Dirk du Toit

[initialsBB]

I just finished reading the book (although i must admit i did not read it to the end since half way through i had a feeling there was nothing new this book could offer me) and i find it misleading. DuToit makes trading sound like some sort of alchemy or mystical endeavor which is very far apart from procedural and rational activity that (i believe) it actually is. There are some very questionable assumptions - for example he says that he only buys the EURUSD (one of the huge advantages of Forex is that you can trade both ways, so why dismiss this advantage - although he traded different markets before FX and maybe this is just old habit), he also dismisses mechanical trading (the fact is that many "wizards" and successful traders do use mechanical systems), he gives great importance to fundamentals (which again might be attributed to his previous trading experience) and finally he stresses the importance of having a mentor while providing link to his web site where he sells his mentoring services!

[HornedGod]

Originally Posted by initialsBB

DuToit makes trading sound like some sort of alchemy or mystical endeavor which is very far apart from procedural and rational activity that (i believe) it actually is.

All that Dirk is trying to point out is that the markets can seem very irrational at times. The markets are made up of nothing more than a bunch of people. Humans are never 100% rational, so there's no reason to expect the markets to be either. The book 'Fooled by Randomness' by Nassim Nicholas Taleb has a lot of good information and examples on this topic.

Originally Posted by initialsBB

There are some very questionable assumptions - for example he says that he only buys the EURUSD (one of the huge advantages of Forex is that you can trade both ways, so why dismiss this advantage - although he traded different markets before FX and maybe this is just old habit)

You focus on only trading one way because that is hopefully the direction that the longer term trend is going in. You give yourself an edge by just playing the long term direction. Corrections and retracements against the long term trend are hard to time and even harder to predict how far they will go. You can save yourself a lot of worry and stress by keeping things as simple as possible while at the same time making your edge as strong as possible.

Originally Posted by initialsBB

he also dismisses mechanical trading (the fact is that many "wizards" and successful traders do use mechanical systems), he gives great importance to fundamentals (which again might be attributed to his previous trading experience) and finally he stresses the importance of having a mentor while providing link to his web site where he sells his mentoring services!

Mechanical trading versus discretionary trading is horses for courses. Dirk is definitely in the discretionary camp, with a focus on fundamentals to determine entries and exits.

Some people naturally gravitate to the mechanical side, others to the discretionary. There's nothing bad or wrong with either camp, it really just depends on the individual's psychological preferences. Go for what works for you.

There's nothing wrong with offering a mentoring service if you have the skills to back it up either. I have taken Dirk's mentoring course and found it be very beneficial. If you like the approach that he puts forward in the book then there is an easy path to learning more and refining your skills if you so wish. If you'd rather figure things out for yourself then there is plenty of excellent information in the book to form the basis of a full trading plan.

Personally, I would have to give 'Bird Watching in Lion Country' the thumbs up.

I have written a full review of the book, but it's a rather long review so here's a quick excerpt:

"This review is not going to be your average, run-of-the-mill book review. I won’t be providing an overview or even chapter by chapter breakdown of the book’s contents. Pretty much all the concepts and insights that the book contains are now littered throughout my postings on this blog. The information and the approach to trading the forex market that Dirk du Toit lays out in the four sections of the book have been absorbed by my mind and now colour the way that I look at the forex world. None of the ideas or views put forward in the book are revolutionary in isolation. On the other hand, if your trading education to date has focused primarily on technical indicators, short time frames and ‘beating’ the market then the contents of the book will open a window on a new world. Dirk asks you to see the forex world afresh."

You can find the full review here.

[MickMason]

I haven't had a chance to read your review HornedGod but you may be able to comment on an email I got just today from someone I gave my copy of BWILC to.

He said:

"His book does not clearly answer simple questions like:

What do you mean by long term trend?How to determine it?
When to enter into a position?
When to exit?
How to put stop losses?"


Those seem like fairly basic questions which I would have expected a book like BWILC to cover, if not in detail then at least to give the reader a direction in which to look to find the answers instead of just leaving him hanging.

[HornedGod]

I think part of the difficulty in a reader not being able to easily pick out answers to those questions from the book comes from being steeped in the exact entry and exit signals that are part and parcel of using technical indicators. If you're used to having cut and dry, pin point entry points as part of your trading plan/strategy then switching over to an approach that is more fundamental based can seem disconcerting at first.

