The Art of Diversification

The comic says it all..... :)

Turtle Trading System and Pyramiding

Many people who had been looking at trading strategies would have probably come across "The Complete Turtle Trader" Book by Michael Covel. I came across an online article which describes the system in good detail. Do check it out.

But what I thought was more important or valuable was understanding the various components of the system that makes it a good one. And these are fundamental concepts that can (and should) be present in all systems:

1. Markets – What to buy or sell
2. Position Sizing – How much to buy or sell
3. Entries – When to buy or sell
4. Stops – When to get out of a losing position
5. Exits – When to get out of a winning position
6. Tactics – How to buy or sell

A good strategy minimally has Entries, Stops and Exits. And a good strategy should help you to identify good (i.e. low-risk) trading opportunities with good risk-reward ratios.

A good money management plan tells you the maximum amount you can to buy and sell each time. (Note: That doesn't mean that you should trade the maximum amount each time.)

But what I think I'm missing (and perhaps many other people too) from my strategy is a concrete, well-thought and written out plan for scaling in and out of the markets for a specific trade idea.

Allow me to illustrate what I'm talking about. In my earlier posts on EURUSD, I indicated that I was gong long at 1.26 if it reached that level before rallying. Prices did eventually rally, with lots of whipsawing. While I did scale in and out of the markets, taking profits for smaller rallies, and re-entering on retracements, I didn't quite put it down on writing exactly how much I should scale in and out each time. Meaning... it was done pretty intuitively.

I was reading some of Van Tharp's materials, and am now thinking of how I can enhance my existing strategy (based on EW) to maximise profits and minimise risk. One of the ways mentioned was pyramiding, and some of the guidelines were:

a) Never add to a losing position (known as averaging down)
b) Add only when your trades are profiting, and if adding doesn't increase your potential losses.

There is one danger to pyramiding. One is that it builds up a significant position at the end of the trade, that a reversal can result in wiping out a significant portion of the trade that you had taken some time to build. Imagine building a position for 2 weeks, only to see your profits wipped out in 2 days!

I believe that there's some value in adding a pyramiding strategy to the existing one, but I think there are some finer points to understand, and that I should be able to quantify the potential gains and lossess before this becomes an integrated part of my strategy.

P.S. I'm still short on EURUSD, and am somewhat cringing that prices are still holding around 1.337 level. Markets had been moving sideways (although through a rather wide range), and seems to be waiting for some significant news next week. One of it would be the Fed rates announcement on Tue (actually, its Wed 3.15am Singapore Time). Good luck for your trading!

EURUSD Review (12 Dec 08)

The markets are moving swiftly this period.... and here I thought that December would be slow or slower .

Yesterday I said that I exited at 1.3, and am looking to short around 1.32-1.34. Prices rallied quickly after I exited (Sigh), and hit 1.34. I'm currently shorting EURUSD.

Meanwhile, I'd like to borrow what Elliott Wave Internation's article on 9 Dec:
"Remember, Elliott wave impulses do not overlap, while corrections do. Would you say that the latest EURUSD rally looks impulsive or corrective?"

"At this moment it's all about risk management. We believe a turn is underway, and that risk is defined and limited relative to reward."

I'm short right now... and keeping my fingers crossed. This is despite
a) People appear to recognise the trend as upwards now. (People also thought that it was downwards when price was at 1.26 levels).
b) ECB hinting and halting rate cuts
c) People think Fed may cut rates to ZERO.

Again.... Fingers still crossed.

EURUSD Review (11 Dec 08)

Here's a short updated on my previous forecast.


Previously, I mentioned that EURUSD could be traded both ways, short around 1.32 or long around 1.26. Prices dipped to around 1.2560 and I took the opportunity to go Long. Prices have since made a beautiful run up to 1.3000 where there appears to be resistance.


My original profit level is around 1.32 level, which is around the level that I intended to short. Price has broken the resistance level of 1.300 and appears to stay above that level at the point of this entry. Staying above that level might mean further upside, but the rally appears to be losing some strength.

Looking at the 1 hour chart, the candlesticks appear to be forming long upper-wicks. Showing that some selling pressure is mounting. Prices are above 1.3 level which appears to be a fairly significant S&R level. But also take note that MACD is showing a divergence right now.

I've since exited my trades around 1.3, and am looking for shorting opportunities around 1.32 to 1.34 levels. If prices retrace first, there may be some opportunities to go long, but it depends on how prices unfold.

My main method is via price action using Elliott Waves and Fibonacci. From time to time though, I'll also look at other indicators. One of which is the COT or Committment of Traders Chart. You'll notice that I've added a widget at the bottom of the blog which provides some COT charts for those interested. For the purpose of this post, I've saved the screen-shot :

Basically there is a divergence on both EUR and the USD Index. For EUR, commercial traders are going long, and for USD they are going short. Expected net result is for EURUSD to rally. Prices have already risen somewhat, and its possible for them to rally further. But do take note that such divergence does not usually last for very long. Looking at the above charts, you can see that extreme position are not held for long, and can often swing to the other end. That being said, I'm not an expert on COT Charts, but would focus on price action more than such indicators.

That's it for now. Good luck for your trading!

Trend Following Funds in Singapore

I never knew that we had fund managers in Singapore who trade technically, and more specifically, are trend traders. I'm not sure if they are a mutual fund or a hedge fund, because from what I understand, mutual funds cannot take short positions, and hedge funds require you to be a high network individual before you can trade.

The fund house is called superfund and you can watch an embedded video below. Seems like an interesting fund, doesn't it. But I'd much rather manage my own trades given the time and opportunity of course. :)

New Feature - Chatroom!

I've just added another cool new feature! All the way at the bottom of the page, I've added a chatroom. So all readers can participate in a live chat, and I'll be there from time to time to see if anyone would like to chat.

I'm piloting this to see if it is useful. Do leave me your comments! :)

Currency Trader Magazine (Dec 2008)

The December Issue of Currency Trader Magazine is out. Click here to download.

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