Intermarket Spread

For now I've just looked at calendar oil spreads. But after digging myself into Keith Scharp's book "The complete Guide to spread trading" I tried an intermarket spread yesterday:

1. You look at the market and decide which one is strong and which one is weak.
2. Right now the Technical's are relatively strong, while the big caps, especially the Financials are weak
3. Meaning: If it goes up you can expect the NQ to outperform the other markets, if it goes down the YM will be the heaviest hit
4. Trading an intermarket spread means: You go long one market and short another at the same time
5. But first you need to understand, that trading 1 NQ is not the same as trading 1 YM contract. They don’t move at the same speed
6. Therefore you do a little calculation:
   NQ at 1080 * 20$ (per point) is worth 21600$
   YM at 6625 * 5$ (per point) is worth 33125$
   To make them move at the same speed, your long and short positions need to have approximately the same value
   NQ: 3*21600$ = 64800$
   YM: 2*33125$ = 66250$
7. So your Spreadtrade would look like: Long 3 NQ and Short 2 YM contracts
   Most brokers will recognize that this is a Spreadtrade and give you a very low commission on the whole trade. In case of IB yesterday this trade cost me about 6500$ margin (IB gives the margin advantage for the corresponding 2 long and 2 short positions and adds to that the 1 contract long NQ margin)
8. This trade will show you a profit in rising and in falling markets as long as your assumption that Technical's will outperform the big cap Dow stocks is correct. It will show you a loss, if there is a snap back rally in the financial sector.

In spreads you need to be right about the fundamentals not about the direction of the market.

Being in a trading hole

Been there, done that, will do it again...

From time to time emails from readers reach me asking me, what to do when you are in a hole. Something which worked last year really fine, suddenly stops working and you find yourself down 50% to 70% of last years profits or worse of your account value at the start of the year.

Stupid example? I don't think so! You can do it with 1 trade, if you are careless and stubborn. (I just proved it going long 30,000 FAS last Thursday in my 125k$ IB demo account, which is now reduced in size by 65% in just 2 trading days...just to prove to myself, that taking a 2,000$ loss on a big position is the correct way to trade... but I will hold it into extinction if necessary)

Being in a real big hole is something, which seems to happen to all traders over and over again. Strategies seem to stop working for no apparent reason and when you finally realize it, you are already down big time.

Question is, how do you stop and reverse the downward slide to climb out of the hole again.

1. You need to have capital, so you have to make sure that you still have an account to trade. Which means: STOP TRADING NOW
   Stop for a day, a week, a month, as long as it takes. The market will be there waiting for you, when you are ready again.
2. Markets change and you have to adjust your strategy to compensate or you switch to a new market which fits your trading strategy better.
3. Something private: From time to time you will find articles about new markets in this blog. Most likely I'm in a hole or I'm feeling no longer sure in the market I'm trading at the moment. It might be that something changed in my trading environment, which causes me to trade at changed times, or I'm occupied with private matters which should take precedent to trading. The result is always the same: My trading system is not working the way I'm used to, I'm not getting the results I expect from trading and that causes me to look somewhere else. Usually when I do that, I write about it to get insight from you through emails or comments in the blog.
4. One thing you know, when you have fallen in enough holes is, that you will come out of them stronger, if you have discipline and persistence. Go back to the basics.
5. First answer this question:
   What has changed, the market or I?
6. If its me, then the first thing I do is: I stop trading.
   1. Maybe my environment has changed and I have to adjust my trading system to the new setup. EG: You had 2 screens and you upgraded to 4 screens. Suddenly you are flooded with information and you need time to adjust. More screen space is great, but you can't process all information presented to you, you need to learn what is important and where to find it on your bigger screen space.
   2. You have less time for trading, but your trading system requires you to be present 100% of the market hours or you will miss your chances.
   3. Something really difficult: You are suddenly dependant on the money earned through trading. It's a huge difference, if you have a regular income and your trading profits are just a nice add-on, compared to having no income other than your trading profits.
   4. Maybe you don't have enough sleep, you drink too much, you don't exercise. Trading requires you to be fit. So take care of yourself.
7. If it's the market:
   1. Question that assessment of the situation as markets usually do not fundamentally change very often. They do, but your trading system should capture quite a range of different market conditions or it would not have been profitable in the past. And that means, before you decide your trading system is not working, it's a lot more likely that something within yourself has changed causing the losses you experienced.
   2. If everything you do is the same you did in the past, then your system might no longer be working. You could try to tweak your system, but usually tweaking a profitable system leads only to an unprofitable system in the future.
   3. Try a different approach: Ask yourself, what is the basis of your system, why is it working, what are its components, what environment does your system need to work profitable.
   4. Once you have answered these questions look for a market which fits your system. No one forces you to trade ES, YM or NQ. There are a lot of markets out there and once you know, what your system needs, you can look specifically for these markets to trade.
8. Once you found your market
   1. Start demo for a week
   2. Learn the movements of the new market
   3. Start trading small
   4. Forget the notion, that you will be whole tomorrow or the day after. You are in a hole and it takes time to get out of the hole.
   5. But know, that once you found your mojo again it will go very fast and you will be stronger and better prepared the next time you fall in a hole.

