Every now and then something either in my trading, or a
comment from another trader compels me to write down my
thoughts on a particular trading subject. Much
of the recent impetus for this has come from spirited online discussions hosted by
OANDA, where I go by the handle ~chaffcombe.
On re-reading some of these submissions it is very easy
to wish that I had put a point a different way, or to be
overcome with desire to correct the style or grammar.
However, what was writ, was wrote. Online discussions
have always been spontaneous and informal; so I'll just
leave things as they were.
I'll kick this off with just a small
sampling of discussions that have come
up over the last couple of years and
will retrieve some more in the near
future. I encourage those
reading to take a look at the full
discussions for a more complete view
than just my own, and even to contribute
Since starting this website I've received a number of
emails from newcomers that seem to be struggling with taking
the first steps. Anyway, the following is a
reply I gave to one person. Hopefully it will
also be of help to others.
(BTW the reason I particularly recommend OANDA to newcomers is because of their incredibly low minimum trade
size (1 unit) ). The fact that I
OANDA's trade platform, their API, and them as a company, is
I'm purely a trader; not a
product salesman or an educator - so as such there's not a
lot I can do for you until you have more specific
questions arising from your own trading experience.
What I'd suggest right now
is that you open an FXGame account at www.oanda.com and
start learning the mechanics of trading fx. Read everything
on the OANDA site and forums,
going back as far as you can. When you feel you have
some understanding of the process open a small FXTrade account (say $1000) in parallel ,
and see what trading real money is like. Keep
doing the above for as long as it takes!
While you are doing that,
systematically analyse every idea you can think off.
Trade what works; just analyse what doesn't. You'll
find that what works varies over time.
Don't expect easy answers.
I've been a trader for over 30 years (with some time off
for good behaviour), and I'm still doing 12 hour days when
I have new ideas (right now it's the api). If
you haven't a passion for this you will not succeed.
This topic is a bit more specialised than the others in
this section, and will only be of interest to a
OANDA has a api (application program interface) that
enables direct computer communications between client
computers and their servers. Earlier
this month (July 2004) I started developing my own systems to use
this interface, and recorded my first impressions on a
The following is an extract:
.........yes, I’ve just taken on board
OANDA’s api, and am doing the programming (in Java)
myself. xxxxxx is also interested in this project, and we
have discussed this quite a bit privately.
From my perspective am extremely happy with it. However it
is not for the faint hearted. You may have seen posts of
mine where I’ve said I prefer Wealth-lab over
TradeStation, because you have more control. Same thing
here; what you get is an application library of system calls
(class objects actually), that enable you to interface with
your account on their servers. You only get the building
blocks (plus an example program), and the rest is up to you.
If you wanted too you could write the thing we know as the
FXTrade platform with the library as it covers all the low
level functionality, providing you put it together correctly
– ie login, getting sub-accounts, getting balances,
getting rates, getting recent price history, etc, etc. It
also has all the calls necessary to place and manage orders
and trades. The only thing the api doesn't include is a call
to your formal account history.
As I've said, I’m doing all my own development. Although
I'm new to Java; I've done a lot of programming, and I
really enjoy it. Now I'm through the first week's learning
curve, I'm finding it very straightforward. Quite honestly,
I would not feel comfortable running an api such as this, if
I hadn't written the code myself. Get it wrong, and it
could clean your account!
So far my biggest effort has been to make the api programs
bullet proof. I'm writing them so they can run unmanaged all
week 24/7. That means they have to handle communication and
session failures, and restart in a logical fashion, without
intervention (and do the job!). I think I'm there now, but
I'm still testing. Remember I have a lot of sub accounts,
and that is also an issue. Note also, I said 'api programs'.
The api supports multiple concurrent sessions! By that I
mean you can write multiple api's, and log them all in at once!
How good is that?
I’m not sure how to answer your question – how you
interface with FXGame … The key to success is knowing WHY
you want the api in the first place. If you have a WHY, you
should then know immediately by just your familiarity with
FXTrade/Game whether what you want to do is possible. If you
can do it manually in FXTrade, you can do it with the api
– just far more frequently and far more accurately.
