Goldman Sachs rules the world?

Maxine Croxall had a frank interview with BBC, he expects Eurozone market to be crashed and he did state a statement which may shock a lot of people "Goldman Sachs rules the world".

From what I'm seeing, the Euro was on the downfall against most major currency, it has been on the fall for the last two month, but last few days, I see big surge of buying on Euro futures, is it a sign of recovery. We'll see. We'll see what happen in 2012, it's expected to be an extraordinary year. We'll see...

Here's the full interview. What do you reckon?

VSA youtube channel

Head off to youtube and search the keyword "VSA", you could find plenty of related videos, most are decent and good for newbie but the really genuine information that you all are looking for, only a few have it. And who is more trustworthy than my mentor :p He has his very own channel and share the info for free, all his knowledge and set-ups, his understand of the market, the truth behind market movement,.. not many videos but basically cover all your needs. Of course, you would need much more in order to start making money but this's a good start, so here's a few of his videos:

The truth behind price movement



No demand and No supply explained, VSA



Trade diary, redistribution short set-up




Enjoy! You can subscribe to his channel, I'm sure you'll be swimming in a wealth of knowledge.

Peace! 

Never say never

Hello guys and girls!

I don't have any trades this week on trading account since it's holiday period as you all know, part of the reasons is because my lappy got infected and as a result can't seem to run now; every single time I touch on the keyboard, the screen turns black, can't do nothing about it...

However, there's an event that rescues this boring week which's the regular monthly contest held by Trade2win, this's a contest which has been running for a year now and I manage to win on 2 months, it's not a greatest achievement in the world but I'm happy that I'm the only one who manage to win it 2 times, it's not easy though, there're 80 traders who are actively battling for the prize. So, this month, I manage to stay 2nd place until now and today is the last day, I probably need a miracle to win it. It seems to me that the 1st place dude mirrored my trade and he got big winner as well as mine in the last trade, therefore the gap between he and I are staying the same, which's 10k by now. I need a great bull run today with maximum risk on and hope that he makes some mistakes in order to claim first place. Let's hope though. My anticipation is that there're a big buying surge emerged last few days, the current chart is also appear as head-and-shoulder formation, so I'm on the buy side. I don't know when the bull run will start, I really hope that it kicks off today. Never say never

Current Euro futures chart, I'm hoping for big bull run today...

 

VSA Bible

Hi all,

My trading technique is Volume Spread Analysis aka VSA. It's something that seems pretty much difficult and like a superior technique compare to other normal trading methods like price action or indicators-based systems. Why is that so? Well, it has its very own reason, talking about VSA, we'll talk about volume, as we all know, volume is unmeasurable in Forex market, that's the main reason why there's a lot of debate not only before, but ongoing debate about volume application on Forex market. People are debating about it but the one who make it doesn't really care though, what they are caring about is their trading statement, they are making money off it month after month. Money is the name of the game, money is all we care about trading this game. If you have any doubts about volume in Forex market, I can reassure you that, volume in forex market is legit and we can make money off it by applying volume to our trading technique. I don't have to explain any further but trust me, learn how to use it and you'll have a worthwhile experience.

When I starting out, I'm also searching for the holy grail, well, it seems like a boring story already LOL, because it seems like every noob falls for it. I demo with without any success, well, it's rather that I'm too noob, don't know how to set-up EAs in MT4 rather than I'm actually been testing it. However, I always like the idea of managing the trade by myself, not to lay my fate in any automated program, part of it is because there're too much horror stories on the net about automated programs. I was never been scammed for any EAs though, quite proud of it, LOL. What should come has to come, the famous trading technique, Price Action Trading has taken me a hell lot of time, it suits me though, I love it and it makes a lot of sense. The only thing is "experience", I lack it, I lack experience. In order to trade PA, even if you learn it well, read every book about PA trading, psychology in trading, you still gonna lose it. There're no way, NO WAY, you'll make it without experience. You'll lose it first, because you could make it. Only 5% make it though lol

So, I've learn PA and doing Demo trading, joining a trading journal called meetpips, I have the chance to meet Marko c, I asked him about his trading technique and he recommend me VSA by Petefader... There you go, a legendary story starts... just kidding lol, so I met Petefader, he's like VSA Joda, he knows it so well that he could trade it so easily and successfully. After that, day after day, month after month, I trade along side Petefader, everything I got today is because of him, well, not to mention others on Forexfactory as well like Dr.Geppynius, Malcom, Intel... but they rather make it too complicated for noob, not like Petefader. I could say that everything I got today, I own him, he even let me participate in his paid trading room without paying a dime... I own him and I'll make him proud, one day I'll mention his name as my dearest mentor....

Ya,  read on and I'll make a lot of posts about my lil' trading technique, hope that you guys can bear it lol

Cya all, have a blessing 2012 year.

Peace.

The Structure of Forex Brokers

“Originally posted by Darkstar at Forex Factory.”

A pretty cool post by Darkstar on ForexFactory, he's also trading Order Flow Trading Method, which he claims to be its creator. There're debate about it but the guy definitely has decent knowledge about the market and its structure. It will takes time to read and learn, so enjoy. 

Unlike the various bond and equity markets, the Forex market is not generally utilized as an investment medium. While speculation has a critical role in its proper function, the lion’s share of Forex transactions are done as a function of international business.

