or reset your mental state to the current account balance (which really should be done on a continuous basis anyway). DO NOT attempt to quickly make the money back. That’s a recipe for disaster. Take a systematic approach to build the account back up based on a clear trading plan, assuming you have one.

Author: "John" Tags: "Reader Questions Answered, money managem..."
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Date: Monday, 04 Feb 2013 12:05

Last week I brought up the subject of a prospective new NFA ban on the use of credit cards to fund accounts in retail forex. There has been considerable discussion about this, as tends to be the case any time the regulators come out with new rules (or at least plans for them). Once more we are hearing the claim that the NFA (and CFTC) is out to kill retail forex in the US. A blog post at Forex Magnates on Friday definitely takes that view. I have a hard time agreeing with this.

Let me pick on one particular comment:

NFA has gone a long way trying to completely kick retail forex out of the US eventually reducing the number of retail forex brokers from several dozens to just 11. With FX Solutions heading out as well the number of US forex brokers may fall below 10 within few months.

There’s no doubt we have fewer US forex brokers now. Is that a function of NFA/CFTC regulations? In some cases, I’m sure it is – especially when we talk about minimum capitalization rules that were put into place. I would contend, however, that such consolidation is simply a natural product of a business that is maturing.

Think about what we’ve seen in retail forex in the last decade or so. Topping the list is the way bid/ask spreads have come down very sharply. This means less income for the brokers, most of whom operate in some fashion on a dealer-based model. To put it another way, profit margins have been squeezed considerably. Any time that sort of thing happens industry-wide you get consolidation as those companies unable to compete either go out of business or get absorbed by those who can.

I would suggest we’re likely headed for a handful of major US forex brokers. We need only look at the stock market to see how few big brokers there are in that sector despite the fact that it features a bigger customer base.

Now, this is not me disagreeing with many of the arguments against the NFA credit card ban. I actually think it’s somewhat silly in a lot of ways given the many ways customers can access and move around money. If avoiding the use of borrowed money is the main focus (and I’m largely in agreement on that) then this ban only makes it slightly harder, as others have noted.

One question I would bring up, though, is that of expenses. Who foots the bill for credit card transaction fees, which are generally in the 2%-3% range? My guess is in most, if not all, cases it is the customer paying that bill. Preventing the use of cards from that perspective automatically keeps traders out of a performance hole. This game is hard enough as is, as I observed in Starting to detail forex profitability data.

I’d still love to hear your thoughts on the credit card ban, by the way. Feel free to leave a comment below, on Facebook, or Twitter @RhodyTrader.

Author: "John" Tags: "News & Updates, forex business, forex re..."
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Date: Monday, 28 Jan 2013 12:00

There’s been considerable talk over the last few years about whether US regulators are killing (intentionally or otherwise) the retail forex business in the States. The latest round comes on the heels of word going around (thanks to LeapRate) that the National Futures Association (NFA), the industry overseer of most US forex brokers, is looking to ban the use of credit cards (directly or indirectly via the likes of PayPal) for funding accounts [I'd love to hear your thoughts on that, by the way. Feel free to leave a comment on Facebook or Twitter @RhodyTrader]. Retail traders have been screaming about overly active regulators since at least 2009 when word came down that “hedge” accounting would no longer be permitted for US accounts and that FIFO accounting would be required (see No More “Hedging” for Forex Traders).

Here’s the thing, though. The figures actually don’t back up any “death of…” scenarios, at least from a regulatory perspective. The US brokers didn’t start reporting active trader accounts to the CFTC until Q3 2010 (with data retroactive to Q4 2009), so we don’t have good figures for the Q2 2009 period when the “no hedging” rules kicked-in, or for the quarter immediately thereafter. There is a dip in active accounts between Q4 2009 and Q1 2010, which may be attributable in some way to the subsequent 100:1 leverage restriction put in place at the end of November 2009 (see New NFA Retail Forex Leverage Restrictions), but that seems highly unlikely given that when the Commodity Futures Trading Commission (CFTC) lowered that leverage cap to 50:1 a year later (see New CFTC Rules for Retail Forex Trading) there was no noticeable impact on active accounts as we can see in this table:

Notice how the number of active US-broker accounts held quite level during the year from Q4 2010 when the lowered permissible leverage went into effect through Q3 2011 (figures derived from the quarterly reports compiled by Forex Magnates). The sharp drop in active accounts doesn’t come until Q4 2011, though there wasn’t any particular catalyst (Forex Magnates suggested the cumulative effect of increase regulation, but that seems unlikely given the sharp 1-quarter move) and the fall was across brokers.

