Currency Secrets

Let’s say you received an email in your inbox this morning of a new forex system and when you went to the website the opening sales copy said something to the effect of…

I have 4 golden rules that I use to determine if a trading method is good for me:

1. It must be a complete method, with setup conditions, entry rules, initial stop rules, and exit strategy rules, leaving no decision to chance.
2. It must include specific risk management, money management, and portfolio management guidelines.
3. It must be based on technical analysis, but it must not be a 100% mechanical system.
4. It must take less than 20 minutes a day to apply after learning how to trade with it.

Impressed so far? Would you continue reading the remainder of the copy?

Well I’d be impressed… I’d be a little niggly on the last two points as I wouldn’t care if a method took 20 minutes or 2 hours (obviously I’d prefer the lesser time), and so what if the system is 100% mechanical, wouldn’t that be a good thing? Sure, all systems break down, we all know that the only thing guaranteed in life is change so you not only need to have a method that works, but you need to have a process where you can adapt to changing conditions (i.e. how do you know a system no longer works? how do you then tweak it?).

But I found there was one even more important element that this person missed from their golden rules. Did you pick it up?

To see if the element I thought they missed in the opening pitch was going to be in the remainder of the copy I continued to read it… and sure enough it wasn’t there! (Okay, so there was one testimonial where one customer claimed to have had 8 winners in a row – they could’ve all been 1 pip profits, or 1000 pip profits, we aren’t told.)

So what was the missing element?

EVIDENCE

Talk is cheap dear friends we all know that – and it’s even cheaper on the internet! The only evidence this copy provided was the web site statistics on how many people viewed their site, and the expense at creating the high class videos that were used to create the DVD course. Both of which I have no doubt on.

But so what!

Sure, your method may use non-technical methods, you may be counting how many pigeons poop on your Porsche every morning to determine whether to go long or short the Euro, but what has been that method’s results? And can they be verified by an independent third party?

Sure, past performance is not indicative of future returns, but they’re a good guide aren’t they? I mean, would you prefer to place money into an asset that loses money 20-30% every year? No? But past performance is not indicative of future returns, next year the asset might make money?? True, but something would need to change for this asset to make money because the probabilities from its previous history indicate otherwise.

And we know you don’t need a 100% mechanical system to be profitable. That’s what demo accounts are for. You can be at the other end of the spectrum and have a 100% discretionary system, that’s fine. Run a demo account for a few months trading your plan (which is written down, yes?) and see how the results go. As you’re trading write down things that you notice with why a trade was profitable or not (did you trade the method exactly? did you notice anything unusual prior to entry? did you notice anything unusual about where your initial stop was? did something unusual happen during the trade? how was your exit?) – by doing this after your testing period you may begin to see a pattern develop with certain trades and find that when your method is tweaked to compensate for this pattern your method improves immensely!

If you have no plan you have no method.

And if you have results but no plan you have no idea on what works and what doesn’t!? So if your trading a demo account but have no plan – STOP!

Then start by doing the following:
1. Formulate a method. Find what indicators/fundamentals resonate with you, or look at some charts and see what patterns you notice. We’re all different here. I’m not a big fan of Elliott Wave, Gann, counting Uranus’ rings, or counting pigeon poop on my car, but for some of you those things will work the best (hopefully not the pigeon poop!). The best system for you is in you. All you need is time and experience to find it.
2. Test your method. If you can get some historical data, and can write computer code then mechanically test it, if you can’t that’s fine, be sure to write your method down and demo trade it.
3. Stick to your method for a set period of time/trades (at least 20 trades, but if you’re doing more than a trade a day I’d recommend trading for at least a month). To stay disciplined I recommend you exercise regularly or perhaps clean your house regularly (trust me your partner will love you for it – even if you don’t make money), because if you cannot stay disciplined in one small area of your life what makes you think you can do it in the hectic world of forex trading? Oh wait a minute you’re a “special case” and these rules don’t apply to you… rrrright.

You don’t need a special top secret course to tell you what you already know on how to be profitable in the forex market. You just need to get off your lazy glutes and do the work yourself.

If success were easy everyone would have it – and what would special about it then?

So if you’re buying this course then I believe you do so on faith. Nothing indicates to me that the method even works, which means clients may be very disappointed at the actual results when they come to trade it. I have no doubt that this organization will offer tremendous support, or help educate the customer on what the forex market is, but can’t all this be done for free from a popular forex forum??

There’s a website that I’ve just recently come across which offers an excellent way for forex traders to automate their strategies.

In a similar style to Mark’s Thinking Stuff Forex trading software where the user is given a NON-programming approach to automating their strategy this web site similarly provides the ability for the user to test a myriad of trading strategies and to then trade those strategies LIVE via your FXCM account.

What made this web site even more compelling was the fact that all this (so far) is offered FREELY!!