Do you have to develop a GUI front-end? Not really. The
thing you are probably building is an execution engine,
and/or a data collector. Certainly the former and quite
possibly the latter are perfectly suited to console
operations. Earlier I said I want my programs to run 24/7
unmanaged. You don’t need a GUI front-end for that. Later
perhaps, but very low priority. Also you don't need to write
anything that FXTrade already does, as you can run the
platform in parallel.
Can trades be triggered by time? Sure: Java is a threaded
application and you can control time to a millisecond!
It’s pretty much straight forward programming.
I’d just add that was surprised at my bandwidth usage. My
Internet account used to use about 1GB per month. Now I’m
using about 250 MB a day and I’ve only just started.
Beware if you plan to move to the sticks!
In closing I’d say that I’m extremely
excited about the whole thing, but you MUST know why you
want it, before you even consider it.
Hope the above helps. If you can ask specific questions,
I’ll try to answer them.
For those who want more information on OANDA's api:
If you've looked at my website you'll get an idea of the
approach I use, which is to basically divide my capital up
amongst various ideas/methods/pairs etc. Then I apply sound
money management methods against each individually. (By
sound, I mean something like a FFP approach). That way, my
good methods prosper; and my bad, wilt.
Providing you keep track of what's going on, you can then
slowly add additional funds to the methods that are doing
Additionally, when you get a new idea, it can be implemented
easily with a small capital allocation, and if it does well,
simply move more funds to it from less successful methods.
By using something like a FFP money management, nothing else
changes - just the trade size.
I separate things by using multiple sub-accounts, and
assign a separate Excel worksheet for each method to keep
track of performance and trade information
(prior to automation, this was
principally to manage my
trade sizing algorithms). I also have an additional Excel
sheet that adds everything up to give me my consolidated
figures. Yard is correct, I feed the stars, and starve the
dogs; that's to say capital flows to what's working, and
providing my consolidated 'ride' is within acceptable
limits, I don't worry too much about the volatility of the
The following thread probably deserves to be read in
full by those who are interested in how bank traders manage
their positions, and how the Interbank market differs from
retail fx trading. The thread is actually about
leverage, and started off with the somewhat erroneous notion
that leverage was a 'loan' from a market maker, and went on from there.
Here's an extract:
You are right when talking about physical delivery. We
would have to borrow one side of the transaction, and
deposit the other. However the fx market only physically
delivers a fraction on the volume traded and we, of course,
NEVER get to physical settlement. All we are doing is going
through the motions, and settling the net difference in p/l.
Even in the broader interbank market where there is
ultimately physical settlement, players with positions
rollover these positions daily to avoid the capital expense
of holding their long or short view. The only physical
deliveries that need funding tend to be for commercial
requirements only, not for speculation. All the rest are
netted out. We, by contrast, have continuous interest
payments that factor in rollover costs. (btw rollover costs
are calculated from interest rate differentials).
Basically, as long as the physical delivery of an outright
position is always deferred, by whatever means, no real loan
needs to take place. It's all virtual, and can be settled
I'll stop now, but I can see this possibly getting involved!
and it did! ....
Oh dear! I knew I would be digging a hole for myself!
Your questions are perfectly valid, but a little more
difficult to explain.
I didn't actually say the fx market never goes to physical
settlement. What I said was that WE never get to physical
settlement, and that the only settlements that require
funding in the interbank market tend to be commercially
oriented, and not from speculative trades.
To understand this we have to understand how speculative
trades don't require funding even though the core fx market
works on a 2 day settlement basis and speculative trades
represent the majority of fx market volume.
At the heart of the fx market are the Banks. Now say a bank
buys and sells EURUSD all day long, and wants to run a long
position of EURUSD 1,000,000 for say a week.
Ok - the bank balances it's trades so that it is net long
EURUSD 1,000,000 by the end of the day. Maybe they have
bought EURUSD 50,000,000 and sold EURUSD 49,000,000. Now
even a Bank does not want to fund the remaining EUR
1,000,000 so it rolls the position over ‘Spot Next’.
