Basket Traders,
Trading the basket of five is not always the prudent thing to do although I’ve done it many times. The problem is the correlation of all five pairs at the entry and also at the exit. I’ve found far too often that this never happens. The AUDUSD is the rotten apple if commodities suddenly reverse. Lately I’ve seen the EURUSD or the GBPUSD suddenly go against the basket. Watching and waiting for them all to correlate is a waste of time and money.
Take what the market gives you. I realize it’s easier to enter five pairs using a script but you must ask yourself is this really your goal or is your goal the profit that making a good trade will give you. More times then not I enter two JPY pairs then one USD and then another. Exiting the trades is the same process as the JPY’s and the USD’s don’t always reach their support or resistance levels at the same time. I’m not saying that trading a basket isn’t profitable but many of us have developed our own baskets and most are not baskets of five. I trade a basket of three JPY pairs and three USD pairs more then the original basket of five.
I traded today and entered a basket of three JPY pairs when suddenly the GBPJPY hit upper resistance. I dumped the GJ pair and left the other two run to resistance before exiting.
Most traders I’ve been trading information with don’t understand how to enter or exit and it gets down to the S & R’s. Why does one pair suddenly go in reverse while the others keep going? It’s not unusual and is really quite normal as are the times they move like lovers and move as one. Some will say they usually see the GJ and EJ turn at the same time which is true but don’t bet the house on it.
The idea to wait for a fifth pair to turn with four already out of the gate and running seems odd to me and totally illogical. If you were meeting four of your buddies at a movie theater to see a hit movie and the time of the start of the movie was drawing very near what would you do? Miss the start because somebody can�t tell time and let the guy who is always late ruin your night out?
I always see trade entry discussions and wonder what the fuss is all about. The place of entry is always clear if you�ve done your homework first. Ask yourself these simple questions.
What do the fundamentals tell you?
- Is the price of oil and gold up or down? Copper and other commodities?
- What are the stock markets doing?
- What�s on the calendar today as far as news?
- What have the currency markets been doing?
What do the technicals tell you? - The currency pair or pairs you are trading, what is the long term trend? Medium trend? Short trend? The trend of the time frame you�re wanting to trade?
- How close is each pair to resistance or support? Is there room to make profit before a reverse?
- Is the pair trending with the trend or against the trend? How steep is the angle if it�s an against the trend trade? Do you really want to trade against the trend?
- What time of day is it? Are you placing a trade before the open, Noon reversal, London close or NY close?
If you can�t answer these questions then what is your plan. Are you planning to win or to lose? Without the answers to the above questions you�re gambling.
THE ACTUAL ENTRY
I have been accused by a few of holding back and not discussing my method of entry. If you have read any of my previous posts on this subject my answers are always the same. There are many good ones and I do not rely on just one. I use the CCI, Stochastic, TRIX, DSS Bressert, and Momentum as a basket of indicators placed in one panel. Any one of these will work but some work better under different conditions and different time frames.
WATCHING THE TRADE
There is really no magic here as the indicators are secondary to the chart itself. Watch your charts and know this may be a bumpy ride before the exit. If you�re really lucky it will go your way for half dozen bars or so but this isn�t always the case. Watch the bars highs and lows and opens. Is the PA close to reaching an S & R? If a bar opens lower then the previous bar on a Long position check your nearest line of resistance as the PA will hesitate before breaking through it. Also check your indicators. Are they reaching the top? Understand that on a long run some indicators will top or bottom prematurely and the PA is far from finishing the run. This is why your understanding of Support and resistance is critical. You don�t trade with the indicators alone and most newbies would be better off if they traded on a demo account using support and resistance as the only thing on the charts. Most traders I�ve assisted with their trading found they made more money doing this then anything else before and admitted they were indicator addicts.
THE EXIT OF THE TRADE
This should be the easy part but we get in our own way. We see the money and we can�t wait to get it registered as a win. Or maybe a slight dip in profits appeared and we get anxious and bail out wiping the sweat from our brow and thanking the Currency Trading G_ds for the little profit we made only to see the PA heading straight up like a rocket which would have made us thousands instead of the hundreds we made. After analyzing the trade we find we had no valid reason to bail as the PA hadn�t reached the next resistance level and the indicators were far from topping. If you don�t understand S & R�s and have trending indicators rather then entry and exit indicators you�re still clueless. Setting a level of take profit such as 150 pips is ludicrous as well as this is an ill advised plan right from the start. If I set a take profit level say of 150 pips and I get 149.99 pips and then watch the profit go down to zero or below, please call 911 as I�ve completely lost my mind, but please make sure Danny boy isn�t in the same room with me as I might never get well.
