Introduction

In a nutshell, we trade every currency every day. We set stops at a fraction of the Average True Range and targets at a bigger fraction of the Average True Range, modified by other technical considerations.  Over time, we can have a gain/loss ratio of little more than 1.5:1 and still have a sizeable net profit in dollar and percentage terms. Equally important, we have a stable profit/loss track record and a stable gain/loss ratio (not 300% one year and -20% the next year), and we have never had a losing year. 

Our trading philosophy has changed over the years. We started out in the late 1980’s with two trading systems, a longer-term “position-trading” version in which positions were held for months, and a shorter-term semi-professional trading system with a 1-3-day holding period.

In practice, most FX trading professionals hold positions for less than 24 hours, and gradually this has become our timeframe, too.

RTS recommendations are for trades that will be opened and closed within 24 hours, and in most cases within 12 hours. We trade everything every day. Sometimes a position has to be carried over to a second day, but this is rare, less than 10% of all trades, and any trade carried for a third day is considered “stale” and is often exited for that reason alone. 

Why the change? First, unless you have Soros-deep pockets, position trading is simply not practical for most traders, who literally cannot afford to sit out the inevitable retracements that occur in even the most splendid of trends. From this we deduce  Trading Rule 1:

Trading Rule 1: Don’t trade big-picture macro ideas even if in retrospect you turn out to have been correct. 

The reason to trade is to make money, not to prove that your ideas about how the world should work are correct. Also, we discovered that the shorter the timeframe of the trade, the higher the gain/loss ratio. This is counterintuitive until you consider that longer-term stops are wider and result in bigger losses. Since position trading uses more lagging indicators, we would be making a gain of (say) 50% only to see half of it disappear in corrections that sometimes morph into a trend change. This violates the rule of never letting a gain turn into a loss. Besides, it’s overly stressful.

As for shortening the timeframe on the shorter-term trading system from a max of 3 days to less than one day, we discovered that keeping trades short had the happy outcome of improving the gain/loss ratio even further. This seems to be a function of being better able to refine the stop and target of each trade. The probable average true range of the upcoming daily bar is easier to forecast than the upcoming range of the next 3-5 days. Again, it may seem initially counterintuitive, but the range-estimate method of guiding trades means we are not news-dependent. Yes, we follow the big-picture news but do not become a slave to each release or try to keep up with each rumor. Hence, rule 2:

Trading Rule 2: Do not trade the news. Trade the chart.

Other reasons not to trade the news include the unhappy fact of life that others, including professionals, will always get the news or the best interpretation of the news before you do. It is more profitable in the long run to have a clear picture of the upcoming range (and a fairly objective opinion on whether you can make any money off the range) than it is to jump and jitter to every news items. Over time, and we have over 20 years of it under our belt now, you come to see that news is interpreted according to the prevailing sentiment. What is favorable news in a negative environment will be tossed off as not important. Negative news needs a negative environment to trigger selling. The interpretation of news is endlessly fascinating but if you can read a chart, you know in advance how the market will interpret the news. It happens very seldom that good news changes a negative tone by 180 degrees in one day, and vice versa. 

There are a few exceptions to the rule. Some data is overwhelming and always causes a big response beyond the normal average true range, including US payrolls, the German IFO survey and some central bank statements.

Most of all, the one-trade-per-day regime means you are out of the market most of the time. When you are out of the market for over half of the trading day, you are taking over half of the risk off the table. You may feel this entails less than a full commitment to trading, especially if you are trading for a living. Not so. You can still spend 10-15 hours a day watching the market without having to trade it continuously. One wise trade is better than 20 foolish ones. If you are trading 20 times per day, you are not doing it to make money—you are doing it for the adrenaline rush.  If one trade per day doesn’t yield enough income, put more capital at risk in each trade. If you don’t have enough capital to raise the stake, then your assumptions about being able to trade for a living are probably incorrect.

Having said that, one-trade-per day is not the only way to use the Rockefeller report. You can modify the one trade per day (or 2 to 3, if the footnote rules come into play) by scaling into our position with (say) three trades, each with its own stop and target. You may wish to put our entry, stop and target on your own chart of (say) 60-minute bars and work within that, using our recommendations as overall guidance. But one of the virtues of a light trading schedule like ours is that it encourages you not to overtrade, the most common error of beginners and old-timers alike.  

