Michalowski, Attacking Currency Trends

Greg Michalowski is a believer in the K.I.S.S. principle—not “Keep It Simple, Stupid” but “Keep It Simple to be Successful.” (p. 100) In Attacking Currency Trends: How to Anticipate and Trade Big Moves in the Forex Markets (Wiley, 2011) he applies this principle to currency trading, but it works equally well in the futures markets. (For equities traders life is somewhat trickier.)

In its barest outlines Michalowski’s book is indeed simple. He shares his mission statement—to make the most money with the least amount of risk—and his game plan—trade the trends and keep fear to a minimum. But we shouldn’t confuse simplicity with simplemindedness. Underlying both the mission statement and the game plan are genuine insights into markets and trader psychology. His five rules for attacking the trend offer even more focused trading wisdom.

Retail traders don’t trade trends well; this seems to be a documented fact. Their failure is due in part to an inability to anticipate trends and get on board and in part to an inability to hang on for the ride. Using unambiguous tools to get on board will help cure the first problem. The second is tougher to deal with since it is more psychological: “a trader fears the success he has on his trade will be taken away.” (p. 93) Alas, we know that sometimes the trader who hangs on really does give up all his profits, so his fear is not irrational. But if he succumbs to it on a regular basis he will abrogate his chance to book profits far in excess of his risk. He needs a trade management strategy that overrides his fear.

Michalowski offers tips that he believes can transform the losing retail currency trader, who bags a pip here or there only to lose considerably more on the next trade, into a successful trend trader. In this post I am going to focus on a single rule, be picky about your tools.

Technical tools must meet three requirements: “they must be trend defining, risk defining, and unambiguous.” (p. 108) Of these three, the author considers the last to be most in need of explanation. “What I define as an unambiguous tool is one that gives a clear bullish or bearish bias. The tool should not give an oversold or overbought condition. It should not give an 80-percent correlation clue.” (p. 109) Indicators such as the relative strength index and stochastic oscillator have no place in Michalowski’s game plan. “If a market is said to be overbought, there is nothing to say that the price cannot get even more overbought. If this can happen, where is the stop loss? Where is the position closed out? There is no price for the stop. It is more of a guess. Guesses tend to increase fear over time. Successful traders look to steer clear of fear, not increase it.” (p. 109)

The author suggests using three tools; it’s the Goldilocks number. These three tools should be “universally used and simple. … Traders who create their own proprietary technical tools don’t get the fact that the market is simple, and as such it focuses on the most obvious, most of the time.” (p. 114)

What kinds of tools meet Michalowski’s criteria? He himself uses moving averages, trend lines and remembered lines, and Fibonacci retracements. These tools enable the trader to define significant borderlines (essentially, lines where the bias is bullish on one side and bearish on the other), which are always low-risk trading levels for entries and also become targets along the trend highway.

Michalowski explains at some length how to use these tools to anticipate trend moves, take the plunge, and get the most out of the trade. We often hear that trading is simple but not easy. Attacking Currency Trends, by exploring the simple, makes it a tad easier—perhaps even more profitable—for the retail trader.