What is Currency Trading?

When you're trading currencies your pitting one currency against another. So with something like EUR/USD, if you buy this pair you're betting that the Euro will rise against the US Dollar. If you sell this pair you're betting the opposite, that the US Dollar is going to rise against the Euro. With Forex there's no distinction between buying and selling, unlike the stock market where there is a tendency to buy and hold stocks.

The Market

The Forex markets are a 24 hour market. It starts in New Zealand, goes to the Asian session, the London session, the US session and then back again. From Friday night until Sunday night the market is closed. Liquidity is another important thing. With the stock market it does about $58 Billion a day. Major players can really move that market. With Forex it does about $4 Trillion a day. It's the closest thing we have to a perfect market. No big players can really move the price with the exception of central banks. If there's Japanese intervention or Swiss intervention then it can easily move the market a hundred points. But still in the scheme of things that's very minor.

Price Movements

One hundred points is a move of 1 cent in the price of the currency. Everything in Forex is measured in Pips. A pip is generally 1/100 of a cent. So in the case of EUR/USD if it's trading at 1.3546 and price goes up to 1.3556 then that represents a 10 pip move. Most brokers will display price out to a 1/10th of a pip (also called a pipette) or a total of 5 decimals. Some pairs, such as the Yen pairs, are displayed out to 3 decimals.

Leverage and Risk Management

One other interesting thing about Forex is the use of leverage. Since the Dodd-Frank legislation passed U.S. traders are limited to 50 to 1 leverage on a trade. (They are also pretty much forbidden from opening accounts overseas.) This means that with $10,000 you could potentially trade $500,000 worth of currency. Now if you do that you're a moron, but some use of leverage that is managed appropriately with risk management can be beneficial. I'll talk more about risk management in follow up posts because it's one of the most important things in trading yet it's often not discussed. The key is to know how much you're risking on each trade. A standard lot in Forex is $100,000 worth of currency. You can also trade mini lots ($10,000), and micro lots ($1,000). At a standard lot each pip movement is worth roughly $10 per pip. So if I set a stop loss in a trade of 30 pips then I'm risking $300 on that trade at a standard lot, or $30 on that trade with a mini.

Brokers

As "retail" traders we are not allowed to buy and sell directly with the central banks. Retail brokers are who we deal with. There are different kinds of brokers and different ways they do business. Most of the larger well known brokers are pretty reliable. Brokers tend to fall into two categories but these often get blurred. There are dealing desk brokers that are taking the other side of the trade from you and there are Electronic Communications Networks (ECN) brokers which are generally just batching up your trades and passing them on to the Interbank (central banks, partner banks, other brokers, etc...). Some folks don't like dealing desk brokers because in a sense the broker makes money if you lose. Brokers make their money mostly on the spread (the price difference between bid and ask).

Some brokers offer lower spreads but then charge a commission to make their money. If you search on the internet you'll find someone complaining about every one of them. A lot of the complaints can be distilled down to morons trying to blame the broker for their own bad decisions. Occasionally it's over an issue of slippage (fill price differences from your order price). Slippage can be a real problem in high market volitility situations. There are various ways to prevent slippage: trade when there is high liquidity, don't trade on banking holidays, don't trade 30 minutes prior to major news items such as Non-Farm Payroll announcements.

I don't want to make it all sound like it's not the brokers fault, because there have been NFA fines against brokerages over slippage and other nefarious trading practices.

No Central Exchange

Forex has no centralized exchange. It's all distributed. That means if I'm trading with FXDD and you're trading with Tradestation your data is always going to be a bit off from mine. Retail Forex trading is only a little over 10 years old. So it's a very infant market.

Some people have pushed for the creation of a centralized exchange. Personally I like the distributed nature of it. As a technical trader (mostly) all I can base my trades on is my data. As long as you are working with an ECN that has good liquidity, it shouldn't be a concern.