That's to say it Sells Spot (2 business days out) EURUSD
1,000,000 and Buys back the next day (3 business days out).
Now when settlement comes they have a completely balanced
book, even though they are running a EURUSD 1,000,000
position. The only ‘funding’ that would need to take
place is in their own bank account (known as a Nostro
account), but this isn’t necessary because they are
balanced on the day! EURUSD 50,000,000 went in, EURUSD
50,000,000 went out.
Now all that needs to be done is to continue to roll this
position over for as long as it's required. Rollovers can be
done Cash (today/tomorrow), TomNext (tomorrow nextday),
Spotnext, or in the forwards market.
If you can grasp this concept, and understand that OANDA and
others plug into this system, you'll understand that
providing delivery is always deferred, there is no need to
raise the full capital for a transaction, we just have to
honor day-to-day price fluctuations. Yes there needs to be
capital adequacy, but nothing like the full amount of the
value of the underlying trades.
How does this work for us, since we never settle? Say every
trader at OANDA was Long AUDUSD. OANDA would offset this in
the interbank market becoming Long AUD/USD with their
banking counterparties. They would also rollover this
position each day with the Banks so they didn’t actually
take delivery of the AUD (and have to come up with the
corresponding USD). OANDA screens us from this process, but
passes on the costs of these transactions by means of
continuous interest payments (both debit and credit). Our
capital adequacy is of course our underlying margin. That's
all we need.
The spot dealer is generally responsible for the size of
his position (within his limits) and balancing his
settlement accounts in the currencies under his control on
settlement day (which is everyday on a rolling basis).
Backoffice certainly confirms settlement activity, so there
is a double check.
If a dealer fails to do this the Bank will be up for a lot
of interest, or worse, risk failing on payments.
Generally the dealer will make his adjustments ( ie balance
his settlement accounts and defer any outright delivery) by
trading spot next, or at the latest tom next. He could also
swap for longer - 1 week, 1 month .. etc., if he so wished
by trading forwards.
Clear as mud?
Let me just add that there are two distinct kinds of
transactions in interbank fx. They are outrights and swaps.
Outrights are a Buy or Sell for a fixed settlement date,
normally spot. We trade a pseudo version of spot at OANDA.
The other, 'swaps', are all double transactions - Cash (today,tomorrow),
Tom Next, Spot Next, 1 week (Spot, 1week) , 1 month (Spot,1
month), etc. With all these transactions there are two
dates, and the pair Bought and Sold, or Sold and Bought for
the price of the swap.
By using a combination of spot and swaps, a dealer can
create all kinds of positions as well as deferring delivery
indefinitely, if necessary. It's the mechanism that makes
this whole circus go around.
If we wanted to duplicate our OANDA trading as a Bank
dealer, we would establish our positions by
and roll them over each day trading Spot Next or Tom Next
for the life of our transaction.
I've absolutely no idea how some
people can trade without first
backtesting, however that's just the way
I'm wired! For those
interest in the subject the following
discussion may be of interest. I
notice that I made a number of
Although I do not carry trade in my
published accounts here, I maintain a
carry trading basket in another set of
accounts. To my mind, it's a
very valid trading method, and I have
been rewarded with a return of about
600% over the last year, which isn't too
shabby, particularly since I only
monitor it weekly! Want to know
more? You are in luck - I've
set out exactly how I do it in
the thread below. You just
need to read the whole thread.
I've described how I manage my carry basket in a past thread (I don't know which one), but basically I've made the decision that I want to run my carry basket indefinitely.
In order to do that I allocate a fixed percentage risk - let's say 15% of the account, calculated somehow. Each week, I review the pairs I'm holding for interest rate changes, and adjust my exposure to each pair, depending on my current NAV. If I've made money during the week, I buy a little bit more; if I've lost money during the week, I adjust my holdings down. I therefore always maintain a fixed risk, no matter how much money I have in my carry account.
With the above approach it doesn't matter how many pairs are in your basket. You simply divide your fixed risk by the number of pairs you wish to carry. If the number changes, so does the trade size of the remainder.
Believe it or not, trading once a week works! Although, as I've commented before, carry trading like this is not necessarily for the faint hearted.
