Dont Put All Your Eggs in One Basket: How to Diversify Your Day Trading
Webinar Transcript Part 4 of 4
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Bob Malinowski: Yeah. Thats a place here — theres multiple places on the internet you can go. This is a fairly new one that actually marks some of — pointed to us to a few weeks ago that I found quite interesting. If youre a Forex trader, theres a lot of great information on this website. Its called forexticket.co.uk. And this chart that I brought up here on the front page, there was a link called Forex Correlation. And again if youre a Forex trader, the nice thing about Forex is you can reduce your trading sites so easily by trading, you know, fractions of whole lots of minis and micros and etcetera. So thats really a great site for that.
Brian Short: Okay. Next question is from Anna and shes asking which of the NetPicks system is the speaker trading?
Bob Malinowski: I — I have traded all of them. I am currently trading the SST and the Keltner Bells. All — you can trade any system. There — you can trade UT — the ultimate trading machine, the ultimate — you name it. Any system that NetPicks has come out, they all work, theyre all a positive equity curves, so — but the ones Im trading with are the SST and the Keltner Bells.
Brian Short: Okay. And I think she continued on with the question. I just located it. Shes asking if you should do FX daily or swing trading, shes just asking for some guidance sir.
Bob Malinowski: Theres this guidance on the correlation, lets see, as it–
Brian Short: Its in regards to the system, I guess. Lets see. Its more — its really not a fair question. Shes asking if you could explain which system to choose, FX daily or swing trading.
Bob Malinowski: Well, let me tell you, this looks a great approach — Im not going to make this an advertising for NetPicks, but I mean NetPicks is a company that provides so many trade plans, several trade plans and systems that you can customize through your own trading stuff. If you are a day trader, you can day trade. A swing trader, you can swing trade. I also do options trading, I use the SST to swing trade options. This presentation is focusing on day trading but whatever your style is. If you got a full time job and you can only do swing trading because youve been — youre in computer only one or two times a day, do swing trading. If you got the time to be at your computer for a stretch of a couple hours at a time, do the — do the day trading, supplement it with some swing trading. These principles Ive outlined of diversification apply to any — any trading style, I simply want to focus on day trading here because day traders tend to start off and all of the time stick with only one market and — and that will work. I mean you can see from the equity chart, one market with a good profit factor, that will make you money. But Im simply offering suggestion you may want to consider more than one to smooth out that curve a bit. Make those drawdowns a little smaller. The smaller drawdowns also allow you to add a little more risk because part of the — part of the issues with risk management is, particularly with day traders is that they dont want to blow up the account. They dont want to risk so much that theres a chance that two or three days in a row, youre wiped out. So again to answer your question, the principles apply to all trading styles, I recommend you trade the style that best fits your, you know, your life.
Brian Short: Thanks Bob for that. Another question from Wooter I think, and Im going to answer this Bob. Hes asking a question here, any chance we could get the SST program for ThinkOrSwim. Well, we will definitely give it a shot. Im going to tell you that our most recent endeavor to get Keltner Bells program on ThinkOrSwim is really — it hit a roadblock. And the issue there is the back office programming language that ThinkOrSwim has is hugely limited. Some other things were doing behind the scenes, I know you dont care as an end user but there is a lot of stuff going on behind the scenes to run these calculations and what we found, we had an expert in ThinkScript who is just totally stumped on how to accomplish some of the calculations we need to do, and it has to do with the Ray Processing. I dont want to bore with that. Basically ThinkOrSwim cannot handle a Rays and thats a key thing you need when youre trying to set up these indicators and do the calculations it need to do. So, well give it a shot. Im not going to guarantee that well be able to get it accomplished.
Bob Malinowski: Yeah, let me add something to that, Brian. Let me just add something that TradeStation was developed as a charting tool, a platform for the charting. Thats how — thats — its back and it was developed that way. It got into brokers and trades after that. ThinkOrSwim came from an options market developed with Stanford. They started out as separate tools. I personally think you need to treat your trading as a business, consider TradeStation as a premier charting tool, it takes a full ends of the charting tool and placing trade on TradeStation. I do that with my options trade. TradeStation — Im sorry, ThinkOrSwim — ThinkOrSwim is a great options platform that provides lots of tools for trading options and ThinkOr — Im sorry, TradeStation is a great charting platform and so, you know, again, consider your business tools get to include, you know, more than one.
Brian Short: Yeah, more in making a statement in regard to ThinkOrSwim saying that theyve been having a lot of charting problems since their acquisition by Ameritrade so I think that same thing.
Bob Malinowski: Yeah. Ive had a few issues with them since the acquisition that I never experienced before. But theyre still great C-tool.
Brian Short: Yeah, its a great tool. Its an awesome tool for trading options. Frank is asking a question here. Im going to shout it out here to you, Bob. What is the main commodity market for a dollar, e.g. crude oil or gold, are all of these parallel or correlated to each other or the opposite? Is the trend movement for all these markets the same?
Bob Malinowski: Okay. Ill just put it something like this chart here. Yeah, basically, I mean, this is something that you kind of notice. Most of these markets are not so correlated that its going to make a lot of difference to you. Believe it or not, even an 80 percent correlation like this chart shows here which shows, you know, these two vehicles trading, you know, yeah, ones fairly correlating with the other, it will still create quite a remarkable smoothing in your curve, because theres always new ones that take place even though theyre correlated and you know, even as high as 80 percent, you can still get smoothed because it would have to be 100 percent correlated of course to make no difference at all and any difference at all, any — any non-correlation at all will aid in the smoothing to a greater extent than even I thought when I first started investigating it. Thats why those charts where I showed the combining of two markets and then combining three, we did notice a big difference. I mean, there was a difference, it was smoother but its amazing, you know, just a couple of markets even loosely correlated can provide great smoothing.