The guy who buys a shiny new Eclipse more then likely will pay for it with US Dollars. Unfortunately Mitsubishi’s factory workers in Japan need to get their paychecks denominated in Yen, so at some point a conversion needs to be made. When one considers that companies like Exxon, Boeing, Sony, Dell, Honda, and thousands of other international businesses move nearly every dollar, real, yen, rubble, pound, and euro they make in a foreign country through the Forex market, it isn’t hard to understand how insignificant the speculative presence is; even in a $2tril per day market.

By and large, businesses don’t much care about the intricacies of exchange rates, they just want to make and sell their products. As a central repository of a company’s money, it was only natural that the banks would be the facilitators of these transactions. In the old days it was easy enough for a bank to call a foreign bank (or a foreign branch of ones own bank) and swap the stockpiles of currency each had accumulated from their many customers.

Just as any business would, the banks bought the foreign currency at one rate and marked it up before selling it to the customer. With that the foreign exchange spread was born. This was (and still is) a reasonable cost of doing business. Mitsubishi can pay its customers and the banks make a nice little profit for the hassle and risks associated with moving around the currency.

As a byproduct of transacting all this business, bank traders developed the ability to speculate on the future of currency rates. Utilizing a better understanding of the market, a bank could quote a business a spread on the current rate but hold off hedging until a better one came along. This process allowed the banks to expand their net income dramatically. The unfortunate consequence was that liquidity was redistributed in a way that made certain transactions impossible to complete.

It was for this reason and this reason alone that the market was eventually opened up to non-bank participants. The banks wanted more orders in the market so that a) they could profit from the less experienced participants, and b) the less experienced participants could provide a better liquidity distribution for execution of international business hedge orders. Initially only megacap hedge funds (such as Soros’s and others) were permitted, but it has since grown to include the retail brokerages and ECNs.

Market Structure:

Now that we have established why the market exists, let’s take a look at how the transactions are facilitated:

The top tier of the Forex market is transacted on what is collectively known as the Interbank. Contrary to popular belief the Interbank is not an exchange; it is a collection of communication agreements between the world’s largest money center banks.

To understand the structure of the Interbank market, it may be easier to grasp by way of analogy. Consider that in an office (or maybe even someone’s home) there are multiple computers connected via a network cable. Each computer operates independently of the others until it needs a resource that another computer possesses. At that point it will contact the other computer and request access to the necessary resource. If the computer is working properly and its owner has given the requestor authorization to do so, the resource can be accessed and the initiating computers request can be fulfilled. By substituting computers for banks and resources for currency, you can easily grasp the relationships that exist on the Interbank.

Anyone who has ever tried to find resources on a computer network without a server can appreciate how difficult it can be to keep track of who has what resources. The same issue exists on the Interbank market with regard to prices and currency inventory. A bank in Singapore may only rarely transact business with a company that needs to exchange some Brazilian Real and it can be very difficult to establish what a proper exchange rate should be. It is for this purpose that EBS and Reuters (hereafter EBS) established their services.

Layered on top (in a manner of speaking) of the Interbank communication links, the EBS service enables banks to see how much and at what prices all the Interbank members are willing to transact. Pains should be taken to express that EBS is not a market or a market maker; it is an application used to see bids and offers from the various banks.

The second tier of the market exists essential within each bank. By calling your local Bank of America branch you can exchange any foreign currency you would like. More then likely they will just move some excess currency from one branch to another. Since this is a micro-exchange with a single counterparty, you are basically at their mercy as to what exchange rate they will quote you. Your choice is to accept their offer or shop a different bank. Everyone who trades the forex market should visit their bank at least once to get a few quotes. It would be very enlightening to see how lucrative these transactions really are.

Branching off of this second tier is the third tier retail market. When brokers like Oanda, Forex.com, FXCM, etc. desire to establish a retail operation the first thing they need is a liquidity provider. Nine in ten of these brokers will sign an agreement with just one bank. This bank will agree to provide liquidity if and only if they can hedge it on EBS inclusive of their desired spread. Because the volume will be significantly higher a single bank patron will transact, the spreads will be much more competitive. By no means should it be expected these tier 3 providers will be quoted precisely what exists on the Interbank. Remember the bank is in the business of collecting spreads and no agreement is going to suspend that priority.

Retail forex is almost akin to running a casino. The majority of its participants have zero understanding how to trade effectively and as a result are consistent losers. The spread system combined with a standard probability distribution of returns gives the broker a built in house advantage of a few percentage points. As a result, they have all built internal order matching systems that play one loser off against a winner and collect the spread. On the occasions when disequilibrium exists within the internal order book, the broker hedges any exposure with their tier 2 liquidity provider.

As bad as this may sound, there are some significant advantages for speculators that deal with them. Because it is an internal order book, many features can be provided which are otherwise unavailable through other means. Non-standard contract sizes, high leverage on tiny account balances, and the ability to transact in a commission free environment are just a few of them…

An ECN operates similar to a Tier 2 bank, but still exists on the third tier. An ECN will generally establish agreements with several tier 2 banks for liquidity. However instead of matching orders internally, it will just pass through the quotes from the banks, as is, to be traded on. It’s sort of an EBS for little guys. There are many advantages to the model, but it is still not the Interbank. The banks are going to make their spread or their not go to waste their time. Depending on the bank this will take the form of price shading or widened spreads depending on market conditions. The ECN, for its trouble, collects a commission on each transaction.

Aside from the commission factor, there are some other disadvantages a speculator should consider before making the leap to an ECN. Most offer much lower leverage and only allow full lot transactions. During certain market conditions, the banks may also pull their liquidity leaving traders without an opportunity to enter or exit positions at their desired price.