Back to the exit of the trade and sorry for the left turn to Crazyville but I want you to understand I learned nothing from the Daisy Chain experience except there are more nuts out there then there are nut houses to keep them. The freaking squirrels are having a great day.
The actual exit point is by each pair hitting support or resistance and not the total amount earned by the basket. Once a pair reaches the point of reversing an idiot could see it�s time to take profit. To demonstrate this point I let my wife trade from June 30 to August 6, 2009 on a simulator of the basket of five. She has never traded in her entire life and only knows trading from the comments I have made. I explained very briefly how to trade and what to watch for while she�s trading which is not unlike the writings above in this post.
She made many trades and had few questions. Her end result starting with 1 full contract on five pairs was over $110,000 in total profit. Her main questions were on trend identification and reverse trend trades and how to trade them. This was on a demo account and also my notes on the fundamentals were at hand which she only looked at briefly. She apologized for taking profit early (within one bar of top or bottom) on some occasions but explained it was her nature being a conservative Brit. I guess I need to get her trading for real as she absorbs information like a sponge absorbs water and remembers everything she ever heard me say about trading. I think she wants a new Lincoln so maybe I could work out a deal. LOL
SUMMATION
The thing that I want to remind the readers about trading is the fact what you are doing with the Daisy Chain is scalping which although it�s fun to do it�s not your road to glory and riches. The good ones can make a decent living at it but if you trade in the same manner as Danny you are going to lose your shirt in time. The only traders that this method impresses are the new traders who know very little or the old traders who still know very little.
I ask that you define what you learned from trading live with the so called inventor of Daisy Chain. Did you trade five contracts at a time in the past? Did you trade at the best time of day? Did you buy the thing about when one pair turns it�s a signal that the others will as well without knowing the whys and wherefores of why this may be true or may be it�s just a bump in the road before taking off like a rocket? Did you set your stop loss at a $3000 loss to give your trade room to breathe? Did you widen your stops out even further if the trade was going against you? Did you hang on forever hoping the trade would go your way? Did you jump into a trade blindly following the blind leader of Daisy Chain?
I surely hope the answer was no to most of those and those who still trade with him wise up before their money is all gone. If any of you take my advice and learn before you make another trade you will find this experience with the Daisy Chain laughable. The truth be known that a lot of things you think you learned will and must be forgotten for your savings to survive.
The ones who are making money with basket trading have already learned that trading all five is not always a good thing. They learned that fundamentals are important and not that difficult to learn. They also have learned that most analyst writing for forex companies are clueless and even the ones who are good are talking more about long term then short term. Trading is not an every minute anytime of the day thing but a more pick the best time to trade deal. Some have learned about the S & R�s but most have not.
Some have learned better entries but again some have not and are searching for the Holy Grail of indicators to show the way to the golden basket of pips. You need not pay for it as I just gave it to you for free. You only have to learn it for yourself as education takes time and effort and cannot be bought or sold. I could sell or give you a piece of paper saying you are an International Currency Trader with a Doctorate Degree but would that make you a better trader? I think not.
Is it impossible to make money without first learning what it is you�re doing? No you can go to any casino and find winners. I watched a young man of around 28 make $83,000 in a few hours at the crap table at the Golden Nugget in Vegas. He made over $10,000 on my roll alone. He was a professional gambler and was amazing to watch as he moved his money from number to number.
He knew how to gamble and when and he was all business. He didn�t learn it overnight and it was obvious he was well taught. I made very little on my roll and eventually lost it all back. I was there to play and he was there to make money. He left as newbie players came to the table. I asked a man on my left why this guy left when his luck was running so good. He said luck had very little to do with that guys time at the crap table. He said the only reason he stayed is the way you and I roll the dice. Look at those new players down at the other end of the table; they�re clueless, drunk and reckless. Professionals only play when serious people are rolling and that�s why I�m leaving as well.
So if you are a newbie and you feel lucky, go ahead place your bets but remember this thing can bite you bad. It�s more fun at a casino but you can lose a fortune here as well if you so want to gamble. I suggest you learn first and trade last.
Trade well and prosper,
Johnny