I hope these points help some of you currently in a trading hole. They helped me in the past and will help me in the future.

US Dollar, Japanese Yen End Day Lower as Bernanke Optimism, Citigroup Report Boost Risk Appetite

- British Pound Remains a Laggard as UK Industrial Output Hits 28-Year Low
- Euro Tests 1.28, Tumbles Lower as ECB’s Weber Signals Further Rate Cuts
- New Zealand Dollar Could See Heightened Volatility on Expected RBNZ Rate Cut

US Dollar, Japanese Yen End Day Lower as Bernanke Optimism, Citigroup Report Boost Risk Appetite
Risk appetite was strong for much of the day, pushing the S&P 500 up 6.37 percent by the end of the day and weighing on the US dollar and Japanese yen on word that Citigroup was having its best quarter since posting a profit in 2007 and amidst reassuring comments by Federal Reserve Chairman Ben Bernanke. During a speech to the Council on Foreign Relations, Bernanke said that the US will ensure banks have sufficient capital, and urged the overhaul of rules for the biggest financial firms in order to “make the financial system as a whole better able to withstand future shocks, but also to mitigate moral hazard and the problem of too big to fail by reducing the range of circumstances in which systemic stability concerns might prompt government intervention.” Meanwhile, wholesale inventories fell for the fifth straight month in January at a rate of 0.7 percent, as businesses try to keep up with declining demand. Indeed, wholesale sales have been consistently falling negative since July 2008, which has led the inventory/sales ratio to climb from 1.06 in June 2008 to 1.30 in January 2009, suggesting that business are burdened with additional costs as they carry excess supplies.

Looking ahead to Wednesday, there will be no key US economic indicators released, leaving the forex markets to move with risk trends during the US trading session. Something that I’ve been focusing on in particular is the status of the DXY index, which has thus far managed to hold above support from the March 6 lows and a rising trendline. If we see a break below this level, the move will likely signal an important turn for the greenback across many of the majors. However, as long as the index holds above support, bullish potential remains for the US dollar.

Forex Currency Trading Market

WHAT IS FOREX CURRENCY TRADING?

If you read about investing, you've seen the word forex trading. But because forex doesn't get much publicity in the major publications and websites, many investors don't know that forex is just short for "foreign exchange". So trading the forex market is simply trading foreign currencies.

As recently as ten years ago, currency trading had high barriers to entry, so only large banking and institutional firms had access to the tools and systems required to play in the forex trading game. Recently, however, technology has developed to the point that any individual investor can hop right in and trade with one of the many online platforms.

When buying and selling in the forex currency trading system market, you'll see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.

The goal when investing in currency is to be holding a currency that appreciates in value in relation to the other currencies. To use an overly simplistic example, if you bought 50 British Pounds for 100 US Dollars, held the Pounds for 1 week, and in that period the value of Pounds increased in relation to US Dollars, you could then convert those Pounds back into dollars for, say, $120.

Unlike the domestic stock markets, the forex currency trading is open for trades 24 hours a day. Much like the phrase "it's always noon somewhere," it's always business hours at some region of the globe. Since every country trades on the FX market, and it's open all day, the daily volume is roughly $1.2 trillion, which dwarfs that of the NYSE. Another comparison to make in order to truly realize the magnitude of the forex market is with the currency futures market (which has around 1% of the daily volume).

