Finding Forex Trades Using Technical and Fundamental Analysis

06/10/2010 2:00 pm EST

Focus: FOREX

Tim Bourquin

Co-Founder, The Traders Expo and The Futures & Forex Expo

This week, we talk with Wayne McDonell about how he trades the currency markets, how he finds opportunities each day, and the various time frames he uses for confirmation that it's time to enter a position. We also discuss why he sets goals in terms of "pips" rather than dollars or percentage gain. A good interview for traders in any market, but especially the forex market. Wayne explains how he approaches the market and the technical tools he uses to find good currency trading opportunities each day.

MORE: Read or Download a Full Transcript of This Interview


Tim Bourquin: Hello everybody. Welcome back to Thanks very much for joining us for another interview this week. We're going to be speaking with Wayne McDonell of FxBootcamp and talk to him about how he finds opportunities in the Forex markets and just basically his overall philosophies as a trader. So Wayne, thanks very much for joining us today on the program.

Wayne McDonell: Well, thanks for having me Tim. I'm a big fan of your interviews.

Tim Bourquin: Great. Well, talk about actually your background. I would just like to start with that for all of our traders. How did you get into trading in the first place?

Wayne McDonell: Well before I was trader, I was a venture capitalist and, you know, I spent most of my time reviewing business plans and patents and then trying to figure out the opportunity for the market place, you know. If we saw a billion dollar market place, we thought that was, you know, totally amazing. And then one day I heard about Forex. I can't remember, probably an informercial, something like that and I did a little research because I like this idea of buying and selling money. As an entrepreneur, you always want to go where the money is. So, that's where I looked at Forex. And at the time, it was something like 1.5 trillion dollars a day. I was thinking, you know, a billion dollars a year was fantastic and all of the sudden 1.3 trillion a day. It seems like all the money in the world. So, I thought I would throw myself at it and traded Forex as a hobby for a few years until it was just too silly to keep it as a hobby and then I quit the firm.

Tim Bourquin: Right. You find out a lot of successful traders realize that they don't have to deal with all the issues of having an office and everything else and then trading seems like a natural fit. Did you feel like your experience as a venture capitalist helped you as a successful trader?

Wayne McDonell: You know, perhaps. I mean as a venture capitalist, maybe. It, you know, made me cautious; it made me plan things out. As an entrepreneur, you know, I have known several business before. I think if being business owner, being an entrepreneur, being a venture capitalist helped me in any particular way, it was treating Forex as a business. And so, as I developed my skills and repertoire as a Forex trader, I looked at the world as a business. So I did things like managing my risk, managing my money which is a big thing in Forex, and then also, I started doing things like creating business plans for my trading career and I started planning things out years in advance to keep myself focused on the long term and not just the trade in the moment.

Tim Bourquin: So what does a business plan look like for a trader or, I guess some people call it a trading plan? What do you think some of that includes?

Wayne McDonell: Well, actually, it was different from a trading plan. It was literally a business plan and what I did, is I started looking at the numbers, sort of how much risk I was taking for the reward and how my capital was growing if I had a minimal acceptable performance every single day, you know. How does that compound and how does that grow? And then as my trading account actually built up members wise, how much risk could I take off the table in the second year, in the third year and still allow myself to get paid, still allow my trading account to grow and at the same time take off risks, take off risks, take off risks. And once again, once I had the numbers planned out day by day, week by week, month by month, year by year, showing how much money is growing, what I'm doing on a daily basis, and what that means in the long term, it took me out of the here and now and gave myself a long-term focus in the sense that as long as I hit my minimal acceptable performance every single day, even if it was small, it really grew into something big, you know. In my book, I actually make a little quote about this. Einstein was once interviewed by a reporter and the reporter asked Einstein, "What's the greatest force in the universe?" and Einstein's answer was "compound interest". And I had to laugh because that's what my business plan told me. As long as I stayed small and stayed humble, and didn't take too much risk, in fact, even take risk off the table, the more I would be successful in the long run. And in fact, by planning things out three years in advance, I actually found that there was a paradox. The less I paid myself on the short term, the more money I made on the long term and that was because of what Einstein said. It's the force of compound interest.

Tim Bourquin: I forgot about your book. We'll, of course, link to that in the notes so the readers can take a look at that. But what happens when you do those daily goals and you don't make it or you don't' make it a couple of days in a row, which I'm sure has happened? Do you find yourself almost wanting to over trade to try and make that up and how do you avoid that?

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Wayne McDonell: Well, in fact, the opposite really takes place. If you take a long-term view of your trading, years and years and years, any single day is almost meaningless because what you're looking at is, you know, just one day out of a thousand days. It isn't that big of a deal. So if I don't trade at all, and there are days where I never pull the trigger because things just don't look good, the market is just not moving. Then I realize, "Well, you know, it's OK." It's not that big of a deal on the long term. I'm certainly not going to look back three years from now and remember that one day that I didn't trade. So, I just back out and remind myself I'm not a Forex trader per se, I'm a Forex profiteer and if there is not profit to be made today, well, then I'll walk. Then I realize that it's not going to hurt me in the long run. Or if I have a bad day, well, I'm looking at really, on average, you know, so if I have a bad day, "Oh well, on the long run, the numbers will take care of things," and, you know. So, again, by planning years and years in advance, you know, one day whether it's an amazing day and you just knock down the pips or if it's a bad day or a day you don't trade at all, it's really not that big deal.

