Tipster Trendlines

This page is out of date, click "Tipster Trendlines" at the top of the page.





The "free" version is no longer available. Go to the Tipster Trendlines 2.1 post for additional information.Trading from the chart - what a concept!


AFL code to trade from your Amibroker Chart


I've had many emails asking me for the code that I use to trade stocks from the Amibroker chart as seen in this chart trading example video post. I've decided to release the code since that is the spirit of the Internet I enjoy most. I was using separate files but to make this easier I've rolled them up, now there are only two files. Before you grab the files, please watch the quick video.



Make sure you test this yourself, all types of trades, Long, Short, at MKT, at LMT, at STP. And always make sure you double check the order entry in TWS before your transmit the order. I take NO responsibility if your a hammerhead and don't check your orders before you send transmit to the exchange.

• MessagePanelInclude.afl - put this file in your default include directory. This is usually /Amibroker/Include/
• TipsterTrendlines.afl - put this in your "custom" folder, or where ever you like, it will work from anywhere.

Click on the file names above, when the window open press "CNTL-A" to select all, then "CNTRL-C" to copy. Paste the code into a text editor like "Notepad" and save with an "afl" extension.
(BTW, donation button is on the right)
What it will do and won't do

• Use this code to place bracket orders with trend lines drawn right on the Amibroker chart.
• It does NOT allow you to use Amibroker to sell or cover, only place bracket orders.
• Lines should be called BS - Buy or Short, TA - Target, ST - Stop (case insensitive)
• Once you place the order and transmit, you need to manually adjust the target and stop inside TWS, the code does NOT do this for you once your order is placed.
• You must have Amibroker 5.0 or above for the coloured bar to appear at the top of the chart.

Installation

• Put the file "MessagePanelInclude.afl" in your include directory.
• Put the file "TipsterTrendlines.afl" in your custom directory
• Right click on the TipsterTrendlines" in the "Charts" sidebar and click "Insert" or "Insert Linked"
• You can run "Debugview" to see what the program is transmitting to TWS. Debugview is in your windows directory.
• You need to install IBController for Amibroker to communicate with TWS, it's available on the Amibroker website.
• Make sure you set up TWS API interface under "global" config, and set trusted IP to 127.0.0.1

Potential Issues

• This code uses GetChartID and therefore might give you odd results if you open another chart with the same code and place trend lines with the same labels (BS, ST, TA). It might place an order for the wrong symbol, I have not tested this. To get around this either consider using the actual chart ID (available in the parameters window)
• There is no code to keep from placing multiple orders. If you hit "Buy" twice, you will place two orders, so be careful.
• The code also does not check for waiting or pending orders.
• This code works for stocks only, or other instruments with 2 decimal places. Forex uses 4 decimal places, so if you try Forex, you order is rounded, therefore do not use with Forex.

Improvements

• In the future I may add additional functionality such as that listed above. If you have improvements on the code please let me know about the improvements.
• Check for pending or waiting order to prevent multiple orders from being transmitted
• Make display bar used as buttons (transmit, auto-trade on off, Long, Short, Close, Reverse, Cancel Order
• Drop down menus can also be added And lastly, if you like the code, please post a comment to this post.

Stock data from Yahoo

Here is a sample of data that is retrieved from Yahoo! for MDCO, on the Nasdaq. This is the data source that I use for the short interest scan.

Trading from the chart with Amibroker

I've had a few inquiries about the code for chart trading with Amibroker. I will be posting the code soon. Should be up in the next week or so.

Weekly Nasdaq Scan

Keep an eye on these stocks as the week progresses. This scan includes the short interest ratio and the increase in shorts from the last reporting period. Short positions are reported bi-monthly, see the link on the right for more information, it takes you to the NASDAQ Short Interest page. As a stock reaches new highs the shorts will start to feel the pain and some are forced to cover for a variety of reason, including margin calls. This gives the upward move more fuel, try to ride the tide. Here is the spreadsheet for the Nasdaq SI Scan Aug 24 2008.

Compared to last week, there are allot fewer shorts that show up on this list, and the number of stocks that have increased in shorts are far less. Does that signal a turn around?

SDS Update

Here is an update to the SDS trade posted yesterday.

Another example of trading with trendlines

I thought I would take the "potential" set-up Brian Shannon spoke of in his video today to show the "Trading with Trendlines" code I have written for Amibroker, interfaced with Interactive Brokers TWS platform. Both the set-up video by Alphatrends and my own video are below.

Alphatrends



Trading with Trendlines

Poll

I've added a new poll on the right side of the blog, "Do you trade from work?" This assumes you have a regular day job. Please take the poll, I'll be doing a short video soon on trading from work.

Do you have a questions that would be appropriate for a poll, that would give you a better sense of what other trader are doing? Perhaps "do you use a moving average crossover as part of your trading system?" If you have any suggestions, I'd like to hear them.

NASDAQ scan for upcoming week

This scan includes short interest as well. Watch the video for details. All the stocks are longs and all are on NASDAQ. You can also get the excel file for the NASDAQ Scan Aug16 2008.

A nice toy, just say it!

If you use the command "Say" in AFL, or some other kind of audio alerts, check this site out;
http://www.research.att.com/~ttsweb/tts/demo.php
This site lets you type in the text, listen to it, and download it. Easy and painless. You can select different voices as well. It sounds tons better than other text to speech engines I've heard, and it sure beats the basic voice Microsoft gives you (Amibroker uses the Microsoft engine when you call the "say" function, look it up in AFL help)

I use the "Lauren" voice to tell me all about the orders I submit, or if there are data errors, etc. Why stop there? You can use these sounds as part of your windows sounds scheme too.

So when you boot up your computer after dinner to plan the day for tomorrow, this is what you could hear.

Software Applications for Trading

Here's what you need to interface between Amibroker and TWS to trade with trend lines and auto trade. I also do a scan of the TSX and update an earlier trade.

Scan of NASDAQ and short interest

Tonight I ran a scan of the NASDAQ looking for stocks that are in one of two categories, the same criteria used in the last video I posted. There is one addition, I have added the short interest to the output (not used in the filter, just displayed on the output)

1. 10 day MA > 20 day MA > 50 day MA and 50 day MA rising
2. 10 day MA < 20 day MA < 50 day MA and 50 day MA falling

Other filters are in there as well, simple things like today cannot be the highest high in the past 5 days, the 20 day avg volume has to be more than 200K, today cannot be the lowest low over the past 5 days. This is trying to catch a basic pull back, or a stock correcting over time in a range. Here is the link to the spreadsheet with the scan. In the video I explain the san results.