What is really interesting to note in the table, though, is how stable the number of profitable accounts has been since about Q4 2010. It’s only twice dipped below 30k. This comes as we’ve seen persistent weakness in the number of active accounts, which could be attributable to reduced volatility in the forex market for the last year or so. We can see that in the Average True Range (ATR) reading in the weekly USD Index chart below.

Interestingly, the number of active accounts is now back down into the area it was in during late 2009 and early 2010 when volatility was also on the low end before it ramped up again as 2010 progressed, which is when we saw the jump in accounts. That may not be cause/effect, but if we see volatility rise and the active account numbers increase again we’ll know that it’s the markets (and increased competition, no doubt) which has put the US retail forex business under pressure, not regulation.

Getting back to the stable number of profitable accounts, though, we’ve got indications of survivorship in them. That means profitable traders are staying active (though as I noted a couple weeks ago, there is considerable turnover in the accounts making money each quarter) and unprofitable ones are dropping out, which is what you’d expect to see in any case. It’s just that these days we’re not seeing an influx of new accounts to replace the dropouts.

Author: "John" Tags: "Trading News, foreign exchange, Forex, f..."
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Date: Monday, 21 Jan 2013 11:01

A couple weeks ago I began a discussion of retail forex trader profitability with my post Starting to detail forex profitability data, which generated some meaningful exchanges in places like (Trade2Win, FXStreet, and BabyPips). That post was really the tip of the iceberg, however. I am going to continue to post on the subject moving forward as my PhD research unveils new, interesting and useful information. To that end, I want to expand on my first post.

The quarterly profitability figures reported to the CFTC by the US forex brokers are meant to provide a degree of transparency to prospective (and current) traders. As I noted before, however, they are extremely limited and don’t really do a good job of telling the story of trader profitability. They may, in fact, provide a distorted view of reality to those who don’t understand them properly. I previously looked at the rate at which profitable quarters were seen coming back-to-back – the degree of consistency in performance. To put it briefly, there isn’t much.

The data I used in that analysis was based on active brokerage accounts, just as the CFTC-reported data is also based on active accounts (defined as those doing at least 1 trade in a given quarter). Here’s the thing, though. Some traders have multiple accounts. This is not the majority of traders by any stretch of the imagination, but to the extent that these multiple accounts are active they can potentially influence the broker profitability figures.

That being the case, I re-ran my analysis using trader performance rather than account performance measurement. In the chart below I’ve differentiated the results from my data between the initial view based on accounts and the new one based on individuals, which aggregates all the accounts held by one person into a single reading.

You will notice that in all cases there is a noticeable drop between the By Accounts and By Traders figures. This tends to suggest that the best performing traders run multiple (profitable) accounts, which is interesting in and of itself. I’ll likely follow up on that tidbit later.

More importantly, though, it suggests the broker-reported figures may overstate actual trader profitability rates by at least a small degree. In my data there are nearly 5900 traders who have done trades in almost 8500 accounts. This likely represents an overstatement of how many accounts traders run, however, as sub-accounts for at least one major broker are each treated as separate accounts in my data set and are not likely done so in the CFTC-reported figures (though confirmation of that would be worthwhile). As a result, a shift from account-based metrics to trader-based metrics may not show as much of a variance as seen in my own data. Still, the broker figures do potentially overstate things a bit.