So to answer your question, these correlations are like gold, you know, gold goes up when, you know, you name, you know, interest rates go up, gold goes down or if the stock rate goes up, gold does, so oil does. You could stop all the time. The problem is those relationship kind of changed over time too. We go through a different periods where gold seems to be a couple more to, you know, the dollar. And then they kind of breaks away. Particularly these days with so many issues going on in the world, you know, we never thought the European markets affect US markets to the degree of it doing now. So my answer would be take a look at the charts yourself. Thats a really good way to do it. Bring up a chart. If you couldve trade gold and youre going to trade oil or an index future, bring a couple of them up, bring them up in your training platform and just look at them and see if it looks something like this, whether it loses a couple or, you know, doesnt it look more like this where theres hardly any correlation at all. But believe it or not even something loosely couple like this can add diversity to your trading and certainly anything thats 60 percent or less, youre good to go.
Brian Short: Okay, Ive got one last one question here and well let me just put this out there, were going to start to wrap things up. If we missed your question for some reason, go ahead and put it into the text well take a few more minutes here and get those all answered up. And this question comes from a long time NetPicks customer Levi. Hes asking, Can one mix stock options with trading indices and have that be considered correlated?
Bob Malinowski: Stock options — I mean, it depends on the stock option youre trading. I mean you can pick maybe a trading AAPL stock options and the NASDAQ future. Well obviously AAPL, on the NASDAQ and there is a correlation because if the NASDAQ goes up a lot, then you kind of expect AAPL to go with it and vice versa. Again theres that kind of 80 percent that, you know, stocks tend to move with, you know, with their corresponding market. But I would consider an index and a particular of stock, especially if the stock is on the index — yes, it will be correlated. But even that amount of diversification will help smooth out your curve. Ill be careful though about if your stock trader just doing a bunch of high flying NASDAQ stocks on the road unless youre day trading them in an uncoupled way, maybe youre trading one for an hour then another one for an hour because these correlations are — theres hardly any correlation between trading times with trading the first hour one stock and the second hour another stock, and if youre day trading, that correlation is hardly existent. Unless theres a strong trend for the day or a strong trend, you know, for that morning session, generally speaking when youre trading different periods of time, the correlation is going to be much lower than if you trade them at the exact same time. So if youre going to do that, well trade them different times.
Brian Short: And we have one final question from Assim. Hes asking do we have a list of the FX currency pairs that are related or not? And I think I can answer that Bob. Basically it refer to the — that correlation table that Bob had opened in his presentation. And thats going to show you whats correlated and whats not. The closer, as Bob said, the closer you are to 100 percent, the more closely correlated the currency pairs are.
Bob Malinowski: Right. Right. And again, this is a 5-minute correlation here that this particular website shows correlation by day and by hour, by week, and its very interesting when you look at how some pairs are highly correlated, you know, on a day or a week but when you look at on a 5-minute correlation, theyre not correlated. So its — its kind of interesting. I think part of that may also be due to the fact that lets say the Asian currencies are traded heavily — more heavily during the Asian session than say the European or the U.S. dollar and the U.S. session. So you may have again, uncoupling because of the different sessions. So again, when youre looking at Forex pairs, look at the time frame youre going to be trading and look — just bring up some charts. This is — this is just a, you know an example of some of the tools available on the net but basically, look at your particular environment that youre trading. I trade these hours of the day, okay. Let me bring up some charts and just look at them. Lets compare a couple pairs each of the day you know, say for 10 or 20 days or so that I trade during comparisons, just ballpark, see what — how correlated the pairs look. If they — if they dont look very correlated, then youve got a good chance that, you know, the decoupling will really help smooth out your trading equity curve.
Brian Short: And we do have one final question, I know I said that before but this will be the last question. This is from Anna and shes asking lastly, What is the function of correlation, the chart that you have up right now shows a 5-minute correlation but this would be changing all of the time and shes got another question or was just asking will this be changing all, you know, every five minutes.
Bob Malinowski: Yes, you know thats a good question and Ive gone to this site a few times and I know it hasnt really changed much in the time Id looked at it. So its my sense that this is an average of how this parallels are correlated over a 5-minute period but Im not — Im not 100 percent sure. I would visit the site and see how and if this number do change over time. Im not really much of a Forex trader myself so I dont spend a lot of time looking at Forex correlation. So this is something you may want to just take a look at yourself.
Brian Short: Well again let me thank everyone for being in our presentation today. I hope it was beneficial to you. Let me say a special thanks to Bob, sorry I have a cold, Bob for doing the presentation today. It was very informative and again, I want to remind you that we have a presentation coming up on November 20th from coach TJ. Itll be on 0:53:31 testing and I put the link into the chat there for you to click on and get signed up. Make sure you dont miss that. Im sure its going to be a very good session as todays was.
So again, thank you Bob. Thanks everyone.
If you enjoyed reading about this webinar, be sure to get on our mailing list and sign up for future webinars, as well as view all past webinar recordings at http://www.netpicks.com/learning-center/training-webinars/