All things being equal, people will invest in high yielding currencies, at the expense of low yielding currencies, for obvious reasons – yield. This demand causes the price to change, again all things being equal, in favour of higher yielding currencies.
In carry trading it's this tendency for rate appreciation that normally attributes most of the gains. It's also why I like to see at least a 3% differential, to encourage this significant phenomenon to take place,
Don't forget this is a broad generalization that only suits a long-term strategy. Day-to-day anything can happen.
To see this working in action you only have to look at the relative strength of the AUD and NZD. Also, the USD was in freefall until they started raising rates. The freefall first stopped, and then reversed.
Finally, 99% of market moves following economic announcements are based upon perceptions on how the information may affect interest rates. If it’s bullish for rates, the price goes up; if it’s bearish for rates, the price goes down.
It is one of my contentions that one
of the most important things a trader
can do is accurately plot his or her
equity curve. The process takes
little to no effort once you have set
yourself up (I use Excel). Again,
IMHO, I believe this should be in
percentages, not dollars.
Looking at our trading accounts in
dollar terms reinforces a whole load of
psychological problems that will
obstruct us from ever trading decent
size, so I advocate tracking your
'cumulative daily percent' as I do in my
monthly reports, published
here. Obviously tracking
return on original investment is simple,
but once you start making capital
adjustments, you will need slightly more
complex calculations. For those
interested, I explained how I do it here
(posts 40 and 43).
going to stick my neck out on this one. While Qetu is
absolutely right, in general hedging trades makes no sense
at all. As fx traders we make our money by gaining exposure
to the market. Quite simply, that is what we do! Any
opposing trade(s) just reduces our exposure, while
increasing our spread cost.
As with anything, there may be some occasions when you
may want to do go against the pervasive logic, but these
should be few and far between - for example my home currency
is AUD, so I have a permanent hedge in place to protect my
AUD investment at OANDA, which is held in USD. Likewise you
may find it convenient to have opposing trades when
you trade both long term and short term systems in the same
currency pair, or different trading ideas for the same pair,
but you pay for this luxury, with decreased overall exposure
and increased costs. It's far more cost effective to net
your trades, but that takes a little more work.
A manufacturer can hedge their overseas currency
exposure, but as f/x traders it's generally
counterproductive, because that's how we get paid! At any given
moment we have to decide the total amount of exposure we
wish to have, and produce that position as efficiently as
possible. Consider, a net position of zero produces no P/L
no matter how much it costs to set up! Even Options are not
a panacea, but let's not get into that!
In a nutshell, we are in a risk business, and we
manage that risk by determining the size of our net
exposure, relative to our account size, while keeping costs
to a minimum.
Anyway, it'll be interesting to see who agrees and
disagrees with me!
The following is part of my first post on the
OANDA discussion forums, mainly in response to the popular
notion that it's somehow beneficial to hold both long and
short trades in the same pair at the same time. It
also raised the point that with any trading platform there
will be pros and cons that the client needs to
been lurking around this board for some time, and finally
decided to join in. Let's get this straight, any attempt to
buy and sell the same currency pair at the same time on the
OANDA platform, will result in you a) having the same
position as you started with (ie Zero), and b) you will have
paid the spread for the privilege. THAT WOULD BE NUTS!
Michael Stumm will be dancing all the way to the Bank! It
doesn't matter if you have two accounts, the overall effect
is the same. Don't do it! (If you have too, imagine you have
bought and sold, and set some limit orders at your t/p
points, but DON'T physically go long and short at the same
It must be remembered that OANDA is a Market Maker, not a
Broker. They make their money from the spread. If you want
to earn the spread yourself you must deal through a BROKER,
not a market maker (There are alternative platforms out
there that will allow you to do this, BUT you then pay a
Ultimately this is about deciding on which trading
platform suits your trading style the best. Personally I
think that for most people OANDA is way ahead of the rest,
because of their 'no minimum trade size' policy. It means
that you can scale your trades to your account balance, and
still deal at competitive rates. If you do everything by
percentages it means that if you can manage a $1,000 account
well, there's no reason why you cannot manage a lot more
(and have the basis for a life-long source of income). With
the other platforms, you have to risk a fortune just to
learn the ropes. Not a good way to go.
