We are publishing a small booklet on how to trade. The content is based on previous posts on the subject. I have expanded the material and hope that you will find the text helpful. The booklet is also a non-technical description of how the trading models powering the Olsen investment programs operate. We program our trading models to be good traders; our algorithm spots imbalances of supply and demand and takes positions when price overshoots occur. If the price rebounds, then the model takes profit but if the price continues to move in the adverse direction, the model trades the coastline to improve its price average and eventually gets out of its position at a profit. As explained in the booklet, there are more decision rules that make a good trader. Have fun.
THINK ABOUT PRESS: How to Trade
16 Responses to “THINK ABOUT PRESS: How to Trade”
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Rich: Agree with the first comment by L where retail traders has the limit to gain access to high quality data and...
mark brant: Deevz, I think it can be simple if one uses intelligent levels of exposure like in HTT. I’ve read...
Deevz: @Mark: I dont think its that simple. Maybe you should reread Olsen’s papers on heterogeneous...
mark brant: I see excessive price movements as caused primarily, possibly soley, by leveraged trading on credit...
richardo: Behavior of traders is fractal; the impact of a forecasting service is to reduce the size of the big...
richardo: Yes, it is possible: You draw a point and figure chart with the following additional features. For each...
mark brant: Deevz, I think it can be simple if one uses intelligent levels of exposure like in HTT. I’ve read...
Deevz: @Mark: I dont think its that simple. Maybe you should reread Olsen’s papers on heterogeneous...
mark brant: I see excessive price movements as caused primarily, possibly soley, by leveraged trading on credit...
richardo: Behavior of traders is fractal; the impact of a forecasting service is to reduce the size of the big...
richardo: Yes, it is possible: You draw a point and figure chart with the following additional features. For each...
First, thank you very much for the very nice booklet. Very much appreciated. I think it’s very clear and to the point written.
Speaking for myself, a beginner would have some trouble to translate the words to practice, hence one get apatite for more. I wish every section could be expanded a bit more with typical examples. Hopefully one day you get time.
Again thanks
This is awesome Mr. Olsen!
Looks like a light read, I’ll have a go at it after having supper. I can’t help but notice, after reading the intro, that you haven’t talked of the mechanics of markets, the “order flow”. You’ve been making a few comments on twitter that grab my attention about traders shorting or longing too much and how it affects the path of lesser resistance and can’t help but wonder which positions you are talking about, those of retail traders, institutional/bank traders, or the market as a whole? I can’t seem to find any article on your fine blog about this. Anyway, thanks for sharing all these little trading knowhow gems!
Richard, Thx for the E=MCsq. of fractal trading. It is fascinating to imagine the sophistication of your automated programs based on the ideas outlined in your booklet. I will read it once a week for the next year for new inspiration. Also, I have discovered the grid lines on the charts and they work well as trigger, stop-loss, and take-profit points on many time frames, purely from a short-term momentum perspective. Maybe you can program the grid breaks and barriers too. Thanks for so many new ideas and tools and please keep them coming!
Come to think of it after reading your book, the phenomenon described above can probably be explained by the cascade principle you describe in this booklet and various papers of yours. My hypothesis is a bit different, it is that retail traders will be on the losing side more often than the big institutions, since the former were allowed in the forex market for liquidity needs by the banks… The banks are in there for a profit, therefore they had planned the retail traders to lose, unless we accept the fact that the banks try to always stay risk neutral and use the liquidity to hedge their position and make money from spread on customer orders.
Richard,
Very informative and very well written booklet.
I think that the most important thing that traders miss when they get into this market is proper expectation setting. You have talked about the fact that traders that make 6% a year should consider themselves as part of the “hall of fame” but unfortunately traders are being falsely marketed to that making 100% a month is super easy and there lies the problem – wrong expectation from trading.
So my 2 cents for traders – set your expectations right and don’t swing for the fence.
– Asaf.
Mr Olsen,
first off, thank you for the very nice booklet. The booklet has provided valuable information for me.
According to you, gauging the open position of Oanda clients is a good indicator for potential price reversals. I have been learning to use the information presented in the order book, I am focusing mainly on the open position summary. I find the information useful the way you described, ie. looking at losing positions building up as price continues to go against them. I feel that I am not fully utilizing the tool, do you have any tips on how to use the order book (particularly the open position summary) more effectively ?
The other question is, in the absence of such order book information, how would you try to infer such information ? Such as detecting potential avalachnes building up.
Thank you for your time.
mak
Thank you for your feedback.
To fully utilize the order book information you need to be aware that the financial markets are complex systems with many different forces interacting with each other. The open position information is a particularly important force, but not the only one. The booklet has tried to give you a overview of the different effects and forces that you need to take into a account. An issue that I did not raise in the booklet that is worthwhile to mention is there are differences in terms of ‘base level’ of orders for different currencies, for example AUD has more longs than JPY for example. In evaluating the likelihood of cascading margin calls you need to account for this asymmetry.