Trade Mechanics:
It is convenient to believe that in a $2tril per day market there is always enough liquidity to do what needs to be done. Unfortunately belief does not negate the reality that for every buyer there MUST be a seller or no transaction can occur. When an order is too large to transact at the current price, the price moves to the point where open interest is abundant enough to cover it. Every time you see price move a single pip, it means that an order was executed that consumed (or otherwise removed) the open interest at the current price. There is no other way that prices can move.
 

As we covered earlier, each bank lists on EBS how much and at what price they are willing totransact a currency. It is important to note that no Interbank participant is under any obligation to make a transaction if they do not feel it is in their best interest. There are no “market makers” on the Interbank; only speculators and hedgers.
 

Looking at an ECN platform or Level II data on the stock market, one can get a feel for what the orders on EBS look like. The following is a sample representation:

                               

 

You’ll notice that there is open interest (Level II Vol figures) of various sizes at different price points. Each one of those units represents existing limit orders and in this example, each unit is $1mil in currency.

Using this information, if a market sell order was placed for 38.4mil, the spread would instantly widen from 2.5 pips to 4.5 pips because there would no longer be any orders between 1.56300 and 1.56345. No broker, market maker, bank, or thief in the night widened the spread; it was the natural byproduct of the order that was placed. If no additional orders entered the market, the spread would remain this large forever. Fortunately, someone somewhere will deem a price point between those 2 figures an appropriate opportunity to do something and place an order. That order will either consume more interest or add to it, depending whether it is a market or limit order respectively.

What would have happened if someone placed a market sell order for 2mil just 1 millisecond after that 38.4 mil order hit? They would have been filled at 1.5630 Why were they “slipped”? Because there was no one to take the other side of the transaction at 1.56320 any longer. Again, nobody was out screwing the trader; it was the natural byproduct of the order flow.

A more interesting question is, what would happen if all the listed orders where suddenly canceled? The spread would widen to a point at which there were existing bids and offers. That may be 5,7,9, or even 100 pips; it is going to widen to whatever the difference between a bid and an offer are. Notice that nobody came in and “set” the spread, they just refused to transact at anything between it.

Nothing can be done to force orders into existence that don’t exist. Regardless what market is being examined or what broker is facilitating transactions, it is impossible to avoid spreads and slippage. They are a fact of life in the realm of trading.

Implications for speculators:

Trading has been characterized as a zero sum game, and rightly so. If trader A sells a security to trader B and the price goes up, trader A lost money that they otherwise could have made. If it goes down, Trader A made money from trader B’s mistake. Even in a huge market like the Forex, each transaction must have a buyer and a seller to make a trade and one of them is going to lose. In the general realm of trading, this is materially irrelevant to each participant. But there are certain situations where it becomes of significant importance. One of those situations is a news event.

Much has been made of late about how it is immoral, illegal, or downright evil for a broker, bank, or other liquidity provider to withdraw their order (increasing the spread) and slip orders (as though it was a conscious decision on their part to do so) more then normal during these events. These things occur for very specific reasons which have nothing to do with screwing anyone. Let us examine why:

Leading up to an economic report for example, certain traders will enter into positions expecting the news to go a certain way. As the event becomes immanent, the banks on the Interbank will remove their speculative orders for fear of taking unnecessary losses. Technical traders will pull their orders as well since it is common practice for them to avoid the news. Hedge funds and other macro traders are either already positioned or waiting until after the news hits to make decisions dependent on the result.

Knowing what we now know, where is the liquidity necessary to maintain a tight spread coming from?

Moving down the food chain to Tier 2; a bank will only provide liquidity to an ECN or retail broker if they can instantly hedge (plus their requisite spread) the positions on Interbank. If the Interbank spreads are widening due to lower liquidity, the bank is going to have to widen the spreads on the downstream players as well.

At tier 3 the ECN’s are simply passing the banks offers on, so spreads widen up to their customers. The retailers that guarantee spreads of 2 to 5 pips have just opened a gaping hole in their risk profile since they can no longer hedge their net exposure (ever wonder why they always seem to shut down or requote until its over?). The variable spread retailers in turn open up their spreads to match what is happening at the bank or they run into the same problems fixed spreads broker are dealing with.

Now think about this situation for a second. What is going to happen when a number misses expectations? How many traders going into the event with positions chose wrong and need to get out ASAP? How many hedge funds are going to instantly drop their macro orders? How many retail traders’ straddle orders just executed? How many of them were waiting to hear a miss and executed market orders?

With the technical traders on the sidelines, who is going to be stupid enough to take the other side of all these orders?

The answer is no one. Between 1 and 5 seconds after the news hits it is a purely a 1 way market. That big long pin bar that occurs is a grand total of 2 prices; the one before the news hit and the one after. The 10, 20, or 30 pips between them is called a gap.

Is it any wonder that slippage is in evidence at this time? 

Conclusions:

Each tier of the Forex market has its own inherent advantages and disadvantages. Depending on your priorities you have to make a choice between what restrictions you can live with and those you cant. Unfortunately, you can’t always get what you want.

By focusing on slippage and spreads, which are the natural byproduct of order flow, one is not only pursuing a futile ideal, they are passing up an enormous opportunity to capitalize on true inefficiencies. News events are one of the few times where a large number of players are positioned inappropriately and it is fairly easy to profit from their foolishness. If a trader truly wants to make the leap to the next level of profitability they should be spending their time figuring out how identify these positions and trading with the goal of capturing the price movement they inevitably will cause.

Nobody is going to make the argument that a broker is a trader’s best friend, but they still provide a valuable service and should be compensated for their efforts. By accepting a broker for what it is and learning how to work within the limitations of the relationship, traders have access to a world of opportunity that they otherwise could never dream of capturing. Let us all remember that simple truth.