USD or EUR's are not your domestic currency, and yet your
domestic currency is one traded at OANDA, the most
conservative option is to open a 2nd linked account and sell
your USD (or EUR) account balance against your domestic
currency. Then just leave it alone, except for
periodic adjustments, as your account changes in value.
For example if your domestic currency is AUD, and you have
sent OANDA A$5,000 to open an account. Make your first trade
Buy AUD$5,000 against USD, and stick the trade in a second
account. DON'T TRADE IT - as it's a permanent hedge.
If you later have a view on AUD/USD treat this as a separate
position and trade it in your main account. (This is one on
the very few times I advocate trading 'both-ways').
As your account grows or shrinks adjust your hedge to
represent your latest NAV.
BTW if people in this position don't do this, they are
speculating, whether they like it or not, on the currency in
which their account is denominated.
was just recently having a private conversation with another
trader, and I thought that his
description of how he started; the obstacles he faced and
how he stayed the course truly inspirational; and too good
not to be shared. With his permission therefore, but with
the promise of not revealing the source, here's an excerpt:
financial independence has always been my objective, the
way I actually got into trading was that at some point I
read something about Soros in a newspaper, started doing
some research and got "Market Wizards" into my
hands, went on to read "Reminiscences of a Stock
Operator" and eventually "Pit Bull", all
fantastic books, thought, hmm, that sounds like incredible
fun, and, with great hubris, what do those guys have that
I suppose one of the biggest initial challenges was trying
to convince wife, family and friends...
"You're going to be doing WHAT ??? Son, (I was 30
when I started this around 5 years ago, and my parents
obviously got worried), why not just get a real job, why
did we waste so much money on your tuition if it's all
going to be for nothing ??? Isn't "playing" in
the markets just like gambling ??? Who has ever heard of
anybody making more money than they lose through the
financial markets ??? What is going to happen if it
doesn't work ???"
In other words, I was facing a two front war at the
beginning, but not only the beginning: I had to be like
the captain on the bridge of a ship in a storm and exude
great self confidence towards my crew (or, in my case,
wife, family, friends) lest they panic, and that displayed
self confidence also had to be directed inwards, I also
had to convince MYself to believe in MYself achieving my
objectives against what are after all quite formidable
While maintaining my self confidence I also needed to find
a strategy that not only works per se, but that also works
for me and my needs, and also actually stick to that ;-).
In my case that was a need for a shorter term trading
system that offered more trading opportunities (although
shorter term in my case is more a type of swing trading,
ie I'll hold anywhere from a few hours to a couple of days
While I would have appreciated having a mechanical system
I never found anything that robustly works off of hourly
charts or that would generate enough trades for me, but to
be honest, not being a programmer, I never looked too hard
either, as I thought that there were others much better
equipped to compete in that very competitive field. I also
didn't want to give up on the short term time frame, and I
thought, being much more of a visual than a numbers
person, that the human brain should be perfectly capable
of getting sufficient information from the charts and pure
price information itself to make a living.
I started out paper trading index and debt futures, but
then discovered Oanda and the trading game which was much
more realistic for practicing, so went on to spend a
really long period of time playing the game here, losing
most of my game equity, but never giving up, always
knowing that if I just stuck it out eventually I would
become net profitable, and after ages things did start
turning around with enough consistency over sufficient
trades to know that this was no fluke, so I started
trading with real money. Until about a year ago I
sustained myself largely on the belief that I would make
it and reach my goals, since then I've had confirmation
from my trading itself, which was quite a novel
Nevertheless I am still at the beginning of my trading
journey in terms of reaching my objective of financial
independence, the way I see it is I now have the tools I
need and the mind set, but I now have to use those to
actually get the account up to a point where we are
talking about a real income or real net worth.
I know everybody always said that the difference playing
the game (or papertrading elsewhere) vs trading with real
money would be huge, but, for me, that was not the case at
all, maybe because I took the game extremely seriously,
maybe because I have this tremendous confidence that,
while the journey may be incredibly tough, eventually, if
you believe in yourself sufficiently, you will reach your
goals. Fall off the horse, and just be willing to get
straight back on again.
