Week in Review: 16th September to 22nd September 2013

My account at IC Markets is live and open. Unfortunately my phone's no longer working, which has made it impossible for me to transfer funds into my trading account. I hope to get a new phone delivered this week. In the meantime, I've been playing around with a demo account, just testing new things. 

I spent the last few days researching retracements during a trend. I wanted to see how often candles can move up (or down) consecutively before a retracement in the opposite direction occurs. So, for example, if we have five bearish candles in a row, how often will the sixth candle be bullish or bearish?

Here's an example of what I'm talking about:

Since I'm stuck in demo mode, I decided to research the 5M chart for the AUDUSD, and compiled the following data. This was from the 2nd, 3rd and 4th of September, 2013.

The total sample size was 440 observations. So we can see that out of 440 observations, we have 220 "stand-alone" candles where the next candle would move in the opposite direction. We have 112 observations where we have two consecutive candles moving in the same direction before the third candle reverses. And so on.

The most interesting statistic is "% of continuation". What this means is, what is the probability of the next candle moving in the same direction? As an example, if we have two consecutive bullish candles, we have a 49.09% probability that the next candle will likewise be bullish. 

Up until four consecutive candles, it would appear that we have a 50 / 50 chance of a continuation candle. This is essentially a coin-flip.

However, it would appear that the chances of a reversal begin to increase once we hit five consecutive candles moving in the same direction. In this case, we have a 40.74% probability of a continuation (or a 60% probability of a retracement). Once we go beyond six candles, the probability of a retracement or reversal increase dramatically. However, we must bear in mind that my sample size of 5+ consecutive candles is very small. 

This information does not constitute a trading system. However, it can help in determining time-based entries and exits. For example, if you trade trends, you may want to close your trade after price has moved in your favour by four or five candles, and then look for a retracement to re-enter. 

Week in Review: 9th September to 15th September 2013

Yeah I know it's early, but there'll be no trades for this week. The main reason is that I'm changing my broker to IC Markets. I'll be opting for their "true ECN" account. 

I've tested a demo account for a few months already, and the low spread is unbelievable. The spread on the EURUSD is frequently between 0.1 and 0.3 pips. The commission is 0.7 pips for an Australian account, but with a rebate from an affiliate marketer, this can be reduced to 0.55 pips. 

As always, perform your due diligence. Naturally, you should never deposit your entire risk equity into a single broker. Deposit enough to provide margin + a little buffer only.

My withdrawal from my previous broker came through yesterday, so hopefully I should be up and running next week. 

Week in review: 2nd September to 8th September 2013

This week was rather quiet. I only opened one trade on the AUDSGD, as shown below.

AUDSGD - Daily TF - Hermes low volatility system

This trade finished in profit, bringing me back up to around breakeven since July 2013. 

UPCOMING

My plate is really full with personal commitments at the moment, so I'll have to put system development onto the backburner for a while. 

This isn't really trade-related, but I've also started a new fitness and dietary regime based on Clean & Lean Warrior and I've definitely noticed a change over 48 hours. It's amazing how a few changes in your diet and environment can affect you. I've definitely noticed a large reduction in stress.

OANDA's Order Book and sentiment analysis

I spent today researching various information sources, and found OANDA's analytical tools very interesting. OANDA reports an aggregate of their clients' orders and positions for free, which is useful if you're trying to measure retail sentiment. They also provide the weekly Commitment of Traders (COT) for free, although it doesn't include commercial positions. 

Anyway, I was looking at their order book and confirmed the theory that stops accumulate around big round numbers. 

The above snapshot is interesting, since it indicates that retail traders seem to be more bearish than bullish on the USDJPY, considering there are more sell orders on the upside than there are buy orders on the downside.

Contrast with the CoT report on the JPY, which indicate that the large money is bearish on the JPY (and thus bullish on the USDJPY).

It seems contradictory, but we have to bear in mind that retail money is generally referred to as "dumb money", and the smarter bet would be to go with the large money (aka the "smart money").

I'm also beginning to appreciate why it may be more sensible to concentrate on a handful of currencies if you're going to delve into fundamental and sentiment analysis. There's alot of information to absorb.

Week in review: 26th August to 1st September 2013

I've finished this week in the red. I lost two trades, which included one on the NZDUSD that I had opened a few weeks ago. I also won some, but because of my inverted R:R ratios, my wins couldn't overcome my few losses.

Since I began trading from July 2013 (start of the Australian financial year), I've made a slight loss of -0.5%. It's not a big amount, but it is discouraging. I'm well within my drawdown limit, obviously, but the last few weeks have wiped my gains for the last few months. 

Incorporating fundamental / sentimental analysis

I've spent the last week going over fundamentals and checking how to incorporate it into my trading plan. My thinking is as follows: use fundamental analysis to determine a bullish / bearish / neutral outlook on a particular currency, and using my technical systems to manage any trade that aligns with my fundamental analysis. 

Fundamental analysis is tricky. While the data behind fundamental analysis is objective (e.g. unemployment %, GDP growth, manufacturing orders etc), the interpretation of this data can be very subjective. I'll post some more thoughts on how to handle this data interpretation in the future.

But the following setup caught my eye. It's an example of combining both fundamental and technical analysis.

Here we see the USDJPY converging, as shown by the two trend lines. We can expect fireworks as the currency pairs heads close to the point of convergence. Non-farm payroll (NFP) is coming out this Friday, which coincidentally (?) takes place just before convergence. Depending on the nature of the NFP announcement, we can then use technical analysis to determine how to proceed.