WELCOME Welcome to InterTrader.com’s InterTrader.com’s guide to protable trading in which professional trader Tom Tom Hougaard reveals some of the secrets of his trading success. Tom outlines a series of practical methods and tips that can help you to become a better trader, with clear rules to follow and real-life examples. Learn how to create a daily trading routine, how to respond effectively to breaking news, and how to balance fundamental and technical analysis. Tom Tom also discusses specic strategies for trading oil, indices and forex. The guide provides a fascinating insight into the life of a professional trader along with a wealth of practical – and protable – advice, direct from the t rading oor. oor.
ABOUT TOM HOUGAARD Tom spent eight years in the City, where he has become an extremely familiar and popular guest on Bloomberg, CNBC, CNN and BBC. Since 2009 he has traded solely for himself while running a live trading room where people interested in learning to trade in a live environment can hear exactly which markets Tom is buying and shorting in real-time.
ABOUT INTERTRADER.COM InterTrader.com provides a suite of products and tools to help you back your judgement in the nancial markets. InterTrader.com’s aims are simple: to make the markets accessible to all, to make trading affordable and to provide a service that you can trust. We offer both spread betting and CFD trading, providing fast and efcient execution on a huge range of global markets. With InterTrader.com you can take your own position on anything from stock indices and forex to commodities, oil and metals to UK, US and international equities. InterTrader.com is also committed to providing free news, research and charting software to all our clients, along with training for all levels of expertise. Quite simply InterTrader.com aims to make available the best-value trading package around. Copyright © InterTrader.com, 2011 All rights reserved
The views and comments in this guide are not the views of InterTrader.com. The provision of this information should not be construed in any circumstances as a recommendation or solicitation to buy or sell any security or nancial instrument. Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
InterTrader.com is a trading name of London Capital Group Ltd (LCG) which is registered in England and Wales under registered number 3218125. LCG is authorised and regulated by the Financial
Conduct Authority.
Registered address:
2nd Floor, 6 Devonshire Square, London, EC2M 4AB. Trading at the top: trading tips and strategies from a professional trader
TOM HOUGAARD CONSULTING ANALYST, INTERTRADER.COM
Part 1. Tips for better trading 1.
FOLLOW THESE TWO TRADING RULES TO WIN
2.
TRADE BETTER BY REVIEWING YOUR RESULTS
3.
GET TRADING EDUCATION ON A SHOESTRING
4.
TRADING THE NEWS IN JUST FOUR STEPS
5.
TRADING TIPS FROM THE FRONT OFFICE
Part 2. Trading Strategies 1.
WHY ENGLAND VS GERMANY IS A WINNER
2.
TRADE TRENDS IF MOMENTUM TAKES A LOSS
3.
HOW TO KEEP YOUR TRADES IN HARMONY
4.
UNLEASH THE MATRIX TO GET ACTION
5.
MECHANICAL TRADES KEEP EMOTION OUT
6.
SIMPLICITY IS SOMETIMES A TRADER’S ALLY
7.
MY CHECKLIST THAT GETS ME SET TO TRADE
Part 1. Tips for better trading
1. FOLLOW THESE TWO TRADING RULES TO WIN Let’s begin with a recommendation. Phantom of the Pits is probably the greatest trading book ever, and it’s available for free online. Authored by Art Simpson, it is an interview with ‘The Phantom’, an anonymous super-trader from the pits of Chicago. He is rumoured to be George Lane, the inventor of the Stochastic Oscillator indicator, but this has to my knowledge never been veried.
The Phantom operated from two basic rules:
RULE 1: In a losing game such as trading, assume you are wrong until the market proves you are right. Positions established must be reduced and removed until or unless the market proves the position correct. Why is rule one so hard to implement? The answer is that 98 per cent of all t raders trade to be right. The rest trade the markets to make money. The fear of being wrong is more often than not a greater motivator than the fear of losing money. Be conscious of it when you are trading.
RULE 2: Press your winners without exception. By incorporating rule two in your game plan from the start, you will be eliminating the desire to be proud when the market moves in your direction, and to take prots to show you are right. Traders love to be right. This is your enemy – to love to be right. Your motivation must be to love to do the right thing. When you think you are right in the market, this is just the beginning of your trade – not the time to take your prots to say to the world, ‘See, I was right!’ Who really cares if you were right? You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading. Otherwise, face the truth that you are only playing to break even. The money will follow the correct action.