Something else to think about is the impact of copy/mirror/social trading. My data has specifically excluded it where such activity could be identified (which is a lot). I’m studying individual trader performance, after all. Those trades automatically be copied from someone else don’t really further my research. If, however, traders are having profitable trader trades copied in their accounts (which hopefully is the case if they are engaging in social trading) then this also will tend to skew the CFTC-reported profitability figures positively, overstating the performance of traders who actually make their own decisions.

Author: "John" Tags: "Trading News, foreign exchange, retail f..."
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Date: Tuesday, 08 Jan 2013 12:00

Each quarter US forex brokers are required to report customer account profitability figures, a requirement which went in to force in 2010 (with data back to 2009). As of this writing, the most recent update available is for Q3 of 2012, which you can find over at Forex Magnates. On average, these reports show that about 30% of active customer accounts are profitable in a given quarter. These numbers often get trotted out as countering the oft-repeated suggestion that 95% of traders fail, a topic which always gets a lot of conversation going when brought up.

While these figures profitability provide some interesting information, they are severely limited. This is something which doesn’t seem to be understood by many forex traders. The broker numbers are only a snapshot view for a 3-month period. They include anyone who has done at least a single trade (the definition of “active”), and profitable can mean a gain of $0.01. As a result, they don’t give us a lot of useful information. Most importantly, they don’t give us any idea of what % of traders are successful in the long run, because we have no idea (from the data) what fraction of the 30% are consistently profitable from quarter to quarter.

In this post I want to address the consistency point using some data I have on-hand for use in my PhD research. It comprises the trades completed by nearly 8500 accounts between January 2009 and April 2012 – a total of over 2.7 million transactions.

To facilitate reasonable comparison, I’ve produced quarterly figures from the trade data which are comparable to the broker-reported figures – namely % of active accounts profitable. Here’s how the traders in my data set stack up:

The accounts in my data come from all over the world and a large number of different brokers. In acquiring the data set I was looking for something which would be fairly representative of general individual trader activity and performance. As you can see in the table above, though, the accounts in my data have consistently shown a higher profitability % each quarter than those reported by the US brokers. This isn’t enough data to call the difference statistically significant, but I think we can safely say that the traders in my account are somewhat better than average, at least using this % profitable metric.

I make mention of the above to frame what I’m about to present.

Since consistency of performance is not something we can get from the broker-reported figures, I decided to take a look at that. This is a very basic study, but it provides some insight, I think.

Basically, I looked at each trader account to see how often a winning quarter is followed by another winning quarter. My data covers 13 full quarters.

Here are some of the notable bits from the figures:

  • Out of the nearly 8500 accounts noted above, 4596 accounts (54%) had at least 1 profitable quarter somewhere along the way.
  • There were 7634 total profitable account-quarters – meaning if we add up the profitable quarters for each trader and sum that all together we get 7634. If we compare that with the 20,724 quarters in which accounts did at least 1 trade we get about a 37% quarterly profitability rate, which fits in pretty well with the figures from the table above.

Now, since the question is one of consistency, I broke things down based on traders winning in back-to-back quarters. Removing accounts which only traded in Quarter 13 (thus having no back-to-back quarters) gets me down to 7933 accounts.

  • A total of 4239 accounts (53%) had at least 1 winning quarter, and there were 6860 winning quarters out of 18,849 total quarters traded (36%), both about in line with the numbers above.
  • Only 4381 accounts actually traded in more than 1 quarter, and of that group 2930 had at least 1 profitable quarter, which is about 67%.
  • Of those with at least 1 profitable quarter, 1250 were able to have back-to-back winning quarters on at least one occasion, about 43%, producing 2211 total back-to-back winning quarters across all accounts.

In order to look further at the frequency at which back-to-back profitable quarters are seen we have to account for the fact that anyone with a first profitable quarter in a potential back-to-back as Q12 will not be counted because there is no Q14. By that I mean while the data will show a back-to-back for Q12 and Q13, it cannot show it for Q13 and Q14. As a result, while 1250 accounts had back-to-back winning quarters, thus at least 2 winning quarters overall, only 950 accounts can be evaluated in terms of going back-to-back multiple times.