A picture worth a thosand words

The picture was taken from Paul Tudor Johns desk, in which there're a famed note which say "Losers average losers"...

Losers Average Losers

Mind over Market- Grkfx review [Part 6]

Mind Over Market Part 6

Mark Douglas talks about how some people need to only start trading a small size.  And that when you are only trading a small size most people do not think there is any point in it.

From an immediate money standpoint you will not make a lot.  But when you can execute your system flawlessly then you can start trading the bigger sizes.

There are many traders out there who may be trading small accounts and wondering whether it is worth it.  There are other traders who are perhaps saying to themselves that they will only start trading live when they have a good amount of capital behind them.

Other traders can blame the fact that they are losing money on not having enough capital.  They think that if they just had another $50,000 or $100,000 dollars that it will somehow solve all the trading system and psychological problems that they may have and they will magically start making them money.  They want to trade a large account while not even being able to trade a smaller size successfully.  Those traders usually end up in a perpetual cycle of the blame game.

If you can’t trade $50,000 successfully, what makes traders think that if they had $500,000 they would be able to trade successfully?  Most of the time there is no good reason.

There is one exception however.  If you start trading a larger account and that causes you to get more serious about your trading and to execute your system flawlessly.  It causes you to get serious because you may have a larger portion of your savings at risk and therefore it causes you to be more careful about managing risk and finding the good trades.  It causes you to diligently keep a trading journal.  It causes you to find the true reasons why the market moved and will move in the future.  Then, in such a situation, you could potentially find yourself doing better with a larger trading account.  But, most people don’t fall into that category.

Gutter Principle

The host asks whether or not you need to blow a trading account in order for you to be successful.  I never blew a trading account, but I have taken some big losses throughout the years.  As long any losses that you take causes a pain similar to that of a blown trading account, then you probably don’t need to blow a trading account.

Douglas:  You have to learn to change the way you think about trading in a way where it doesn’t cause you to have this potential to think that you will be disappointed or betrayed or put you into a state of emotional pain.  Getting to that carefree state of mind… Then everything about your trading will change.

Mark Douglas talks about the transformation of a traders psychological into that of a professional traders mindset.  And that is definitely required no matter what trading style you have.

There is a separate transformation that other traders can take which is that of an order flow transformation.  Where the traders choose not to view the market through technical indicators, or chart patterns, but rather through order flow and liquidity principles, news, global macro, market sentiment, stops, option barriers, expectations, positioning, etc.

Trading Edge

Mark Douglas then talks about what he believes a trading edge is:

Just simply a higher probability of one thing happening over another.  Higher probability over a series of trades.

Every trader needs a higher probability of one thing happening over another in a series of trades.  That is always a necessity no matter what trading system you have.

What the order flow trader does and how they define an edge is by having a higher probability of one thing happening over another on the very next trade. And then the next one, and the next one.

Subtle, yet profound difference.  The order flow trader wants an identifiable edge on almost ever trade that they place, preferably a gigantic edge if possible.  Is it always possible?  No, but the order flow trader always strives for it.

The order flow trader does not want to take for a series of 50 trades for their edge to develop.  They want their edge to be shown relatively quickly in a short series of trades, or preferably in the very next trade, and then in the next one, etc.

And in order to place such trades, you need to have a mastery of the order flow concepts as well as mastery of your own personal psychology.

Towards the end of the video with Mark Douglas on stage he talks about the trading profit gap.  How traders who have a wonderful trading methodology with enormous potential to make a consistent income, but there is the profit gap.  And how most traders try to fix it by learning more about the market.

Firstly I would say that there is always more to learn about the markets.  Always new order flow generators, scenarios, global macro situations to learn about.  More order flow and liquidity principles to learn and implement if you want to.  So I would always like to learn more about the market.

Secondly, it is true that many traders can fix the profit gap by learning more about themselves.  But in order to do that, you need to already have a trading system that has an edge.

If you already have a trading system that has an edge, then learning more about yourself can prove to be much better than learning more about the markets.

But if you do not have a trading system that has an edge, then you still have to learn more about the market in order to find a trading system with an edge.  I talk about this in a previous article about how money management isn’t everything.

The problem lies in the fact that when a trader chooses to learn more about the market, the trader typically learns about more moving averages, more technical indicators, more chart patterns, more price patterns, more confirming tools, etc.  All those things do not generate order flow.

I would not trivialize the importance of having a trading edge, preferably a massive trading edge.  For if you have a big trading edge, an order flow edge, then it can overcome any slightly negative aspects of money management or psychology that you may have and still generate a healthy profit for you.

Instead of learning more about the things which do not move the market.  Choose to learn more about the things that can actually cause markets to move.  Things that can cause billions of dollars of aggressive order flow to be generated.

One of my biggest trading edges is not really my trading psychology.  My trading psychology is probably no much more better than anyone else.  It is my mindset about the trading system and knowing how to capture the big market moves.  That is one of my biggest edges.

That is a big secret to the fast lane of trading riches.

[source: http://orderflowforex.com]

Mind over Market- Grkfx review [Part 5]

Mind Over Market Part 5 of 7

Mark Douglas talks about how you need to be able to change the way you think.  He is absolutely right.

Not only do you need to change the way you think about money management and trader psychology.  Not only do you need to change the way you think about over trading.  You also need to change the way you perceive the market information that comes your way during the trading day.  Then you can become an order flow trader.