2. TRADE BETTER BY REVIEWING YOUR RESULTS Here is an exercise that Steve Ward taught me. I may be paraphrasing, but to the best of my recollection these are his exact words: ‘Tom, you will never make the progress you want, if you don’t go back and review your old trades. On your losing trades, you have to ask yourself if you could have done things differently. Was the entry well dened? Was the stop in the proper place? On winning trades, you have to ask yourself if you got out too early, too late or timely. Could you have added to the winning position, rather than just sitting back and watching the trade?’
REVIEWING A RECENT TRADE I traded euro-sterling, and I bought it at £0.8793 with a stop at £0.8775. The entry was perfect, for about a minute, then the market sank lower. It spiked lower to £0.87743, then reversed hard up, and is now trading at £0.8820. So I got stopped out on a spike by half a pip and it is now sitting exactly where I would have liked it to be. In my diary, I noted calmly that, since I was trading with the daily and the four-hour time frame, I probably needed to have a slightly wider stop than I did. Otherwise everything was ne. It was just one of those trades that didn’t work out. I also took a snapshot of the before/after chart, for reference. I have learnt more from reviewing my old trades than from any book or from any course I ever took.
3. GET TRADING EDUCATION ON A SHOESTRING I received a phone call from a guy who wanted help with his trading. He had spent nearly £15,000 on trading education with a well-known educational trading establishment. Yet he was nowhere closer to making trading his chosen career than he was before, despite his sizeable investment in trading education. I related the story to a few of my trading friends and together we came up with a book budget which we felt would amply cover the syllabus the unfortunate man had been through, and at a fraction of the cost. In fact, we calculated that it would probably have saved him more than 99 per cent.
BOOK NO. 1 Technical Analysis of Stock Trends by Robert Edwards and John Magee. This will cover 95 per cent of your trading education. It covers everything you would want to know and it will cost you £23. Although concerned with stocks it is fully applicable to trading FX, futures and any other asset class.
BOOK NO. 2 High Performance Trading by Steve Ward. This is a complete psychological infrastructure of trading, dealing with everything you need in order to trade for a living. It will cost you £19. And that is all you need to purchase for now. The rest you can nd on the internet for free. In Google you will need to search for ‘pattern recognition’ so you know what patterns to look for. You need to search for ‘candle chart patterns’ so
you understand price action. Finally, you can consider joining a bulletin board where experienced traders post their trades. You can learn a lot from that alone. InterTrader.com also frequently runs webcasts where experienced traders talk about specialist topics.
Once you have studied the material, you are ready to trade with a minute amount. Open an account with InterTrader.com, either a demo or a real one and get tucked in. There is no better practice than doing. Reading about it is ne, but you will learn far more from actually trading and keeping a trade log.
4. TRADING THE NEWS IN JUST FOUR STEPS Formal education doesn’t help you become a good trader. My own mentor told me that ‘you only see what you have trained your eyes to see.’ This short run-through is an insight into how I have trained my eyes to trade news-driven markets.
STEP 1: Your rst duty every morning is to check the calendar for economic news. Stick it on your screen so you don’t forget.
STEP 2: I don’t anticipate what the news will be. I am too stupid. Instead I put my chart on ‘one-minute mode’. Whichever way the market breaks after the news is released is the direction I want to trade.
STEP 3: Once news is out and the direction has been set, I do my very best to get i nto the market on any kind of retracement against the news spike. It helps to have watched the market 10 hours a day for a few years. You get to understand price action.
STEP 4: I don’t look for a big move. If I can pick up 10-15 pips I will take it. My studies have shown conclusively that although there is no guarantee that the direction of the news spike will last for long, the market in question will almost 80 per cent of the time do a retest of the low it made on the news spike.
TWO EXAMPLES 23 February: The MPC minutes are released. Cable spikes violently higher. After one minute I see a 20 point retracement. I buy it. I wait almost 10 minutes. Nothing happens. I get out for a small (but annoying) 10 pip loss. The market continues lower for the next hour. 25 February: The GDP numbers are released. I don’t even register the number. Price is my God. Sterling-dollar spikes lower. I wait for a 20 pip retracement against the spike. I enter, with a 20 point stop. I take a handful of deep breaths. I am out, 30 pips richer. The principle is always the same: wait for direction, enter on a retracement, and don’t be (too) greedy.
5. TRADING TIPS FROM THE FRONT OFFICE Did you ever see the trading pit scene from the lm Trading Places? Well in real life it is every bit as crazy and then some. In 2007 I visited the oil pit in New York. I got some rather unusual trading advice from a 20-year veteran of the pits. The oor traders seem to have a unique take on the market, probably because they are so close to the forces of demand and supply unleashed in the pit.