As for my trading itself it is pure simplicity, based on
nothing but pure price action and trading off of support
and resistance, maybe the occasional price pattern, and
while I will go with the trend occasionally the larger
portion of my trades will be counter trend, I have fairly
aggressive money management, but being able to participate
another day is key.
I think the main thing about trading is really how you
cope with yourself: if I allow myself to feel like a loser
because of a string of losses I very probably will remain
one: if however I maintain the ability to believe in
myself and my long term objectives through all adversity,
can view the adversity as no more than a cost of doing
business, while being able to let go of the individual
trade as pretty unimportant in the bigger scheme of
things, then it's more likely than not that your long term
objective will be achieved. For me at least trading really
is a mind game more than anything
can I say? Brilliant! I'm
sure the above will touch a cord with many.
It is a popular misconception that the market maker with
whom we deal lends us money when we use leverage. This
isn't correct. The following thread discusses what
really happens, but also goes off to discuss a number of the
finer points of trading fx (threads are like
that!). For those interested in how things
really work, it is a good read.
You are right when talking about physical delivery. We would have to borrow one side of the transaction, and deposit the other. However the fx market only physically delivers a fraction on the volume traded and we, of course, NEVER get to physical settlement. All we are doing is going through the motions, and settling the net difference in p/l.
Even in the broader interbank market where there is ultimately physical settlement, players with positions rollover these positions daily to avoid the capital expense of holding their long or short view. The only physical deliveries that need funding tend to be for commercial requirements only, not for speculation. All the rest are netted out. We, by contrast, have continuous interest payments that factor in rollover costs. (btw rollover costs are calculated from interest rate differentials).
Basically, as long as the physical delivery of an outright position is always deferred, by whatever means, no real loan needs to take place. It's all virtual, and can be settled net.
The following explains in practical
terms how margin rules work at OANDA. It was given in
response to a newcomer considering using Margin Calls as a
risk management tool. Not something I'd
you are 'fully loaded' a margin call will take half of your
account. If not, it will take even more !
Please understand what you getting into (ie the margin
before you risk real money with this strategy.
Say you have a $1,000 account.
If your margin is set at 50:1 you can take out a $50,000
trade. OANDA requires $500 maintenance margin for this.
Therefore if the position loses more than $500 (ie your NAV
drops below $500), OANDA will close the position. The loss
is therefore approximately 50% of your account.
However, if you had only taken out a $30,000 trade, OANDA
only requires $300 maintenance margin. Therefore the
position can lose $700 before OANDA will close the position.
The loss on margin call is therefore approximately 70% of
For those who are unsure of some of
the calculations used to determine
returns, the two threads below discuss
the subject at some length.
In particular the latter part of the
second thread is worth reading, thanks
to the input from Tom Schneider (tsch)
Well, it's just about unlimited,
isn't it? Here's something a
wrote in a thread that deteriorated
after a while. Never
mind. BTW GrimFD also said
somewhere else that the next Soros' and
Buffet's are amongst us! I
just add to the Grims comments, that the
opportunity for individuals to trade at
interbank prices, at 50:1 leverage,
multiple times an hour, 24/7 (if
automated), is a new phenomenon. Who
knows where or what the limits are? As
has been said before; argue for your
limitations, and they are yours – so
why on earth would you do it?
However, you do need net
profitable systems (those that make more
pips than they lose) to go with your
'attitude', but I believe this comes
down to what I've said earlier this week
about having an unshakeable belief in
yourself that you will find a way.
