Say NO to H.R. 1068: Trader’s Tax

A post from Robert Green of Green Trader Tax on his blog yesterday indicates the “Financial-Transaction Tax” proposed during the last session of Congress has been reintroduced in the House of Representatives as of last Friday, 02/13 (coincidence?).

I’ve found that most traders I’m acquainted with are oblivious to this proposition, and the few forex traders with which I am both personally acquainted and who have learned of it seem indifferent because “forex” is nowhere explicitly mentioned. But as anyone trading spot forex ought to know, the IRS has very little explicit guidance overseeing the categorization and taxation of spot specifically. Tax professionals (such as Green) knowledgeable of what can and can’t be reasonably inferred from how forwards and currency futures are treated will tell you spot forex’s identity as futures product for purposes of inclusion under any tax is very easily accomplished. Conflating spot forex with futures if it means subjecting forex traders to the tax, if it means further revenue…uh, “reparations appropriated from the nefarious speculators responsible for our present economic crisis” is not something a cash-starved government is likely to pass by, negligible as the retail forex trader demographic may be next to equity and futures traders.

Given the presence of uncertainty but potential that the bill, once passed, could exert a highly adverse impact on domestic retail forex traders, I’m passing along my own recommendation to read Green’s informative post here and then become conveniently but critically involved by signing the petition and sending emails/letters to your Congressmen/women here.

Confluence

Of those skills inherent to consistently successful discretionary traders, few can more basic or important than the capacity for recognition and practical application of confluence.  There are many types of confluence in trading: candlesticks and pivot points or fibonacci retracement/extension levels, indicators x and y, median line/pitchfork analysis and chart patterns, and so on.  As we’ve seen, particularly in the case of candlesticks, Eastern and Western methods of price analysis have many points of confluence: places where they meet to reinforce and corroborate the other.

Another instance in which historically Eastern and Western approaches overlap one another, though their mathematical bases were developed independently is Ichimoku Kinko Hyo and Fibonacci studies, specifically retracements and fans.  The 3H chart from the past few days displays this very well:

Self-fulfilling prophecy, as those critical of the conception fibonacci numbers map the structure of the market as they do the natural world allege?  The traders flooding the market with long orders at the 76.4% retracement level of a movement down and those long off the top of the Cloud at Senkou Span-A where 76.4% and Senkou Span-A overlap are – in effect, though not by explicit intent – co-conspirators?

Fascinating questions, as ever; too bad I have neither the time or dedication to work at answering them, though I have a better grasp of why they interact as they do than time permits writing here.  But whatever the exact basis of their relationship, whether as a natural function of the marketplace or as one of the epiphenomena given off by the inexorable yet unwitting collective consciousness of the market, a remarkable confluence exists between them that can be exploited profitably.

A Deeper Look at Ichimoku

I’ve incorporated Ichimoku Kinko Hyo (IKH) as an ongoing feature of my analysis regime for about 6 months; and while often including the overlay on charts posted, my conception of what IKH is communicating is something I don’t usually mention.

Given the remarkable insight IKH offers, along with its relative obscurity and daunting appearance, I think it’s time to change things up.

My plan (maintaining some degree of pragmatism) is to post a thoroughgoing IKH analysis every couple of days or so: probably for GBP/JPY, EUR/USD and a handful of others. I’ll be dipping into other pairs and maybe even other markets, but only insofar as intermarket analysis improves comprehension of some correlated pair(s) – e.g. equities vis-a-vis carry pairs.

I don’t employ many tools to analyze, execute on and manage through, but there’s certainly more to how I go about things than IKH. While I think Ichimoku can stand alone, I also use S&R, fibonacci studies, candlestick and chart patterns, looking for unanimity and confluence to disregard (what I think are) less probable trades. And sometimes, it actually works out.

Along the way, then, I’ll be bringing all of this together, while giving IKH more explicit treatment.

IKH Resources

For a primer on IKH, the best singular resource I’ve found online is the Ichiwiki.

As TLT pointed out some months ago, Nicole Elliott’s Ichimoku Charts is the best treatment of IKH currently published in English in bound book form. While Elliott has made invaluable contribution on behalf of students of IKH in the English-speaking world, I look on her book more favorably because of the sheer dearth of IKH material in publication in English, rather than true expository merit. As trading books go, it can be acquired for a relatively cheap price, and whatever its faults is indispensable for any IKH chartist without competency in Japanese.