  • Of the 950 accounts with at least 2 winning quarters we could test for repeat back-to-back, there were 434 (46%) who had better than a 50% rate of doing so.
  • There were 241 accounts (25%) with a 100% success rate in following one profitable quarter with another.
  • Among the 214 testable accounts with 4+ winning quarters, 171 (80%) were successful in going back-to-back more than half the time, with 67 being 100% successful (31%).

In other words, the consistency rate is low in general terms. On average, less than half of those who make a profit in one quarter do so again in the next quarter. That means we can expect less than 15% of accounts profitable in one quarter to be so again the next, based on the broker-reported data. And seeing as the data I’m using here is from what looks to be a somewhat above average group of traders, we can probably shave a bit off even that 15%.

Furthermore, even among the 15% who are able to repeat, less than half are able to do it multiple times. That means not only is there no consistency among the profitable traders broadly, but there’s not a great deal among those who experience success – at least until you get further out into those who have a history of repeating.

This isn’t a complete analysis of the profitability figures, obviously, but it’s a start. In the future I’ll post some additional numbers to further the discussion. Comments, suggestions, and thoughts are both welcome and encouraged.

Author: "John" Tags: "Trading News, foreign exchange, retail f..."
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Date: Monday, 07 Jan 2013 12:00

Last month I had to push back my annual birthday event due to some technical problems which cropped up in the days leading up to the event (and on the date of itself in fact). As I informed everyone at the time, I decided I would run the event after the holidays were cleared, and that’s what I’ll be doing. I’ve set the new birthday bonanza date to be this coming Saturday. I hope you will take part.

Be aware, though, that the birthday event is only open to those who are on my newsletter mailing list. So if you aren’t already a subscriber (it’s totally free), make sure to sign-up today.

In the meanwhile, mark January 12th down on your calendar. As always, the birthday event will only last for 24-hours. Then it will be over, so I don’t want you to miss out.

Author: "John" Tags: "News & Updates"
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Date: Thursday, 03 Jan 2013 12:00

At the request of my PhD supervisor, I’ve been working on a document that will no doubt be part of my overall dissertation. It’s meant to explain retail spot forex in an academic manner (meaning multisyllabic words and copious formulas), with an eye toward setting the stage for my research into individual trader performance from a Behavioral Finance perspective.

In developing the area of the document which discusses market participants I came across a telling graph. Below is a 1-year look-back at the positioning of OANDA customers in EUR/USD, which I pulled from the broker’s website.

The black line is the EUR/USD exchange rate, while the histogram shows the overall net position of all OANDA customers (blue being net long, yellow net short). In many ways this is comparable to the Commitment of Traders (COT) report, which I’ve written about in this blog on several previous occasions (see Commitment of Traders – A Weekly Report Worth Viewing as a starting point).

What I want you to make particular notice of is how often in the chart above the market is rising when traders are positioned short and falling when they are long. This supports the often-expressed view that retail traders are usually on the wrong side of the market, and suggests in general terms that they trade in a counter-trend fashion.

Author: "John" Tags: "Trading Tips, Commitment of Traders, for..."
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Date: Wednesday, 02 Jan 2013 12:00

Every year I like to look back and see which blog posts got the most readership. Here is the overall list, which includes a number of oldie-but-goodie entries.

  1. An Introduction to the Fixed Income Market
  2. Most Traded Currency Pairs
  3. Forex is a Scam!
  4. Most Active Currency Pairs
  5. My Top 5 Trading Books
  6. Should I Become a Chartered Market Technician?
  7. Misunderstanding the Bid/Ask Spread in Stock Trading
  8. Using Unusual Options Activity to Predict Stock Moves
  9. Is Trading for a Living Worthwhile?
  10. No More “Hedging” for Forex Traders

As for just among the posts written in 2012, here are the top reads:

