Shares Magazine
Dec 20 2007
I have often heard trading referred to as an art. I can certainly see the truth in that. However, just as some artists start with the paint-by-number kits, so should some traders start by considering the numbers when setting up their trading plans. Numbers will help answer such questions as; What currency pair should I trade? What day is the best day to trade? What are the best times to trade? And the ever popular how much can expect to make?

What if there was a way for you to see in advance how much the average daily pip movement per currency pair was? It would certainly help you to determine which currency pair you should trade.

The average number of pips per day that a currency pair moves.
Analysis date December 12, 2007

Let me inject a small word of caution here. The GBPJPY may look like a great pair to trade due to its high average daily trading volume however this pair has managed to ravage more than its fair share of currency traders. However, take a moment to look at the chart above. This is a terrific starting point. If you are looking to trade a fairly active pair you probably wouldn’t choose to trade the EURGBP.

For the sake of argument we will choose to trade the GBPCHF. It seems to have a good trading range, not to crazy but not too conservative. But like most people, we have a job and a family and a life. So we can’t devote our entire life to trading quite yet. So we need to choose our trading schedule carefully in order to maximize our trading opportunities.

The average price movement range by day of week.
Sample date December 12, 2007.

Let’s say you can only dedicate three days a week to trading. You can use the image above to help you select the days that would have the largest trading ranges. So, let’s choose Tuesday, Wednesday and Friday to trade. You can take the weekend, Monday and Thursday off. Excellent, can you feel your trading plan coming together?

I am going to digress just a tiny bit. One of my favorite TV shows is Myth Busters. If you haven’t seen it, there is a team that takes common myths and puts them to the test, returning either a Confirmed or Busted conclusion. I have traveled all over the world talking to traders and speaking at conferences. My favorite Forex myth is that the best time to trade is 2am. I hear that everywhere I go. How can 2am be the best time to trade all over the world? Well, it can’t. I say let’s bust this myth and look at the data behind our chosen currency pair.

Trading Range of the GBPCHF by hour of the day. Time is in EST.
Analysis date December 12, 2007.

Well, as you can see from the above image, unless you are located in the US Central Time Zone this myth is BUSTED. However, this is some very useful information for us. We can determine that a good trading strategy for us may be trading for three hours in the morning, from 2 – 5 am EST. Then we can take a little break and come back to trading for another four or five hour session. This allows us to be sitting in front of our computer for a fair percentage of the potential moves.

With three small graphs we have determined that we will trade the GBPCHF on Tuesday, Wednesday and Friday. And we will only be trading about 7 or 8 hours a day. We have used the numbers to help determine what and when to trade.

There are so many other things that looking at the stats behind the currency pairs can tell you. You can look at the consecutive number of bullish or bearish bars, the average range of each bullish or bearish bar, and any number of other statistical measures to help you make the right trading decision.

So, back to my painting analogy… whether you are a master artist or just starting with the paint by number sets I would strongly suggest incorporating stats into your personal trading plan. It may help to open your eyes to what is truly going on. The stats above have been kindly made available by my friends at AutoChartist. You can find a link on the homepage of my website – www.marilynmcdonald.com

World Commerce Review
December 2007

By: Marilyn McDonald

Any trader who is even remotely familiar with retail foreign exchange knows what an extremely volatile market it is. This year alone international currencies have fluctuated wildly, with the dollar reaching decade, and in some cases even all-time, lows. Within the forex market realm, however, volatility often creates opportunity. And because forex is open for trading 24 hours a day, five-and-a-half days a week, it is nearly impossible for any one trader to take full advantage of every opportunity that arises during market hours. As a consequence of this growing desire to trade around the clock, automated trading has piqued market-wide interest and completely changed the face of forex trading.

Automated trading, or algorithmic trading is using computer programs to generate nearly instantaneous buy and sell orders. This type of trading has been leveraged heavily by institutional traders and is now gaining popularity in the retail sector, particularly in the forex market. Algorithmic trading accounts for a third of all share trades in America and the Aite Group, a Boston-based consultancy group, thinks it will make up more than half the share volumes and a fifth of options trades by 2010.