To do well at this business you need
an extra-ordinary psychology, but I
think it all boils down to one crucial
element, and that is ... (insert drum
I'd say the essential
core component is an absolute belief
in oneself that you will find a
way. This has to be unshakeable, or
else you are in the wrong business. You
cannot dabble at this and expect to get
GrimFD is a trader over on the OANDA
forums. He is also a deep sea
diver by trade, diving off the
rigs. This must be just
about the most dangerous civil
profession there is, which makes him
especially qualified to talk on the
subject of personal
quote.... (author GrimFD)
... all of this is relevant in developing a decent working
1. You have to train and train and train till handling any event is second nature. It means you have to experience the events in a controlled environment. In fact you have to train to the point where you subconsciously react before you even consciously realise you have a problem. Spikes, slow markets, trends, re-quotes…with training/practice you can bring them on, no problem…trade those demo’s….experience the problems.
2. Know your craft. Equipment, procedures, back-up procedures. Which gasses, which mixtures for which depths, what tables to use? Your team. Who is responsible for what and how much you can rely on the individuals to help you prepare? The team here is the forums. People working towards a common goal. Everybody brings something to the table. Ask yourself what do you bring and how are you sharing? Learn things like what to do if you lose connectivity, if bad data causes spikes that kick you out of trades. Who to phone, how to get back online in a hurry etc…what happens in if you’re off-line 24 hours…
3. Take whatever you think is possible and time’s it by 10. Even then you’re not even close to what is really possible with the right motivation. If you think 10 pips a day is possible, aim for 100 and you’ll fail at 20 or 30. If you aim for 10 you’ll get 5.
4. Don’t pass the buck or blink under pressure. You’re the one swinging the hammer. If the bung implodes in your face and rips of your head it’s your problem. With a diving problem you probably have less than 45 seconds to sort it out (or as long as you can hold an exhaled breath, you only realise an equipment failure when you take the next breath). Stuff happens. You either stay cool and handle it, or you make the papers. If stuff happens in the market same thing. Might be somebody else’s fault, but it’s your problem. Stay cool.
5. Procedures. Work them out before the dive. Comms fail. Fine, 3 pulls on the umbilical or flashing light on the helmet. Primary fails, go to back up, back up fails…call for a Pneuma, Pneuma fails, signal like hell and hope your buddy was paying attention in CPR class, your last chance just became his retention span and how much attention he’s paying to the umbilical. …have those procedures in place for market events. Know your back ups as well as you know the trading…
6. Safety, safety,
safety…on rigs you have to report near misses. They know for every 600 or so they have, one fatality occurs. If a rig owner sees the near miss reports climbing he’s on the radio, the rig’s getting sloppy and a fatality is one incident closer. Watch your near misses. If you’re making mistakes something’s slipping and your margin call is that much closer. Tighten up your ship…
He also says:
Our job is to win with the hand we've been dealt...we can ask for a new card or two, but you can only draw so many new cards before you have to play the hand.
proceeding, I'm going to wish wdbaker
well, and assure you that I'm not trying
to pour cold water on what you are
suggesting. In fact, what
you suggest is the way I would prefer to
trade, if only it would work!
below is something I wrote in a previous
post about the extreme adverse
risk/reward scenario you get when you
scalp with a market maker like OANDA, as
opposed to dealing with a broker, and
attempt to earn the spread yourself.
Believe me, I wish the following wasn't
true, but I don't see how it can be.
Of course, nothing I've said below will
stop you giving it a serious go, but you
should be aware of the math’s!
'.....it seems to me that scalping for pips when dealing with a market maker is doomed to failure. Let me try to explain why.
Say we are trading a 2 pip market like Euros, and let's just say we want to make 5 pips, and are willing to risk 5 pips.
Ok. We buy at 60, t/p 65, s/l 55
Now here's the problem: To buy at 60 the
market must be 58-60. To reach our
profit target it must move to 65-67 (a 7
pip move). To reach our s/l the market
must move to 55-57 (a 3 pip move).
look at that 7:3 risk/reward ratio. The
market has to move over twice the
distance for us to profit the same
amount as we have risked! Those are
terrible odds - we would stand more
chance at roulette!
comparison, if we are looking for 100
pip moves, say Buy at .9860, t/p
.9960, s/l .9760, the market has to move
+102 for us to win, and -98 for us to
loss. It's still pretty horrible, but
it's a hell of a lot better.'
Michael; there's a lot of rubbish written about stop losses, and
the relationship between t/p's and s/l's, so let me say that
there are very few absolutes in trading; we all have to find
out what works for us, and go from there.
