Commitments of Traders (COT) - 28 Apr 08

The COT for 28 April 08 is out, click on the following links for the currency that you are interested in:
COT 04/28 - EUR (Bearish)
COT 04/28 - GBP (Bullish)
COT 04/28 - CHF (Neutral)
COT 04/28 - JPY (Bullish)
COT 04/28 - CAD (Neutral)
COT 04/28 - AUD (Bearish)
COT 04/28 - NZD (Bullish, but be cautious)

Personally, I'm still short on EURUSD which is a on decline after a diagonal triangle, and short on AUDUSD which appears to be in a diagonal triangle at this point. But as FOMC announcement is coming this Wednesday, caution is warranted. The expected rate cuts may spur further weakness that may cause EURUSD and AUDUSD to rally in the short term.

That's all for now, and I apologise that I hadn't been putting up my charts. I really hadn't enough time to put everything down nicely. Take care and good luck trading!

Commitments of Traders (COT) - Apr 08

The COT for Mar 08 is out, click on the following links for the currency that you are interested in:
COT 04/21 - CAD (Bullish)
COT 04/21 - EUR (Bearish)
COT 04/21 - GBP (Bullish)
COT 04/21 - CHF (Neutral)
COT 04/21 - JPY (Bearish)
COT 04/21 - AUD (Bullish but Forming Top)
COT 04/21 - NZD (Bullish)

I hadn't had the time to really look at the charts in detail, but generally I think there are many diagonals that are currently forming. This is also pretty much inline with what DailyFX is saying.

Some of my open trades right now are:
a) Short AUDUSD
I hope that the above COT is correct and that AUDUSD is forming a top. Based on my charts, I see a diagonal (see weekly or daily chart) forming with negative divergence (on both weekly and daily charts!).

b) Short EURGBP
This is somewhat of a riskier trade because fundamentally, GBP is expected to cut rates and EUR seems to be rather hawkish - basically, fundamentals appear to favour upside for EURGBP I think. But again, based on the charts, and the above COTs - Bullish GBPUSD and Bearish EURUSD, I'm somewhat more comforted for this trade.

c) Short EURUSD
Yes, I'm bearish on the EURUSD too because I think a diagonal is forming (and should be completing soon). You'll also see some negative divergence on the daily and 4-hourly charts.

That's all for now and good luck for your trading!

Gold, the Dow, T-Notes: Which Does Best During Recessions?

By Susan C. Walker, Elliott Wave International
April 11, 2008

Each year, the NCAA college basketball tournament winnows its starting field of 64 teams to the Final Four teams who play for a chance to become the national champion. Congratulations to the University of Kansas and the University of Tennessee, this year's men's and women's basketball champions.

The structure of the NCAA tournament got me to thinking. Wouldn't it be great if we could set up brackets for our own investments the same way – start with 64 equities, bonds, mutual funds, commodity futures, metals, etc. Then let them duke it out against one another to see which ones emerge as the "Investment Final Four"?

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Click here to download a free 5-page report from Elliott Wave International with even more information on which investment does best during recessions. The report, excerpted from Bob Prechter's Elliott Wave Theorist, includes in-depth historical analysis and six eye-opening tables.

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Since most of us have neither the time nor the money to act as our own version of the NCAA which might stand for the "National Coordinator of Asset Allocation"), it's worth knowing that Bob Prechter of Elliott Wave International has already set his mind to the task. He has specifically explored which investments do best in times of recession and which do best during economic expansions. But instead of starting with a field of 64 investments, he researched the three most popular investments – gold, the Dow, and Treasury bonds. We can call them the Treasured Three, rather than the Final Four.

Gold and Recessions

Since economists and even Ben Bernanke, chairman of the Federal Reserve, now admit that it looks like the U.S. economy has entered a recession, many people may wonder whether they need to change the mix of their investments. In particular, as some prices keep going up –notably for food and gas – the threat of inflation makes people more interested in gold as an investment, since it's usually seen as a bulwark against monetary inflation.

It is this conventional wisdom that piqued Prechter's curiosity. He wanted to find out whether it would hold up to a reality test. As he writes in The Elliott Wave Theorist, "I have often read, 'Gold always goes up in recessions and depressions.' Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data."

So he and another Elliott wave analyst ran the numbers, reviewing the behavior of these three key investments during recessions following World War II, from February 1945 through November 2001. This is what they learned:

Gold was not the best investment during recessions in terms of total return.

The winner of this tournament was actually Treasury Notes, which had a total return of 9.96%. In contrast, gold had a total return of 8.80%, and the Dow came in at 6.89%. But that's not all – once they figured in the transaction costs for each investment (at a 2008 level), gold fell from second to third place as a worthwhile investment during recessions. The total returns with transaction costs came out this way:

1. T-Notes 9.82%
2. Dow 6.85%
3. Gold 4.80%

This result turns conventional wisdom on its head. It's also worth being aware of as you invest in 2008. Here's how Prechter sums up the results:

The Best Investment During Recessions
The most important question, however, is not whether the Dow beat gold or vice versa but whether making either investment would have been better than taking no risk at all. Table 3 [see free report provided by Elliott Wave International] shows that ten-year Treasury notes beat both gold and the Dow during recessions since 1945, and they did so far more reliably. T-notes provided a capital gain in 10 of the 11 recessions, and of course they provided interest income during all of them. And the transaction costs are low….