There is little doubt that in recent years automated FX trading has exponentially increased in both corporate and retail arbitrage strategies throughout the world. And as demand for better execution performance and reduced latency continues to grow, automated trading becomes increasingly more embedded as a key tool for the successful forex trader.

Whether you are active in the FX arena or new to this dynamic sector, you will most certainly have come across the three following idioms: Don’t allow greed and fear to cloud your trades; always set a stop loss and profit objective; and execute trades quickly. Using an automated trading system fills each of these requirements and has the added benefit of being able to trade around the clock in this 24-hour-a-day market.

When considering an automated trading system, it is essential to bear all of these in mind. Take the time to think through your system carefully. Considering all of the possible outcomes is key to the best possible system. Keep in mind that your system won’t make adjustments for market volatility, nor will it take every eventuality into consideration unless you have already thought through every conceivable scenario and made the appropriate modifications. What’s more, a well thought out system will not modify a stop loss because it believes the market will rebound, nor will it modify the profit target of a trade because it suddenly thinks it can make more money. The program won’t second guess itself and the execution is performed within seconds — it sees a signal and it places the trade.

If you have been in the forex game for any length of time, you have most certainly spent countless restless nights worrying about that one trade that will either bring you riches or flatline your account. An automated system eliminates the problem of emotional overload and gives you peace of mind knowing that your program can identify trading opportunities, set trailing stops, and profit targets. No more late nights spent worrying about your trades.

Which brings up yet another advantage of automated trading — your ability to trade while away from your desk. An effective strategy could trigger a myriad of signals and create profit during times at which you have previously been unable to trade. The average “nine-to-fiver” is no longer limited by time constraints.

Greater diversification is yet another fascinating aspect of employing a computer in your trading. Automated trading now allows one single trader the ability to trade in different markets and different time zones simultaneously. A system can be programmed to analyze short-term data and scan for opportunities on any and all available currency pairs and periodicities, essentially eliminating the need to open 15 charts to ensure you don’t miss out on a good trade. An effective program can make certain that you see any available opportunity and execute the trades accordingly.

So the question that begs to be answered is how does one develop an effective automated trading strategy? Well, you need to consider the issue from three different perspectives; as a trader, as a programmer, and as a technology specialist.

As the trader you must be able to clearly specify your trading behavior across all of your chosen currency pairs, in all different market conditions, and in all applicable time frames. This is what I consider to be the major stumbling block for retail level forex traders that are becoming interested in automated trading. It is one thing to look at your charts with all of your indicators and make trading decisions. It is quite another to write down the rules of your systems and only trade by those rules. You may be making considerations that you can’t even pin point. You can’t program a system to look at generalities, you must make specific rules that you never violate. A good start is to keep a notebook next to your trading platform and record exactly why you buy and sell. This is an important part of the process that many gloss over and then wonder why their system doesn’t perform as they think it should.

The technology specialist in you has already selected a trading platform. However prior to building your system it is not a bad idea to look around at all the offering and make sure that you using the best technology for your objectives. There exists today a myriad of popular platforms — including several that are free of charge — provided by a number of forex brokers for development and back testing. Consequently, it is now possible for the retail investor to start trading on a variety of platforms that were once available only to large financial institutions.

Once you can clearly identify your trading behaviour you can begin the programming process. This can either be done by the trader or done as work for hire. There is an entire cottage industry that has sprung up around automated trading for the retail trader. Make sure that your system is clearly defined before starting the programming process. Without this foundation, the project will only end in tears. If you choose to program your own system it is wise to look for a broker or platform that offers a full function library of basic systems.

Automated trading for the retail forex trader is really in its infancy and while this segment of the market is poised to grow substantially over the next few years only the prepared will be able to take full advantage of the full offering. If this happens to be an area that you are interested in I would suggest taking full advantage of all of the information available on this subject, perhaps even studying the algorithmic trading systems of other securities industries. This will give you the greatest insight into what needs to be considered when creating your own strategies.

Shares Magazine
November 22, 2007

By: Marilyn McDonald

Welcome to our last and final article in our six week series from IBFX and IBFU. We will be helping you develop your own forex trading plan. Creating a trading plan doesn’t involve me telling you what and when to trade. It has nothing to do with a super fabulous secret system and honestly it won’t be easy. You will need to look at yourself and decide why you want to be in this market and what you are trying to achieve.