  1. One Broker is so Nervous it’s Shutting Down
  2. Ten of the Leading Trader Mistakes
  3. What Trading Books do the Pros Read?
  4. Help to Avoid Setting Your Stops to Tight
  5. Has Trading Ever Made You Physically Ill?
  6. Technical Analysis in Manipulated Markets
  7. How to Tell if You’re Over-trading
  8. Trader Looking for Angel Investors
  9. If a System Works, Why Share it With the World
  10. New Book Out from Market Wizards Author Jack Schwager

For those wondering why none of those on the 2012 list are on the overall list, it comes down to search engine traffic to a large degree. The older posts are well established in Google, etc. and so bring in visitors who have done searches on specific subjects. The newer posts tend to just get immediate readership at the time of their posting, and beyond to the degree that they get shared around via Facebook, Twitter, etc.

Author: "John" Tags: "News & Updates"
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Date: Tuesday, 01 Jan 2013 12:00

Happy New Year and welcome to 2013. Since I know many of you probably have gift cards for Amazon and the like burning a hole in your pocket, I thought I would help you spend that money by offering a up a few suggested purchases. Here is a list of the books which readers of this blog ordered with greatest regularity in 2012.

Of course my own book The Essentials of Trading is of interest to everyone. :-)

As for other people’s writings, here’s the top 10 purchases by readers.

  1. How to Make Money in Stocks by William O’Neil
  2. Market Wizards by Jack Schwager
  3. Hedge Fund Market Wizards by Jack Schwager (My Review)
  4. Trade Your Way to Financial Freedom by Van Tharp
  5. Market Sense and Nonsense by Jack Schwager
  6. Mind Over Markets by James Dalton (My Review)
  7. Buy and Hedge by Jay Pestrichelli and Wayne Ferbert (My Review)
  8. The Daily Trading Coach by Brett Steenbarger (My Review)
  9. The New Market Wizards by Jack Schwager
  10. Way of the Turtle by Curtis Faith (My Review)

It is no surprise that My Top 5 Trading Books list is well-represented above.

Of course you can always look to my growing list of Trading Book Reviews for additional ideas. And although it isn’t a print book (yet), my Trading FAQs book is a very good resource for new and developing traders.

Author: "John" Tags: "Trader Resources, trading books"
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Date: Monday, 17 Dec 2012 09:57

Got an interest in Wall Street and want some fairly light-weight fiction to read? If so, Bond Girl by Erin Duffy, may fit the bill. It is, in short, the narrative of a young woman’s experience working on a bond sales desk at a major financial institution. Think of it as Liars Poker (the book that launched Michael Lewis) written from a female perspective, set in the lead-up to the Financial Crisis rather than the Crash of ’87, but without as much of the detail and with less of a moralistic undertone. Lewis was writing of his own experience specifically, but while Duffy’s is a work of fiction, it definitely has a strong feeling of realism throughout, which leads one to suspect quite a bit of the author’s own experience has made its way into the book.

Those looking for a lot of insight into the markets or financial operations on trading desks will be disappointed. There isn’t much. This is a book written by a woman about a woman’s experience trying to navigate her way in a largely male-dominated arena. Some of what the lead character (Alex) goes through would also be experienced by a male in terms of her treatment as a freshly hired analyst (lowest level of trading desk employee), but it takes on a different perspective seen through a young woman’s eyes. Most of the story involves relationships and trading room antics rather than stories about trades and deals and the like.

While I found the end of Bond Girl rather abrupt and disappointing, it did do the desired job of making the train trips I read it on go faster. If you go into it with serious expectations, you’ll likely be disappointed, but if you pick it up as a light read then you’ll probably find it fairly enjoyable.

Make sure to check out all my trading book reviews.

Author: "John" Tags: "Trading Book Reviews, bond market, book ..."
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Date: Thursday, 06 Dec 2012 17:00

As long-time members of my mailing list know, each year on my birthday I like to do something special. In the past, that’s been things like offering major discounts on the educational products I’ve developed and allowing first access to new offerings I am putting together. This year I’ll be celebrating not just my 43rd birthday, but the 25th anniversary of the day I could finally get into the markets for real after having turned 18 (As you may have read in my discussion of the Crash of ’87, I was only 17 at the time, so as much as that event motivated me to get trading myself, I had to wait a couple months).