Douglas:  Basically, all it really takes is a sincere willingness to do it.  Honest to God.  It is just like anything else in our lives.  When we realize that there is a particular goal that we have and there is a strong desire to achieve that goal then we are going to take whatever steps we need to achieve it.  

He is absolutely right.  Just like I wrote about in a previous article.  Everyone gets what they want out of the market.

The problem lies in that many people think they want to achieve a particular goal, when in reality they don’t.  Or they want to achieve a goal, but their thinking and behaviors are not in congruence with achieving that goal.

For example, when I first started trading, I obviously wanted to make a lot of money and become financially free.  That is what I thought I wanted.  When in reality in my first year or two trading, what I really wanted was some form of action, adrenaline, doing something fun, a hobby.  That thinking and the actions I took by placing ten trades a day in the currency markets was not congruent with making a lot of money.  Eventually, I figured out that I was not going to be able to achieve my goals.

I was getting exactly what I wanted out of the market.  I wanted action, adrenaline, and I got it by over trading and spending countless hours watching profit and loss gyrate back and forth.

The other thing that I wanted to do was to place really good trades and know why I should place them, why the market should move in my favor, and why I was able to extract profit from the market.  That is what I wanted.  My thinking was aligned to that goal.  But my actions were not in alignment as I stayed stuck in the technical indicator, forex robot, chart pattern trading cycles.  Those were not able to give me the edge I was looking for.  They were not able to sufficiently explain to me why the market was making its movements.

And so, if someone really sets their mind to becoming an order flow trader, then they have in this website a resource that will drastically cut down the learning curve.  If they are willing to work and be committed to making money and learning about order flow, global macro, and news trading then traders can read my forex factory posts, read this trading blog, buy the recommended trading books, buy my order flow mastery course when it is available.

Or you don’t have to read this blog if you don’t like it.  But at least go out there and find the order flow and liquidity information somewhere.  Whether you feel you are better served on a trading forum, or with some other book, or other trading strategy.  Never stop searching for the true reasons why the market makes its movements.  For the moment you are able to determine the true reasons and series of order flow triggers and scenarios why the market moves, then it will change your trading forever.

Douglas:  What we set our mind at is how to change our mind.

Mark Douglas is absolutely right.  You have to be willing to change your mindset.  I had to do it on so many different levels.  My views about money management, trading psychology, managing a trade, order flow trades, how to view the market, etc.  It all involved substantial mindset shifts.

A lot of people are stubborn.  They don’t want to change the way they think.  They think they know best.  I used to be like that as well.  That was when I had trading cynicism.  I didn’t make much money during that stage.  Eventually, I figured out that I would rather stop being cynical and take the money.

Douglas:  They have to eliminate the potential to think that the market is going to disappoint them.

Unfulfilled expectations can be a very powerful force that can work in your favor or against you.  If you are disappointed after a trade, then the unfulfilled expectations will wreck havoc on your trading.  On the other hand, if you can identify when the big players expectations have been unfulfilled and they are forced to do billions of dollars of aggressive position re adjustment, then those unfulfilled expectations can do wonders for your trading account.

Host:  We did everything we could, we had our edge, it didn’t work out, move on. Douglas:  That is all it really is.  When you put on a trade and it doesn’t work, all it really means is this:  Some other traders didn’t come into the market that had the same belief that you had or the same conviction that you had about this market doing whatever it is you thought it was going to do.

This is slightly mediocre thinking.  It is good, but mediocre.  The truth is that most traders, when they place their trades, think they have an edge.  They do not actually have an edge.  They think they have an edge, and then the trade doesn’t work out, and they move on.

The problem is that they were fooled into thinking that they had an edge.  And since they were fooled, they will continue attempting to trade the same poor system again and again.  That is how I was trading moving average crossovers, MACD divergences, and chart patterns for two years with no success.

Also, truthfully, most people do not do everything that they could to place the best possible trades.  Most people only do the bare minimum.  Most people only look at charts, and go find the patterns, or the indicators lining up.  They love to do quick analysis.  It is definitely quick, but it is the lazy way to trade.  And the lazy way to trade does not mean that you did everything you could.  I know about this stage because I was in it for two years.  I thought I was doing everything I can, I even tried to do more by tweaking moving average settings or attempting to find the new holy grail indicator.

Eventually, I discovered order flow trading.  That is when I realized most people do not do their very best.  Most people are not going to attempt to find the stops and the option barriers.  They are not going to attempt to read the news or figure out what it means.  They are not going to attempt to figure out what the market sentiment, sensitivity, or positioning is.  Most people are not going to analyze the global macro environment.  Most people do not do those things, so they get poor or mediocre results.  The traders that actually perform the order flow exercises and attain the skills are on the highest point on the trading profit ladder.

Mark Douglas then proceeds to talk about how most people are not good at predicting other peoples behavior.  That is true for the above reasons that I mentioned.  If traders focus on moving averages and chart patterns, then those will not help you much in predicting other peoples behavior.  If however, traders focus on the order flow skills, then predicting other traders behavior and predicting the future order flow becomes much easier.

Douglas:  You have to understand that there is no possible way that these mathematical formulas can predict the outcome of these patterns on a trade by trade basis.  Only on a series of trades.

This is the same old trader trap of the mathematical formulas giving you a trading edge.  If the mathematical formulas cannot give you a trading edge on the very next trade, then I would seriously consider purging them from your trading system.  Does that mean order flow trading has 100% win rates?  No, absolutely not.  There are various forms of order flow trading.  You can have high win rates with mediocre reward risk ratios.  You can have high win rates with high reward risk ratios.  You can have 50% win rates with high reward risk ratios.  You can have low win rates with extraordinarily high win rates.  All sorts of different systems that you can create using order flow knowledge.