Indicators

DAX, QQQQ, SPY, IWM, TSX Stocks, Forex, whatever you trade, price patterns and understanding why price moves is probably better than memorizing patterns. Take a look at a MACD divergence and a price chart that uses the same MA's as the MACD. Find a divergence. Look at the patterns of higher highs and lowers lows. Notice that you can see these if you look. I find the most use for indicators is to filter my scan results.

Here is an interesting concept that I have looked at, it comes from some forum somewhere. I believe it has merit.

Crossover systems will generally do well when traded intraday, not so good when traded of daily prices. By substituting different filters based on the most recent action of the chosen market, you can use their basic rules (idea) forever. You can program this to be self adjusting (auto optimize).

As part of my exploration scan for trending stocks, I use the double stochastic, it filters out stocks that aren't pulling back quite to where I would like to see. This is a good use for an indicator, not as sole selection criteria. Support and resistance, and a dose of anticipation.

Using Multiple Trading Systems

Some info I found while surfing. I don't use neaural nets but I can relate to using multiple systems to increase trading frequency. The system should be non-correlated. It's a good read.

First find out what is going on in the market you want to trade in the timeframe you plan on holding a position. If you want to day trade with one trade per-day then find out all the different ways the day has played out in the past. Ex. trend day, two-way day, reversal day, etc.

Once you've done this you should have an idea of which type of day is most common and which is most profitable. Then define something which could be of value to trade one of the market types. An example might be in a reversal day to find out how often the market makes a low of the day in the first 15 min. of the session. If it happens often enough to be of interest then you go on to the next step.

Take every period for which the target is found and create a table of outputs with 1 for the target and 0 for non-targets. Then pre-process all the inputs into the target and convert them to binary inputs. (A common mistake is to take open, high, low, and close data -- analog and assume you can find relationships with the target). For ex. yesterday close > day before yesterday close. If found mark the input as a 1 if not present mark it as a 0. Do this for as many identifies as you can. This may present a hundred or more binary inputs leading to the target for each day of the data.

Then you'd pass the data into a backprop neural net and have it train on the data. (You’ll need to set aside some data for out of sample testing). Once it's trained to hit at least 90% correctly test the NN on the out-of-sample data. If you hit at least 85% correctly then you can do one of two things. If you're a discretionary trader, setup the NN and pre-process the inputs every day and use the net to predict whether tomorrow has the target (in this example the low of the day is within 15 min. of the start of the session). If so use it to trade to the upside as long the net remains 85% correct. If you're a systems trader then go back to the net and look at the weights of the net to see which of the binary inputs were most important in hitting the target. Use the inputs to create a back testable system based on the patterns. A system might be when xyz pattern exists then buy next bar above the lowest bar as long as the time is within the first 15 min. of the day. Set the stop to one tick below the low.
If the system tests profitable enough to be of interest then move on to the next step.

Next, take the trades and test them against random trades pulled from the same year (the edge test). Rank the trades versus random for each year of the back test. If the trades score consistently above the 70th percentile then you can guess you've found an edge-based system. If not, then you have to assume you've found a temporal characteristic in the data that can be exploited for some period of time.

If its edge based then all you need to do is adjust the trades for market volatility and apply a money management strategy. Check the trades on a periodic basis to ensure the edge continues and plan what to do with your next million. If it's not edge based you can still trade it but you need to setup an objective bailout method such as running a monte carlo sim and determining the bailout point to be say the 95% level of the predicted max drawdown point. Your trading would be more defensive using a non-edge based method as well. Maybe you'd split the trade size in half and have a 15 min. or 10% of daily range as a filter to adding the second position (letting the position prove itself) as long as the volatility was large enough to justify the scaled entry.

Every model I've worked on has gone through the same process. Look at the behaviour’s present in a market; characterize them by creating a rule and checking the fit until all behaviour’s are noted. Then start looking to see if there is a component to the behaviour that is non-random. If so, develop a system to mine it and create a way to monitor the behaviour to ensure it's persistent over time. For example, one of the behaviour’s widely known is the trend day in the SP market. It can be identified just by visually inspecting a chart. I characterized it as a low/high within 10% of the low/high of the day and the close within 20% of the high/low of the day. With the definition I can see how many of these days have persisted over the years (averages about 25 day’s per-year). Then I can see if there is a way to identify these days in advance (realizing I'm going to also be capturing some false days as well).

The algorithm used to adjust the number of contracts traded to volatility is calculated by the range (high - low), then average it for the past ten days. I use ten because I want my model to cut back on size pretty quickly if the volatility jumps. Then I divide the highest historical 10 day volatility (approx. 48 pts.) by the current volatility (ex. 8 pts) to come up with a multiplier (ex. 6). The model would then apply 6 contracts for the next trade. This is not the final size used to trade. It's just used to adjust the model for volatility levels so I measure one period against another without volatility being a consideration.
By doing so, I can see if the same level of opportunities persist from period to period. I can also use these normalized trades to feed into money management models as well as Monte Carlo tests to estimate future performance and drawdowns. If you were to use trades from say 2000 and 2004 for the SP market in a Monte Carlo test without normalizing volatility you'd get a much distorted estimate of future performance.


Comment from reader:
Just to make sure I understand the big picture, this is all being done to increase frequency in the desired profitable time period, correct? So if I understand, sub-par models tested individually with low frequency can be morphed into an above-par model when combined with other non-correlated sub-par models (assuming they're not too sub-par), thus increasing frequency, consistency, and lowering the need for a higher profit factor? Thank you for presenting the information the way you did, I would not have made that connection otherwise (assuming I’m on the right track). Fascinating.

Trading System Development

Trading system development – The DUM method

D - Define

All systems are based on finding and pulling a fundamental truth about the market. Define what fundamental truth you'll be going after. Eg. All markets have a tendency to trend beyond random. Now you've got the definition that most technical-based hedge funds are derived from.

U - Understand

Determine the conditions under which the defined truth tends to occur. In the case of a trend tendency it could be when does the trend tendency begin beyond random? This will lead you to how to measure a trend. Since trends can occur randomly, how do I determine if a trend is beyond a confidence level of randomness? Does the trending tendency beyond random exhibit the same degree of persistence beyond one year? two years? 5 years? If not, is there some point at which the persistence beyond random occurs every year? If so, does it also persist at the same frequency for 5, 10, 50 different markets? If so, you've discovered a fundamental truth and you now understand what you need to know about the behaviour.