Chris Capre holds a weekly webinar on FX Street called “The Weather Report” that covers the basics of IKH. As webinars go (always excruciatingly slow), the material is decent and Chris an able analyst, even if there is nothing so novel being presented as Chris suggests. But then, that’s the staple of anyone hawking fee-based mentoring, signals services and system packages via the “free” education carrot.

Out of time, so a chart for now, and the first formal installment this evening.

Ichimoku Kinko Hyo

What? I’m modestly ashamed to admit it, but on occasion I’ve plotted this overlay on a chart out of curiosity, only to take it off within 10 seconds because of how hopelessly complicated interpreting it appears.

I’m notorious (among a tiny, elite cabal of traders moonlighting as laundromat attendants) for wrecking my charts with moving averages (limit of 3, really) trendlines of all kinds, and fibonacci studies (fans w/speed lines and retracements typically, but also arcs and expansions, and when I plot different series over top one another…well…). I’ve always had a limited fascination with indicators (which is why I like using Metatrader for reference and testing, but don’t find it necessary or even preferable when trading), preferring price action and line studies; but do use RSI, ADX regularly and sometimes MACD and/or Williams’ Awesome Oscillator. Anyway, I’m no architect, but no slouch either when it comes to drawing intelligible lines and knowing my around them.

But what is this garbled monstrosity?

That’s Ichimoku Kinko Hyo (Japanese for “Equilibrium Chart At a Glance”); and only laid over naked price. Here’s what it looks like with some of the aforementioned studies tacked on:

Positively mayhem. Fortunately the purpose – if not the underlying data – of a lot of those non-IKH lines is redundant on IKH itself, so keeping it all together in one chart isn’t necessary. I prefer to run multiple charts at once anyway, separating different studies for clarity.

In a quick re-read of Ed Ponsi’s Forex: Patterns & Probabilities (a good primer for novices, if a bit limited for those more experienced) the other day, I came across a reference to widespread use of IKH by Japanese traders on Yen crosses. Guppyphile that I am, my chart study wanderlust was aroused; and so I set off to finally become acquainted with IKH, scary greenish-yellow poisonous nuclear fallout cloud-looking things floating on my chart be damned.

My search turned up some fascinating information, mostly on the single best site (in English) for IKH information: Kumotrader.com’s Ichiwiki.

There’s nothing of real value I can add here that isn’t already located there; have a look if you’re interested…. As it turns out, those lines and that “cloud” (kumo in Japanese) are very comprehensible (no noxious gases or DNA-mutating radiation, either) and, at least tentatively, look to be an excellent addition to the toolkit. I’ll be reading about and tinkering around with it for a little while, in any case.

Regarding News-Specific Trading

Making the rounds on the blogroll tonight: the author of Macrotactics just threw up an interesting post about news trading. His synopsis of the emergent popularity and deceptive attraction of news trading among retail traders is more-or-less dead-on target.

It’s important to mention I do not discount duplicity on the part of some brokers: re-quotes, stop-hunting, true excessive slippage and other “anomalies”, if they are purposely carried out to mitigate the broker’s risk constitute manipulation and would, I think, constitute criminal activity.

But I do not buy in to the ubiquitous “bucket-shop” (that doesn’t express my position on the “bucket-shop” v. “ECN” controversy, by the way) harangue to be found on forums and on some blogs, emanating primarily from the reviews published at Forex Peace Army, many of which are written by none other than novice news-specific traders. I am not denigrating FPA or Felix Homogratus: there are, undoubtedly, “forex bastards” (the former name of the FPA site) that ought to be exposed and blacklisted (whether that’s possible by means of gathering reviews is not apparent) but the complaints leveled by so many (“they widen their spreads during the NFP”, “I didn’t get filled on my market order at the price I submitted it at”) belie the very prevalence of general bastardliness they’re intended to expose. Perhaps others choose to disagree….

One is left with serious doubts about the veracity of many of the accounts (and there are quite a few) found at FPA and elsewhere; and not because the authors are lying, but because they aren’t infallible – or more to the point, sufficiently educated – narrators of whatever event(s) prompted them to post. Simon reminded me recently of an outstanding post at FF I read some time ago on the topic, to be found here. Some time there, with the post at Macrotactics and a basic brokerage handbook reading up on basic order types (market, limit, stop) and the function of spreads suffices to squelch much of the noise.