Douglas:  The odds are in my favor that somebody is going to come into the market and bid it higher from here if I bought or offer it lower from here if I sold.

I would say to take it a step further and place trades where you have the massive order flow, and thus massive odds in your favor where somebody has to come into the market to move it, for they have no other choice.  To place high probability trades.

[source: http://orderflowforex.com] 

Mind over Market- Grkfx review [Part 4]

Mind Over Market Part 4 of 7

The interview starts off with Mark Douglas talking about how believing in a random result affects your expectations.

Douglas:  We don’t want to get into trading with the possibility of being disappointed, dissatisfied, or betrayed.  A lot of traders feel that way.  The problem is, when that potential exists it has the affect of affecting the way that we see market information in detrimental ways.

Mark Douglas is absolutely right.  Many traders, including myself when I first started, are afraid to take losses.  I always wanted to be right.  Every time I would take a loss I would feel the exact emotions above of disappointment, dissatisfaction, and betrayal.  I couldn’t believe that the market could cause me such pain.  After all, I was expecting my trades to be winners.  I had back tested the chart patterns and technical indicators, seen the great trades and charts on the forums, so I thought that I was going to be a winner.

There were some problems with my chart and price pattern analysis that I only discovered at a later point.

William Eckhardt from the book New Market Wizards was asked why he doesn’t use chart patterns in his systems.  The answer he gave was:

The human mind was made to create patterns.  It will see patterns in random data.  A turn-of-the-century statistics book put it this way:  ’Too fine an eye for pattern will find it anywhere.’  In other words, you’re going to see more on the chart than is truly there.  Also, we don’t look at data neutrally – that is, when the human eye scans a chart, it doesn’t give all data points equal weight.  Instead, it will tend to focus on certain outstanding cases, and we tend to form our opinions on the basis of these special cases.  It’s human nature to pick out the stunning successes of a method and to overlook the day-in, day-out losses that grind you down to the bone.

Eventually I didn’t just look at the time the chart patterns worked.  I started spending more of my time on when the chart patterns failed – and failed miserably.  That is where the order flow light bulbs turn on and the market epiphanies come.

Distorting Market Information

Mark Douglas then proceeds to talk about how traders have pain avoidance mechanisms that affect their perception.  The trader who is in a trade that is moving against them, they will a tendency to focus on the information that they believe validates their trade and avoid the information that tells them the market is trending against them.

The way this manifests itself in trading is for example if you are in a long trade and the market has just taken out a low point and posted a huge down day.  Instead of the trader focusing on the fact that their pain tolerance point was just hit and they should get out of the market, the trader can focus on the small upward retracements that occur in the market.  The trader can just look at and focus on the small green bars, instead of the large red bars.  That is for a chartists.

An order flow trader can focus on the small pieces of bullish news that he or she believe support the trade instead of the big bearish news that caused the market to sell off hard.

Which is why becoming an order flow trader, especially global macro and news traders, involves understanding and assigning importance to the information that is going to move the market.  Knowledge of market sensitivity is crucial.

People can latch on to all sorts of different market information.  The chartists can latch on to their head and shoulders pattern.  The technical indicator trader can latch on to their divergence signal.  The price pattern trader can latch on to their engulfing pattern at a major support/resistance level.  The astrological trader can latch on to the planets aligning in a certain pattern.  The order flow trader can latch on to a stop loss and option barrier location.

What is important is that the thing that you latch on to generates order flow and moves the market.

Mark Douglas offers some more words of wisdom:

Regardless of the reason for getting into a trade, if other traders don’t buy into that reason, or if other traders don’t have another reason to want to buy at a price that is worse than yours.  You bought the stock at $10, someone is going to want to buy it at $11, buy it at $12, at $13, and not only be able to buy it at 11, 12, 13 and 14, there are going to have to take out all the offers, all the traders who think it is high at 11, 12 and 13.  And so, if these people aren’t coming into the market to do that, then whatever reason you thought you had might not be so good.  That is why it is critical to pre define your risk before you get into a trade.  Professional traders do not think of it any other way because they know it takes other people.  My reason might be great, but if someone else isn’t buying into it what different does it make?  It doesn’t matter because it is not a winning trade.

This is a very important quote.  Professional traders know it takes other people to move the market.  They know it takes order flow.

Therefore it stands to reason that your analysis method, your reasons for entering a trade should be as closely linked to what the other traders are thinking about, and more importantly, what their future actions will be.

Why is it important to know what the market is currently thinking?  Because if you know what the market is currently thinking, then you can project out future scenarios for what could happen.  You can know what shocks to the market can cause order flow to be generated.

I do not go into trading with the expectation that my next trade or next series of trades are a random outcome.  I go into trading believing that I will take small losses, but I never believe that my trades have a random outcome, for there are always order flow and liquidity reasons.  Most of the time they are identifiable.  Some of the before the trade and hence I place a trade.  Other times in the middle of a trade, hence the management of trade occurs.  Other times after the trade, where it is either a profit or a loss.  If it is a profit then you can re affirm whether your analysis caused the market to move.  If it is a loss, then you can examine what went wrong.  Only on a small number of occasions do I attribute it to some fluke event.

Some more words of wisdom from Mark Douglas:

The pattern shows up first. Then what we have to do is put up our money.  Meaning, how much am I willing to risk to find out if it will work. Most traders because they evaluate, because they judge and because they analyze and build a case for the pattern being right, they actually talk themselves out of believing that the risk even exists. 

