I’m not too proud to say that although I’ve known about them and used them for well over a year – I haven’t been using them like a pro. Like most things, there is so much information and misinformation out there – its easy to get totally lost and confused.

If you’re not familiar – the name Fibonacci comes from Leonardo de Pisa, who was the son of Guilielmo Bonacci. In Italian, “figlio” means son,  therefore you get “Tiglio Bonacci”, which was shortened through the years to Fibonacci. He is one of the most famous mathematicians and came up with the fibonacci sequence. Long story short – fibonacci principles are found all throughout life from the great pyramids to the proportions of your body to this beautiful shell…

Back to trading – there’s the 38%, 62%, 50%, 78%, 23.6% fibos, etc, etc.  There are all types of advanced courses and methodologies and I have taken quite a few. So, did they help me become profitable?  Nope.

Over the last couple weeks I have been introduced to the principles of legendary trader Joe Dinapoli. I highly recommend his book Dinapoli Levels which is very comprehensive and yet easy to understand. Joe has shown me an easy and smart way to use fibs. I don’t use all of his techniques (I really dislike stochastics), but I’ve adopted a couple and wow are they good. Joe’s been trading since the 70′s and really knows his stuff. AND – he keeps it simple which is really important.

What I’ve learned recently will help me capitalize on situations where the “dumb money” is getting clobbered and also help me pick up lots of easy pips everyday.  I highly recommend Joe’s book and video seminars.

Whether you believe in it or not, Fibonacci is a huge part of trading and not knowing about these key levels is like driving your car blind – you’re going to get hurt!  Before I knew about these levels but I wasn’t really getting how to trade with them properly.  I’m not going to get into the specifics of it here, best for you to go right to the source. All I can say is that my fibonacci trading is a lot simpler and a lot more profitable. Thanks Joe!

A quote from Joe’s book:

“Conservative Carl had purchased some unriped bananas the day before. That was enough risk for him so he decided to sit this one out.”

So far I got it working for either the 2001-2006 tick data or the 2004-2009 data (two different mt4 installs), I wasn’t able to put them together all in one file.  For newer tick data there is some available on the forex tester website under data sources. That’s a handy piece of software by the way as you can use it for visual backtesting, it’s like you have a rewind and fast-forward button and can actually enter instant and pending orders, stops, etc and it keeps track of your wins/losses. The only thing I don’t like is that you can’t use custom indicators, just the usual ones that come with mt4.

Here is a link to a forum where someone uploaded a bunch of tick data for e/j a/j g/j and more. You have to do a bit of work but it’s doable. Tip: Most of the links are expired but the megaupload links still work. More Tick Data

I’ve been investigating dozens of ea’s this year and they’ve all been jokes imho. For example there is a managed program that has been doing 50-100% per month for the last 6 months. I’ve been following it with interest. Last week they had a 50% drawdown. (That means that they lost 1/2 the account).  Of course they justify it by saying that it’s doubled a few times already, everyone is still up. Nonsense!!

Just like when you’re a kid and someone twists your arm – we all have a point where we yell Uncle!  Is that when you’ve lost 50% of your account?!  I think that is ridiculous.

Here’s another system that’s listed on MyFxBook which I’ve been watching, its’ an automated system which has done over 200% the last 2 months: Spytrader – Yesterday I was watching it and at one point he had 5 trades open on his 750$ live account and I saw it down 150$ (600$ equity), luckily the euro turned back up and he got out with a small loss but what if the euro would have gone another 30 pips south, would he have let his live 750$ account go to 500$,  400$ ?  Where’s the Uncle point?

AND – what’s up with MyFxBook’s drawdown statistics, it still shows the DD as 3.43%, I witnessed the account go down 20%.  Maybe that’s because the account is already so far in positive it’s not affected. This statistic is not good for me anymore. I don’t know about you but if I saw my live 10,000$ account which has been gaining nicely is all of a sudden down to 7000$ equity in one day’s trading session I would flip.

Introducing: Quantified Risk.   “You know exactly where your Uncle point is for each trade”.

Think about it, who cares if you win 98% of your trades if the 2% losers blow up your account?