M - Mine

Once you understand the conditions under which the behaviour occurs, you write the code necessary to map the understanding of the behaviour. Is the code going to be all inclusive of many markets? or try to just go after the best of the best? Once mapped it's a mechanical process to determine how well it maps against the behaviour. After you're satisfied you've developed a satisfactory method for mining the behaviour, you can do an edge test to see if it happens beyond random. If not, use Monte Carlo sims to determine confidence levels for trading the method. Determine at what confidence level you'll stop trading. Examine the drawdown versus the profit. Is it worth risking any money on this? If so, allocate money using a money management scheme.

After you're done with this, you'll have your first system. Next, develop a complimentary system (non-correlated). Go through the same process for (a different type) a range bound system. Once you've gone through the mining stage, use the correlation test to weight the two systems. Apply the weights to the money management scheme and move on to your third system.

Trading with Amibroker

In this video I'll show you how I enter trades using Amibroker and the interface to Interactive Brokers TWS platform. I also briefly discuss how I find the stocks that I trade, using an Amibroker exploration. I wrote the interface code for two main reasons, to eliminate input errors using a graphical interface, and to speed up my order entry. IB's chart trader has it's use, but its not suited for what I want to do, not to mention its clunky and not customizable to my liking. Enjoy the video!
Update can be found here:
http://blog.tipster.ca/p/tipster-trendlines-3.html

Short Interest and the Short Squeeze

The NASDAQ web site allows you to take a look at the short positions over the past year or so by semi monthly data. This data is posted twice a month and is also available on Yahoo. I download this into Amibroker, sort it, scan it, and out comes the short data. The filtering I do involves the positions of the moving averages. The 10 above the 20 above the 50. I'll look at each of these and buy on strength anticipating a break out with a tight stop in case the breakout fails.

Here is the data for the last part of July, the new number will be available in a few days. When the new numbers come out I'll post the scan again. I can also run the scan every weekend to see what stocks look like the might advance. If you don't know what a short squeeze is, Google it.

The thing to remember here is that the high short interest is not the only reason to get involved in the stock but it sure helps fuel it to new heights. This scan picks stocks that have momentum and are poised to advance. You can get the excel version by clicking the image.

Scans

Check back frequently, I'll be posting scans for the TSX and the US markets. The TSX scans are based on momentum buys. The US market scans are for short interest. You can use the short interest scan to look at some charts and select those that look poised to move on a short squeeze.

Basic Rules

All the list of rules floating around, what do you belive, what do you use? What works? After spending a few years digesting lots of information I can now quickly read an article or blog post and know if it fits me, my style. There are a few very very basic rules that I remember each day. You should do the same. Make a top ten list. Revisted the list every now and then. Put the list on the wall. Modify it as you learn and progress. Here are two rules I have boiled down to one, once I learn to understand the first rule and was burned a few times, the second just made more sense.

Don't chase price. Do not chase price. All the books tell you that, but then they go on to tell you about indicators or other stuff. Want to prove it to yourself, run a system where you buy after a run, say 3 up bars and see what happens. You get hammered that's what happens. Why do we do it? It's not based on logic. This is one of the reasons I want to implement a mechanical automatic trading system to keep me from doing it. Yes, I have done it it and I look back and wonder what the hell I was doing.

Patience. Have patience. If we follow this rule, we don't have to worry about chasing price. This is rule #1.

I think the single most meaningful sentence I have read in any book or blog is "Most of your time trading is spent waiting". I hate waiting. Who likes to wait in line for a ride at the amusement park? Who like to wait in traffic. We are trained to not like to wait.

Learn to WAIT for the opportunity to appear. Sometimes the wait is short, sometimes long. LEARN TO WAIT. BE PATIENT. If you miss your entry, learn to trust that you will get another chance. If you miss your exit, just take what you can and be happy.

"What you do determines whether you lose. What the market does determines whether you profit." (Sun Tzu)

Price Patterns

We have all tried to use indicators to build a system, I have tried to use them to build an auto trading system and have found that it’s not worth the effort of looking for a great combination of indicators only. You need to use price action first and foremost. Support and resistance with a few other gems like a simple momentum and moving average are, to me, what works.

I have also found that indicators and patterns are just another way of looking at the same price action. Now that I've been staring at indicators for a long time and understand price action, and memorized patterns such as head and shoulders, bull flag, etc, understating basic price action has allowed me to forget about all that stuff. It's all just another way of saying higher high, higher low. If you read the book you might also have this "moment". After watching Alphatrends videos and reading Brian Shannons new book, the approach that makes the most sense to me is support and resistance, higher high, lower low, etc. For auto trading, the trick is to be able to program the rules as you apply them when looking at a chart, into software. Not so easy.

I trade Forex based on an auto trading system I developed, currently, no real money as there are still bugs. I also trade the TSX stocks (real money) based on the approach demonstrated in Brian Shannon's book. Each night I’ll perform a scan of the TSX and set up the trades for the next day. My approach has been altered somewhat since reading his book. The original was based on reading his blog and watching his videos. I have created code to scan for these stocks that are in stage 2 or 4. So far so good. Obviously it would be more profitable to check on the trades intra day and adjust the stops to protect profit. That doesn't seem to be the most damaging though. The entries are planned to be on a stage 1 to 2 short time frame but a morning gap usually kills me as it retraces. This doesn't happen all the time. TWS (IB platform) does allow conditional orders but not to the extent I need them. I need to look for a pullback to a level, then a break above another level (buy stop) to pull the trigger. To do this I will need to program Amibroker to follow the stock and place the order. That's my next project after I get this auto trading forex code working well enough to make some $. As for the TSX, its working out, but it would be more profitable if I had the code mentioned above implemented.

Technical Analysis Using Multiple Timeframes

Technical Analysis Using Multiple Timeframes - a trading book by Brian Shannon

Brian's work has been published or written about in Technical Analysis of Stocks & Commodities, Barron's, Active Trader, Stock Futures and Options Magazine, and hundreds of online sites.

I bought this book recently and read it from cover to cover twice. The presentation makes it easy to understand the concept of support and resistance and offers some input on why markets move the way they do. Brian also eliminates chart reading bias by removing the symbols from the charts.

I've been reading and watching blog videos since day 1 of Brian's blog and have tried to dissect many of the videos to determine how he finds the stocks, trades them, and manages the trade. I even wrote down the phrases he keeps repeating in the videos. I was not sure if the book would have any additional valuable information for me. I have since read it twice and there is indeed a whole lot of of valuable content that is in addition to the great videos on his blog.