[source: http://orderflowforex.com]

Paul Tudor Jones's Perfect Failure

PERFECT FAILURE

COMMENCEMENT ADDRESS TO GRADUATING CLASS OF

THE BUCKLEY SCHOOL

June 10, 2009

            When I was asked to give the commencement address to a graduating class of 9^th graders, I jumped at the chance.  You see, I have four teenagers of my own and I feel like this is the point in my life when I am supposed to tell them something profound.  So thank you Buckley community for giving me this opportunity.  I tried this speech out on them last night and am happy to report that none of them fell asleep until I was three quarters done. 

When composing this message I searched my memory for my same experience back in 1969 when I was sitting right where you are.  I realized that I could hardly remember one single speaker from my junior high or high school days. Now that could be my age. I’m old enough now that some days I can’t remember how old I am. But it could also have been a sign of the times.   Remember, I was part of the student rebellion, and we did not listen to anything that someone over 30 said because they were just too clueless. Or so we thought.

          Anyway, as I sat there considering this speech further, I suddenly had a flashback of the one speaker who I actually did remember from youthful days.  He was a Shakespearean actor who came to our school to extol the virtues of Shakespeare. He started out by telling us that Shakespeare was not about poetry or romance or love, but instead, was all about battle, and fighting and death and war.  Then he pulled out a huge sword which he began waving over the top of his head as he described various bloody conflicts that were all part and parcel of Shakespeare’s plays.  Now being a 15-year old testosterone laden student at an all boys school, I thought this was pretty cool.  I remember thinking, “Yea, this guy gets it.  Forget about the deep meaning and messages in the words, let’s talk about who’s getting the blade.” 

          As you can see, I have a similar sword which I am going to stop waving over my head now, because A) I think you are permanently scarred, and B) the headmaster looks like he is about to tackle me and C) some of you, I can tell, are way too excited about this sword, and you’re scaring me a little.

          I’m here with you young men today because your parents wanted me to speak to you about service—that is, serving others and giving back to the broader community for the blessings that you have received in your life.  But that is a speech for a later time in your life.  Don’t get me wrong, serving others is really, really important.  It truly is the secret to happiness in life. I swear to God.  Money won’t do it.  Fame won’t do it.  Nor will sex, drugs, homeruns or high achievement.  But now I am getting preachy. 

          Today, I want to talk to you about the dirtiest word that any of you 9^th graders know.  It’s a word that is so terrible that your parents won’t talk about it; your teachers won’t talk about it; and you certainly don’t ever want to dwell on it.  But this is a preparatory school, and you need to be prepared to deal with this phenomenon because you will experience it.  That is a guarantee.  Every single one of you will experience it not once but multiple times, and every adult in this room has had to deal with this in its many forms and manifestations.  It’s the “F” word.

 FAILURE.  Failure that is so mortifying and so devastating that it makes you try to become invisible.  It makes you want to hide your face, your soul, your being from everyone else because of the shame.  Trust me, boys—if you haven’t already tasted that, you will.  I am sure most of you here already have.  AND IT IS HARD.  I know this firsthand, but I also know that failure was a key element to my life’s journey.

          My first real failure was in 1966 in the 6^th grade.  I played on our basketball team, and I was the smallest and youngest kid on the team.  It was the last game of the season and I was the only player on the squad that had not scored a point all season.  So in the second half the coach directed all the kids to throw me the ball when I went in, and for me to shoot so that I would score.  The problem was that Coach Clark said it loud enough that every person in the stands could hear it as well as every member of the opposing team.  Going into the fourth quarter, our team was well ahead, Coach Clark inserted me and thus, began the worst eight minutes of my life up until that point.  Every time I got the ball, the entire other team would rush towards me, and on top of that, that afternoon I was the greatest brick layer the world had ever seen.  The game ended.  I had missed five shots, and the other team erupted in jubilation that I had not scored.    I ran out of the gym as fast as I could only to bump into two of the opposing team’s players who proceeded to laugh and tease and ridicule me.  I cried and hid in the bathroom.   Well, that passed, and I kept trying team sports, but I was just too small to really compete. So in the 10^th grade, I took up boxing where suddenly everyone was my size and weight.  I nearly won the Memphis Golden Gloves my senior year in high school and did win the collegiate championship when I was 19.  Standing in the middle of that ring and getting that trophy, I still remember looking around for those two little kids who had run me into that bathroom back in the 6^th grade, because I was going to knock their blocks off.   That’s one problem with failure.  It can stay with you for a very long time.

          The next time the dragon of failure reared his ugly head was in 1978.  I was working in New Orleans for one of the greatest cotton traders of all time, Eli Tullis.  Now, New Orleans is an unbelievable city.  It has the Strawberry Festival, the Jazz Festival, the Sugar Bowl, Mardi Gras, and just about every other excuse for a party that you can ever imagine. Heck, in that town, waking up was an excuse to party.   I was still pretty fresh out of college, and my mentality, unfortunately, was still firmly set on fraternity row.  It was a Friday morning in June, and I had been out literally all night with a bunch of my friends. My job was to man the phone all day during trading hours and call cotton prices quotes from New York into Mr. Tullis’ office.  Around noon, things got quiet on the New York floor, and I got overly drowsy.  The next thing I remember was a ruler prying my chin off my chest, and Mr. Tullis calling to me, “Paul. Paul.”  My eyes fluttered opened and as I came to my senses, he said to me, “Son, you are fired.”  I’d never been so shocked or hurt in my life.  I literally thought I was going to die for I had just been sacked by an iconic figure in my business.

