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Effective Cost Technique

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[Update 2021]: This post was written back in 2007 November. Unfortunately, the original webinar has been removed and I guess the presenter is no longer with FXstreet as well.

I have managed to find the presentation slides here. Hope it helps.

Tony Juste from Fxstreet.com posted a presentation on money management in the forum of Fxstreet.com. It is called ‘Effective Cost’ Technique. The outline as follow:

  • It is a defensive technique. It is based on the probabilities of success of a particular position initiated.
  • It was built to prepare for the worst-case trading scenarios It allows for moderate profits while attempts to keep losses under control.
  • Allows a trader to determine the stop loss level:
    • Based on equity drawdown
    • Based on technical triggers

Full presentation is available in this thread of the forum. You have to sign up a free forum membership to gain access through. Good stuff. Go and have a look.

Why do I do monthly review, and only monthly?

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I don’t have to write another post to tell you why do you need to keep a trading journal. I assume you should know if you are taking trading seriously. But, I guess, most of the traders might have the same problem which I used to have, ‘over review’ your trading result.

No doubt, we have to review our trading results or the accounting book of your business. Do not try to hide the losses and mistakes to yourself. After all, this is our own business, isn’t it?

But just how frequent should we do that?

After trading for a little while, I figure out, doing a monthly review is pretty much enough for day trader, like myself.

Why monthly and not weekly? Well, this is not a rule, but an observation.

I used to do a weekly review of my trading. It is useful. But, it does not really tell me my overall performance. In other words, the weekly review is kinda ‘short-sighted’.

Why is it so? Let’s take an example, during the FOMC meeting week, the market might be a little bit choppy, most likely traders are waiting for the interest rate decision. I might be trading extremely well during this kinda week, or I might be chopped to pieces. Does the result of the week itself tell me a little about my over performance as a trader? Nah, I don’t think so.

So, why do we spend time to analyse the result of the week, and feel ‘happy’ or even ‘devastated’ about it? And subsequently thinking about ‘maybe I should not trail my stops’, ‘maybe I should wait when the candle closes above yesterday’s high’ , blah, blah , blah. Maybe I should change the system rules! again?!? I don’t see a point.

In fact, it is similar to trading. Do not trap yourself in the 5-minute charts and forget about the hourly chart or even daily chart. Why? Over the long run, the big picture tells you more about the ‘truth’.

I would think a monthly, quarterly, and yearly review of the overall trading performance is pretty adequate. Tracking monthly cost of trading, reviewing mistakes, analyzing the system performance over different weeks, or even seasons. That’s more effective, well, to me.

Lesson 03-April-2007: Monkey around the stop

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This series of short notes is to record down thoughts, skills, and any lessons that I have learned from day to day trading. I am not talking about Technical analysis. One can really learn TA by getting a good book, and practice, so nothing much to discuss here.

So, what did I learn recently?

Stop Monkey-ing around with Trailing stops in Forex trading. I know I will attract a number of attacks or debate over this topic. But wait.

I note down this because it suits my trading style. It doesn’t mean trail your stops is wrong. There is no right or wrong in trading, but only what works for you and what’s not.

I start to realize, what I really love to do is to take care about how bad /how much I will lose in a single trade instead of how much I am going to earn in a single trade.

Put in the stop, that’s it. I will either close my position at a profit target (which is pretty far away) or at a predefined time. It hurts me more when watching a huge profit run away from me because I got stopped out prematurely by trailing stop than accepting a predefined amount of loss.

I can’t nor anyone can predict where will the price go and how much space we need to give to the trade to fluctuate before continue gaining. So, it is extremely tough to design the right trailing stop techniques. It can be done, but I am not into that.

OK, that’s the lesson 1. Lesson for myself.

Structure your Entry, a suggestion

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Years ago, when I was reading Alexander Elder’s Trading for a Living: Psychology, Trading Tactics, Money Management, the triple screen idea caught my attention. I thought it was a great idea for my swing trading. The basic idea is to have a broader view of your trading time frame, looking at the bigger picture before considering your entry.

Since the beginning of this year, OK my dummy trading 2.0, I have been using this concept. I always have 3 screens on my chart, for example, NQ futures. I called these three screens Sentiment screen (the longest time frame), Value screen (intermediate time frame), and Entry screen (the shortest time frame). Again, I am not illustrating my trading setup, because, it is irrelevant to anybody. Instead, I will give a brief explanation of this structure setup.

Sentiment Screen
This is a screen with the longest time frame among the three. In this screen, you need to have your own method, be it a moving average or your very own Magic Index to determine the direction of the trend and current sentiment of the market that you are trading. For example, if we have a very bullish view in Sentiment Screen, we do not want to go short. It is either Long or no trade.

You should spend some time to find the right method for yourself to determine bullish/bearish sentiment and determine a trend. No free lunch, do your own research.

Value Screen
This screen is having a shorter time frame than the Sentiment Screen. How short is shorter? Up to you. Do your research. It can be 3x shorter or even 5 times shorter. No absolute answer. Here, I am looking for the best value to enter a position. For example, you might be looking for price to trade near a support level, moving average or Bollinger band, etc. For example, if you are trading breakout, then you might want to see congestion on this screen. If you are considering joining a trend, you might want to wait for a bounce from a pullback on this screen.
On this screen, we decide if it worth establishing a position. I don’t want to see price exhaustion on this screen.

This screen keeps me disciplined from chasing a trade. When the price runs away on this screen, I do not want to establish a position.