The trend is your friend, but which one? Opposing trends can be found on various time frames in the same stock, at the same time creating confusion and worse, unnecessary losses. Understanding market structure and trend alignment allows you to put emotions aside and focus on the right stocks at the right time. Techniques covered in this book are appropriate for anyone (from day traders to investors) who is looking to improve accuracy in their buying and selling.

To order this book, just click on the image below.

How's your autotrading system? - Response

Here are some good posts from a Yahoo group on this topic.

Post 1
When you cut your losses and let your profits run, it tends to produce about a 35% accuracy (i.e. win rate). The problem seems to be sitting while the losses accumulate. If you're doing lots of trades on one-minute data, maybe it isn't so hard. Does your software run unattended?I have a preference for higher-frequency trading because it seems to produce a smoother equity curve. I am also a bit impatient, and I have difficulty watching my systems lose money. The computer trades better than I do in that regard.I get my ideas from pretty much anywhere, including some unlikely places (e.g. elitetrader.com). My main criteria for choosing an idea to develop is how well it would fit with my needs and lifestyle. I have been at this long enough to know how important that it. I want as smooth an equity curve as I can get, and I want the most reliable system that will generate a minimum return. I reject ideas because they trade too often or not often enough, or because they have drawdowns that are too deep or too long. I also develop trading ideas as a form of -- don't know what to call it -- entertainment, I guess. It's a treasure hunt.I write almost all of my own software using Delphi/Pascal. I like to test everything I do, but I have developed and run system that I cannot test beforehand. Christian Gross also talked about that with regard to algo trading. That can be scarey.[rwk]

Post 2:
This is going to be a very long-winded response, but I think itmight be helpful. So, before I even get into how I come up withtrading strategies, I think it will be helpful to give a little bit ofmy painful history, just for context.....Let me start by saying that I'm (by trade) a full-time softwareengineer and have been for about 18 years. I've tried to trade/investfor about 10 years with very little long-term success. If I wouldhave kept my money under a mattress for the majority of those years,I'd be better off today. But, I don't think I'd be better off 10years from now.....All of my trading endeavors/techniques were based on more-or-lesssubjective opinions and the latest book from Borders or Barnes andNoble. So, after trying to trade/invest half-heartedly for severalyears and then loosing my $#*&^*&@&# about 5 years ago, I took a breakfor about 1 year and then started treating investing/trading moreseriously. I read many books (all of which I'm sure you've heard of)and really just took the time to understand the let some of the basicssink in (namely-RISK MANAGEMENT). After I learned how to properlydeal with risk management and position sizing, I still tried to trade(by hand) and mostly broke even (or lost a little money).So, about 2 years ago, I think I finally got serious enough aboutnot loosing money that I decided to try to "objectify" a few tradingstyles (based on one or two recurring intra-day market patterns that Ihad my eye on). My stategy ideas were a result (I think) of my ownfailures, reading books, reading blogs and understanding what I likedand didn't like (I like speed). By the way, none of the books that Iever read from any bookstore have helped me with trading techniques. To be honest, I have found them all 100% useless. Now, with thatsaid, I have read some very good trading books, but they were onpsychology.I started doing this (by hand) in my IB SIMULATION tradingaccount. By the way, the decision to finally "objectify" my tradingtechnique was as a result of reading "Trading in the Zone" (by MarkDouglas). If I would have read this book early on in my "halfhearted" trading career, I probably would have stopped reading halfway through as it would have been boring to me. But, after being aperpetual looser and beating my head against the wall for so manyyears, I think I became a better listener. I guess I was at a pointwhere much of what the author had to say actually mattered to me andmade sense.As I embarked on trying to objectify my trading style, I quicklyrealized that putting numbers & reasons to everything I did was adaunting task and there wasn't a chance in hell that I could do it byhand. Hence, why I started to consider automating my tradingtechnique. This process was a HUGE "eye opener" for me as I quicklystarted realizing just how darned hard it was to objectify ABSOLUTLEYEVERYTHING that I did (including setup determination, individualposition/stop management, entire portfolio management, etc, etc, etc).I also had to work around all of IB's crappy API and market datalimitations. Everyone on this forum knows what I'm talking aboutthere......It also quickly became apparent that my trading methodologystill sucked. In fact, I completely changed my trading methodologyabout 3 times over the course of the last 2 years, until finallysettling in on something that seemed to work. It was in writing,tweaking and simulation trading my system that enabled me to finallyhone in on a successful methodology. I kept tweaking and working overthe course several months with my Simulation Account until I startedto see a positive expectancy emerge.Once I started seeing positive expectancy for a for months, Istarted trading with real money (only $27,000---very near the $25,000pattern day trading limit). Not much to my surprise, I saw myexpectancy drop when I went to real money, but it still remainedpositive. Moving from a simulation account to a real money account isjust a different beast--all together. Strangely enough, the thingthat has hurt me the most has been psychology (and commissions). Slippage hasn't really hurt me very much moving to a real moneyaccount (at least not yet at this small account level). Commissionshas hurt me, because I simulation traded with a $100,000 account andas such, the commissions were less of a percentage hit per trade. Many of my trades are "odd lot" trades below 100 shares.As far as psychology is concerned, I find myself thinking that Iknow better at various parts of the day and I prematurely close outpositions. I've also had several instances where I've introduced a"money loosing" bug the night before or have changed stuff thatadversely affects my expectancy and I don't find out what it was untila week or so later. I now document (in a journal) every single changethat I make to my system and I back up my code base every night, incase I need to revert. I also document how the system did that dayand various problems or fixes that I need to work on in the near future.My system trades only stocks and I've been running it now (withreal money) for only 3 months. It's placed 1,330 trades (822 long and508 short). It's going to make IB rich with commissions. I've paidthem $2,938.93 in three months and I've only made $3,165 (11.7% inthree months) and my overall expectancy is only .08. Because I'm aday-trader and I sometimes can carry up to 40 positions on a givenday, my risk size is very, very small. I keep it to a max of .135% ofequity on every trade (or approximately $40 bucks per trade rightnow). I'm a bit bummed about my expectancy, but I've tweaked andhoned just about everything during these 3 months and as such, Ibelieve things are going much better now than they did in the beginning.As far as back-testing, I don't actually have a piece of softwarethat backtests my strategy yet. I've written back test software forprevious END-OF-DAY strategies, but not for my current intra-daystrategy. I'm actually collecting all of the data that I need tobacktest. It's just a matter of finishing my backtesting software. Just collecting the darned data was a pain in the rear, because mysystem uses 5 second bars and tick data to make its decisions and itmay look at anywhere from 500 to 1,000 stocks per day. So, justwriting decent software to collect and store this volume of data was abeast. I only collect 5 second bars on TRADES, BIDs and ASKs. Idon't actually grab the tick data from anywhere like opentick.com forbacktesting.As far as a suitable result, I'm not really sure. Perhapssomeone else can chime in on this. I think 11.7% in three months (inthis shitty stock market and with this small account size) is prettydarned good. Going forward, I think I'll do much better than this,now that I've perfected just about everything that I can perfect. Ican't wait for a nice bull market, as my system seems to do betterwhen the market mood is positive and not negative. I also plan ondumping more money into this after another 3 months of positiveresults and once I break through my previous equity high of +17%. Jason