For example in my personal experience I have found that
stop losses of any point size are detrimental to my trading
performance, so I only use them to protect my account
against catastrophic ruin; not as a trading tool.
By this you can safely assume that I generally take profits
at smaller intervals than when a stop loss is hit. This may
go against popular wisdom, but it works for me - and that is
all that is important. Somehow you have to get to the same
place - ie find out what works for you.
My previous post was no more than an example that said
the pure mathematical odds of success improve as you
increase your targets. It was not advocating a 1:1
relationship between t/p's and s/l's. Try some different
relationships for yourself - 7:1 5:1 3:1 1:1 1:3 1:5 1:7
etc., and see what works best for you. However, I can almost
guarantee that if you use tight stops you will lose, because
the spread (as explained above, and no matter how small)
will get you.
Synthetic pairs are pairs that you calculate yourself
from the underlying data of their components. For
example NZD/JPY can be calculated from NZD/USD and
USD/JPY. Normally you would be interested in
calculating synthetic prices to arrive a price for a pair
not offered by your market maker, but on occasions it can be
useful to calculate the price of a pair yourself, where you
also have underlying information. For example OANDA
quotes EUR/AUD, but it is nearly always cheaper to trade the
underlying (AUD/USD, EUR/USD - often by some 3-4
pips). You need to first do the calculations to see if
it is worthwhile.
The following is a small extract of Java code, that shows
the concept for calculating synthetic pairs
Every now and then one see posts over concerns about a
market maker presenting prices differently that the way in
which we perceive the 'real' market. Frequently this
take the form of outrage against stop running, although this
wasn't the case in the thread I've taken this
extract. Anyway, my point below is that any
filtering can basically favour us, providing we are flexible
in out approach.
I've never really understood the concern over tick filtering.
Let's say for a moment that there is a mythical 'real' market, and various market makers base their prices around that. Some might dampen price movements a bit, while others elect for a more volatile approach. None of this can be particularly extreme, as any outside the norm will be arbitraged – no matter what it says in the small print.
Now providing spreads are common throughout neither dampened nor volatile is particularly disadvantageous to us, because each one favors a different trading approach. A volatile price feed favors
scalping and support and resistance type trading, but is murder on stops, breakout trading and trend following, while the reverse is true if trading a dampened feed.
If one concludes that there is a bias in the price feed, simply pick a style that suits, or change market maker. If not, we should be concentrating on beating the market in general.
if you want to know how I set my trade size... this is a
description of the method I use, which I normally refer to
as Variable Fractional Percent (VFP)
you want another money management idea that is very
responsive to performance, yet doesn't make you make too
hard decisions up front try this:
Firstly you need to know your daily Net Asset Value (NAV)
gain or loss in percent.
Start trading at a conservative 5% FFP (or whatever suits
you). But instead of using a Fixed Fractional percent, you
use a range say 2%-25%. Move up and down the scale by adding
or subtracting half of your last daily NAV percentage.
For example start at 5% FFP
Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%
Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%
Obviously use ranges and a daily factor (here 50%) that
suits you, but you'll find this method really rewards good
methods, and lightens up very quickly on bad.
I've been flamed a few times on these forums for saying that we should endeavor to traded as efficiently as possible because the spread costs of our transactions can become a significant issue.
Anyway, as many of you know I now trade with the api, and as a consequence I've just gone through my volume figures for the past month. Now I think I'm trading conservatively at the moment - low(ish) leverage, and modest trade frequency. Even so, I am turning over my account over 6000 times per annum! (That's USD trade volume for the month x 12/USD Balance). I even had one sub-account that turned over 2000 times, in the last month alone!
I know that is nothing compared to dgcfx's comment sometime ago that it's quite possible to do $80m turnover pm off a $10,000 account, but it still goes to show that turnover can be somewhat high - and possibly much greater than some might expect, which is good news if you are interested in the api, but bad news if you like to offset positions in different accounts.
But anyway; I don't want to get in an argument about that. All I'm saying is that some may like to do your own calculations - you may be quite surprised at the result.
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