In betting language there’s a concept called Flat Betting and an old saying that “no system which doesn’t work in flat betting is worth its salt”. I really like this and if you can get back to simplicity you’ll see that you just need to have an edge. I’m confident after my research years ago on gambling that there is no edge to be found at the casino except for maybe card counting which is not my thing. With Forex you lose some edge everytime you get in a trade by paying the spread to the broker. However, it’s so open-ended that you CAN find a system which has a 60 or 70% win rate. Once you’ve found this and a way to execute consistently you are set.

I’m also testing a 3 step martingale at the moment but here’s the difference: I know that on step#1 I’m risking 1% of my account and then step#2 I’,m risking 2% of my account and step#3 I’m risking 3% of my account. So if I lose the 3 step series I’m down 6%.  Then I can look at how often statistically will I lose the series. Let say for every 30 wins I get 1 series loss, I still have a profit of 24% for that round.  This is Quantified Risk.

It’s possible also that -25% of your account is your Quantified Risk level, but in this case you will have probabilities and statistics in your favor.

Another factor is Risk of Ruin – at 6% loss each time for the mini martingale series, I would have to lose a dozen or so times to ruin my account. Important to factor this in also, It might end up not being worth the risk of ruin and I will stay with flat betting.

I”m so shocked at how many joke systems are out there, is it because the internet is full of scammers who just want to sell broken shovels to unsuspecting gold diggers? Or, is it because few of us take the time and energy to really understand the game.

This is where magic happens!  I’m loving trading manually lately, staying up all night playing tunes and making nice gains, gotta love it. After 2 years of tough work to get here, now it’s gravy time!

Update on Ultimate – 2 weeks ago it made close to 300 pips, last week it made 250 pips and then lost all 250,  Ouch. I realize that I need another filter so that it just trades with the “general trend” which for me is above/below the 77 ema. Why 77?  I like it and it works =)  I’ve got to do some more testing before I send it to my programmer for the upgrade but after 8 hours of visual renko backtesting yesterday, I just wanna trade…

Yahoo!!  I’ve been at it full on – focussed -  in the lab working hard. (well mostly =)

I’m excited to report that my new ea”ULTIMATE” is 4 real.

Ulimate was designed to prosper in ALL market conditions yielding consistent, high-probability trades with low draw-down, YES!  (It doesn’t trade when the volatility is too low and I manually turn it off before high volatility news events)

Last week was its debut and Ultimate brought in 540 pips!!! I’ve made a small tweak which will improve the probabilities. Ultimate is based solely on price action and “takes small bites out of momentum moves“. Brilliant!!!  The following results are based on a demo account so it may be a bit less although I did have some technical glitches to sort out with my new vps, it turns out that you can’t use Windows Server 2008 for forex trading software because it shuts off every 12 hours. Right now I’m using 2003 64 bit.

I’ve just thrown 100$ into a micro-account and turned on the ea. Updates to come.

(This was on a mini account so each dollar represents a pip. The last trade doesn’t count though because I loaded my new version and forgot to change it from a standard lot to a mini-lot).

It’s been 2 years now since I began “The Quest”, to earn a REAL income, working when I want – living where I want – traveling the world – abundance baby!  There have been many times I’ve been extremely  frustrated and considered giving up.  Losing money hurts and even more when it’s because you haven’t been disciplined.  AND even more when you don’t have much money to begin with. But that’s all in the past now…

Don’t worry, this is about automatic forex trading sytems, it’s not some article that’s been put together by a robot for search engine optimization. =)

During the last year I’ve tested/investigated “a bunch” of ea’s. How many?  At least 20. I’ve tried backtesting the systems using mt4, reaching for that positive equity curve. Previously I had one that was profitable but was on the daily chart and I don’t want to wait years to get mine. I’ve visited blogs where other people tested sytems a variety of ways and shared results. I’ve “come across” hacked versions of various ea’s, etc.  Nothing, nada, zilch.  Don’ta worka.

This is from testing in my own account for a couple weeks by the way, not from backtesting. I want to see for myself it it works or not, how is the drawdown (the amount of your account at risk), most wins in a row – most losses in a row, etc.

So, I gave up on all the “ea nonsense” and worked really hard to come up with a system that suited me.