Post 3
I dream of indicators, non-standard correlation, and edge detection.I love indicators.Take the CCI, smooth it with an SMA and then take a KAMA of that. Whenthis KAMA pivots (reverses) beyond a CCI threshold of 30-50, look forprice confirmation (shorter time frame [15 min] price reversal), thenenter three positions, 1 at market, 1 at limit +- 10% of 5 period ATRand 1 at limit +- 20% 5 period ATR. If you don't get hit on the limitswithin 3 periods, close them. Close positions scaled out after certain%'s. Leave one in until a trailing stop knocks it out. Run this on 45minute data, and 90 minute data.To me it's indicators that drive strategy development. If I canenvision new indicators, or recombinant indicators, like thatdescribed above, I can build up a version of the strategy and see howthe price action and indicator action play out. If it looks promisingI keep it around as a potential rule. I've got dozens and dozens ofthem, all dreamed up and waiting for me to code them up.But as rwk mentioned - I dream and build them mostly forentertainment; confirmation that I can see a market pattern and buildan indicator to trap it.Backtesting strategies is first and foremost for me. It's how I canconfirm an indicator is doing its job. I trade FX only and data is nota problem, unless I want 10 years of 5 minute data...Matching strategies/indicators up with instruments is important I'vefound. A curr pair that doesn't behave well with strategy A may workjust fine in strategy B. EURCAD/USDCAD for some reason - just don't dowell for me. Just like metals and softs don't behave in a similar wayto make you think you could trade them with the same strategy. Sostrategy/indicator : instrument pairing is one way I like tocustomize.Non-standard correlation is something I came up with that allows me tocompare say gold with a home built AUD index. Or lumber and copper andthe home builders. Dump them all into a single chart and see if youcan get leading/trailing correlation events out of them. Of course thetrouble is decoupling price so that they can all fit in the samechart...Then there's edge detection. This is a popular concept but one youshould test for. It allows you to separate your entries from yourexits and position and risk management. Testing for strategy edgeallows you to understand that your personal trading edge may notstrategy based but perhaps money mgmt based or risk aversion based. Doyou make money because your strategy picks excellent entries? Orbecause you've got a great exit technique? For instance you could waitfor a certain volatility level to be reached and then you could entera spread position (long AND short). Use a chandelier exit for both.One will get closed out pretty quick but the other will tend to run awhile - hopefully long enough to clear your commish and make you some$. It's all in your exit. But you should know what type edge you haveso you don't screw it up and try switching it or changing it.To me the shear breadth of potential with regards to all the marketsand trade lengths and trading styles and just so much data to be mined- all of this boils down to endless possibilities, of which I spendmost nights dreaming about. Yeah, I know, I'm an odd duck. MM

How's your autotrading system?

This is an invitation for you to tell us about your auto trading experience.

Notice the poll on the left side of the blog. The polls asks "Do you use some form of automation in your trading?". Today, this is how the poll appears...

If you have not yet submitted a vote please do.

For those of you who either have a fully implemented auto trading systems or partially automated system, it would be very helpful to hear from you, not to mention encouraging. If you would be interested in answering these simple questions, I will post them on the blog for others to learn from (omitting your email and name).

Here are the questions
1. Is your system fully automated or partially automated
2. If fully automated, how often do you check on your system?
3. If partially automated, what component is partially automated?
4. How many different strategies are in use at any one time
5. How long have you been auto trading for?
6. In your opinion, is your system complicated or based on simple techniques?

7. What time frame do you use to enter the market?

8. What instruments do you auito trade?
9. Is your system(s) consistently profitable?
10. A few brief words on the strategies utilized (without giving away any secrets of course)
11. Other than actual buy/sell signals and formulating a winning system, what were two of the toughest problems you faced while trying to implement auto trading?

If your interested in participating, email me your comments, my contact information is at the top of the blog under "What this Blog is all about". Alternatively, you could just as easily post a comment.

Currently I have partial automation implemented. I select buy/short, sell/cover and targets by placing lines on my charts. I select the type of order (limit, buystop / shortstop, or market) and transmit this from Amibroker, to the API (Amibroker IBController) to TWS. This way I can walk away and check up on the trade later on. I find that I'm impatient, so this helps me get over that.

For the future: If your reading this post and it's old, send me your comments and I'll update this post.

New Links

I have updated the links on the left side of the blog with some sites and tools I use often. One link to check out is the news calendar. There are four video's by the Knight that I have posted below to show you how to trade the news after the initial pop. This is less risky than trying to guess the direction of the pop or chasing the intitial spike. Try it on your demo account first, but remember, demo accounts do not mirror actual fills you would get in the real world.

Delayed Entry


Using Fibs to enter


Multiple Targets


Re-Tests: Resistance Becomes Support

Scan - for May16, 2008

I was going to post the spreadsheet but excel is not working right. So here is a screen capture.

The data from Yahoo is available sometime after 8pm, so it's usually after 9 or 10 by the time I get around to scanning. I have Amibroker set up to scan, then I select the stocks I want by quickly looking at the charts (sometimes the scan gives me charts that look a little wobbly). Then I add the ones I want to a watch list. From there I look for the best one to set up. Once I find them, I have a screen where I draw 3 lines and click a button to send them to TWS (IB's trading application). Then I just have to go into the trading application and set up a condition and transmit the order. It might sound like lots of work but it's not. The condition I place is a buystop (for longs).

Trades

Here are two trades I'm in right now. These both appeared on the recent scans I posted. On the charts, green is a long entry, black lines are stops and targets.

Stops and targets are changed daily, these are the entries yesterday. Tonight I will adjust the stops and targets based on intraday charts.

The good, the bad, and the ugly will be updated once I exit the trade.