Basically here’s how it works:
1. First you start at the SIGNAL end by compiling your entry and exit signals on selected time frames (you’re unfortunately only limited to the signals offered). If you’ve created some exit signals be sure to create a “Contextual Exit” otherwise your exit signals will not be used when you formulate your system.
2. When you’re happy that you’ve got your signals listed, jump over to SYSTEMS and select which currency pair you’d like to test your singals on, which direction (either Long or Short), what the order type should be once your entry signals are satisfied, and at what times you would want your system to run on (i.e. ALL, or just during the London session, or NY session… etc). Lastly, select your exit strategy.
3. Then move over to TESTS and create a new test. Select the strategy you want to test and the date range of your backtest and hit start.
4. Wait a few minutes and you’ll soon have your results sent to your email address.

Easy, huh?

Okay, so what are the downsides of this service?

Well, I think one issue that some people might have is that your systems are public. I suppose this is a negative and a positive, because on the one hand you can look at other people’s systems and tweak them to suit your own trading personality, yet on the other hand YOUR edge may begin to lose its profitability if others start using it.

Another problem is that you’re only limited to 100 signals, systems and tests per account. This may not sound like much, but considering that you can only test one currency in one direction at a time 8 tests can be chewed up quite easily on one system if the user tests both LONG and SHORT on each of the four majors.

Lastly, I’d prefer if I could access the test results better – maybe an export to CSV file or something of that nature. Ideally I’d like to see something whereby we have a table that has at least the following: ENTRY DATE & TIME, ENTRY PRICE, INITIAL STOP LOSS (IF ANY), EXIT DATE & TIME, EXIT PRICE, MAE, MFE, P/L (IN PIPS).

Anyway, HiveTrader is definitely worth a look and I would encourage you to go over and have a little play.

(If you like you can include my username currsec in the referrer ID when you register your account – I don’t make anything by you doing so.)

It seems from what has come across my desk over the last month or two that the easiest way to make money out of the forex market is to sell an ebook or DVD course catered to forex traders (i.e. the forex market).

One such forex course that came across my desk not too long ago stated in their copy that users COULD make US$300 per day trading their method, with only 20-30 minutes day of work.

What shocked me though, as I read through the copy, was that the claim was backed on mere hearsay.

That’s right there was no substantive evidence confirming that a user could make US$300/day – just someone’s opinion!

Yet this course sold for US$2,000 and many bought into the hype.

When I asked how such claims were derived (i.e. from hypothetical backtesting, or from actual trading – whether it be from the person selling the course or from a customer) no such response was given (which didn’t surprise me).

In this internet age things such as this will become more prominent.

Forex trading is a skill. There’s nothing wrong with purchasing ebooks or courses if you believe purchasing the course will enhance your forex trading skills, but try to remain objective whenever you come across such emotive sales copy that has been written by a trained copywriter who is expert in exaggerating claims and enhacing the course without stretching the truth too much.

You may even want to employ tactics that I use before I purchase a product (I’m going to assume that the product being pucrhased here is an informational product, you wouldn’t likely be able to use these tactics if purchasing a signal service, or something more tangible such as forex data):

First thing I do is look for claims in the sales copy of what this product will give me and I try to reverse engineer from the sales copy! What I try to look for are bullet points as these usually contain small snippets of information about what the product will provide. What I do with each bullet point is to try and figure out for myself what each bullet point’s answer is – it will be test of your own knowledge and also your creativity. As an example a sales copy might say:

• Know which direction a currency is likely to trend in the short-term AND medium-term in TEN SECONDS.

Now if you had to think of what this could be what answers would you come up with? Stop, think about it for a minute. Try it for a few seconds and see what you’d come up with.

If I had to have a guess on copy that said something like that I’d probably guess that the course would be either peddling some sort of trending technical indicator (such as moving averages, trend lines… etc) and employing them on different time frames to gauge short and medium-term trend, or perhaps looking at carry trades by assessing which pair has the higher interest rate (for medium-term direction), or perhaps looking at announcements to see whether an economic report will be favorable or not to a currencies short-term direction.

Sometimes brainstorming like this has produced new ideas… all thanks to a product I never bought!

If I come across a bullet point that I cannot answer I write it down and come back to it when I’ve gone through the copy. When I’m done I then go back to all the bullets and determine whether the bullet point will indeed enhance my forex trading. For those bullet points that I believe MAY enhance my forex trading skills I look at the price of the product and make one last final determination on whether the price fits the value (that I deem) for me to increase my forex skills.

Sometimes I’ll even search on the internet to see if I can try and find the answer to it before buying the product, because you never know if the seller may have pinched it from somewhere else!