Being a discretionary, fundamental trader means that the answers to all the questions in the email you received are very much dependent on the personality of the person doing the decision making. With that in mind, the answers I give are obviously very biased towards my own trading method. Someone might have greater risk tolerance and so might use more gearing, or have a different viewpoint on certain underlying fundamentals and so have a different interpretation of the long term picture. There really is no right or wrong, just what works for you.

Let's try and answer each of those questions:

Originally Posted by MickMason

What do you mean by long term trend? How to determine it?

The long term trend is determined by the traders interpretation of the major macro economic factors each of the two currencies that make up the pair that you are trading. I currently only trade the EUR-USD, and so I am only concerned with the macro economic factors that affect the US and the EU. Long term also means viewing the trend you expect over the next year at minimum. My current view is that the dollar will continue to weaken, given the huge deficits and the increasing likelyhood that the Fed will cut interest rates at some point this year. The Euro zone is looking to stay at its current level of strength, with the ECB having the potential to further hike interest rates this year, possible up to 4%. With these main factors in mind my long term direction is up on EUR-USD. On going daily and weekly data releases and other factors will strengthen or weaken my long euro bias.

Originally Posted by MickMason

When to enter into a position?

When I say that this trading method is discretionary, I truly mean that. You can enter a new trade when ever you think the time is right. I will generally look to enter a new trade on any signs of euro bullishness. I'll look to buy euro on continued euro strength. I'll look to buy when euro makes a rebound after some dollar strength. I'll normally watch news releases and buy on any euro strength that is seen from them.

How much I'll buy depends on where price is within the median grid. The lower the price is in the grid the more gearing I'll use on any individual entry. The grid is normally broken up into 4 quadrants, each 100 pips in size. I will use a gearing of 3:1 in any made in Q1, 2:1 in a Q2 entry, 1.5:1 in a Q3 entry and only 1:1 if price is in Q4.

I will use both market orders if I want to enter on the spot, or use limit orders if I want to buy any dips that develop in the near future while I'm not screen watching. I'll generally use two marker levels per 100 pip range for where I place my limit orders, with them spaced 50 pips apart. What levels you use is not really that terribly important and is up to the individual. For example, if your favourite number is 12, you could use every 1.xx12 and 1.xx62 as your limit orders level. Or use the day of the month as your entry level basis.

The reason why the exact number is not that important is the trading method is looking to profit from medium term moves (positions are generally held for several hours if not days). At the very short term price moves are essentially viewed as completely random, with price generally acting random plus or minus 30 pips at any given point.

Originally Posted by MickMason

When to exit?

I primarily use profit targets, with the target depending on which quadrant the entry was made in. Since one of the main tenants of Dirk's method is regular small profits, I stagger my profit targets to take that into account.

On Q1 entries, I'll look to exit 50% of these entries for 30 pips, 20% of entries for 50 pips, and the remaining 30% of entries for 100-150 pips. With entries in Q1 you are expecting price to gravitate back towards the median line, and so if your long term direction is correct, you will get the necessary moves to extract those 100+ pip moves. Since price can be rather rangebound at times, it is vital to take advantage of these scenarios and extract regular 30 pip profits.

With Q2 entries, I'll aim for for 50% 30 pip profits, 20% 50 pips, and the remaining 30% for 50-100 pips.

With Q3 enties, I'll aim for 70% 30 pip profits and 30% 50 pips.

With Q4 enties I'll just go for 30 pips.

These are just guidelines that I use, and I will exit trades at market price if I feel that dollar bullishness is about to appear and put my trades into the red.

Originally Posted by MickMason

How to put stop losses?"

Stop losses are definitely one of those things that will depend on the risk tolerance of the individual. Dirk's method is to try and hold trades through some severe dips, so that you give the market time to allow the long term trend to re-establish itself and return your trades to profit.

Obviously, this will not happen all the time, and the market can remain in a retracement or correction for longer than you can remain solvent. It is up to the individual trader to ascertain their own cut off point.