So if you want to make money reliably and safely during recessions and depression, you should own bonds whose issuers will remain fully reliable debtors throughout the contraction. Of course, as Conquer the Crash [Editor's note: Bob Prechter's best-selling business book] makes abundantly clear, finding such bonds in this depression, which will be the deepest in 300 years, will not be easy. Conquer the Crash forecast that in this depression most bonds will go down and many will go to zero. This process has already begun. This time around, you have to follow the suggestions in that book to make your debt investment work. [The Elliott Wave Theorist, March 2008]

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Keys to Successful Trading

Since I started trading about 1+ year ago, I've come to a conclusion of what are the most important components of successful trading. No, I don't have the solution to become instantly and constantly profitable yet, but I have an idea of how to manage my growth in trading.

So what are the keys to successful trading?
3 Things:
a) Method / Trading Strategy
b) Money Management
c) Psychologcal Management

a) Method / Trading Strategy
A method is a trading strategy, the tools of the trade. How do you decide when and where to go long or short? What price patterns do you look at? What indicators do you look at? What has to happen to the price and indicators before you enter a trade?

Bascially, a trading method must VERY CLEARLY state 3 things - Entry Level, Target Level, and Stop-Loss Level.

Naturally, your trading strategy should have a positive expectation over the long term. What does this mean? Basically, your total profits from your winning trades should be greater than the total lossess from your losing trades. (I already hear people saying "DUH").

While it seems like common sense, there are people who employ trading strategies which promises 90% winning trades. Now, I have no problems with strategies which give me a 90% success rate, until I realise that these 'strategies' do not use a stop-loss! So while you may have a large number of winning trades, just one losing trade is enough to wipe your entire account out! Bad strategy.

On the other hand, if you have only 40% winning trades, and profits on your winning trades are 2 times more than losses on losing trades, that is still a profitable strategy. Here's the math:
Assuming losses at 50 pips and profits at 100 pips on average.

Expected profit/loss
= 40% x 100pips + 60% x (-50pips)
= 40pips - 30pips
= 10pips

This is just an example that a good strategy doesn't need to have many winning trades to be profitable. And many trend following traders understand this well.

Another important aspect of the method, once you actually enter into a position, is called position management.

This means that your method should tell you how to manage your trades at it enfolds. Do you take profit on 80% of your trades as prices move in your direction or do you enter another position?

Do you shift your stop-loss to protect profits as prices move, or do you leave it at the original identifed levels?

Knowing exactly how your method protects your profits and allows you to take advantage of big-moves will help you to be more profitable (we all now what it feels like to take a 30pip profit, only to see prices jump by 100 pips thereafter!).


b) Money Management
Now that you know when or where to enter, take profit and stop-loss. How much of your account do you trade? Some people report that they have 40%-50% profits or losses each week! To me, I think that's over-exposing your account to your trades.

Generally, I would risk no more than 2% per trade (which I can identify with my entry and stop-loss levels), and no more than 3 trades at any one time. So I'd risk at most 6% of my account at any one time.

There are two money management methods out there that I know of - Fixed Fractional Method, and Fixed Ratio Method. I had a post on effective money management in the past.

c) Psychological Management
Last but not least, Psychological Management. Although an overlooked aspect of trading, any trader who has started a live account will be able to identify with some of the following scenarios:

- Not entering a trade that you identified would be profitable. Not soon after, the prices move in your predicted direction and you are knocking your head against the wall wondering why you didn't take the trade.

- Entering into a trade and realising that price is creeping towards your stop-loss. You think that prices will definately and eventually move towards your target, so you shift your stop-loss further. Finally, you took a much larger loss than expected.

- Your trade encounters the stop-loss, and you decide that it can't go down/up much more. So you decide to long/short with double the capital to make back your losses..... only to triple your losses! (That's 2 times the original loss you were trying to make back + the original losss).

These's are classic scenarios where emotions of greed and fear take-over your mind like an alien-abduction, and you no longer follow your method nor your money management rules. I don't think there's a course that can truly address this aspect as it is largely internal. It generally improves with experience and lots of conscious effort.

One of the popular books on this aspect is "The Disciplined Trader" by Mark Douglas, which I think should be in the trading library of any trader. Even if you don't like the way he writes, the knowlege of what goes on within your head when you trade is extremely valuable. The next time you find that you are "not yourself", you know what - Fear and Greed has reared its ugly head!

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These are what I think are the most important aspects of trading, and I constantly work at developing all 3. Of course, you are entitled to your own opinion of what successful trading entails, but I hope there's something interesting in this post for you. :)

Good luck!

Short Term Trading Strategy (David Floyd)

For personal development, I think it is good to see what other people are using as their own trading strategies. This does not mean that we should go round chasing each and every strategy, but it does mean that we should keep our minds open to new approaches and concepts for our own growth. This will help us evolve our own trading strategy as we grow. Of course, you don't need to do this if you have already found the holy grail (if it exists).

Having said that, here's a rather interesting strategy (see link below) employed by David Floyd, a professional FX trader based in Bend, OR and the President of Aspen Trading Group.

Short Term Trading Techniques for the FX Market (David Floyd)


Meanwhile, I had also been reviewing my other knowledge of Forex and learning how to gel everything together. It is interesting how much I had missed the first time round, and how multiple methods can provide a converging entry/exit level. I'll share more when I have becomed more 'enlightened'. :)

Good luck and take care with your trading!