So, one of your main priorities when purchasing any forex product should be: will it enhance my forex trading skills. If it doesn’t don’t be afraid to say no and move on – spending money on forex material is an EXPENSE and will affect your overall profit and loss at the end of the financial year.

Signal vendors come and go, methods have their season, but if you have purchased products that have enhanced your forex trading skills then you’ve got something that will last you a lifetime.

Another web site that was presented to me not so long ago was TopForexReview.com.

The site offers personal reviews by its owner Cindy on forex brokers, forex signal services, forex managed accounts, and forex training courses.

Now ordinarily I wouldn’t bother recommending something like this as there are a gazillion opinions on these things on the internet nowadays, however, there is something that’s a little different: Cindy provides free forex signals.

Now again, nothing extraordinary here, except for the fact that her signals aren’t half-bad – and she maintains quite a high accuracy (since July 2006 she’s hit 23 winners out of 27 trades!). The only negative with her service is that she doesn’t have any stop losses so some trades can experience large adverse moves against them.

But if you’d like to receive Cindy’s free signals (which she sends by email) then by all means go and register your name and email now!

Back in March Malcolm from Excalibur Forex offered readers of Currency Secrets free access to his signal service for a month.

Having now used Excalibur’s services for over 6 weeks I can provide my opinions on his service.

The things that I liked about Excalibur Forex was its simplicity of signals. Excalibur only trades the 4 major currency pairs, as well as the AUDUSD, the USDCAD, the EURJPY, and the GBPJPY. Each signal is sent out at 0000 GMT (and some times a little earlier) and even though there were days where I’d only access these signals an hour or two after they had been sent I still had no problems getting in (the market isn’t that volatile around that period). I will also add that the majority of exits where either through trailing stops set from the previous day or a target limit orders – with only one trade being exited at market during my sample.

The way in which I tested Excalibur’s system was by risking US$500 on each trade (which equated to 1% on my fresh demo Oanda account). I would then calculate the position size needed using Oanda’s FXMath Profit Calculator based on entry and stop loss prices.

Unfortunately during the testing period Excalibur wasn’t profitable. With risking US$500 per trade the account never went above starting capital and slipped to as low as US$45,022.60 (a tad under a 10% loss). The ending equity was US$46,174.16 (a 7.6% loss) and this excluded the profit/loss of the two open positions as at 30 April 2007.

Now I can understand the unfortunate luck of reviewing a service during a down month, so this isn’t my biggest concern, my biggest concern is whether what was reported as the ending profit/loss for the period was in fact what I had.

Excalibur report that the ending profit/loss in pips for April was -135.

My ending profit/loss in pips for April was +85 pips (BTW my opening balance as at 1 April 2007 was US$46,762.26 – so I still lost money)! Firstly the discrepancy for the difference in pips made lay in several factors: first there was an erroneously placed order on the web site to buy the USDCAD (Malcolm reported a stop loss higher than the entry price) I didn’t place a trade and informed Malcolm of the error, and by the time it was corrected the trade had already hit its stop loss – losing 60 pips). The other discrepancies lay in the EURUSD and USDCHF trades where it was by sheer luck on my part that I entered the order 2 hours late. I still kept the orders active, but the currencies never came back up and hit the entry price each losing 55 and 85 pips respectively.

Which brings us to an even stranger discrepancy: Why did you still lose money during April, even though YOU made 85 pips?? The best way to illustrate this is by using an example.

Let’s say that I have two trades on the GBPUSD and one loses 100 pips and the other makes 60 pips, netting me a loss of 40 pips. If my initial stop loss for trade #1 was 200 pips away, and my initial stop loss for trade #2 was 100 pips way what would my position size have been for each trade if I were willing to risk US$500 per trade?

We can easily do the math as follows:

Trade #1: U$500 / 0.0200 = 25,000 units
Trade #2: U$500 / 0.0100 = 50,000 units

Okay, now what would our net result be:

Trade #1: 25,000 x (0.0100) = (U$250)
Trade #2: 50,000 x 0.0060 = U$300

Our net profit = U$50.00 even though we’re net -40 pips. Even though the currency was the same, the pip value was the same, the risked amount was the same, we were still able to achive a net profit DOLLAR-wise compared to our net PIP losses.

It makes you think twice about forex signal services who provide performance statistics PIP based doesn’t it – especially if you trade their services as I have done with Excalibur by RISKING a fixed amount per trade. You’ll want to make sure that if you do employ a money management strategy such as this for a forex signal provider that you not only analyse their performance but also whether their initial stops are always a fixed distance away, or variable.

Anyway, getting back to Excalibur’s Forex I’d like to thank Malcolm for the opportunity and wish him the very best for the future with his service. If I could recommend one thing for his service it would be the capability to have alerts emailed to the user inbox, but that’s about it.

If you have similarly trialled Excalibur Forex and would like to detail your experience please do so below.