Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
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An Interview with David Becker – Helping novices get to grips with forex trading

David Becker has over 20 years of experience trading and managing risk focusing on forex, commodities, equities and bonds. He is the managing member of Fortuity LLC a New York based consultancy firm focused on capital markets.

Example of trend lines on EUR/USD 1-hour chart:

David Becker has over 20 years of experience trading and managing risk focusing on forex, commodities, equities and bonds. He is the managing member of Fortuity LLC a New York based consultancy firm focused on capital markets.

He actively trades currencies and during his career has worked as a portfolio manager, a hedge fund manager and was previously a managing director of Citigroup's commodity group.

You can find out more about David by visiting: http://www.investoo.com/

JP: Let's start off talking about the bigger considerations in terms of trading and then work our way down to specifics such as technical analysis:

DB: One of the first things that I would recommend doing when you’re looking to design a trading strategy is to look at your own personality. You should determine upfront what kind of things you normally do in everyday life that you might be able to take over into trading.

Finding your trading personality could be looking at simple things like when you buy something, do you spend hours going through the internet looking for the best possible price.

In which case you're someone who likes value.

If you’re like that, it’s going to be hard take a trade on something that is increasing in price or at the top of its range.

So when figuring out your trading personality you want to figure out things like whether you're for example a value driven or momentum driven trader ie like to follow the trend.

 

JP: So it’s kind of momentum versus value?

DB: That is correct. Once you figure out your personality type you can design your trading strategy around that. if you don’t really understand yourself, then you’re not going to be able to design a strategy around yourself.

 

JP: OK, so now that you've defined your trading personality – what do you do next?

DB: The next step is to define your goals and that's something that people rarely do.

For instance are you going to be the kind of person who is going to be OK with a strategy that wins more than it loses, but the amount that you win is very similar to the amount that you lose?

Or, do you want a strategy that's going to catch very large moves moves, but there’s a very good chance that you’re going to lose more times than you win?

 

JP: Some hedge fund managers lose on 70% of their trades, but they're still profitable overall, because of big winners. But for someone beginning out, that strategy will be really hard to stick with because of all the losing trades:

DB: Right, but it depends on your personality and I'll come to that.

You also need to decide if you’re the kind of person who is discretionary or systematic in nature.

The discretionary style is one where you’re making the decisions. You’re not relying on a trading system. You might use a number of different tools and techniques to make trades. But we'll get to that a little bit later.

Or you are going to do the research and come up with a trading methodology that you’re going to stick with no matter what.

If you’re designing a strategy that’s going to capture trending movements, you’re going to have to realize that those are difficult to capture and when you do capture them, you have to make a lot of money during that time.

Because when the market starts to get choppy, it’s going to be difficult to make money and you’ll probably lose often based on the way you’ve set up your (trend following) strategy.

Regardless if you're a relatively experienced trader or a novice you've got to come up with an idea of what you want and know what your goals are.

 

JP: I gather markets only really trend a quarter to a third of the time, which means if you've got a trending system you're going to spend a lot of time waiting for trends so should one be looking at developing a system based on choppy movements or ranges?

DB: The problem with designing a strategy for choppy or range bound markets is that when the market trends you'll have periods when you're winning a lot, but then when you lose, you’ll get clobbered.

With a trending trading strategy, you're losing a lot, but you win, you win big.

But it really comes down to the type of goals that you have as I mentioned before. And once you’ve decided on those you goals, then can design a strategy.

Though this might be a bit beyond the scope of beginners, but its things like interest rate differentials, which drive forex markets. Also, many of the big players are looking for really big moves (trends), such as when the pound goes from 1.50 to 1.60 against the US dollar.

The key with a trending strategy is how do you keep yourself on the sidelines when the market is not trending and then how will you recognise a trend when it is beginning.

 

JP: What about looking at time frames, such as scalping versus long-term trading?

DB: For me scalping is a very difficult way to make money. The ones who make money from scalping are people with the best information flow and those people are typically the dealers on a bank's trading desk.

But, if you’ve decided you're going to be a scalper and you want to take little bits of profit out of the market multiple times, then you’re much better off looking at slightly longer short-term charts and short time frames.

 

JP: What sort of time frames?

DB: I would say one to five-minute time frames on your charts. You'd then be looking to do four, five or maybe more trades in a day if you’ve got some movements in the market.

 

JP: I think scalping takes a lot of concentration. It’s very hard work and I think quite stressful as opposed to the guy who just has to come up with a couple of ideas a week and trade those because maybe they're looking at a time frame of a couple of days or weeks even.

DB: With scalping you're basically competing against the guy who trades the dollar and Euro for Chase, JP Morgan or Barclays. That guy is seeing the actual trading volumes. He’s looking at the same charts as you, but he also knows that his customer is about to buy €500 million versus the US dollar and so he can take a position and capture the momentum created by that order before it is executed.

