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
32 Responses to “THINK ABOUT PRESS: How to Trade”
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MARK BRANT: Kind of depressing, sir! Especially being American. But on the bright side, we can enjoy each day in...
L: Mr. Olsen proposes “introduction of stabilizing investment strategies” but on the other side his own...
Deevz: Nice article. Been a while til you updated your website!
GregE: I recently used this strategy to get out of a losing AUD short position at break-even. I would normally have...
Nicholle Evanosky: Wonderful goods from you, man. I have understand your stuff previous to and you’re just...
halogen torchiere floor lamp: Truly great blog post and seriously can assist with learning the subject much far...
L: Mr. Olsen proposes “introduction of stabilizing investment strategies” but on the other side his own...
Deevz: Nice article. Been a while til you updated your website!
GregE: I recently used this strategy to get out of a losing AUD short position at break-even. I would normally have...
Nicholle Evanosky: Wonderful goods from you, man. I have understand your stuff previous to and you’re just...
halogen torchiere floor lamp: Truly great blog post and seriously can assist with learning the subject much far...
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.
This is an excellent read.
Thank you very much, Richard.
I’ve made a little video using images from you website about retail positioning: http://www.youtube.com/watch?v=_dNKpsmzHxQ&hd=1
Thanks for making this and other information public and for believing in a more open market.
Your HF book inspired me to investigate HFT which I now believe it’s the only way a retail trader can profit.
Sir, I’ve been re-reading “(mis)Behavior of Markets” by Mandelbrot, and I postulate that the 20-pip box automatic trend lines drawn on the FXLabs Point & Figure Charts are the mathematical patterns that Mandelbrot was searching for and admitted that he had not found. He never mentions P&F Charts; it’s possible that he didn’t even know they existed! I have backtested the majors at 1-1 leverage and and the drawdown is tolerable between trend lines. If the trader takes the trade direction when the trend lines are first presented by the program, then profits can be continuously generated and compounded throughout the year. Thank you and OANDA for providing such a low-risk wealth generation tool.
http://enantiodromian.blogspot.com/2011/01/point-and-figure-is-chart-not-method.html
My Blog post
Point and Figure is an old way
to Digitalize the price series
By covering the Coastline of price with Boxes of different resolutions
Motorway
Testing a program using the Long/Short ratios sampled every 20 minutes: Using the seven non-synthetic pairs, sell any pair over 50%, buy any pair under 50%. Stop and reverse all 50% threshold crossovers. Cumulative exposure is 1-1, cash on cash
$100m, the current hedge fund viability minimum. Thx for the ideas, sir!
Program is up .05%, $55,000, in four hours using 1.5-1 leverage. A little aggressive but I like it. Can’t wait for the first 50% long threshold crossover to stop and reverse. So much fun!
Up .08% and rising!
Surfing positive avalanches as London warms up. This is so great. Thank you Richard.
Refined to: $100M capital, 1M units per trade. 14 open trades off the FX L/S Ratios. Longs are below 50% long threshold, shorts are above it. 100-pip T/S (trailing stop) replaces the price improvement method; exposure is never raised beyond 0.17-1
or 577% margin. L/S ratios sampled every 20 minutes and the 14 pairs are always in the market 24/6 all year earning cash flow positive. T/S stops losses and allows profits to run. Positive EV and strong risk control.
Anyone can view the program: markbrant3, fractallight. Please don’t trade it or alter anything!
@mark brant: What does HTT stand for? Is your 50% threshold trading still working?
weatherprofi: HTT is for the booklet by Dr. Olsen, “How to Trade” Yes, but I am concentrating on Longs and Shorts close to or over 70%, which are called Passive Herders in HTT. The results are dynamic and astounding. I advise to devise a program modeled on HTT and trade it on FXtrade Practice. You’ll be in the Hall of Fame in no time. Cheers!
I might add that Eur/usd and Gbp/usd are always good buys below 40% long. The dynamic to look for is when ratios are pulling back on one side and rising on the other like a slingshot being pulled back storing energy that is released as prices rise. Don’t just look at the static percentages, look at how they are changing. I got that from Dr. Olsen’s tweets on @olsenscale. If you can learn to see the ratios the way he does you will be way ahead of the game.
Dear Mark, thank you for your feedback. Having said this, the blog is not designed as a trader’s blog, so it is not ideal to post comments on actual trading strategies, because this will change the nature of the blog. I am trying to build a blog that addresses the bigger picture. Time constraints on my side prevent me from being more active, so apologies for moving slowly. I am grateful for your understanding.
Great sir! No problem. Thx for the tweets and please keep them coming, and a very special thanks for HTT. A global “big picture” of real-time Long-Short positions of all financial instruments would indeed be useful in preventing the crisis culture that Wall Street benefits so magnificently from in terms of bailouts and political control of government policy. I’ll just make it simple and not post here, but I’ll be reading!
Thx for all your help and please take a look at Practice 6587183 occasionally to see how my program derived from HTT is working out. Cheers!
Mr. Olsen, I’ve been rereading your booklet lately and it led me to ponder how can the passive herding phenomenon can be. I understand that the herd tends to accumulate losing positions and that their stop losses and margin calls can drive the price up. However, shouldn’t the market orders of the herd (which, by hypothesis, are selling into uptrends and buying into downtrends) offset the price movement caused by their stoplosses? I’m no expert on market microstructure, but it would seem logic to me. And keep up the good work, I’m sure most people reading this blog appreciate the holistic approach to trading that you share with us here, can’t thank you enough for all those interesting articles!