I generally have two guidelines on when to cut my losses. If a trade is 150 pips in the red then I will consider hedging the trade at that point. Sometimes I'll do this, sometimes I won't (generally because I like to keep things simple and hedging can act an extra layer of complication). If things progress to 200 pips in the red then I seriously start to look at the posssibility that the dollar strength will continue. If the dollar bulls have the market on the run then I have no problem in exiting my position for a loss. This generally means that trades entered in Q4 are under scrutiny in Q2, and Q3 trades in Q1.

The second main guideline is when the bottom of the grid is being tested. If the bottom of the grid is breached by price and the breach continues then obviously the grid is no longer really valid and needs to be readjusted. In this case, all open trades need to examined and closed out if they no longer make sense given the new grid placement.

Given all of the above, losing trades are obviously going to be much larger than the daily small profits of a winning trades. That is one of the main reasons of looking to have occasional 100+ pip profitable trades resulting from Q1 or Q2 entries. These large trades will be the main counterbalance to the occasional large losing trades. The daily small profitable trades that you grind out then become the trades that allow your trade balance to slowly rise over time.

Hope that helps in clarifying some things.

[MickMason]

Thank you HornedGod for that detailed and comprehensive reply. I'm hoping the emailer will come up here and reply himself but I'll copy and paste your reply into an email and mail it to him in case he doesn't. If he raises any other questions I'll get back to you if that's ok.

Again, thanks for your time and trouble.

[initialsBB]

Originally Posted by HornedGod

All that Dirk is trying to point out is that the markets can seem very irrational at times. The markets are made up of nothing more than a bunch of people. Humans are never 100% rational, so there's no reason to expect the markets to be either. The book 'Fooled by Randomness' by Nassim Nicholas Taleb has a lot of good information and examples on this topic.

You misunderstood me on this. I did not write markets were rational, since they are not. I wrote that trading(!) must be both rational and statistical. I think that Mark McRae wrote that traders are also statisticians. Now i see how correct he was.

Originally Posted by HornedGod

You focus on only trading one way because that is hopefully the direction that the longer term trend is going in. You give yourself an edge by just playing the long term direction.

True, but i think what DuToit claims is that you should trade only the up trends. One of the big advantages of Forex is that you can both buy and sell!

[HornedGod]

Originally Posted by initialsBB

You misunderstood me on this. I did not write markets were rational, since they are not. I wrote that trading(!) must be both rational and statistical. I think that Mark McRae wrote that traders are also statisticians. Now i see how correct he was.

I sort of agree with you here. In the long run it is probabilities that determine whether you win or lose money. If your edge tips the probabilities in your favour then you make money. Or maybe we're all just being fooled by randomness and it's just pure, dumb luck at the end of the day. Obviously we like to think that we have some control over our fate so we don't think about that option too often.

So in the long run we hope the numbers come up our way. In the here and now though you still have to deal with the non-rational aspects of life. Like being human and having to make decisions. Would our success be greater or less if we were all like Vulcans, emotionless, as we traded?

Stats are also great in measuring our performance, which is a useful tool in determining if we're making any forward progress or not.

Originally Posted by initialsBB

True, but i think what DuToit claims is that you should trade only the up trends. One of the big advantages of Forex is that you can both buy and sell!

Being able to both buy and sell is a big advantage of forex? Being able to buy and sell is what makes what we do trading. You can buy and sell futures and stocks. There's no real advantage about the way that you can buy and sell in forex over those other trading instruments. It is just the act of trading.

The fact that you can both buy and sell represents the options open to you. If you determine that you have a stronger edge by just trading in a single direction, would you be wiser to avail of that or dilute your edge by trading both ways just because you can?

[MickMason]

HornedGod, do you pay any attention to interest rate differentials at all (carry trade), I'm guessing not if you're long Eur/Usd.

The reason I ask is that I'm trading a very similar strategy but without the grid, and without stops. I always trade in a yield positive direction on the premise that while the carry trade is still attractive then real money will support the currency, as well as the fact that the trade earns interest of course.

With such a potentially long term strategy, and therefore a potentially large unrealized loss, the use of a stop would be uneconomical surely? By the time the trader became nervous about his positions the losses could be astronomical. If the position can be supported financially then why close at a loss, why not use it to earn interest while waiting for it to come right, however long that might take?

Don't get me wrong, I do not have deep pockets so took the small position option, so far so good!

I'd be very interested in your comments.