Entry Screen
This is the shortest time frame. In this screen, I am looking for an entry spot, be it a dummy spot or chart patterns, etc. The most important thing to remember here is, I am only interested in an entry spot in the direction of the Sentiment screen.

Of course, this is not all. This structure setup only helps in refining the entry signal. There are different ways to incorporate stop loss. The stop may be set up according to the chart in Value screen or Entry Screen. Again, this is subject to your own research.

Stephane from The Chart Strategiest applies the similar approach that I have described here, though there are differences. Check out his blog. He trades both commodity and index futures. It is good to see how he trades.

Just another piece of study that I have done to improve my trading.

Goals for Consistency

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Consistency, consistency, this is one of the most important quality I wanna achieve. Here I have a set of goals pertaining to consistency. I got the material from an article sometimes ago. I have no idea who is the author. Anyway, here is the abstract and I have added my own ideas.
I want to consistently…

  • Visualize myself in tune with the market

Seeing oneself in tune with the market and apart of the ebb and flow. Great athletes constantly visualize themselves performing at their peak. In trading, which is purely a mental game, is just as incumbent upon us to do this as well and even more often.

  • Be as professional as possible.

Trading is not a pastime activity. It has to be treated seriously, and professionally. We have to do the best job, possible leaving no regrets at the end of the day.

  • Record my trades for review and analysis

By recording our trades and thoughts, we allow ourselves to internalize the market’s actions even more and objectively analyze our own actions.

  • Look to be the agressor and proactive

Looking for setups and taking a dynamic approach to the market is critical in succeeding. Those that can consistently seek out great opportunities and then execute on them are usually rewarded.

  • Following my trading plan

Having a plan is important. Being able to execute the plan is the key to success. Stick to it.

  • Be patient and hit the same high quality spots

By executing the same game plan, we remove a great deal of the emotional turmoil that trading can bring.

At last, consistency in our approach leads to consistency in our profits!

Indicator or Indicatorless-Should you use indicator?

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Should you use indicator?
Should you use indicator?

This started from yesterday when I was proudly showing my Adjusted TRIN and Buyer/Seller Index to my fiancee because I thought it was so cool. Well, I guess the colored lines on the chart were meaningless to her. She said:” When you first started dummy trading, you were trying to get rid of these indicators, now why are you messing up the chart again?” ah well…

I am not a big fan of technical indicators. In fact, I can’t even understand and apply Stochastics properly (maybe, I just did not put enough time in this area)

Should You Use Indicator?

I have always heard or read about, “Follow the price action is enough”, or “Indicators are useless” from anonymous traders who sound like a pro (or pretend to be one) blah blah blah.

To a certain extend, I agree with them. You can’t rely on an indicator to make a living in the trading business. But are indicators really useless? I don’t really think so.

Ok, first, I try to understand the construction of a technical indicator, as well as the construction of the understanding of price action in my mind.

Technical indicators are some arrangements of price. The creator reads charts trying to understand the price action and subsequently uses mathematics presentation to analyze the price action and finally plots it on the screen. Here we have our “Superman Index oscillator”. The indicator that was designed according to the creator’s understanding, and belief of the market.

Notice this, before a formula is developed, the creator, in fact, needs to read the price, understand it, blend it with his/her belief of “how does the market work” and subsequently turning it into mathematics. This is the process of development.

How about when we do it without an indicator?

Well, we again, read the price, understanding it, observe the volume, or looking at narrow range, and finally come to the conclusion that “the selling is over, it is time to buy in and the market should continue its uptrend.”

Notice the process.

In fact, the “Superman Index oscillator” was coded and executed in our mind. Instead of presenting it as a mathematical formula, we have done the processing in our mind (ok, our brain), then we say “Oversold, buy signal”.

Comparing these two processes, I really do not find very much difference. (Well, maybe it hurts the ego of a trader to pull in indicator into his chart. It makes him looks like an amateur).

The indicator is either drawn on your chart or in your mind.

I see the important components of an indicator: the belief of the trader and his/her understanding of price action. Each of us has our very own belief of market, such as “I see the market is not random, it is always moving to form a trend, etc”. So does the indicator creator.

To me, in order to use an indicator efficiently, I would prefer to understand the internal (construction) of the indicator. Well, you can read tons of charts, trying to observe some patterns of the indicator in relation to price action, however, when market condition changes, the indicator will fail. And you will never know the reason without knowing how it was created.

The problem of trading with technical indicator is that, trader tends to be lazy or being ignorance to understand the mathematics construction behind the scene.

Instead, he is focusing on looking for “overbought/oversold” lines, crossover points, etc. I don’t think reading some text description of a technical indicator are enough.

Understand the programming and mathematics behind, is the preferred way. Tough job though. If I can’t figure out the intention and the construction of the indicator, why do I want to risk my money trading with the indicator? (ok, some traders prefer backtesting the indicator before applying…)

Having said that, the best technical indicator is always the one that is created by yourself. It is just another way of explaining your understanding of market. You have your belief, understand and plan, you code it , and plot it on the chart. You trade with it, without much emotion hitches, you follow it. You are responsible to its success and failure.

Technical indicators can’t help you to understand price action. Instead, you should first understand price action and use the indicator that represent what you understand. Use it as a tool to reduce guess work.

Should you use indicator? It depends on what do you see in it.

Just another piece of my random rant on this topic.

On the side note, if you are interested in learning more about trading, check out my Back to Basics of Trading series.