Demo Trading

The tools are starting to get really good. One great thing about Forex is that with any broker you can sign up for a demo account and start "paper" trading right away. Their value add is in the tools they provide, so it's pretty amazing what you can do for no commitment. As an example, you can go to Oanda, Dukascopy or Alpari today and sign up for a demo account, download a platform and start getting a feel for what it's like to trade the markets without risking any money. The demo platforms are exactly the same as the live platforms in terms of features. Data reliability and execution time of orders is not guaranteed to be the same, so it's always a good idea to take a new strategy live with very minimal exposure. Personally I'll trade in micro lots for a couple of weeks to be sure I'm seeing live what I saw in my own back testing.

Note that any reference to brokers in the above paragraphs does not represent and endorsement and they are not "introducing broker" links. I'm a trader, not a salesman. Do you own homework.

What Kind of Trader are You?

Different traders use different trading methodologies. There's fundamental traders which like to trade off longer time frames and base it on the overall fundamentals of the economies in play, and there are technical traders that simple trade off the technicals of the price.

A fundamental trader for instance might short EUR/GBP betting that the Eurozone countries are going to suffer ratings downgrades, due to lack of a sustainable plan to address the Greek debt crisis, and the British Pound is going to continue to strengthen.

A technical trader may just have a technical strategy that says if price reaches a prior point of support it's likely to bounce off of it and head higher. I think the best traders combine the two methodologies and consider both in a trade. Most of my trading is purely technical, but I don't ignore the fundamentals. If nothing else I don't trade on bank holidays for instance because of the low liquidity. Things like that.

For technical traders they tend to fall into two main camps, those that trade based on indicators and those that trade based on price action. This is not a hard defined rule, but I'm just trying to generalize things. Indicator traders tend to use things like Fibonacci levels, stochastics, exponential moving averages, etc... to build a trading strategy. Price action traders tend to look at support / resistance, candlestick patterns, and just general price movement between the bears and bulls.

Some traders like to go after small wins, such as a 10 pip move, and other traders like to have a trade open for several days and go after 100 - 300 pip moves. I'd caution about trying to scalp trade for very small pips because as a retail trader you would get eaten alive by execution speeds and the spread. When you carry a currency over a day there's interest to be paid, so some folks make sure they close their trades by end of day or in other cases end of week. In fact sometimes it's to be paid and sometimes it's to be received. There is a trading methodology that is just based on this interest called the Carry Trade. It's not such a good thing today since all economies are in the toilet but there was a time when it was a great way to trade. With the carry trade you would find a currency paying 6% interest and another that is paying .5% interest. You would sell the higher interest currency.The buyer of the currency would pay you that 6% over the .5% you'd pay out and you would make a relatively low risk 5.5%.

Automated Trading

The up and coming thing these days is automated trading. That's what I'm most interested in. I'll have a lot more to say about this in future posts. The tools are finally good enough that most brokers offer an API that you can code to. This means you can back test a strategy for about 10 years, fine tune it, and then automate it. If you balance a good strategy with good Risk Management you can live to trade another day.

Automated trading also takes a lot of the psychology out of it, which is huge. In my opinion psychology is the number one reason why most traders lose money. In fact it is said that 90% of Forex traders lose money. That's huge! Discretionary traders tend to not follow their rules. So although they may have developed a great strategy when they get into the trade the psychology eats them alive.

Final Thoughts

I could go on and on but I'm sure I'll have future posts on the subject. I will wrap it up with just one more item. You shouldn't be trading Forex with money you cannot afford to lose. That's critical. Because as much as you can back test and use risk management the high degree of leverage offered in Forex means price can work in your favor just as much as it can work against you.

Here's a couple of helpful resources to get you started in the right direction:

Baby Pips - excellent resource to get started. They make it fun and do a good responsible job of presenting the fundamental aspects of trading.

Review Pips - by the same folks that do Baby Pips. This is a review site by users of products and services they have used. Be careful about any review sites. Some "salesman" are clearly stuffing the ballot. I'd get the opinion of people you trust and combine it with reviews from multiple sites.