We will walk you through the mechanics of setting up your trading plan because it is extremely important for you to know why you are placing the trades you are. In my opinion if you know why you placed the trade and got in and out a points that you have predetermined then you have made a successful trade, even if it wasn’t a profitable trade. If you are not willing to put some work into creating your own trading plan, I think it would almost be more beneficial for you to place your money in a managed account simply to give it a fighting chance in this arena. Developing your trading plan is very similar to a company Business Plan. It is a device for you to define how you intend to operate your business (or trading). A trading plan lays out how you will make trades – the time, price, volume, and news are all essential components of the trade. While your trading plan may not necessarily be for others, it is still your own road map to tell yourself, and reaffirm to yourself, how you expect to get there. Include goals in your plan: 3 month, 6 month, 1 year, 2 year, 5 year, 10 year, and even 20+ year goals you would like to reach through your trades and investments.

Elements to consider
- What times during the day will you be trading (which sessions)?
- What currency pairs are you interested in following?
- Will you be trading during volatile market moves (fundmental news announcements)?
- How long will you hold your trades?
- How much are you willing to risk in the markets?.

Essentials

There are many essentials you may want to consider in your trading plan. These essentials lay the foundation of your plan and will help you reach your goals. Here are some essentials you may wish to include.
State Your Purpose
- Why do you want to trade in the Forex market?
- What do you hope to gain from trading?
- What are your trading goals?
- How do you plan on becoming a better trader?
- How are you going to use your trading plan?
- Clearly define your purpose for trading and investing.
- State your goals and what you hope to gain and achieve through trading.
Strategy for Buying
- How are you going to find which pairs to trade? Examples: news, research, technical analysis, fundamental analysis, etc.
- How will you refine your “buy list” (currency pairs on your radar you are considering buying)?
- Using Technical Analysis: You need to understand what you are looking at. Understand how the indicators you use work and what they are measuring. Your favorite indicator may not be useful in many situations, in fact I recommend using a number of indicators rather than just one. You must know when to use technicals and when not to use them.
- Using Fundamental Analysis: The Fundamental News announcements can trigger the most volatile movements in this market. Make absolutely certain you understand how fundamentals work.
Strategy for Selling
- Set a desired minimum goal for each trade. You may be happy making 20 pips per trade. Or 50 pips per trade. Set a goal you are happy with and stick to it.
- Use Stop-Loss Orders to reduce risk by automatically selling at a pre-determined lowest price. Oddly enough this is a hotly debated subject. I didn’t used to trade with stops at all. Lately the Euro and the Pound have taught me some hard lessons and I will be incorporating stops into my strategy as I move forward.
- How much are you willing to lose if this trade goes bad?
- Some traders continually raise their stop-loss prices as the trade goes in their direction. This is called a trailing stop and can be a very useful tool for locking in gains and reducing risk.
Strategy for Holding
- What will you do if the price does not move at all after you buy? Sell it and move on, or hold it and wait for action?
- Some traders will hold on to the stock until more activity and volume pick up. They are comfortable waiting it out. This action may require more capital in your trading account, as you may have to hold on to more than one non-moving trade.
Money and Risk Management
- How will you keep your risks to a minimum?
- How will your keep your total account value at a maximum and grow it?
- Research money management techniques – there are many. This can include how much money or what percent of your entire portfolio value to use in each trade.
- Margin: margin can be a very useful tool for many traders, but can be scary and risky if not used properly. You can get a margin call from your broker at any time, which means they want to collect their money now. Margin gives you extra buying power. Margin also gives you additional risk. Use margin cautiously and wisely. Some traders do not use margin at all.

I have a workbook that will help you develop your trading plan on the homepage of my website – www.marilynmcdonald.com. I also have a webcast talking about developing your trading plan you can view at www.moneyshow.com, just search for my name.

Preparation for the Forex trader means making your plan, developing your strategies, testing your techniques, and continually refining it all. The process is never really over and there are good trading opportunities to take advantage of out there. Having a well thought out plan is a solid foundation for a beginning trader. Be dedicated to your plan and stick to it. I would recommend trading on a demo account until you can show decent returns. Then begin to trade micro lots on a mini account. This will ensure that your plan is built upon sound principles and will benefit you in the long run.