Here is what the trader told me:
1. FIRST CUT IS THE CHEAPEST ‘The rst cut is usually the cheapest. I see so many of the new traders who are unable to take a loss. They hold on to their position for too long. They don’t understand that I too am wrong more times that I am right, but I cut the trade the moment I am in doubt. That rst cut has kept me alive in the pit for 20 years.’
2. THE MARKET IS EFFICIENT He also told me about the nature of the market: ‘The market is efcient. I t wants to go where the orders are. These orders can be stop (loss) orders or limit (buy or sell) orders.’ I asked him to elaborate and he said: ‘often the market will go to a certain price just to make sure as many people are lled as possible, and then it reverses. We say in the pit that they push them up to take them down.’
3. TREND DAYS ARE THE BEST I asked him about intraday trends. He told me he had the advantage of being able to see the orders from the brokers. His best days were ‘trend days’, where the
market continues in one direction all day. This point was aired by others I met in the pit. If a good trend was developing intraday, these guys would press it for all it was worth, irrespective of who was on the other side of the trade. They were never concerned about whether the market technicals were overbought or oversold. The only thing they had in mind was to press it as high or as low as they could before the bell rang.
Part 2. Trading Strategies
6. WHY ENGLAND VS GERMANY IS A WINNER I admit it. It’s an attention-seeking title, playing on the emotions of every football fan in England since 1966. ‘England vs. Germany’ is also a trading strategy which seeks to play two stock indices against each other. It is perfect for nancial spread betting, because you don’t have to factor in currency risk. The FTSE 100 consists of 100 companies, of which 10 make up about 45 per cent of the index value. The German DAX consists of 30 stocks, representing the crème de la crème of German commerce and industry. Together, they are considered the two leading stock indices in Europe.
Clem Chambers, the brilliant head of ADVFN and even more brilliant technical analyst, taught me the interplay between the two stock indices and how stocks are executed in block trades using volume-weighted average price (VWAP). I realised that there is a statistical correlation between the two stock indices signicant enough to bet on. I began to explore how to trade the two against each other in a straight arbitr age strategy, and came up with the idea that if the two diverged by more than 40 points from the previous night’s close, I should short the one that was strong, and buy the one that was weak. Take 9 March 2011 as a good example. The DAX closed the night before at 7164. The FTSE closed at 5974. Both indices were down about three to four points on the day. During trading on 9 March the DAX and the FTSE diverged by more than 49 index points: the DAX was up 53 points while at the same time the FTSE was up only four points on the day. So I shorted the DAX and bought the FTSE in equal amounts. The DAX closed at 7131. The FTSE closed at 5937. The spread between the two indices had gone from 1243 points during the day to 1194 points at the close. Although I did not capture all the 49 points on the table, it serves to illustrate the strategy well. Now, let’s deal with ‘what can go wrong?’ In one sentence: where is your stoploss? The answer is: you can’t have a normal stop-loss. You have to use a monetary stop-loss, and you have to be there to watch the screen. In that sense, it is more suited to the short-term traders of the City and beyond.
7. TRADE TRENDS IF MOMENTUM TAKES A LOSS A dear child has many names. The strategy below is called ‘lost momentum’ in my vocabulary, but it no doubt has other names too. It is in essence a form of trendfollowing strategy.
INGREDIENT NO. 1: DEFINE THE TREND I recommend using a simple or exponential moving average (MA) of more than 50 bars. Some have reported good results with the 62 period MA. I don’t want you to get too bogged down with rigid denitions. You are looking for a trending market, which trades above your chosen MA, and the MA is pointing up (for long positions – reverse the instructions below for short positions).
INGREDIENT NO. 2: DEFINE YOUR TIME FRAME You can use this technique on any time frame. I nd it lends itself very well to day trading on the 15-minute chart, and swing trading on the four-hour chart.
SET-UP FOR ‘BUY SIGNAL’ Your chosen market is trading above your MA indicator and the MA is pointing up. If you observe that the market is taking out a previous low (that previous low must be at least 8 bars prior to the current bar), you now wait until the market closes back above the price point of the previous low. That is your buy signal.
EXAMPLE: On 15 March 2011 euro-dollar made a low at midnight at $1.3920. However the trend was up on my 30-minute chart. At 8.30am the euro dipped below $1.3920 by about 10 points. It closed below $1.3920 too but, on the very next 30-minute bar, the euro closed back above $1.3920. That is my signal to buy euro-dollar, with a stop-loss below $1.3920. The technique stems from the observation that even in a trending market you will often nd that price dips below a previous low, only to immediately resume its trend
higher. All I attempt to do is to trade in the direction of the trend dened by the moving average. I reverse the instruction above for selling short.