How to Use the Trading Recommendations from Rockefeller Treasury Services

Before figuring out how to adapt your trading ideas and goals using our trading recommendations, you need to be clear about what we are doing:

1. We trade everything every day and generally only once a day.

2. We determine which direction to trade based on a preponderance of the weight of 10 indicators.

3. We set stops and targets based on the average true range of the daily bars, modified by other indicators (candlesticks, Bollinger bands, linreg channels, hand-drawn support and resistance, etc.) 

The biggest difference between our trading regime and yours is likely to be the timeframe of your trades. Most of the time our trades are entered and exited in the first 12 hours, which is why we invented the Footnote Rules, and occasionally we carry a trade for two or three days. The prospect of holding a position for that long strikes terror into many a heart.

Here’s how to think about using our trading signals to develop your own trading regime.

All trading systems consist of technical indicators, sometimes adjusted by reference to the fundamentals, and specific risk management rules. Assuming you do not follow our trading system blindly, those are the three areas you will need to modify. 

Risk Management

In any upcoming 24-hour period, we know prices are not going to move in a straight line that we can identify at the close the day before. And yet that is what the trader’s recommendations report seems to be trying to do. The trader’s recommendations are designed to give you guidance on how to make a profit on the most likely outcomes, not the only outcomes. We hope to do this without confusion or your having you sit at a screen all the time.

It often happens that we can foresee a V shape or inverted V shape coming but we only occasionally give the instruction to reverse direction during a single session. This is because conditional trades are so hard to execute unless you are willing to sit at the screen all day (and sometimes all night). A “real” trader, someone who is making a living from trading, does sit at the screen all day and all night. It’s tedious. We assume trading is not your full-time occupation and you prefer to trade for only a few hours, and some of the trading on auto-pilot.  

You will probably be trading for only a few hours of every 24-hour session. Therefore, our stops and targets should be viewed as a reality check. We never set a target beyond the current average true range because that would be unrealistic.  If a currency trades a maximum 100 points per day, it would be wishful thinking to set the target at 150 points. In fact, we set stops at a fraction of the ATR. If you are trading in a shorter timeframe, the daily ATR is not the right number for you. You need to find software that will deliver the ATR in your timeframe, say 60-minutes or 360-minutes.

We also modify stops and targets when a key support or resistance line, including a linear regression channel line, historic high-low or Bollinger band, cuts through the range. So, when we suggest a target of 50 points with a stop of 35 points, that’s for a 12-24 hour timeframe. If your holding period for the trade is shorter, the target and stop need to be a smaller number of points and you need to look at the same factors for modification—Bollinger bands are especially useful, plus hand-drawn support and resistance. You can still use our range estimates as a guide. This is why we laboriously record key extremes in the commentary boxes on the charts (B band bottom, etc.).

Our perception of risk will always be different from yours. For example, good risk management calls for the profit target to be bigger than the stop loss. But as we search for a logical and likely range for the next day’s bar, we almost always find that the worst-case stop contains more points than the best-case profit target, and thus our stops are sometimes wider than you will like. You should adjust your stops and targets off ours to reflect the amount of loss you are willing to take or the amount of gain that you yourself see as possible. We set stops and targets on the average true range, adjusted for key levels like support and resistance, candlestick patterns, and other modifications. You may prefer to adjust stops and targets using pivot points or some other concept, including a plain old dollar amount of maximum loss. 

Note that we almost always issue a trade recommendation even when we have less than full confidence in it. This is because we sell guidance and if you want to trade, we owe it to you to deliver guidance. We do have a recommendation, “No Position Recommended” or NPR, but we use it sparingly for this reason. However, you do not have to take every trade even if we feel ethically bound to offer our best guidance. You are free to skip trades that you don’t feel comfortable with.  We used to offer a confidence weight (strong or weak) on the report and may reinstate that at some point to help in this trade/no trade decision.

Indicators

We choose trades based on the preponderance of the technical evidence, but you may want to put more weight on an indicator than we do, or to use indicators we do not show. The value of our indicator work is to identify trend direction and the strength and reliability of the trend. If we show a rising trend, be careful about trading short. 

Do not forget that indicators that work really well on the daily chart are far less effective in shorter timeframes. The MACD is the single most reliable indicator in foreign exchange, according to our decades of experiences, but it is not so hot on hourly bars. Conversely, candlesticks are wildly unreliable on the daily chart—“three white candles” is supposed to signal a fourth higher high but almost always predicts a lower low, instead. But candlesticks work very well on shorter timeframes like the hourly bar. This is because so many traders looking at the hourly bar are using candlesticks—a self-fulfilling prophecy.