Interbank FX is an off-exchange retail foreign currency broker and can be reached at www.interbankfx.com. It’s free Forex education site can be found at www.ibfxu.com. And Marilyn McDonald is an author and foreign exchange trader. She can be reached via her website at www.marilynmcdonald.com

Shares Magazine
November 15, 2007

By: Marilyn McDonald

Welcome to week 5. It’s time to pull a Dr. Phil. It’s time to get inside your own head. Let’s find out, are you mentally prepared to trade? During week five of the IBFX and IBFXU series, we are going to take a closer look at some of the things you need to do before you make your first trade.

One of the first things you need to do before you place your first trade is to determine exactly what you want to achieve. Create your own trading plan. Get out a piece of paper and write it down. Do you want to eventually live off your trading? Or are you just trying to outperform your savings account. Be as specific as you can and then pin this up by your computer.

Once you have created your own trading plan, take 4 or 5 minutes and review your goals before you start clicking that mouse. This will help you keep your goals in mind as you trade. If your goal is to make 20 pips per day then you will start each trading day with that particular goal in mind. It is easy to get wrapped up in the emotion of the moment and forget your larger picture. Taking a few minutes before the day starts will help you focus on your goals.

Be aware that when you start trading, particularly if you are new to trading, you may be confronted by negativity from your friends or relatives. They simply don’t understand what you are doing or the language you are now learning. Some people react to new situations with fear and frustration. You should join a traders group, whether it be online or in person. Make sure you have friends and associates that understand the new language you speak and can possibly help you learn from their mistakes.

Another nugget of wisdom I have for you is to remain focused. Every new trader will hit a wall. They will become over confident and lose a lot of money, potentially even their entire account. This usually comes after a series of wins. The true test of your character as a trader is going to be what you do with yourself after this happens. Do you quit? Or do you dust yourself off and build on the hard lessons that you have learned? Your actions at this stage of the game are going to help form what kind of trader you will grow to be. My advice for this situation is to lean on your fellow traders. Anyone who has been in the market for any length of time has been through this. This is what separates the men from the mice (so to speak).

If you are having emotional responses to your trades it is time to pay attention. During these times, walk away from your computer if you can. When you lose your emotional detachment you have lost your perspective. You are now far more likely to place bad trades, second guess yourself and close out everything at a loss. Take a break, get out of the house, and come back when you can look at the charts and your account impassively.

Another caveat for you is to beware of greed. This is one of the seven deadly sins for a reason. Greed can cause you to act impulsively and irrationally. Set your goals for the trading session, achieve your goals and be grateful for another day of trading successfully.

You should also track your progress. As long as you can see that you are progressing down your projected path then you will continue to stick to your trading plan. This also gives you the confidence you need to see that you plan is working. Don’t deviate from your plan, remain steadfast and you can achieve your goals. Think slow and steady and you maintain your trading edge.

Set profit targets for yourself. I like to make 10 or 15 or 20 pips and get out. Do I miss out on some terrific moves? You betcha! Do I make a profit while some people lose everything they have gained because the pair retraces? You betcha. I am happy making a bit of money and getting out. I don’t get too greedy mostly because it makes me nervous. Decide how much you think it will go up or how much will make you happy and set that Take Profit level.

Limit your losses. Setting a stop loss can allow you to decide how much you want to lose. This one is a toughie. Because if you set it too close in volatile conditions the market is likely to dip down, bump you out of your trade and then reverse back up and make a profit. However, they will save your behind if you simply read the market wrong and make a bad decision.

There are plenty of sites out there willing to tell you where to place your take profit and stop loss orders. I am not going there… I will simply default to my mantra… read everything you can get a hold of, try it out on a demo account, and make your own decisions. You can download my workbook – Create Your Own FX Trading Plan from my website – www.marilynmcdonald.com. This will take you through the step by step thought process you should follow when you are setting up your own trading plan.

Interbank FX is an off-exchange retail foreign currency broker and can be reached at www.interbankfx.com. It’s free Forex education site can be found at www.ibfxu.com. And Marilyn McDonald is an author and foreign exchange trader. She can be reached via her website at www.marilynmcdonald.com