One other important distinction to make is that forex currency trading is not centered on an exchange like the NYSE or NASDAQ. There is no central body or organization required to act as middleman. Trading circulates between major banking centers around the world.

Until recently, there were strict financial requirements and massive minimum transaction sizes which prevented individual investors from trading. But with the advent of the internet came the FX brokers. A forex currency broker is similar to an online stock trading account such as etrade.

Anybody can open an account and buy and sell in any quantity. Because the brokers have thousands of investors placing orders through them, they are able to meet the large minimum transaction size by purchasing in large blocks and distributing currency amongst the purchasing investors.

Although it is now easy to start trading forex, it is a complicated and complex market. While it offers fantastic opportunity for wealth, it is also very easy to lose your shirt in a hurry. Before trading forex, do your homework and read as much as you can find before investing your hard earned money.

GBP/USD Closes Below 1.3845 - Is 1.30 Now Possible?

You may recall that I mentioned in one of last week's posts that 1.3845 is the critical level to watch out for on the GBP/USD pair because if it closed below this level on any one day, then this would signal the start of a new down trend. Well this is exactly what has happened because it closed below this level yesterday.

I think this is significant because this is the key Supertrend level on the daily charts. To put it into context the Supertrend was red from October 1 2008 until February 8 2009. It was then bullish for about a month or so until yesterday, when it turned red once again.

Also if you want further confirmation of possible weakness in this pair, the latest signals on Marketclub have all been sell signals. This includes the daily, weekly, monthly and quarterly charts, with the latest signal coming on the daily charts yesterday with a sell signal at 1.4035.

Anyway the negative Supertrend means that I will automatically be looking for short positions on the 4 hour chart for this pair, but on a longer term basis I wouldn't be at all surprised to see a sustained fall from now on to around the 1.30 level. It's bounced back a little bit today but this rise is far from convincing and I personally think that further falls are inevitable.

Forex Profit Farm Review

I was kindly sent a review copy of Forex Profit Farm a few weeks ago but haven't really had the time to read through this system and give it the attention it deserves up to now. However I have spent several hours in the last few days analyzing and back-testing the system and can now give you my full review of Forex Profit Farm.

An Introduction

Forex Profit Farm is basically a forex day trading system that you can use to capture many of the big intraday moves that occur on a daily basis.

What Pairs Does It Trade?

The system works on any currency pairs but it is recommended that you stick to either the EUR/USD pair (where it seems to be most effective) or the major currency pairs that have the tightest spreads.

What Time Frames Is The System Most Effective On?

The creator of the system recommends you use the 15 minute time frame, and my own research backs this up. Any less than this and you will be the subject of too many whipsaws, and any longer than this and you risk entering a trade after a large gap up or down, meaning you could be stopped out if the gap is filled.

What Indicators Does The System Use?

I obviously can't tell you the exact indicators that are used but they are nothing revolutionary. The handful of indicators that are used are very common and are found in all charting software.

What Are The Stop Loss And Profit Targets?

The stop loss is set at 35 points (or less) which I've found to be just about perfect because it gives the pair plenty of time to breathe and will keep in you a trade long enough to capture the big price move when it occurs. There is no target price as such but for maximum profits there are instructions on how you can use a trailing stop loss so that you can bank as many points as possible when the price moves in your favour.

So Finally Is The Forex Profit Farm System Actually Profitable?

Well from testing this system out on various different currency pairs, I honestly believe this system is profitable overall. The stop loss of 35 points hardly ever gets hit and yet it captures many of the big intraday swings that occur every day.

I would only recommend you use this system between 08.00 and 16.00 (GMT), because this is when you get the biggest price swings. Plus if you really want to maximize your profits, I would recommend you trade the set-ups that occur just after the UK and US markets open as this is the time when you get substantial price moves.

Overall though I have to say I'm very impressed by the Forex Profit Farm system. It generates at least two or three strong trading set-ups per pair per day, and some of these resulting price moves are in the region of 60-100 points so the risk reward ratio is very much in your favour.

I've been testing it out on lots of different pairs to see if this system has any weaknesses but I just couldn't spot any. It does appear to have a very high success ratio, and I think you can probably increase this further by only trading those high probability set-ups that occur at the busiest times of the day, as I've just mentioned.

To be honest my expectations on receiving a review copy of this system were very low, but after doing extensive back-tests on this system, I honestly think Forex Profit Farm could be a winner.