By Zac Storella, CountingPips.com
Today, I am pleased to bring you a new forex interview with professional forex trader and blogger Mike Kulej from the popular website and blog FxMadness.com. An active trader since 2001, he trades major and exotic currencies as well as futures while his website focuses mainly on currency pairs outside of the US Dollar. Mike’s blog posts are very insightful and explain his way of viewing the markets, his technical trading ideas and upcoming trade setups. Please see interview below:
Q: How did you become involved in the forex trading world? Was there something specifically attractive to you about the fx markets?
I started to trade stocks in late 80’s. Unfortunately, most of the books and educational material from that period was heavily fundamental in nature, which I found too vague. They lacked the precision (or at least the “perceived precision”) of technical trading. Charts always made more sense to me, and I searched for books on the subject. There was not much available at the time and bulk of what I could find was written by and for futures traders. One could say that by default I gravitated towards futures trading, which included currencies. The Swiss Franc contract was suitable to technical analysis and pretty soon became my favorite trading instrument, along with silver. By mid 90’s I was working on fishing boats, being paid abroad. The crew was international and everybody was trying to make as much money as possible in domestic currency. Since everybody knew I was trading during my time off, we always talked about switching deposits from one currency to another (our bank allowed that), in effect market timing, or trading. At the same time, online Forex brokerages opened for business and pure currency trading became a reality. In 2001, I started to trade full time.
Q: What markets do you mostly trade and do you have any preference on the currency pairs you trade?
For the first 18 months or so, I traded the USD-CHF pair almost exclusively, rarely testing waters elsewhere. As time went on I added the GBP-JPY (the beast), because it was extremely volatile then. Eventually, though, I expanded to all major crosses. However, not each one is necessarily worth following at all times. For example, currently the EUR-CHF, a great instrument last year, is no longer tradable. That will change with time, but I am leaving it alone for now. I avoid short term trading in the so-called exotics, because the costs of doing business (spread, slippage) are too high when compared to others. In the blog, I like to write about non-Dollar pairs since they get less coverage in the mainstream media. Periodically, I still trade futures, with preference to physical commodities, but probably 98% of my total activity is in the OTC Forex market.
Q: How did you get your trading education? Did you learn by demo trading, did you have a mentor?
Unfortunately, I did not have a mentor and my trading education was, well, eclectic. Very early on I decided to be a technical trader and was reading everything on the subject, which was not very focused. I experimented with a lot of concepts and strategies, something which is still evolving to a certain degree. All my learning was hard-core, with real money – demo accounts were not available when I started. Interestingly, it were Forex brokers who introduced this concept, which is a great tool, if misused. In my opinion, the demo should used to learn all the platform functions ( placing orders, stops, profit targets and so on). After that, one should switch to a real account, but fund it with a small amount for traing purposes. At the very least, one should lower the balance level to something realistic. If you have 3-5K to invest, why practice with 50, or 100K in monopoly money? It develops unhealthy habits and creates unrealistic expectations.
Q: How often do you trade, are you a full-time trader? Do you trade longer or shorter times?
I am a full time trader, but…. Trading for a living is incredibly difficult, in a sense that results are never linear. Even if you are consistently positive (over time), it is impossible to make a set amount of money every day/week/month. This means that income is not as steady as a paycheck from a regular job. Many traders tackle this problem by creating other streams of income within the industry. For me, it is a hedging advisory for local exporters, companies that sell goods overseas. As for the trading itself, most of my trades, at least the “money trades” (read – large), are using 1H and 4H charts. Holding period is intended to be from 1 day to 2 weeks, although the bulk of them are completed within 2-4 days. During the day, I often trade using shorter-term charts, with respectively smaller objectives and position size. On occasions, I will engage in longer-term trades, using daily charts, but admittedly, I do not have the patience to sit on a position too long. In an average week, I probably make 30-50 trades.
Q: Do you use more technical analysis, fundamental analysis, and/or sentiment analysis in your decision making for trades?
Vast majority of my trades are technical in nature. I like to have predefined parameters before entering a trade. That does not mean they are set in stone, there is some flexibility to it once the trade is live, but I have a very good idea of what I want to accomplish. In addition, risks are also defined. However, I am always aware of major fundamental news releases, the ones that have potential to move markets. I avoid trading before them, in particular trying to predict their outcome. For example, interest rates decisions by central banks almost always create volatility. Some traders place orders before these events, first trying to guess what the announcement brings and THEN how markets will react. As far as I am concerned, this is pure guesswork. That said, new trends may emerge after key news releases and on occasions I trade them once a direction has been established, which is at least 15 minutes after the event. Breaking news is somewhat different animal, which I try to exploit only it causes a move that lines up with existing technical picture. On balance, 90%+ of my trades are technical.
Q: Do you have any favorite economic indicators or favorite technical indicators that you feel are most reliable?
In the last few years, it has been back to basics for me when it comes to technical work, on the principle that “simple works best”. For most of my trades, I use price swings analysis, identifying multiple support/resistance areas, combined with candlestick patterns. The only addition is the Ichimoku cloud, which I find an easy to use tool. As for indicators, I like the old school MACD and RSI, at default settings. Neither one is particularly better than the other and that is the case for all of them. The trick is learning how to use 1 or 2 indicators rather than keep searching for the “best one”. In order to achieve it, one has to pour over hundreds and thousands of examples on charts, which obviously takes time.
Q: Is there any market(s) that you generally feel is important to keep an eye on, maybe that are outside of the ones that you trade?
I find silver to be a good broader sentiment indicator most of the time, except for periods when it is driven strongly by own fundamentals. That, however could be said about all financial markets, these relationships come and go. For example, currently the Euro and by extension most other risk markets react strongly to results debt auctions in Europe. With time, perhaps in a few months, perhaps in a year, this link will become less useful, but something else will replace it. One has to make a distinction here between correlations. Many people look for correlated markets, with hopes of taking advantage of them. Unfortunately, unless there is a lead time (unlikely), this is false premise. Most markets move in unison, or respond to one another almost immediately, so there is little time to do anything about it.
Q: Do you have any advice to anyone that may be just starting out in forex trading that you can share from your experiences? Is there anything in particular that you wish you had learned when you started out?
Beginners should consider the issue of leverage very carefully. While the very high leverage in Forex trading is very appealing, it is not for everybody. It magnifies losses as well as gains and that will affect every trader in different ways, depending on his/her personal tolerance and psychological makeup. There is no such thing as “correct” leverage; it has to be discovered through trial and error. When starting out, one should trade without leverage for a while (1:1), in order to prove to self that one can actually produce gains. Once results are promising, the leverage can be increase to, say, 5:1 and after some time to 10:1 or even higher. Eventually a trader will discover own comfort zone, which allows for enhancing gains through leverage, while the pain of losses is tolerable. This takes some time, but becoming a trader is a process, not an event.
Another important issue for beginners is how much money to start with? Obviously, that is very personal depending on own unique circumstances, but the amount of money cannot be too small. One compromise is to fund the trading account with amount equivalent to an average paycheck. It is large enough some to create a “sting” when lost, thus helping in development of good trading habits. At the same time, it is not excessive and should not put anybody in a financial trouble. More than that in early stages of trading career is probably too risky. After all it is very difficult make a fortune in a day, but easy to lose it!
Thank you to Mike for taking the time to answer my questions. To see more of Mike’s trading insights, charts and blog posts, be sure to visit his site at fxmadness.com.