Forex CT head of sales Simon Bishop shares his trading strategy
How did you get into trading?
I just fell into it. After finishing a business degree at uni, I started off in the currency options back office at ANZ. I spent seven months there and decided I wanted to move up to the dealing room.
There was a trainee foreign exchange dealer role there and I didn’t even get an interview. So I said to the guys on the forex night desk “Do you mind if I sit in and learn a little bit?” I figured that the next time there was a role at least I would get an interview!
After about three months it got to the point where they would ring me every night because they needed help with the orders.
So you just volunteered?
Yes, I just volunteered. I would work all day in the back office and then go into the night desk for three hours each night. I’d finish my usual job at 6.30 and then go up to the trading room. It gave the opportunity to learn about the markets and I would obviously help the guys with their work.
How would you describe your trading style?
I would structure my view on the markets by constantly asking: “Where to from here?” Before you start your trading session, you’d look at what’s been going on in the session beforehand and try to figure out what’s most likely to occur next.
As a forex dealer, I would look for the next move of between 70 and 100 pips, I wasn’t interested in where it would be next week, just where the next 70-100 points was going to be. Also, at the bank you have a certain budget you need to meet every day, so if you come to the conclusion it might only be a 30-pip day you would look to take a larger position size looking for less in terms of points.
How would you figure out what kind of day it is going to be?
I would look at the technicals. I look only at the technicals and I am a big fan of three timeframes. First, I would look at a one-hour chart. I always base my view on a one-hour chart.
Then I would look at four-hour and daily charts to see whether that chart causes me to negate that view. If the four-hour or daily charts produce something to make me think twice, then I would sit back and reassess the situation. This is because I always work on the assumption that the longer-term charts outweigh the shorter term.
For example, if I was really bearish on the hourly, but there was a big cracking uptrend line about to come into play on the daily, then I would respect the longer-term chart. Although the bearish pattern on the hourly may be the catalyst for the breaking of the uptrend.
So you look at short term, medium term and then long term?
No. Strangely enough, I look at the one-hour, then the daily, and then the four-hour. I use the four-hour to clear any confusion produced by the hourly and the daily charts as I find the four-hourly to be a cleaner chart. But overall, I came to a view on the hourly and if no red flags appear in the other charts, then I stick by the view I gained from the hourly chart.
When you are trading intra-day, you are looking only for the moves that an hourly chart might produce. The hourly was the smallest time frame, as five or 15-minute charts are too focused in my view. Yes, they show many signals, but they tend to give plenty of false ones also.
What markets do you think are best to trade and why?
I have a background in forex and so I try and stick to what I know. The forex market is a good market to trade in because it is so liquid and it’s less prone to see the kinds of shifts in sentiment you see in the share market if one big player decides to enter or exit a position.
What are some of the biggest hurdles you have had to overcome?
Confidence. You have to be confident to be able to take the trade when you need to. The other major hurdle a trader has to overcome is the lack of a trading plan, but that’s related to confidence. A trading plan helps you gain the confidence to pull the trigger.
At the end of the day, in trading, you are going to be right or wrong. But if your trading plan makes sense, there’s more chance you are actually going to be right. And if you are wrong, the trading plan should ensure that you don’t lose too much on the trade.
What’s the most important part of your trading plan?
Managing risk, without a doubt. Every single trade that I have done has always been derived from where the stop loss needs to be placed. This is because you sit there and look at your charts or look at your order book and you think, “Where am I wrong?” From there is where you derive your trading strategy.
Every time you take a trade, you have to think about whether you afford to run the position to where your stop needs to be. If you can’t, then the trade’s not worth doing. In that case, you will just have to be patient and hope you can get set at a better level. But that might never happen. Alternatively, you might have to take a smaller position.
It comes back to the structure of the trade. If you cannot afford to stop out at the right level, the trade is a “bad” trade in my book, even if you ended up picking the market move right. This is because you need to control your trading and make sure that you don’t enter trades you cannot afford.
Can you tell us some of the tricks of the trade you have learnt over the years?
I think people need to be aware that certain currencies suit certain traders. For instance, as part of my role at the bank, I had to look after the USD/CAD book for some time. It was a tough book to trade (especially in the Asian timezone) and I don’t think I ever made money trading it, so when I moved onto another desk, I was happy to not have to trade it anymore. It wasn’t that I was a bad trader, the USD/CAD just didn’t suit my trading style.
The USD/JPY and the GBP/USD, on the other hand, suited me down to the ground. Those pairs suit break traders, that is, they break to new lows or new highs and you just go with the move. The same with the GBP/JPY.
Another example is the AUD/USD which can go through periods when it is range bound for some time, and if you are a break trader you can get very little joy. So when the Aussie is in a range, you should just ignore it. At the end of the day, you just have to find the currency that’s right for you at the time.
One other thing to note is that when you trade forex, patterns work particularly well. Bull and bear flags along with pennants and triangles are great continuation patterns and on the hourly and daily they give break traders plenty of opportunities.
What advice would you give to traders that are starting out?
Always work on your trading plan first and be realistic about what your expectations are. Also, think about your risk to reward ratio. I believe that a risk to reward of 1:1 or 1:2 is appropriate. I have no problem with a risk to reward ratio of 1:1.
I also think it important to remember that even the best traders are only going to get it right about 65% of the time. So you have to make sure that the losses on other 35% of the time don’t wipe out what you make on the other 65%.
Also, be careful not to take your profit too early, because that throws out your risk/reward ratio. You have to be careful that your risk/reward makes sense.
Finally, I would say to all those looking at technicals to help their trading, keep it simple. At the bank, all I used was a 13-period RSI on the daily chart to look for divergences. You don’t need to have Stochastics, MACD, RSI and ATR on your charts all at the one time. Keep it simple, otherwise you get too many conflicting indicators and you will never pull the trigger. The simpler the better works for me.