Many times in the past I’ve written about the need to adapt, the need to be able to change your behavior relative to the market because the markets are ever changing.
I’ve stated that mechanical systems may be workable, but for only a short time relative to the life of markets. You must learn to trade what you see and to understand what you see on a chart.
When I first began trading there was no such things as futures contracts for foreign currencies. Why didn’t they exist? Because there was no need for them! In the 1970’s all that changed when the US dollar went off the gold standard and began to float against other currencies. Following that, the Chicago Mercantile Exchange began to create currency futures to provide a place where currency traders could hedge the risks associated with dealing in foreign currencies. Some of these risks are direct and some are indirect. Direct risk is involved for those who deal directly in foreign exchange. Indirect risk involves companies who export or import and receive payments or make payments in the currency of another country.
Ever since currency futures were created, they have been in a state of flux. More recently, for purposes of futures trading, currency gyrations have centered on a massive move away from currency futures to more direct trading in the forex markets. Currency futures, while maintaining their volume and open interest figures, are actually less liquid than they had been previously. Volume and open interest do not reveal the picture of what is happening in the currency futures pits. Volume and open interest levels are being maintained by fewer and fewer futures traders.
In the period from 1992 to the present, we’ve witnessed currency futures moving from “red-hot” to “cool” and now hot again insofar as speculators are concerned. Foreign exchange, which in 1992 was one of the hottest plays, first turned dull and then back again to exciting.
That this has happened can be seen in areas of which most futures traders are ignorant. Five years ago foreign currency traders were being paid huge salaries and anyone with a track record could virtually name his price. Following that, currency traders were no longer in great demand. Now, again, there is a huge demand for successful currency traders.
Currency (forex) are but a small representation of the $1.9 trillion dollar foreign exchange market. Professional currency traders use forex, forwarding contracts, derivatives of all kinds, and the futures pits, to deploy their various trading and hedging strategies. Looking at only the futures is like the blind man trying to tell what an elephant is like by feeling only the tusks.
In past years, foreign exchange desks at banks, insurance companies, brokers, and other institutions were seen closing down and firing hundreds of employees. Today, they are again looking for currency traders.
Interpreting Bar Charts
The opening price of a daily or a weekly bar usually illustrates the amateurs' view of value. Research has shown that opening prices very often
occur near the highs or lows of daily bars. Prices tend to recoil later in the day from the extremes set early on by the buying or selling of amateurs.
The actions of professional traders are often reflected in the closing prices of daily and weekly bars. They become especially active near the close, taking profits to avoid holding positions overnight.
In bull markets prices often hit lows on Monday and Tuesday due to profit taking by amateurs and then rally to new highs on Thursday and Friday. In bear markets prices often make new highs for the week on Monday and Tuesday and new lows then occur on Thursday or Friday.
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Don’t Overtrade!
Over Trading is the greatest single cause for losses in the markets. Whether you are winning now or losing now, ninety-five or more percent of all traders trade too often.
Even a daytrader trading a five minute chart has no need to trade every day nor to trade all day long. You should be filtering your trades so that you take only the best of the best.
Overtrading was a problem that took me a long time to overcome because I did not know what I was looking for. Overtrading is a very serious problem, and veteran traders learn to avoid it. In fact, one way to know if a trader is a mature professional is to know if that trader conquered the problem of overtrading.
The biggest problem with overtrading is that you don't even know you're doing it. You can overtrade by trading too many contracts (too much size), trading too often, attempting too many positions or sitting and staring at the screen all day.
One trader I met, who was following a system in twenty markets, received entry signals in fourteen of the twenty. The entry prices were such that probably only two or three of them had any chance of being filled. Yet this trader boldly called in to enter all fourteen orders. After the first six, his broker refused to take any more orders. Had they all been filled, the trader would have been several thousand dollars over margin.
Good traders immediately cut back on size when they are losing or have an equity draw-down.
The total commitment you make on any entry should be relative to a reasonable expectation of the profit potential for that trade. Each trade is different and must be weighed on its merits.
How do you know how many contracts to trade? Certainly you are in a pickle if you always have to trade in single lots. That is not to say that there are never times when a single lot is the right thing to do. It’s okay when you’re scalping , or trading options . However, wherever possible try to trade a least two contracts. You need one to cover costs, and the other to give you a profit.
If it's late in the day and you are a daytrader who normally does a five lot, perhaps you should use a smaller size due to the fact that the trade hasn't as much time to develop as one made earlier in the day.