          My shame turned into anger. I was not angry at Mr. Tullis for he was right.  I was angry at myself.  But I knew I was not a failure, and I swore that I was going to prove to myself that I could be a success.  I called a friend and secured a job on the floor of the New York Cotton Exchange and moved to the City.  Today, I will put my work ethic up against anybody’s on Wall Street.  Failure will give you a tattoo that will stay with you your whole life, and sometimes it’s a really good thing.  One other side note, to this day, I’ve never told my parents that I got fired.  I told them I just wanted to try something different.  Shame can be a lifetime companion for which you better prepare yourself.

          Now, there are two types of failure you will experience in life.  The first type is what I just described and comes from things you can control. That is the worst kind.  But there is another form of failure that will be equally devastating to you, and that is the kind beyond your control. This happened to me in 1982.  I had met a very lovely young Harvard student from Connecticut, dated her for two years then asked her to marry me right after she graduated from college.  We set a date; we sent out the invitations; and all was fantastic until one month before the wedding when her father called me.  He said, “Paul, my daughter sat me down this afternoon, and she doesn’t know how to tell you this, but she is really unhappy and thinks it’s time for you two to take a break.”  At first I thought he was joking because he was a very funny guy. Then he said, “No, she is serious about this.”  I thought to myself, “Oh, my God, I am being dumped at the altar.”  I’m from Tennessee. Getting dumped at the altar was the supreme social embarrassment of that time. It was a big deal. When all my family and friends found out, they were ready to re-start the Civil War on the spot. I had to remind them that the last Civil War didn’t go so well for our side, and I didn’t like our chances in a rematch. The reality was that I was a 26-year old knucklehead, and since all my friends were getting married, I kind of felt it was time for me to do the same thing.  And that was the worst reason in the world to get married.  I actually think she understood that and to a certain extent spared me what would have been a very tough marriage.  Instead, I’ve had an incredible marriage for twenty years to a wonderful wife, and we have four kids that I love more than anything on Earth.  Some things happen to you that at the time will make you feel like the world is coming to an end, but in actuality, there is a very good reason for it. You just can’t see it and don’t know it.  When one door closes, another will open, but standing in that hallway can be hell. You just have to persevere.  Quite often that dragon of failure is really chasing you off the wrong road and on to the right one.

          By now you are thinking, how much longer is this loser going to keep on talking.  My kids are all teenagers, and whenever I’m telling them something I think is important, they often wonder the same thing.  But the main point I want you to take away today is that some of your greatest successes are going to be the children of failure.  This touches upon the original reason  I was invited here today.  In 1986, I adopted a class of Bedford Stuyvesant 6^th graders and promised them if they graduated from high school, I would pay for their college. For those of you who don’t know, Bed-Stuy is one of New York City’s toughest neighborhoods. Even the rats are scared to go there at night.  Statistically about 8% of the class I adopted would graduate from high school, so my intervention was designed to get them all into college.  For the next six years, I did everything I could for them.  I spent about $5,000 annually per student taking them on ski trips, taking them to Africa, taking them to my home in Virginia on the weekends, having report card night, hiring a counselor to help coordinate afternoon activities and doing my heartfelt best to get them ready for college.  Six years later, a researcher from Harvard contacted me and asked if he could study my kids as part of an overall assessment of what then was called the “I Have a Dream” Program.  I said sure.    He came back to me a few months later and shared some really disturbing statistics. 86 kids that I had poured my heart and soul into for six years were statistically no different than kids from a nearby school that did not have the services our afterschool program provided.  There was no difference in graduation rates, dropout rates, academic scores, teenage pregnancies, and the list went on.  The only thing that we managed to do was get three times as many of our kids into college because we were offering scholarships whereas the other schools were not. But in terms of preparing these kids for college, we completely and totally failed. Boy, did this open my eyes.  That was the first real-time example for me of how intellectual capital will always trump financial capital.  In other words, I had the money to help these kids, but it was useless because I didn’t have the brains to help them. I had tried to succeed with sheer force of will and energy and financial resources.  I learned that this was not enough. What I needed were better defined goals, better metrics, and most importantly, more efficient technologies that would enable me to achieve those goals.  What that whole experience taught me was that starting with kids at age 12 was 12 years too late. An afterschool program was actually putting a band-aid on a much deeper structural issue, and that was that our public education system was failing us.  So in 2000, along with the greatest educator I knew, a young man named Norman Atkins, we started the Excellence Charter School in Bedford Stuyvesant for boys. We set the explicit goal of hiring the best teachers with the greatest set of skills to be the top performing school in the city. Now that was an ambitious goal but last year in 2008, Excellence ranked #1 out of 543 public schools in New York City for reading and math proficiency for any third and fourth grade cohort, and our school was 98% African American boys.  We never would have done that had I not failed almost 15 years earlier.

          So here is the point: you are going to meet the dragon of failure in your life.  You may not get into the school you want or you may get kicked out of the school you are in. You may get your heart broken by the girl of your dreams or God forbid, get into an accident beyond your control.  But the point is that everything happens for a reason.  At the time it may not be clear.  And certainly the pain and the shame are going to be overwhelming and devastating.  But just as sure as the sun comes up, there will come a time on the  next day or the next week or the next year, when you will grab that sword and point it at that dragon and tell him, “Be gone, dragon. Tarry with me and I will cut your head off. For I must find the destination God and life hold in store for me!”  Young men of Buckley, good luck on your journey…..