Market Wizards Books - very inspirational series of books by Jack D. Schwager that are interviews with traders that have done exceptional. These books help to understand the mindset of a succesful trader.

How I Got Here

First a little background on me, at least in how it relates to trading. I've always been interested in the markets. I can remember that the first time I really had some sort of understanding about stocks and financial markets was around the time of the breakup of the Bell System in 1984. I recall asking my step-father to explain what it meant. It was only a year later that I found myself attending conferences with a childhood friend in San Francisco on investments and investment opportunities. (As an interesting aside, at one such conference a company called Motorola trying to raise investment money for it's newish mobile phone division. They phoned me twice the following week and I had to tell them that it would take quite a bit of allowance money for me to be able to pony up the $2,000 minimum they were asking. What a missed opportunity that was.)

Although I remained interested in investments and markets I only flirted with the idea off and on over the years. Even though I was quite proficient with computers and software development, I was a finance major and attended school at Golden Gate University in the financial district in San Francisco. I studied for my Series 7 with a relatively small brokerage house in Cupertino in the evenings, but decided it wasn't anything I wanted to go through with. (The idea of selling something to someone because it's what I had to offer instead of what was best for their situation didn't appeal to me.)

About 5 years ago I became aware of the retail foreign exchange (forex) currency markets. I read lots of interesting pieces on it, entertained exploring it further, but never did move on it. Somehow, about a year ago, the foreign currency markets crossed my path once again. I don't even recall how it happened, but when it did I knew it was an itch I wanted to scratch.

Ninety Percent of Traders Lose Money

From then until now I've been reading, watching, and studying as much as I can. I've read countless numbers of books, spent hours in forums, and continued to educate myself on economic affects on the forex markets. What I discovered is there is a ton of misinformation in the marketplace. Most of what folks are selling or even giving away is pure bullshit. Like so many financial experts you see on TV, most are just regurgitating what they've heard others say. There's many approaches to being successful in the financial markets. Some prefer to trade on fundamentals, others on technicals, and some just on pure price action. But if it was as easy as trading a 20 day EMA breakout, or some such horseshit, why would any of us work for a living. There's this huge herd mentality and not many are stopping to do their own analysis or homework. It seems that everyone is looking to get rich quick, and yet most are getting broke even faster. There's a sobering statistic in trading: 90% of all traders lose money.

I knew that if I was going to do some trading of my own I didn't want to be part of that 90% and I knew that my best chance for success would involve doing the hard work, testing ideas, and finding someone that was where I wanted to be and getting that person to mentor me. About six months ago a friend introduced me to Phil Newton and his Trading Strategies site. After talking to Phil and reviewing others' personal experiences with Phil, I decided that it would be worthwhile to hook up with someone like Phil, in order to get some guidance in the markets. Phil is the real deal.

The Journey

For the past six months I've been demo trading, developing a trading plan, and continuing to learn as much as I can. I'm not sure where any of this will go, but I always enjoy learning something new, and right now trading is satisfying that desire for me. Maybe at some point I'll be posting charts, making predictions and all the rest of that crap, but until then I'll keep watching, learning, studying, and documenting my journey. For me the journey is really the best part.

Wrapping Django's send_mail

In every Django project I have an app called core. Core is something I've built up over time to include common things I want in every project. Core contains things like admin screens for LogEntry, ContentType, and others. It also includes a wrapped version of Django's send_mail that I use whenever I need to send email messages.

from django.conf import settings
from django.core.mail import send_mail as send_mail_original

def send_mail(subject, message, from_email, recipient_list,
              fail_silently=False, auth_user=None, auth_password=None,
              connection=None):
    if isinstance(recipient_list, basestring):
        recipient_list = [recipient_list]

    if getattr(settings, 'EMAIL_DEBUG_ON', True):
        # wrap the email message
        wrapper = "-------------------------------------------------\n" \
                  "- DEBUG EMAIL                                   -\n" \
                  "-------------------------------------------------\n" \
                  "- To: %(to)s                                    -\n" \
                  "- From: %(from)s                                -\n" \
                  "- Subject: %(subject)s                          -\n" \
                  "-------------------------------------------------\n\n" \
                  % {
                        'to': ", ".join(recipient_list),
                        'from': from_email,
                        'subject': subject
                    }

        message = wrapper + message
        subject = "DEBUG: %s" % subject
        recipient_list = getattr(settings, 'DEBUG_EMAILS',
                                (k for k,v in settings.ADMINS.items()))

    send_mail_original(subject, message, from_email, recipient_list,
                       fail_silently=fail_silently, auth_user=auth_user,
                       auth_password=auth_password, connection=connection)