Besides, news trading is, even if pulled off flawlessly, a very superficial way to trade. For the sake of argument, assume one can consistently make money doing it: what is it you really know? Which releases to watch, what time those releases occur, what pairs will be most affected, and perhaps, along with a little strategy about timing, the mechanical steps required to simply place trades? No. Now, suppose you do have an excellent, holistic grasp of the underlying fundamentals contributing to the printed number released: can you leverage that into an advantage in timing of execution? If you’re trading at 08:30 ET on the first Friday of the month, probably not.

I don’t trade the news (though I trade through it) for very good reasons, some of which can be gleaned reading the above-referenced material. The appropriate inference from of all of that, I think, is that there are better ways to trade: more stable, more reliable, more consistent and consequently more profitable ways to trade. Finding at least one of those ways, tirelessly conforming to it through hard work and truly making it one’s own by attaining mastery is the only vocation of a trader.

Selective (Market) Ignorance

Price action is the single inherent function of the marketplace: fractal in scope, present at all times in the tension between divergent perceptions of value and the streaming drama of supply and demand. Each trader is a free agent acting within a seamlessly fluid environment where mass alignment and antagonism coalesce out of the limitless, blurred disparity of its individual participants. Put simply, price is the unified description of the cacophonous din of the market crowd.

This week brought with it significant short-term moves for the USD and JPY that, taken in the isolation of the timeframe in which they occurred, are contrarian in direction but do little to subvert the prevailing long-term outlook for them. Countertrends, then, which are nothing atypical. The concrete analytical rationale for these temporary retracements in price action are very important to observe and study. Whether you employ a methodology yielding trend-following trades, countertrending movements, or both, it is all too commonplace for a trade to get stopped out at the very bottom of a pullback, whipsawed, or otherwise derailed by a momentary hesitation in price which then resolves itself into the direction you initially anticipated. All of this is why placing stops is so often referred to as an art; but this isn’t about placing stops, although the non-perfunctory, situational manner in which they ought to be placed (and which makes them so difficult to get right) tells us a lot about the structure of the marketplace.

Getting back to the examples from this week, notice the common perception of the USD and JPY: generally, the USD is thought to be on an at least medium-term depreciative march across the board, while the JPY has been advancing steadily against all the majors (though it mostly neutral vis-a-vis the Euro). Certainly the consensus of economic data corroborates, and our charts plainly bear out the psychological bias reflected everywhere from the COT to any number of blogs or message boards.

In this market context of mass alignment, taking a trade that creates disparity and antagonizes the sentiment of the crowd, even if you’re reliably certain of its positive outcome, is very difficult and can be full of misgivings when you know the spoken bias of the market is against your own analysis. Is this an incontrovertible sign you’re wrong? No, but it’s immensely challenging to suppress the notion that you are. Even if you do take the trade, the likelihood you will maintain your position if it goes against you initially is probably much lower because it will be immediately perceived as an affirmation of the bias you’re opposing. Nevertheless, this week (Friday aside) there were some excellent trade opportunities across the market long the USD and short the JPY. Again, nothing atypical.

I do not recommend reversing positions anticipating retracements, picking tops and bottoms, trading countertrend or ignoring the wider sentiment of the market: that’ll get anyone killed almost as quickly as throwing a suitcase of trading capital off a bridge, no matter how adept the analyst. What I am getting at is this: where an analysis of price that is our own (based off raw chart and statistical economic data only) is then informed by a perception of the mass consciousness and collective bias of the market, that perception can and does induce faulty analysis and irrational decisions. Sometimes, without the perception, trades we would’ve been scared out of are taken for hundreds of pips, or trades we would’ve been certain of on the basis of wider market bias almost immediately proceed to our stop price.

Ignoring the market is not an answer; but slavish adherence isn’t either. So, we have to cultivate and keep in mind the practice of another art, easily referred to but difficult to describe: selective ignorance, or the purposive filtering of expressions of sentiment to arrive at a balanced apprehension of the currency or pair analyzed. Paradoxically, conscious selectivity of what one knows and doesn’t know about the market (or anything else, for that matter) begins with acknowledgment that selectivity is necessary, and by development of one’s own faculty of self-awareness to know whether bias or irrationality is present in their analysis. More to come in a later post….