Crazy EUR/USD Chart - August 10, 2008

Check out this chart of the EUR/USD pair over the past few weeks. One of the most dramatic reversals from long to short on the Euro I've ever seen...look at that huge gap downward over the weekend of August 9-10. The recent decrease in oil prices has really taken a lot of the pressure off the dollar - and also lost me quite a few pips as I continued to bet against it. Only in the past few days have I started shorting the Euro and made back some of those pips - including almost 300 pips this past Friday. Now I'm wondering how the conflict between Russia and Georgia is likely to effect regional stability, oil prices, the EUR/USD and everything else...

2008 Results So Far

I know it's been quiet around here lately, but I am still trading almost every day, focusing on strictly the EUR/USD pair. So far it has been a pretty good year, with around 1500 total pips in just over 6 months. July has been ugly so far, though, and I'm down over 400 pips for the month, mainly because the market has not been following a clear trend for these past few weeks. Here are my month-by-month results for 2008 so far:

January -168 pips
February: +404 pips
March: +964 pips (!)
April: +338 pips
May: -179 pips
June: +582 pips
July: -445 pips (as of July 16)

2008 Total: 1496 pips

I've made several revisions to my trading system this week that have hopefully corrected some of the problems that have led to the big drawdown this month. I'm also prospecting for new trading signals pretty intensively right now and will be integrating those into the system as I find them. At this point if I can at least break even in July I'll be happy. Hope your trading is going well!

Note to Self

I just came across this angry note I wrote to myself last year after a particularly bad run of trades that could very easily have been avoided. Ever had that feeling? I find it often helps to scribble something like this down immediately afterward to help get that awful sinking feeling out of your system, and to remind yourself of the lessons you've (hopefully) learned. Enjoy...

You have completed screwed up [not the phrase I actually used] your trading discipline. You have lost over 200 pips because you:


• Exited trades too early
  
• Set arbitrary and unnecessary stop losses
  
• Allowed discretionary trading
  
• Failed to trade at the right time

You are no longer allowed to look at any trading application or chart outside of times you should be trading. You must exit all charts and applications immediately after placing a trade and keep them closed until it's time to review your position again.

On the bright side, the lessons I learned from this nasty period led me to trade with much more discipline in the months that followed, and as a result I've been having a good run so far this year.

Hivetrader Community-Based Trading

A while back FX Engines switched its strategy from automated trading systems based solely on backtested technical indicators to systems that are fine-tuned with input from a community of forex traders. To reflect this new community-based methodology, it's now called Hivetrader. Here's a quick breakdown of how it works, lifted straight from their front page:

• You view the hive [the community of traders] to see the best community-created systems.
  
• You copy hive systems.
  
• You improve the systems and re-test them.
  
• You trade the systems live with the dealer of your choice.
  

I used to play around with FX Engines quite a bit, and had some luck creating and trading with my own customized engines (as discussed in past posts on this blog). But I have absolutely no experience with Hivetrader (yet) and am quite curious how it's performing. So if you have any experiences you'd like to share, pro or con, lucrative or expensive, please share them by posting a comment below. Are you thriving in the hive, or getting stung?

Full disclosure: I have an advertising relationship with FX Engines/Hivetrader, but I promise to publish any and all feedback posted here, good or bad, as long as its on-topic and not spam.

Nice Chart to Wake Up To

If you were short the EUR/USD today, that is - which as luck would have it I was.


I haven't seen volatility like this in quite a while...over 200 pips of movement. Hope you're all short the Euro today as well!

Your Trading System Needs Internal Controls

I've said this before, but it's worth repeating - especially after reading about the rise and fall of Soul Trader's Grail forex system, which I always regarded as one of the most advanced automated systems around. Reading his explanation of why this system finally had to be shut down really brought home to me the need for rigorous internal controls on your trading system.

By internal controls I mean the type of tracking algorithms that watch over your trading performance and intervene to shut it down when performance begins to dip. Or to paraphrase Soul Trader, "How to identify when the market conditions cause the system to fail, and what to do when it's failed."

String of losses over X% of trading capital? Click: the system goes off until performance improves. Recent trading odds dip below Y%? Sorry, you're out of the market until things perk up - and if they don't perk up, you'll just have to be patient and appreciate the fact that at least your funds are safe. Preserving your capital in adverse conditions is pretty boring, but it's one of the most important single factors in trading success.

The only reason I'm still trading, and have even bothered to return to trading after a recent hiatus, is because of these built-in trading restrictions. I think of them as a firewall between me and the worst the market can dish out. They're not perfect, and they certainly don't prevent all drawdowns all the time, but they're a lot better than nothing at all. In fact, given the choice I'd much rather trade with no stop-losses and strong internal controls than vice versa.

Disclaimer: check back in a few weeks and see if I've abandoned my trading controls because they failed completely in unexpected market conditions.

Back in the Market After Some Forward Testing, a Bad Carry Trade, and a Bit of Boredom

Hello again, and apologies for this blog's recent suspended animation. For various reasons hinted at above I decided to give forex a rest for a while - but I'm now back and have just made my first foray into live trading the EUR/USD again.

The principal reasons I took a break were:

I was frankly a little bored and disappointed with the progress of my EUR/USD trading system. Out of impatience with its performance, I'd convinced myself it didn't actually work with real trades, it just looked good in backtesting. In fact, I ended up questioning the entire idea of backtesting since it offers absolutely no guarantee your trading rules will work into the future. So I decided to give it a break, and maybe come back in a few months, plug in the new data, and see if my system would've actually made decent trades in that time.

Around the same time, largely because I was disillusioned with my own trading system, I convinced myself carry trading was by far the best way to trade. So I devised what I thought was a very clever hedging system using the USD/CAD to balance the volatility of the carry trader's beloved GBP/JPY pair. But unfortunately I decided this just before the GBP/JPY carry trade experienced a giant melt-down that demonstrated how little I know about carry trading or hedging. So I got burned. Thanks to my stop-losses I didn't get wiped out, but I did get scorched pretty badly. (Did I mention I also broke my own trading rules by taking on way too much risk? Well, I did. And it was dumb.) In case you're wondering what a carry trade meltdown looks like, here's a picture. Congratulations to all the GPB/JPY shorts out there, it must've been a fun couple of months:


But there is some good news after this tale of burnout and reckless trading. As I mentioned, I've been letting my trading system sit idle for the past few months while new EUR/USD price data piled up. This new data was the raw material I needed to effectively forward test my system and see if it actually produced real, profitable trades, not just pretty pictures of historical backtests. When I plugged in the new data earlier this week, I was very pleasantly surprised: my system had racked up a very steady, consistent, profitable trading record while I was ignoring it. Which is why I'm back trading (and posting) again.

One of the trading risks I've described before is the desire to fiddle compulsively with your system, even when it's doing just fine as it is - the "If it ain't broke, don't fix it" problem. Since I'm a bit of a compulsive fiddler, my challenge now is to find something else I can fiddle with to keep me from breaking what isn't broke. One thing I've been wanting to learn for a long time is how to program Metatrader to trade my system automatically using their MQL programming language. I suspect it'll be quite a challenge transitioning all my trading rules from Excel to Metatrader - but if I can get them automated it'll save a huge amount of time over the long term. So if there are any experienced Metatrader programmers out there, any advice on getting started with MQL would be much appreciated!