8. HOW TO KEEP YOUR TRADES IN HARMONY The denition of harmony is a pleasing combination of elements in a whole. My mentor Bryce Gilmore taught me harmony in the markets. There was no course book, and no papers to read. It was night after night going over the day’s charts, pointing out the harmony in the day’s price action. Let me give you a concrete example. The DAX pushes up 50 points after the news announcement on the war against Libya. It retraces briey, only by about 18 points, before surging higher. I make a note of the number of points it has retraced. The next time it retraces from a momentum move higher, I am ready to buy it, once the retracement has reached 18 points. Why? No other reason than I have seen it happen thousands and thousands of times on the practice charts. For a good example of how practice makes perfect take 23 March 2011. The eurosterling cross rate was retracing from a surge higher. The daily trend, the four-hour trend, the hourly trend and even the 15-minute trend were pointing up. The rst retracement lasted about two hours, and was 40 points in extent. After a rally for 30 minutes, it began to trade lower again. I made a note that the high of the brief rally was £0.8744. I plotted that, should the cross come to £0.8704, which was 40 points from the high, I would be a buyer. The trend was, after all, still up. All good things come to those who wait. Eventually, £0.8704 printed and I bought, with the smallest of stops of no more than 15 pips. What made £0.8704 so powerful was that it was also a 61.8 per cent retracement of the last swing. I may be getting ahead of myself here, but when two or more ‘tools’ come together at the same price level, it is called conuence. We will discuss that in a later chapter.
Once I am in a trade, I have one primary objective: get my stop to breakeven as soon as I can. In this example I had the pleasure of being able to buy euro-sterling twice at £0.8704, both times making 10-15 points.
9. UNLEASH THE MATRIX TO GET ACTION You remember I mentioned the lm Trading Places before? The key scene takes place in the commodities trading pit for orange juice in the World Trade Centre. Two traders observe that Randolph and Mortimer, the two old-timers running the show, are buying every orange juice contract in site. Then those two observers rush into the pit to be part of the action. I didn’t understand the signicance of this ‘action’ – the volume and activity in a trade – until my friend and trading partner Dr David Paul taught me the Relative Strength Matrix. He explained that because many traders trade just one thing at a time you could be losing out on ‘action’ in other asset classes, something that short-term traders favour. For example, if you only trade euro-dollar, you may well miss out on better opportunities in other currency pairs. David taught me to go through each currency pair and cross pair within the ‘four majors’ and ascertain where the strengths and the weakness were. The explanation below is not a strategy, but an analytical framework to ascertain where the best move of the day is likely to be. Put a four-hour chart on the screen with a 60 period moving average. Go through each of the 10 pairs – euro-dollar, sterling-dollar, dollar-Swiss franc, dollar-yen and their six cross pairs – and make a note of which currency is the strongest and which one is the weakest. After looking at all 10 pairs, you now have a Relative Strength Matrix of the 10 currency pairs. Here’s an example. On the morning of 1 April 2011 the euro was stronger than all
the four main currencies, while the yen was the weakest against them. So naturally I was looking for opportunities to buy euro-yen all day. The non-farm payroll numbers made it a difcult trading day, but nevertheless in my live trading room I raked in 30-40 points in euro-yen alone. It is a simple analytical framework and it only takes 15 minutes to do in the morning.
10. MECHANICAL TRADES KEEP EMOTION OUT My own trading coach, Steve Ward, once told me that there is no point in having a mechanical trading system if you are not going to follow it. He certainly has a valid point.
I fondly remember the trading exercise that I put myself through in order to build trading discipline: pick a strategy and execute it religiously for 30 trades. You should nd that by trade 15 or so you will have taken an enormous step towards trading discipline and consistency.
PRACTISING MECHANICAL TRADING I have a good suggestion for a mechanical entry. I like to trade it in euro-yen, which is quite a volatile currency pair. The ingredients for this straightforward technique contain the following well-known principles: Fibonacci, overnight high and overnight low. In the morning, around 8am, I look at what the high over the overnight range is. I then look at what the low of the overnight range is. I then wait for the market to take out either the high or the low of the range. If, and only if, the market then trades back into the range, after having taking out the high or the low of t he range, I prepare an order to enter the market at the 62 per cent retracement over the range. This order comes complete with a stop and a target too. It doesn’t trigger every day though.
