TraderInterviews.com: That’s a great analogy along with the car insurance deductible as your stop loss for driving. I love that. I’ve never heard of that, but it makes perfect sense.
Derek: I think I’m an analogy-driven guy. I mean, because when I use things in an analogy format, I think it can put it into a very practical. I don’t think I know at all about trading. Chances are I know more than the average person that comes to me. I don’t know it all. I always joke, the day you think you know it all about trading is the day you close your account. But I really enjoy sharing with other people and teaching other people how to trade, and how it’s not changing them. It takes them 30, 40, 50, or 60 years to get the way they are now. Heaven forbid, I’m going to try and change somebody. But if I teach you to modify your behavior, if I can show you a way to see a 5, or 10, or 15% improvement in your behavior and instill some discipline, that slight modification of behavior for most traders is the key to massive success. Most people are spinning the wheels on little bit positive, little bit negative, little bit positive, little bit negative. So I use analogies all the time because then it’s a visualization thing.
TraderInterviews.com: You mentioned momentum at one point. I know in equities and everything else, volume is a big part of that. But, of course, you don’t have that volume, so talk about that. How are you determining momentum then as well on the market?
Derek: And I don’t want to make this sound like I’ve got the best thing in the world, but I have some tools that I use, and I use them consistently. I just said that in our charts, I remove time. We don’t look at time. So that removal of time we then use that as our momentum tool. It’s not an entry indication that we have what we call the average time of bar. So a new bar is not created until the current range is filled. So I have a tool that’s called the average timing bar that’s doing nothing more than putting a stopwatch and say, “OK.” If each bar is creating self-based on its own time frame, and they’re not standardized, but they are standardized by price. Remember, that’s important, looking at price. Well, the ATB is saying, “OK. If we reach a support and resistance point, what happens? It’s a collision of buyers and sellers.” My analogy on that is think about the revolutionary wars where the entry would line up on flanks from each other and then very organized. Half of them would shoot. Half of them would reload. Half of them would shoot. Half of them would reload. And who won the war? Then that’s who won. So support and resistance is that same calvary fight, buyers and sellers coming and colliding. Who wins the war is whether support or resistance went down. Well, what happens when we stop to have a skirmish? The markets slow down. We get stuck at a support and resistance point so those ATB linked then. Then once we’ve passed that support or resistance point, the momentum comes back to the market place and my ATBs show that the bars are filling quicker. I don’t have to see pure volume. You can look at futures volume by the way. I don’t have to see just the volume. I can look at the momentum coming into the bar, how slow or fast they’re filling, and that becomes a tremendous momentum indication. The other is just taking off the CCYX. We have a numerical code associated with the movement of each individual currency. And one of the traders in my team took and he’s an excel spreadsheet wizard, and he created an excel spreadsheet, a color mapping what we call the CCYX worksheet. We actually track those codes, and so we’ll input those codes. It gives us some divergence, calculations, some movement calculations automatically, and some percentage calculations. So we can see if the momentum is accelerating or decelerating a trend. They don’t make V patterns. They don’t make inverted V pattern. So we don’t go up, up, up, up, and then turn around and go right back down. We don’t do that. If something moves up, and then it’s going to hit a crescendo and it’s going to stall out for a while. Whether it’s going to move higher or starts to reverse, there are some things like divergence and situations like that, we’ll look at to determine if the direction is going to change now potentially or not. Remember, you anticipate. I get to move up. I consolidate. Once I’m consolidating, what can happen? I could continue to consolidate or I’m going to break or I’ll break down. I can’t go east forever. At some point, it’s got to break out or break down so I can anticipate what may happen up there, but we track those codes, and we’ll see it go to 45, then 46, then 50, then 52. Then maybe it’s back down to 51 and then 50, and then 51, and all of the sudden 49, 48, 42 so on and so forth. So we track the codes and look at momentum and trend that way. Is it accelerating? Is it decelerating?
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