RIG


The good: Profit. 1% risk, followed entry rules, placed stop. The stop moved up the day after the trade to above break even. In the trade 3 days.
The bad: Profits taken too soon, but this was the plan. I haven't completed setting up my entire trade plan, specifically the exits. I have three target ideas - use MA's with a coefficient, use ATR, use a target that is only in reach in case of a huge gap up (unlikely), use resistance levels (could be far in the past, so perhaps too weak to worry about?) , don't use a target, only a trailing stop.
The ugly: Good lookin' trade, considering "the bad"

LLTC

The good: Still in the trade, moved stop to break even.
The bad:
The ugly:

Support and Resistance

Here is a great article on Support and Resistance. It's by Sam Seiden of Online Trading Academy. I receive emails from them periodically.

You read about this concept all over the web, and in books, but I have never seen it explained like this before. He explains WHY it works, and more importantly, what to look for. Time does play a role, the amount of time price spends at a price level while bulls and bears kick each other in the balls and struggle for control. This article has not only helped me understand where the low risk entries are located, but also where to place stops more effectively. If I looked to place an intraday stop, sometimes I looked at support and thought it would be at cluster lows. That was probably not the best place to put the stop. As explained in the article, look for areas where price spent the least amount of time. This is where the buyers/sellers stepped in big time to snatch up any offerings, and with one side dried up, prices moves fast. Read this article several times and understand the concept. Memorize it so you don't have to think about it. Thinking, not reacting, can get you into trouble.

Support and Resistance, a Deeper Understanding

Often, I talk about supply (resistance) and demand (support) in articles. I use simple examples and pictures to help explain how markets work and prices move. Today, let's take our level of understanding to a deeper level by actually simplifying the picture of quality support and resistance, the way we do in the classroom during the Professional Trader Part 1 and 2 courses . I was recently reviewing the pages in the stock class, and came across a page that showed what I considered something very close to the perfect picture of support (demand) and resistance (supply). The message that page conveyed to me was something I want to share with you here in hopes of improving your level of knowledge and understanding.

Price and Time: Price spends the least amount of time at price levels where supply and demand are out of balance. Price spends the most amount of time at price levels where supply and demand are NOT that out of balance.

In other words, price levels on a chart where price spends the LEAST amount of time are where the most quality trading opportunities are found. What this picture looks like on a chart is a pivot high and a pivot low, NOT a cluster of trading activity. Let's have a look...

Notice the turning points on this stock chart. If you focus on the pivot high point in the upper left portion of the chart, that provides for solid resistance when price returns to it on the 29th. That is a quality supply level. Notice the demand (support) level on the bottom of the chart, the pivot low on the 29th. Price shoots up from that level because supply and demand are so out of balance. Price spends so little time there because demand greatly exceeds supply. When price revisits that area two days later, that is the time to buy as price is revisiting a quality demand level. Next, notice the circled cluster of trading from the 28th. Price declines from that area and when it returns to that level, it moves right through it like a hot knife through butter. This is because supply and demand are not that out of balance, the cluster of trading tells us so. The fact that price spent more time in that base than it did at those pivot high and low points tells us that the great supply and demand imbalance is at the pivots, not the cluster of trading. While I may show these clusters in letters, they are for understanding. For application of support and resistance, pivot highs and lows are where the greatest imbalances are found.

Let's go over the turning points in this forex chart. Notice pivot high area "A". We call that a "pivot high" because price could only stay there for a few minutes. Why? Because supply (resistance) was so much greater than demand at that level. "B" was the first time price revisited "A" which was the low risk/high reward time to sell short. Area "C" on the chart is a pivot low. "C" happens because of a major supply and demand imbalance. There are so many more buyers than sellers that price can only stay there for a few minutes, creating the pivot low. The first time price revisited that level was the time to buy "D" as the risk was low and the reward was high. Next, notice "E", the cluster of trading that is followed by a decline in price. When price comes back to that level for the first time at "F", it goes right through it without turning lower. This is because of the time issue. Price spent more time at "E" than it did at "A" which is why "A" is a higher probability shorting opportunity (turning point) than "E". The same issue is true at "G". The cluster of trading provided no support when price revisited that level at "H". Again, time is the key issue here which is why the pivot highs and lows are the low risk/high reward support and resistance levels, not the clusters of candles.

NASDAQ Scan

Given that the market is at a long downtrend resistance level today, I thought it would be appropriate to post a scan of stock that are in trends. The scan clearly shows the up and the down trending stocks. The scan attempts to filter only those stocks that are experiencing a pull back.

What does the scan look for?

It uses linear regression, force index, and a few other goodies. The close must be greater than 5 and less than 100 (no reason only that I don't want pennies). The volume (20 period MA) must be greater than 250K. Once this scan is run, I look at the charts to select the potential candidates. Typically I like to buy on momentum, using buy stops (for longs).

Performance: To see how this scan performs, I ran it on past data. The FIRST scan shown was run for April 24, 2008. I selected this date as it was in the middle of an uptrend in the Q's (QQQQ).

The SECOND scan shown is run on today's data.

All the symbols are not shown. If you like the scan and want to see more of them let me know and I'll post excel sheets so you can see all the symbols. If I get no responses, I'll probably won't it anymore.

April 24, 2008

May 14, 2008

Some great tools for trading... education

In this post I'll give you some tools you can use to obtain videos, blogs, websites, books to help yourself. Make sure you follow the law and don't' abuse any copyrights. Your on your own, know what your doing and be responsible.

Videos
Have you ever watched a video online and wanted to save it to your hard drive? Most online videos these days are streaming, and they don't save to your "temp" directory like they did only a few years ago. Back then you could go to your temp directory and copy the file and re-play it. So what do we do now? There are two options, you can play the video and use a screen capture program similar to the ones these guys use on there blogs to make there videos at Alphatrends, Trade-Guild. The problem with this is you have to have the video player open and you can't do anything else while recording. Also, if there is a hang-up or delay in the stream, you going to record it. The better way is to use a streaming video capture program that captures the digital stream, behind the scene and while you work on something else.

I tried quite a few video download tools to find most didn't work well. The best one I have found is the cheapest, "FREE". It's called ORBIT and you can get your own copy right here. You can even schedule downloads and control bandwidth. So while you at work, where the bandwidth is HUGE, you limit the speed your downloading at so you don't raise any IT heads.

I have download videos from FXCM, Alphatrends, Optimize101 and 201 for Amibroker, MACDots system, all kinds of videos. I load them into my MIO UPS and watch them in the car on the way home from work. Well, I don't actually watch them, I listen to them. I also download mp3's from TrederInterviews and listen to them on the way to work/home.