EXAMPLE: The overnight high was ¥117.40 and the low was ¥116.80. Around 8.30am, the market traded below ¥116.80, down to ¥116.60. It then began to rally. The entry price is ¥116.60 + 62 per cent of ¥117.40 minus ¥116.60 = ¥117.10. The stop is below the old low and the target is double of what the stop is, in this case 100 points. If the target has not been reached by 4pm, I will close the position, unless I am in prot, in which case I will move the stop-loss to breakeven, and potentially close some of the position, depending on how much I am up. I use a bit of discretion when it comes to the end of the day.
11. SIMPLICITY IS SOMETIMES A TRADER’S ALLY For some, trading is an academic endeavour. For others, it is a daily battle they relish and look forward to. When I started out I thought it was the best job in the world. Today I have to admit I am sometimes sick of trading. I don’t know what else I would do, but when I nd myself feeling sick of it, I have to leave it alone for a couple of days. That is usually enough to get my hunger back. Not everyone in the industry trades. You learn that when you go on the lecture circuit. I have the advantage (and sometimes disadvantage) that I trade publicly, and my results are visible to everyone. However, I know of two world famous trading authors who don’t trade at all. I wonder why they don’t. To write about trading, you need to have felt the pains of being wrong and the joy of riding a winner.
A SIMPLE SUCCESS STORY As this set of trading tips draws to a close, I want to tell you about a world famous trader named W. D. Gann. He wrote many courses on trading, some of which were exceptionally esoteric in content. Gann was supposedly a very clever man, so it
came as no surprise to me that the man who made his millions selling forecasts to people actually made his money from a remarkably simple trading method. My friend and trading partner David Paul once spent a whole summer at the British Library, researching past wheat and beans prices, and tracking Gann’s trades to get to the nitty gritty of his actual trading strategy. His conclusion was startling. He told me that ‘Gann simply traded double tops and lows in the direction of the daily trend, nothing more, nothing less’. After eight weeks in the archives of the library he was adamant that what Gann wrote in his courses and what he traded were two very different things. Maybe the lesson for all of us is to keep things as simple as possible.
12. MY CHECKLIST THAT GETS ME SET TO TRADE Before I sign out, I want to go through with you the checklist that I use daily. It has become an essential part of my proprietary trading, especially because I trade both currencies and indices, and both intraday and over several days.
CHECKPOINT 1: What is Asia doing? Every morning I go to Yahoo Finance and see what the Asian indices are doing. If they are all up, I expect a bullish Europe.
CHECKPOINT 2: I go through the major currencies (dollar, sterling, yen and Swiss franc) and their crosses on the weekly, daily, four-hour and 60-minute chart. I look for patterns, double tops, trendline breaks, and anything else that I can use to gauge for direction for the day. I also look for Fibonacci ratios and expansion of range bars. In total, it amounts to 40 charts, and it takes me about 30 minutes. I make notes
next to each pair where I see something of interest. It means I am ready for the trading day.
CHECKPOINT 3: I trade indices off a tick chart, but I still need to know what the daily and weekly trend is in indices.
POST-MORTEM: Once the trading day is over, the hard bit starts. Trading in itself is fairly mechanical, although controlling the emotions is something I have to be vigilant about every day. I easily get over-condent and trade way too big. After the day is over, it is time to ask the three Ws: •
Why did I do that?
•
What could I have done instead?
•
What did I miss today?
As I said before, there is no better practice than doing, either with a live trading account or a demo. Keep a log of your individual trades, and make a level-headed review of each day’s trading, and you will learn more than any course or book can ever tell you.
YOUR NEXT STEP Through the course of this guide Tom has shown us how every successful trader needs to: •
Stay abreast of breaking news
•
Use charts to dene trends
•
Develop trading discipline
•
Press winning trades, and
•
Learn through practice
If you want to know more you’ll nd training tools and live webinars at our website www.intertrader.com All InterTrader.com clients also have free access to market news reports, fundamental and technical research, and valuable trading signals. Plus a powerful charting package helping you to analyse live and historic price data for all the markets we cover. You can add trend lines and Fibonacci retracements and apply a full array of technical indicators. Whether you are interested in spread betting or CFD trading, you’ll nd that InterTrader.com offers tight xed spreads* on a fast and reliable online trading platform, with all the support you need.
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*Throughout 2012 our spreads have been fixed 100% of the time during trading hours.
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•
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Or use the Live Chat facility at www.intertrader.com The views and comments in this guide are not the views of InterTrader.com. The provision of this information should not be construed in any circumstances as a recommendation or solicitation to buy or sell any security or nancial instrument. Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
InterTrader.com is a trading name of London Capital Group Ltd (LCG) which is registered in England and Wales under registered number 3218125. LCG is authorised and regulated by the Financial Conduct Authority. Registered address: 2nd Floor, 6 Devonshire Square, London, EC2M 4AB.