If you're sitting at home it’s much harder to capture that, by the time the move actually comes, it’s almost over.

It’s a very difficult way to make money as opposed to working with some kind of longer-term systematic approach.

 

JP: OK

DB: With your trading strategy you want to have an understanding of risk and reward. So you risk £1 to make £3. But you only look to lose £1 on a trade, for example.

Now, for risk management to work – there are two parts to it. There’s the part where you’re managing risk on each individual trade and the next part is determining the bet size that you’re going to make on each individual trade.

Once you decide that in your methodology, then you have to decide how much you’re willing to lose per trade. And, there’s a couple of ways of doing that.

The one that’s used the most is a stop loss so you’re saying to yourself, “I’m entering here. When it gets to this level, I’m out.”

For the most part, these stop losses have to be set in stone.

The biggest mistake novice traders make is allowing their stops to run. They give it a little bit more time after the stop has been hit. And the market ends up moving twice as far as the original stop level and then they end up getting out of the market with a bigger loss.

It’s very important to keep to those stop losses.

 

JP: Yes, indeed.

DB: Taking profits can be done in a number of different ways. One way you do it is you can say, you're getting out at a certain level or you'll follow the trend and exit once it turns against you.

 

JP: So, you have a target level basically.

DB: Yes, so you decide you'll get out after it's moved 100 pips or you can trail your stop loss as the market moves further in your favour.

For every trade, it’s very important to have that type of risk management technique.

 

JP: So what are some of the most effective technical analysis tools in your opinion?

DB: I'll tell you about some of the ones I've used in my career that will be good for specific styles.

If you're using a break-out style then you're looking for trend lines to be breached. Trend lines are quite subjective, but for the most part it is a line touching two points on a chart (usually the highest or lowest prices on a chart).

 

 

If a currency pair closes above that trend line, it’s a signal that the market could be breaking out.

In terms of analysing trend lines I would highly recommend traders look at Tom DeMark. (DeMark has created a number of proprietary market timing tools to help identify areas of likely trend formation and exhaustion prior to their occurrence.

For more information: http://www.marketstudies.com/

To me trend lines are one of best ways of identifying break-outs whatever time frame you're using.

It’s very hard to catch the beginning of a trend, but it’s a lot easier to catch the end. But if you’re trying to catch the middle of a trend, one of the best ways is to use a moving average cross-over strategy. So a trade can be initiated when a five period moving average crosses a 20 period moving average, for example.

For longer-term trends some people look at the 50 period and 200 period moving averages.

 

JP: Yes.

DB: One of the better tools for catching the beginning of a trend is the moving average convergence/divergence (MACD) indicator.

The MACD is a momentum index and basically what it does is it allows people to look at the shift in the moving averages.

Example of MACD on GBP/USD 1-hour chart:

Those changes in the moving averages will give a trader an idea of when positive or negative momentum is developing.

So for example it might track the 9 period, 12 period and 26 period moving averages. And then it compares the difference between those two moving averages (12 & 26) to a moving average of that difference.

The indicator gives a trader an idea when momentum is positive or negative.

 

JP: Sure

DB: Bollinger bands are good. They're based on markets reverting towards an average historical volatility. There's an upper and lower band, which is two standard deviations above or below the 20-period moving average.

Around 95% of the prices are captured within the bands. So the way Bollinger bands are generally used is when prices are pushing through the upper or lower bands. So when the upper band is being stretched you might consider shorting the market – that tactic can work well in range bound markets. And most of the time markets are range bound.

Example of Bollinger band on GBP/USD 10-Minute chart:

 

JP: A lot of people are into the idea of trading the news, big events like Non Farm Payrolls. What's your opinion about that?

DB: Trading the news is very volatile.

One way is to bet before the news. You might think you know something everyone else doesn’t know. So for instance market consensus says non-farm payrolls will be 200,000, but you think it’s going to be 300,000 and you position yourself accordingly.

That's one way of doing it and that's difficult.

Another way is to trade after the news after the market slows and you can determine whether or not the news is worse or better than expected.

So if non-farm payrolls comes out at 300,000, instead of expectations for 200,000, the dollar moves up a big figure, but now you believe it’s going to continue to movein that direction because not all the news has been priced into the pound versus the dollar or the Euro versus the dollar and you’re looking for a continuation of that particular trend.

But that also is very dangerous because markets move very quickly and have a lot of volatility post a large news release. So, my particular advice would be to avoid trading the news.

 

JP: It’s one of those things that looks very attractive, but getting filled at the right price when the market is very volatile is in reality very difficult.

DB: Yes that's true.

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