Part of what was frustrating was that I found a few systems along the way that actually worked but I didn’t want to play that way, waiting forever and not enough opportunities.  So I’ve kept searching to find what I really wanted. (after reading this, you can google forex factory big dog breakout, from my tests if you use a 1:2 risk: reward, it’s profitable, test for yourself of course…)

BTW – This blog post has some amazing clues in it, some people are going to relate I know it. A lot of us on this crazy forex journey I’m sure.

Along the way I have established some personal biases:

• You can never know with 100% certainty what will happen
• Don’t trust backtesting results from mt4, most likely they will be “curve-fitted” – meaning either a certain date period was chosen to enhance results and the settings were tweaked for this
• There are some “technical fundamentals” and if you look hard enough you will find them - It doesn’t hurt learning traditional methods used by professionals, the tough part is deciding what is useful and what is not unless you are going to copy their system/tweak it slightly.
  
• Set an alarm and don’t be in trades when major news happens. - This is dangerous as the market could go 100 pips against your position so fast that your stop loss doesn’t work.  We have to accept that it’s possible this could happen anyways if a terrorist event, etc happened  on a once-in-a-decade basis, but it can also happen on a weekly basis if you’re not smart with news. I use a program called Aquarius Soft PC Alarm Clock Pro, I just scan Forexfactory at the beginning of the night and set the alerts for orange and red events and get out of my trades beforehand  unless I’m up a lot on the position and think it’s safe
• I like “black box” strategies as opposed to discretional – no stress! (b-b-when this happens do this)
• I like Renko charts better than time based charts - It is so much cleaner and smoother =)  In Renko charts, each bar shows price movement only, instead of ‘in 5 minutes it went up 10 pips’, you could set the bars to be 10 pips each and then ‘a new bar will only be formed when it completes 10 pips’.
• I want a lot of opportunities per week with a high success rate

That’s what I’ve been working with for the last year. Personally before I risk a lot of my hard earned money I want to know that the method is solid.  I don’t want an automatic forex trading system with a fancy name like Golden Goose Forex where I have no freaking idea why it enters a trade. That’s almost as scary as “photoshopped” results appearing on a sales site for Forex Kill Em All coming soon to your local web browser. (A lot of tangents I know, I’m having fun with this!)

What I mean is that I want to be able to manually backtest the system for the last 3 years and see how it performed. What’s the win rate, how much profit per 100 trades based on my risk:reward minus fees, slippage, etc.  Personally, I find Renko to be awesome because you can easily manually backtest – I’ll talk more about this later , and I will discuss the ea that I have created and why it’s different.

• Which Markets/Currency Pairs do we trade? – If you are trading more than 4 markets and are losing money, its a good idea to specialize and get to know the pairs you trade. Personally I find cross pairs, especially yen crosses very hard to trade with short-term strategies as it’s like the pair is in a middle of a tug-a-war, getting pulled in opposite directions.
• Risk Control / How Much To Trade - It’s important to know exactly how much of your trading account you will risk per trade, and also to have a predefined “pain threshold”, if you lose X amount in a day/week you will quit trading and re-evaluate your strategy. Without proper Risk Control, you can not be a successful forex trader
• Entries and Exits – Exactly when do you enter and exactly when do you exit a trade? If you don’t know this, you might as well go to the casino and play blackjack, your odds are about the same. (bad)

• When Not To Trade – There are times when you should not be trading the market. If you have a trend-following strategy and the market is range-bound, you should not be trading or your account will get eaten up. And vice-versa, if you have a counter-trend/range strategy and the market is in a major trend, you’re just throwing your trading money out the window. Know thy strategy!
• Time of Day – this is similar to the last point, but I gave it a new heading because its really important. If you are a daytrader, just because the market is open 24 hours a day does not mean you should be trading at all times. There are many hours per day that have very low volatility for example, if your forex strategy requires high volume, you will get chewed up. Spend time analyzing and backtesting your forex system and find out which times of the day work best.

By covering the above points you will be heading in the right direction, I can’t emphasize enough the importance of really knowing your trading strategy inside-out, what are it’s strengths and weaknesses? How do you know when you’re wrong? When exactly do you take profit or take a loss? To be a professional forex trader, you really need to treat this like a business.

Euro moved below the 4 hour kumo and that 1.4600 level looks like it is giving way.  Looks like Euro is going to go down and test that 1.4530 level.

Interested in Eminis? Check out Emini Trading blog.