Be aware, though, that the birthday event is only open to those who are on my newsletter mailing list. So if you aren’t already a subscriber (it’s totally free), make sure to sign-up today.

In the meanwhile, mark December 13th down on your calendar. As always, the birthday event will only last for 24-hours. Then it will be over, so I don’t want you to miss out.

Author: "John" Tags: "Misc"
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Date: Monday, 26 Nov 2012 13:00

I had the following note come in over the weekend. Not only does it say nice things about my book :-) but is also addresses some very important points.

Hi John,

I bought your book because I’ve recently started trading index futures but my inner voice said something was not quite right. I started with a $10k account and got stopped a couple of times, so I was at $9780. At that point I realized that I was missing my entries because I was too busy running my own design business along with other domestic duties. Then I came across a paragraph in your book about the amount of dedicated, uninterrupted time it takes to day trade futures. Bingo-I was glad I stopped early and kept most of my capital. My mentor never mentioned any of this. Now I’m starting over and working on setting up a trading plan that can fit me — swing trading appears to be the goal at this time. I’ve been searching high and low trying to find information on how to really set up a good trading plan and your book is the first one I’ve seen that really addresses this important issue.


Firstly, I’m glad Michele recognized early that she had a problem. It would have been better had she done so while demo trading so she didn’t have to lose the money she lost, of course. I definitely encourage getting real money trading experience early on in one’s development, but that doesn’t mean demo trading doesn’t have a proper place in sorting out one’s strategy and trading plan. Fortunately, Michele didn’t have to suffered an overly hard lesson.

Secondly, it doesn’t say much good about her mentor that they failed to take into account Michele’s schedule when helping her determine a good way to take on the markets. A mentor is supposed to factor these sorts of things in. Maybe we’re talking a specific stylistic mentor here, someone who focuses on one type of methodology (like day-trading S&P futures). Even still, though, they should recognize someone who is not suited for their trading approach (see Trading Coaching and Mentoring).

Author: "John" Tags: "Reader Questions Answered, Trading Tips,..."
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Date: Tuesday, 20 Nov 2012 12:57

There’s a story on Forex Magnates about how FXCM has decided to require margin for forex “hedge” positions.

That’s right. Even though these positions have no directional risk whatsoever (in as much as they represent complete offsets), the broker is going to require that margin be posted. Specifically, they will require the margin that would be needed if only one leg of the trade was open. So basically, the margin requirement will be the same as if you there was no “hedge” at all.

Why is FXCM doing this? Here’s what their representative had to say:

Under the current system where no margin is required, some traders have inadvertently opened positions that were disproportionately large compared to the size of their account. In some cases clients have received margin calls when closing one side of the position (which would then trigger an added margin requirement for the remaining un-hedged side).

So basically, what is happening is that some traders are building up “hedges” which are much too large, then getting burned by margin calls when they unwind them (the Forex Magnates author suggest they are closing out the profitable legs and leaving the losing legs open, not realizing the losing position’s margin requirement). This whole thing, to my mind, is just another example of how traders can get themselves totally deluded by doing these “hedges”, and why I have long argued against the practice (the No More “Hedging” for Forex Traders article is the single most commented on post in this blog).

The “inadvertently” part of the above statement, to my mind, really speaks volumes to the whole hedging discussion. It implies either these traders are clueless about trade sizes, or they are horribly off-base in terms of risk management and/or margin requirements. Hedging is thus masking serious trading deficiencies.

FXCM is actually doing traders a favor by putting these margin requirements in place, helping the foolish avoid blowing themselves up. It would be better if they just scrapped “hedge” accounting (and really “hedging” is just about a different way of accounting for gains and losses).