If there is no position information for a market, you have to infer positions based on price action, but this is difficult. This is one of the reasons, why I want to build a predictive service accessible for everyone, like a free weather forecast.
Great comment, Mr. Olsen. I believe the actions of participants are at the core of the market (pretty obvious when you think about it, if you ask me). I wonder if it would be possible to infer the positioning data from the price action without considering external factors, I’m mainly thinking about news here. Any ideas?
Yes, Richard, I’ve found that the base level for CAD is to go with the majority long or shorts, not fade them. But never go with 70%ers in any pair I’m sure. If one could digitize the geometry of dynamic charts on a universal time frame I believe that a broad predictive service could be realized as long as users never had an aggregate exposure of over 50% of equity in their FX portfolios. Kind of like a space-time continuum for FX prices. We might even discover that FX space too is curved by gravity! This approach would be independent of open positions data however; more like a physics experiment using price dynamics alone as the most relevant parameter.
YouTube: “The Elegant Universe – Einstein’s Relativity”. Spacetime coordinates similar to dynamic grid lines on FxTrade.
FX positions as matter and gravity warping FX spacetime can be predictive of what prices will do in the future?
I’m trying to fathom the consequences of having a free financial forecast service based on open positions data available to the public… If the public is aware of the risk of avalanche to the upside, for example, they will inverse their position, thus shifting the risk to the downside, and then the forecast would update and the public would inverse again… Eventually the market would reach an equilibrium where there are as many people short as people long, thus rendering this whole forecast thing irrelevant to the individual if the mass follows it. This is assuming the forecast would be accurate enough to provide people with an edge, which would cause everybody to follow it. Just speculating here, Id be curious to have your opinion on that Richard.
Yes, it is possible: You draw a point and figure chart with the following additional features. For each column you have two sub-columns – one for the buyers and the other for the sellers.
In these sub-columns you record the open positions of traders going long and short. The behavior of traders is different, when they are in a profit (they close positions rapidly) than when they are in a loss (they close positions more slowly).
I would try out the following rule: if there is an up-tick, there are 105 long positions, 95 short positions. If the up-ticks continue, then you adjust the number of open positions. The long positions are reduced to 95 (minus 10), but the short positions are only reduced by (minus 5) to 90. If there is another uptick, then the open positions for the long reduces to 85 (minus 10), the short positions to 85 (minus 5). If there is a further uptick, the longs decline to 75, and the shorts to 80….as the trend continues, the number of open short positions will increase.
At any time, you can compute the total open long and short positions by adding up the positions listed in all the columns.
I do not know, if you understand, what I am trying to explain. This is a lot of work to do manually…
Behavior of traders is fractal; the impact of a forecasting service is to reduce the size of the big swings, as this happens, spreads get compressed and traders start to focus on the smaller movements: the forecasting service will help further reducing the big swings on this more compressed smaller scale. The forecasting service would increase the transaction volumes in the markets, reduce overall volatility and make the economic system more efficient: excessive price movements are a big energy leak to society.
I see excessive price movements as caused primarily, possibly soley, by leveraged trading on credit offered by prime brokers.
I remember reading an interview with Bill Lipschutz: he was asked how much capital he used to trade. He replied he doesn’t use any capital, all his trading was done on credit. This is why he’s been wiped out so many times as Wall Street and everybody else gets wiped out. If all trading globally was done on a cash basis then volatility would be so low and price deflation so pronounced that no trading could be done. I see excessive price movements as the essence of capitalism. But High Frequency Finance processing of trading and transactions would smooth the volatility, certainly not eliminate it if leveraged credit was employed. Leverage increases the mass and gravity of price impacts on the market.
These price impacts warp the fabric of market space-time making price predictions a simple matter of gravity. Prices are forced uphill and then they fall back downhill when the forces dissipate. This is best seen on a daily chart but HFF should be able to use gravitational ideas also, why not?
@Mark: I dont think its that simple. Maybe you should reread Olsen’s papers on heterogeneous participant groups, different traders have different trade horizons. Also, you have to account for those participants who are not speculators.
Deevz, I think it can be simple if one uses intelligent levels of exposure like in HTT. I’ve read all those papers since FxTrade came online and to me the main issue is over-leveraged exposure via excessive credit lines to institutional traders. After memorizing HTT I can print money for the rest of my life as long as I follow the exposure rules. I believe in the potential of High Frequency Finance to unify and smooth markets and global transactions but a model of gravity-warps on the space-time grid of a 4-D chart is right every time because the leveraged mass will always dissipate at some time. The purpose the model-metaphor is precision in prediction, not a comprehensive grasp of everything that is going on all the time in the markets. It’s just another way of looking at cascading margin calls in physics terms of general relativity. Leveraged credit distorts and ultimately destroys all markets, then central banks and treasuries must rescue them. The traders are crushed by the mass of their own positions because they haven’t read HTT! Thx Deevz and Richard.