If you are new to trading, we recommend that you study the charts accompanying each daily report. You can easily figure out what indicators are ruling our trading decisions and as you learn how each indicators works, become free to overrule our judgment. Modestly we suggest that you invest $20 in our book, Technical Analysis for Dummies. It will help you read our daily charts.

Our indicators are not the only indicators. But having said that, check the track record—they work pretty well over long periods of time and we have never had a losing year. If you take every recommendation on every trade, you should be able to duplicate the hypothetical track record, although slippage and commissions can reduce profitability by a considerable amount. We hear from readers that by trading in shorter timeframes, not taking every trade, adjusting stops, and other variations, they do not match our track record. That’s only to be expected because they prefer less risk than our system embodies. And make no mistake—our system embodies a lot of risk. On a capital stake of $50,000, you can lose as much as $10,000 in a single month and take as long as three months to get it back.

Fundamentals

How does knowledge of the fundamentals influence reading technical indicators? This is a really hard question.  The purpose of studying fundamentals is to detect market sentiment. At any one point in time, you should be able to sum up market sentiment in a single phrase. For example, if market sentiment is wildly pro-euro, you need to be very wary about shorting the euro no matter what the indicators on the chart are telling you.

The purpose of the Morning report is to display and discuss market sentiment. We have been doing this for over thirty years and on the whole, we can usually sniff out the ruling market sentiment. It can be very hard to reconcile the fundamentals with the technicals.  When this is the case, you must have less confidence in the indicators and be watchful for sentiment to shift in favor of the most reasonable interpretation of the fundamentals—in other words, a reversal.

It’s important to do this without ideology or value judgments. A case in point: in February 2011, the euro reversed from a downtrend to an uptrend on talk of rising inflation and pending ECB rate hikes, and this trumped the sovereign debt crisis. We happen to think that the sovereign debt crisis “should” rule sentiment, which is a value judgment, but clearly the market disagrees. There is no point in trading on the value judgment but it needs to be kept in mind, if off on the side, against the day it rises up again as a giant euro-negative factor.  

In another practical application, let’s say a central bank like the Bank of England has announced it will likely be raising rates and data confirms the hawkish stance. The currency rose on the central bank announcement but is now much lower and in fact giving off a sell signal—the close is under the 20-day, under the linear regression channel, and so on. Do we defer accepting a sell signal because we know that central bank rate hikes trump almost everything else? Yes. And yet we do get confirmed sell signals in currencies where we know the central bank has a hawkish bias, so this is not always the right choice.

Actually, to call it a choice is not accurate. To apply knowledge of fundamentals to the chart is named “discretionary,” but in practice, it’s often not really a choice. The mind is a mysterious place and becomes informed or influenced in a process that can’t easily be picked apart. Once the brain synthesizes fundamental knowledge, you are no longer looking at a chart with true objectivity.

This is where experience comes in handy. We use technical indicators to overcome emotion and bias, but good decision-making lets in some emotion and bias. Human beings out-perform mechanical systems and robots all the time and over longer periods of time, and one of the reasons is the intrusion of fundamental knowledge. For example, in all trading we have the phenomenon of “buy on the rumor, sell on the news.”  A currency will rise on talk of a rate hike even though everyone acknowledges the hike itself may be many months away. Once you know the central bank has a hawkish bias, it can be very hard to obey a sell signal—and rightly. You never know when a central bank official will give a speech or some data will be released that will revive the rate hike talk. This is why we say knowledge of the fundamentals serves the purpose of avoiding unhappy surprises.

Having a firm grasp on market sentiment is different from “trading on the news.” It’s up to you whether you want to “trade the news.” Many newcomers do that and subscribe to services and blogs that not only estimate upcoming data releases but “plan the trade” based on the forecast. We say this approach has a 50-50 chance of working well, in part because the forecasts are built in to prices long before the release date itself, and also because it’s tremendously time-consuming. It’s better to have a good general grasp of big-picture conditions and market sentiment than to twitch with every news release. If market sentiment has been identified correctly and the indicators are lining up with that sentiment, adverse data should have only a temporary effect. Longer-run and over many trades, this is a proven technique.

We are always interested in hearing from you, whether it’s a question about indicators, a request for a change in report formatting, or anything else.

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