Author: "John" Tags: "Trading News, foreign exchange, Forex, f..."
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Date: Tuesday, 13 Nov 2012 11:04

Let the countdown begin! :-)

As long-time members of my mailing list know, each year on my birthday I like to do something special. In the past, that’s been things like offering major discounts on the educational products I’ve developed and allowing first access to new offerings I am putting together. This year I’ll be celebrating not just my 43rd birthday, but the 25th anniversary of the day I could finally get into the markets for real after having turned 18 (As you may have read in my discussion of the Crash of ’87, I was only 17 at the time, so as much as that event motivated me to get trading myself, I had to wait a couple months).

I’m not quite sure yet exactly what I’ll be doing this year, but I’ve got some ideas. More information will be forthcoming.

Be aware, though, that the birthday event is only open to those who are on my newsletter mailing list. So if you aren’t already a subscriber (it’s totally free), make sure to sign-up today.

In the meanwhile, mark December 13th down on your calendar. As always, the birthday event will only last for 24-hours. Then it will be over, so I don’t want you to miss out.

Author: "John" Tags: "Misc"
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Date: Friday, 09 Nov 2012 10:50

I’ve written before on how tight stops make me nervous because too often those who employ tight stops are thinking about how many points or pips they are willing to risk on a given trade, having already decided how big a position they are going to trade (“I’m trading a standard lot of EUR/USD, and I only want to risk $200, so my stop is 20 pips”). Sound familiar?

This also ties into the whole fixation on risk/reward ratios I discussed in Stop Getting Hung Up On Stops, Targets, and Risk/Reward. Too many traders fail to realize that the closer they put their stop, the higher the probability that stop gets hit. The result is normal market moves taken them out of their trades, which leads some to claim stop-hunting to place blame elsewhere. It also means a lower win %, which can severely impact their overall profitability.

What these traders should be thinking about instead is how many pips of risk there is in the trade they are looking to make, and then backing out the position size (“I’m risking 50 pips, so in order to only risk $200 I can put on 4 mini lots of EUR/USD”). Many traders figure out their risk point using some form of technical analysis, identifying a point beyond which the market should not go if the trade is to retain a good prospect of working out as expected (see Where do I put my stops to avoid being taken out?).

There’s something else which can help in this regard, particularly for those who’s trading approach does not lend itself to easy identification of exit points – or for those working on trading system development. It’s the concept of value-at-risk (VaR). The basic idea of VaR is that you develop an idea of what kind of move the market may make against you based on historical information. There are limitations to VaR, which I will address below, but it can be a starting point for developing a strategy for stop placement.

The forex broker OANDA has a VaR tool which can be used to this purpose in terms of currency pairs (I don’t know off-hand of a similar one for other markets, but if you do please post a link in the comment section below). It looks at recent history to give you an idea of the size of moves have occurred as a certain significance level. For example, if I want to look at EUR/USD in the 30-minute time frame covering 10 bars (5 hours) I get the following:

Here we have a breakdown of how EUR/USD has traded over the last 300 periods. It tells us that 95% of the time the market moved 90 pips or less, averaging 39 pips, with a maximum move of 127 pips. The report also provides a graphical representation of the types of moves the market has made.

Reports like this can be very useful in understanding how far away you should put your stop to avoid it getting hit by normal market volatility. In the example above, if you were to have your stop only 20 pips away from the market the odds would strongly favor it being hit, but if your stop was at 50 pips the odds would favor it not being reached.

I’m not suggesting you just use VaR in this fashion by itself to set your stops, but you can certainly use it to get an idea of whether a stop you are contemplating is in a high-risk position or not.

A word of caution with this kind of backward-looking VaR. The future may not look like the past. Specifically, the market may be more or less volatile (more being the bigger risk for most traders). As a result, you would be well-served in joining some kind of forward-looking indication of volatility to a VaR analysis so you don’t get caught by a major shift.

Also, don’t let the 95% or 99% confidence level stuff lull you into not taking proper risk precautions. A number of financial institutions were basically sunk during the Financial Crisis by developments beyond those confidence levels. That’s where individual traders can get destroyed too. And you don’t need to trade all that much before you effectively assure that you’re going to have to survive a market move beyond those bounds.

Author: "John" Tags: "Trading Tips, risk management, stop loss..."
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