Here is a portion of my library right now - click to enlarge. If you want some of these, I was thinking up opening up my FTP site. Depends on how many people ask for them.



Blogs and Websites
Have you found a website or blog that you want to spend time reading but can't find the time? Do you want to archive your blog? Do you want to save a copy of someone else's blog to your hard drive for reference? Do you want to save a website to your hard drive so you can read it while sitting an an aircraft? Here is the tool for you... your going to have to read the help a little to get the right results, it will only take 15 minutes or so.

HTTrack


Books
So you want to read some books. First off, don't go and buy them. Search Google for them. There and many PDF books out there, all you have to do is find them. Check these out, this is just part of what I have found. Once I find the book, I print it double sided, with 2 pages per side of paper. Instant book.



Go to Google and use advanced search.
Here is a sample page, make sure you use filetype to return only PDF's


Hope these tools help you. Let me know!

Taking a break, making the plan

I have been taking a break, since work is keeping me busy. I am shifting, or rather opening up to other markets now. I have written a trading plan that includes the pairs I will ONLY trade in Forex. There are three pairs, non correlated and all USD's. I am also opening up to the TSX, trading the ETF's and highly liquid stocks. Prior to using IB, I was with E-Trade, this was a few years ago. I found that the profits I made were all eaten with commissions, that to much, that money could have been in my pocket. Since switching I was intoxicated with the though of auto trading and switched to Forex. Well, here is my long term goal:



Trade the TSX with daily charts and intraday triggers, set up on TWS. At the same time, trade Forex intra day in small lots. As the same time, work on the automated trading system that will trade on a 1 hour time frame, from Monday to Friday, from 11pm to 8am EST.



Does anyone think I should share and post my trading plan?

Divergence and the Tick

Divergence:
Here is a tick chart of GBP.USD. I have inserted a line at the highs and lows. I continue to struggle with interpreting divergence. This chart looks like is is in consolidation, so a breakout set up is probably best, but I'd like some comments on where you readers see a divergence set-up. What is used for the MACD, the MACD itself or the histogram? I have seen both used. This chart shows two opposite divergences for MACD and the histogram, at line B and D. Perhaps the double top makes it null and void. Can anyone help on interpreting this chart?

Tick: I have read that back testing should be done with tick data, since it removes the time element. I am beginning to read more about using tick charts, after looking at them for a few days I like what I see. Price action matters more than time data. Comments?

EURUSD

The green line is where I have set my buy order, at the bottom of the consolidation, with a tight stop shown as the dotted grey line. Target set for 200 pips. If it triggers and goes higher, my plan is to monitor it each night looking for signs of weakness. My trading plan has always been that once I am in, the first objective is to move the stop to break even when I see a higher high form on a reasonable time frame, most likely 4H in this case. The target is set only to get hit on a large spike, from an event such as news. When the momentum slows I will place the target closer to catch all I can while the stop will also move tighter. I look for momentum to slow from the STOCH, prices coming off the top of the bands, or volatility increases, making lower lows. I use the volatility to have the target hit. If the climb is steady, I like that and I stay in. The trick is to catch the steady climbers.



Note that none of these post are recommendations. I am entering these trades in the blog to capture this moment. I'll come back to each post and do an "UPDATE" as the trade close and add my thoughts. I want to track my progress for these daily time frame "swing" trades, or hopefully "trend" trades.

UPDATE:
The Good: Position size set, Stop placed, Target placed, trade planned before placing trade.
The Bad: Took a loss, a small loss.
The Ugly: Totally forgot about the first friday of the month. The US released the non payroll farm report. I was reading about trading the news just days before this trade and noted that I have to commit this news release date to memory. I think it will stick in memory now!

Correlation and Sentiment

This post includes some useful information I found at Mataf.net. An interesting feature they have is called the sentiment calculator that allows the user to determine sentiment of the various pairs by looking at different time frames of charts and selecting up, down, or sideways trend. Once you pick all the choices it tells you what you entered. An easy way to determine the trend yourself without any bias.

The chart is the last one in the post. This correlation table supposedly update with time as it is a link, not an image.

USDJPY Trade

Pulled the trigger on a short of USDJPY.

The stop is on the chart, above the recent high, shown as a grey dotted line. I'll trail this one, current target set at 90 just so I have a target.

UPDATE:

The Good: Position size set, stops set up with order, trade planned before placed. The trade went the right direction to start with

The Bad:Took a loss. Stop set up to far away, didn't wait for the right time to enter. With the entry, the stop stop could have been tighter.

The Ugly: I think this quick move was from the US non farm payroll report. I was reading about trading the news days before this trade and I should have known better. If the trade went my way though, I would have been claiming victory right?

Watching the Daily Charts

Aside from my quest to have a system work while I sleep, work, play, etc. I want to put my technical skills to work for some trading off the daily time frame. Back when I first started downloading Forex data and looking at the charts, and researching what exactly a "pip" was, I was mostly day trading and swing trading stocks. I learned this all myself, with a few courses, offered free to try to get you to sign up with the brokerage firm. I have no problem with high pressure sales tactics, they don't other me and I can exit the establishment without feeling like I hurt anyone's feelings. It's business, and in business, people either get screwed or they do the screwing. I prefer neither so I go for the free pizza and learning session, notepad in hand. Back to the subject.... I first downloaded Forex data so I could develop a system, and I didn't like all the gaps in the stocks. Since then, I have found that stocks, sectors, Forex, bonds, all have their own behaviours and different tools work for each. I have also found the daily time frame to have much less noise and are far less "jerky" than the hourly charts.

This post will list my thoughts on four pairs, and where I interpret the charts to be headed. Some I will actually put real money into.

The dots and circles on the chart or just to provide me with some basic buy/sell areas. They have to be used with the trend.

USDCHF

Downtrend, recently broke 1.00, and bounced back to 1.00. I'm looking for
consolidation around this level before it drops hard. I'm not playing this
looking for the drop, the chart doesn't tell me it's going to drop. The 1.00
level is importnat because it's "round" and "par". This time it cracked it.
(Look at USDCAD when it cracked par 9/20/2007). I'm watching it to come back to
1.02 to test the high, watching the STOCH, and watching my 5EMA trigger when the
time comes. One potential outcome is for the STOCK to drop below 20 and sit
there as the pair heads south, if this happens I'll be looking at riding that
sled to the bottom of the hill.

USDJPY

A short is setting up. It broke 100, a nice round number and 100 has became
resistance. This level has been support since 1999 and now that it has been
penetrated, it is resistance. I'll be shorting this soon, looking to catch
100.40 so I can set a tight stop. If I miss the move, there will be others and I
will learn from it.

