Month 1, Day 3 - 36-month forex trading challenge - automation and update on GBPUSD and EURYJPY trades.

Day 3 of the challenge already, and I have to say I'm pretty pleased with how things are going so far.

I know from experience however that this is where ego can get in the way. When things are going well it's important to be all the more cautious – the Midas touch doesn't last forever. The market has a habit of punishing those who believe they've figured it out!

The daily routine is working nicely and I'm feeling calm about things. I'm trusting in my system to tell me which currency pairs to focus on, the ones to ignore, and to regulate my behaviour to make all decisions without emotion.

As I outlined in an earlier blog post where I explained the only trading strategy you'll ever need, trading is very simple. Toss a coin, go long if it's heads and short if it's tails – hold for 2 if you're right and get out with a loss of 1 if you're wrong. That's really all there is to it, but we humans have a habit of overcomplicating even the most simple of tasks.

This brings me to the topic of automation. As human beings we've automated many of the mundane tasks we used to do by hand (and foot). Coffee makers, washing machines and automobiles have helped us improve our daily lives and given us more time to enjoy them.

But can automation work in the currency markets and could it make me a better trader?

One of my copiers on eToro messaged me through LinkedIn. This is one of the benefits of having a presence on a social trading platform – you meet lots of people with a common interest with some very interesting backgrounds.

MJ is a programmer with an interest in trading and contacted me to ask my advice on the possibility of building an automated system that would buy / sell any given forex pair against certain specified criteria.

We've had some back-and-forth dialogue and I explained that while my system has very specific rules, individual trade selection is made on a discretionary basis. The reason for this is that the latter involves an assessment of correlation risk and trade potential, which I expect would be difficult to programme into any system.

I have a number of proprietary candle signals programmed into my Trade Navigator platform, which shows me when one of my strategies could be on the table, but it doesn't mean I'll take the trade. This is when the discretionary element comes in and for me good trading combines a mechanical methodology with trader discretion.

No computer is as good or sophisticated as the human brain, and while automation removes the emotions that can be a trader's downfall, on the flip side it disconnects the trader from having a feel for the markets.

As human beings we have a gut instinct, which has evolved through evolution. It's important we listen to it tempered always by an understanding and awareness of the emotions that could be involved.

A trader's gut comes from experience of, and being hands on in, the market.

In Reminiscences of a Stock Operator by Edwin Lefevre, arguably the greatest book ever written on trading, Jesse Livermore watches the tape. The tape being the 'ticker tape', which before computerisation was the way market prices were communicated. Watching the tape was how traders got their feel for momentum in any given financial instrument, which helped them make their decisions.

My morning routine, which begins at 6am and runs until about 7am, sees me review each of the 23 currency pairs I watch to assess relative strength, overnight strength and current mode (whether the market is bullish, bearish or in range). This analysis doesn't give me an entry signal, but it does give me a feel for the market.

For example, from this morning's analysis I know that JPY, relative to other currencies, is strong. This doesn't mean I'm going to buy JPY pairs, but it helps confirm that I should stick with my EURJPY short (see below) and give priority to signals that show up in JPY pairs – there's a difference.

In part the inspiration for my 36-month forex trading challenge came from reading The Holy Grail Trading System by James Windsor. His was a primarily mechanical system, which I feel encountered a number of problems as a result. It's an interesting read with lots of trading lessons contained within.

While I'm on the topic of trading systems, it's probably worth mentioning the dreaded 'algos'. Algorithm trading (automated trading for marginal gains on a grand scale) is a method of trading conducted by some of the large investment banks and hedge funds.

Blame for irregular market spikes and whipsaw action is often laid at the door of the algos. I'm sure there is some blame to be assigned and if you are day trading with tight stop losses, it's very likely the algos will have cost you money.

One of the reasons I swing trade (where trades last anywhere from a few days to a few weeks) is that I'm less likely to succumb to the whim of an algo order. In addition, a primary reason I trade the forex market, is because it's the biggest financial market in the world. This provides insulation from the individual actions of one or other party and great liquidity. It's also dominated by commercials (those transacting for business), as opposed to speculators. If you don't believe me, it's all in black and white on the weekly Commitment Of Traders (COT) report, published by the the Commodity Futures Trading Commission (CFTC).

Anyway, let's get back to the task in hand.

Yesterday a GOLDEN GATE signal showed up on EURJPY.

On the daily chart I observed that the market was in range mode:

On the 240 chart I got my GOLDEN GATE entry signal when price closed below the 200 and 50 SMA:

I'm currently short with an open profit. Patience is now a virtue – observe the market and stay with my trade until my initial target (T) is hit, or the market gives me a clue that things have changed. The clue that things have changed would be a close back above the SMAs.

For now there's nothing to do, but to sit and wait.

As Jesse Livermore said: 'It was never my thinking that made the big money for me. It was always my sitting.'

Price is now at the bottom of the range on my GBPUSD short, but I'm not buying. All SMAs and retail trader sentiment point to more downside to come. This is now a risk-free trade (my stop is at entry), which has generated a 1% return on opening capital.

This combined with a marginal gain on my AUDUSD short from earlier in the week means that three days in I'm 1.24% of the way toward my 10% monthly target.

So far so good, but I'll be sure to keep the ego in check!

*********

Is it really possible to turn £50K into £1M? Over the next 36 months I'm going to find out by trading my personal account with full transparency.
Follow my 36-month challenge to turn £50K into £1M.
Read my blog here: https://stgforextvforexchallenge.blogspot.com
Subscribe on YouTube here: https://www.youtube.com/channel/UCyGySJ5IeDjq-DIJPU7nYvw

[Please note, the information presented is general educational material and does not constitute trading advice.
Trading foreign exchange (forex) on margin carries a high level of risk and may not be suitable for you or your circumstances.
Before trading forex you should investigate all of the risks, including the possibility that you could lose more than your initial investment.
It’s important to consider your investment objectives, level of experience and risk appetite. If in doubt seek advice from an independent financial advisor.]