The code is pretty self explanatory. This simple method allows you to send email messages, but wrap them so they are actually only delivered to the ADMINS, or DEBUG_EMAILS if you have specified that setting. DEBUG_EMAILS is a list of email addresses to send to.

Using django-mailer-2

Another method that can be used to verify the contents of sent emails is to use the django-mailer-2 application. I prefer this one by SmileyChris over the original by James Tauber, but both fundamentally do the same thing. django-mailer-2 captures, queues, and sends out emails via a cron job, in place of the standard "fire and forget" method. django-mailer-2 provides a method to monkey-patch the Django version of send_mail so that its specialized version is used instead.

This simple addition to my urls.py module means I don't have to modify any of my application code.

# queue all email
from django_mailer import queue_django_mail
queue_django_mail()

Once you have django-mailer-2 wired into your project any emails will automatically be queued up into the django-mailer-2 tables. As long as the django-mailer-2 cron job entries are not running on your test server, the messages will never be sent out. Incidentally, I have my own forked version of django-mailer-2 that only makes modifications to the admin in order to make it simpler to find mail messages.

This application is also very useful when working in a development environment, especially if you are not running a mail server on your local development system.

Hopefully these couple of tips will help you test and debug Django emails more simply in the future.

Converting My Content

One of the challenges when moving from one blog platform to another is getting your content converted. In my case I was going from HTML to ReStructuredText for the posts. I was also pulling data out of a PostgreSQL database. To simplify the process I wrote a script that uses SQLAlchemy and that made the process pretty straight forward. I've included an excerpt of the script below, but if you'd like the whole thing let me know.

def from_html_to_rst(content):
    p1 = Popen(["/Users/mtrier/.cabal/bin/pandoc",
                "--reference-links",
                "-r",
                "html",
                "-t",
                "rst"], stdin=PIPE, stdout=PIPE)
    p1.stdin.write(content)
    p1.stdin.close()
    return p1.stdout.read()

posts = session.query(Post).filter(Post.status==2).order_by(desc(Post.pub_date))

for post in posts:
    year_directory = os.path.join(post_directory, str(post.pub_date.year))
    mkdir_p(year_directory)
    with open("%s/%s-%s.rst" % (year_directory,
                                str(post.post_id).zfill(4),
                                post.slug.split('/')[-1]), 'w') as f:
        # write out YAML
        f.write('---\n')
        f.write("title: %s\n" % post.title)
        f.write("date: %s\n" % post.pub_date.strftime("%Y/%m/%d %H:%M:%S"))
        f.write("tags: %s\n" % ', '.join([p.name for p in post.tags]))
        f.write("categories: %s\n" % ', '.join([c.name for c in post.categories]))
        f.write("author: Michael Trier\n")
        f.write('---\n')
        try:
            f.write(from_html_to_rst(post.text))
        except Exception as e:
            print "Post %s can't be decoded." % post.post_id

To convert from HTML to ReStructuredText I used a Haskell tool called Pandoc. It worked quite well, requiring very little cleanup after the fact. Pandoc was easily installable on my Mac by using homebrew to bring in the Haskell platform and then using cabal to install Pandoc.

$ brew install haskell-platform
$ cabal update
$ cabal install pandoc

Hopefully all of these changes will mean that I'll be more inclined to post more often, but that remains to be seen. At least when I do post it will be a much simpler process. Special thanks to Mike Bayer for his help on some Blogofile issues.