GBPUSD

Looks like its going into consolidation for a while on weekly, making Lower Low
and Lower High (see chart). I'll be looking to short at 2.0021 to 2.0026. On the
daily, it looks like it could make its way up to the higher high. Stoch is on
the way down, a good signal might be to wait until Stoch gets to 20 then short
for the start of the downtrend using a tight stop. The yellow line is
resistance. The hollow red circle is a sell signal, if I was watching this I
would have shorted at the low the day before the hollow circle appeared.

EURUSD

Weekly - no signal - good counter trend short, I don't play that game though.
Daily - huge uptrend continues, wait for pull back, wait until Stoch gets to
below 50 then buy on strength on the break of a daily high, also watch the 5EMA
system for triggers.

Forex Video

Here are a couple of videos that I find useful.

1. MACD Video
2. Where to get Forex Information

MACD = A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

Here is an educational video done by Brian Shannon at AlphaTrends.net He explains the MACD and how to use it. Good review if you don't have things memorized. The MACD is one of the ost verstaile indicators.

PFX Global has a good video that describes where you can get Forex related information. It sure is easier to watch a video than weed through all the information on the Internet and figure it out yourself. If your not going to take a course or have a mentor, this is a good place to start.

Trendline Trading

I have updated my code to include a trailing stop. When I see a possible set up, I can now set the "Study" in Amibroker to send two complete orders to IB. The first has a defined target and stop, better known as a bracket order. The second submits a buy at the same price with only a trailing stop. This will get me a quick profit and also let an order run with the price. Here is the window I use (Param window) to set it up.

I'm considering sending the order once I set up the lines, that way it's sitting on the IB system. Currently the order is triggered with the real time data on my screen, then sent to IB. There are advantages to both, not sure what the better way to do this is. I'm getting the hang of trend lines, and trading 15 minute bars with tight stops just doesn't work. Using the hourly with small position sizes and wider stops is the way to go, compared to what I have been doing. What have I been doing? Using a 10 pip target and stop. I'm figuring out the best method to obtain a positive result using STOCH and a 5 EMA of the highs, and a 5 EMA of the lows. The success rate is pretty good with the 15 minute chart. I have also added some code as a count down bar timer, this is good to have when scalping for 10 pips. Here is what my screen looks like even trying to keep the clutter down. Below I'll explain the screen shot.

The colored bars are a system in itself, I don't use the signals for automation, I use it for "watching the screen trading"
I set up the "Study" lines, green for buy, red for short, as solid lines. When the order is triggered the profit and stop lines turn grey, this tells me the lines are not active and locked out. I can also go to the menu and press "Lock-Out" so a trade will not be triggered for buy or short. I can also select "scale-out" to use the trailing stop feature. With more options comes more clutter. The plan is to figure out what suits me best, suits my style best and remove everything else.

Right now I'm scalping some evening (EST) USD.JPY and setting up night time trades for EUR.USD. So far it's break even with real money. This blog is one way to record how I'm doing instead of keeping a log. Perhaps my next posts will describe some trades, both good and bad, so I can track what my thoughts were and what worked. Haven't decided on that yet.

A Trading System

Much has been written on trading systems. I have tried many and found that the advice given by most honest traders is fitting, that is, the system has to fit well with the person. One such system is shown in the screen shot below. I was reading the latest post by Rich over at Forex Project and the comment section began a long topic of systems discussion. It was a discussion about trading systems and one trader offered up his charts. The discussion is very interesting, and should be read. I noticed that the chart looked familiar to one I use. All I really had to do was change the period variable. Read it here - Want To Buy a Forex Trading System?

I don't use this systems now, I stick to S/R and a 5 period EMA on the 1H or 4H charts. The top chart is mine, the lower chart is from the post at Forex Project.

This particular chart is from comment No. 16.



Tipster Code Above


System posted and discussed at Forex Project.

Breakouts

What is better, indicators or trend lines, what has better results for an auto trading system? I have tried, as many others have, to use indicators to buy and sell Forex. It works about half the time. Why not just use a random number generator to trade then? What about breakouts?

Look at a 5 or 15 minute chart, how far is 10 pips in relation to the average bar length. How hard can it be to make 10 pips? It's harder than it looks. My next system involves breakouts and trend line trading. Here's the idea;

I set the chart up with 1 to 4 lines, when the line is crossed it trades, setting stops and targets, and gets locked out until I reset it. I can use horizontal or sloped lines to do this in Amibroker (AB). The code I have done so far works OK. I'm amazed how how simple the code was to do this. The "system code" is very small compared to the auto trading interface code need to talk from Amibroker to TWS via the IBcontroller. I'm waiting for the bugs to show themselves. I was surprised when I was testing this, I would trigger it to test signals and next thing I know I'm hitting the profit target of 10 pips.

I can't find many others that have coded this or auto trade this way, I searched with Google and found very little. The AB Knowledge Base doesn't have much either. If you trade Forex this way I'd like to chat via email, drop me a line. Email link is at the top of this page.

Profit Target and the Spread

Some online forex brokers now offer 3 to 5 pip spreads in the liquid currencies such as EUR/USD and USD/JPY. These are very competitive prices which a few years ago were unthinkable. As recently as the mid 1990's brokers were quoting 10 pip spreads in the major currencies plus a commission! Thankfully due to the internet, the current boom in Forex trading and the competition between Forex brokers, those days are well and truly over.The excellent value available from trading on tight spreads works very much to the traders advantage. However, some recomend that you avoid overtrading and entering trades for just a 5-10 pip profit or loss. Even trading this way on 3 pip spreads can adversely affect your profitability.

Below are examples of both a winning trade and losing trade when trading for a 10 pip profit or loss:

Winning Trade:
Buy EUR/USD at 1.2020 (price = 17/20)Sell EUR/USD at 1.2030 (price = 30/33)
Market moves 13 pips before taking profit

Losing Trade:
Buy EUR/USD at 1.2020 (price = 17/20)Sell EUR/USD at 1.2010 (price = 10/13)
Market moves 7 pips before taking loss

The above example highlights that the risk/reward of trading for a 10 pip profit or loss is poor. For the same 10 pips P&L, the market must move 13 pips for your winning position, but only 7 pips for your losing position. As a general rule of thumb, Take-Profit or Stop-Loss levels are recommeded by some as at least 10 times the spread you have traded on. This strategy will (should) help avoid overtrading and improve risk/reward. This is being considered in my current system where I aim to take a profit at 10 pips.