Tim Bourquin: OK. Well let's start in the morning. I know Forex is 24/7 or 24/5.5, if you will. Talk about when you get up in the morning. What are you looking at? How do you start your day? How do you start to find opportunities in the markets?

Wayne McDonell: Well, the things that I do right away at the beginning of the day and let's day, like 5 a.m. London time, midnight in New York time, the thing that I do right away is I try to figure out two things or look at two different currencies. I look at the US dollar first and I decide whether I want to buy the dollar today or whether I want to sell the dollar. Then I'll flip over to the Japanese Yen and I'll try to decide, "Do I buy Japanese Yen today or do I sell Japanese Yen?" And the way I figure this out is I look at the all the majors and try to use currency correlation to see if there is strength or weakness in the dollar and then at the beginning of the day, I'm trying to catch the move of the day. So, it's sort of a day trade or a swing trade based off of a 15-minute chart. That's what I start with and I usually carry that out until London lunch around 6 a.m. New York time.

Tim Bourquin: So sounds like you try to set up the bias, your overall bias for the day, before you even start. Now what happens if you decide, "Well, I may have been wrong. I need to take the obstacle course. I need to be long when I thought I might be short." Do you not trade at all or do you go ahead and make the change?

Wayne McDonell: Well, if I pick a direction and for whatever reason I'm wrong, because I'm a very, very conservative trader, I'll back myself out and I'll start my analysis all over again. It's pretty rare that I'm that wrong, you know. Not that I'm such a great trader but I'll open up my charts and I'll look at long-term trends. I'll look at support and resistance. I'll look at the pivot points for both daily and weekly. And then, of course, as the moving averages start crossing over each other at the beginning of the day, most of the time, when you put all those things together, a direction is established. And now, I just have to get in, swim into the middle of the river, and float downstream with the current.

Tim Bourquin: How much size are you putting on typically when you're trading?

Wayne McDonell: What I do is I spread my risk around multiple trades. So I look at my trade plan, my actual business plan, how much risk I could possibly take, and then once I decide whether I want to buy dollars or sell dollars or buy Yen or sell Yen, then what I'll do is I'll spread my budget over the pairs. Let's say I was trading four Standard Life. Instead of putting four Standard Life on the Euro and USD, up at one on the Euro/USD, one on the Pound/USD, one on the USD/Swiss Franc, and one on the USD/Yen and spread my risk. So in the sense, what I'm doing is, I'm betting on all the horses.

Tim Bourquin: What kind of setups are you looking for and in terms of time frames, are you looking at the five-minute and then deciding when to get in, and what setups exactly are you looking for that would say that it's time to trade?

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Wayne McDonell: Well, I break it down into pieces, Tim. So what I'll do is I'll start on let's say, maybe a two-hour chart, or a four-hour chart. And of course, I'm assuming if we're just talking about a trade that I'm going to do in a day or within a day, I'll look at a four-hour chart or a two-hour chart and get sort of the broad picture, what I call "aligning the satellites," you know, taking a look from afar. And then once I kind of get a feel for what has been happening for the last few days, then I'll drop in and I'll look at the one-hour chart, the 15-minute chart, and the one-minute chart all at the same time, OK? At this point I have decided, you know, let's say I decided I want to buy dollars. I've gotten that far by looking at my longer-term analysis. So then I'll drop in and I'll look at the one-hour, the 15-minute, and the one-minute and it's my goal to align those three time frames with my longer-term bias. So it takes a while to set things up and it take a while because I'm so conservative but I'll tell you what: When all three of those time frames line up, success is a lot easier obtained.

Tim Bourquin: Yeah, and how often does that happen? How many trades a week are you taking?

Wayne McDonell: Well, I trade a lot, but in this particular case, you know, in the morning like your first question was, you know, what do I do in the morning. Well, in the morning, I'm trying to catch a trade that I can carry till the London lunch. Then there is a pause, and that's another time, an opportunity to do fundamental analysis and sort of to get warmed up for New York. Now New York is a lot different from the European session. The American session is a lot more choppy. There's news that comes out that affects the US dollar. The US dollar is the reserve currency of the world. Everybody cares about this because every single central bank on this planet has way more dollars than they would like to admit. So, everyone cares about this greenback. So when news comes out, the market's very choppy. It's very volatile, you know. We'll have news at 8:30 then the stock market opens at 9:30 and often there's news at 10. And so, what I do is I break New York into segments, into little pieces, and I'll actually use a much shorter-term time frame to trade New York. So, I might be using the one-minute and the 15 minute more often than I'm using the longer time frames specifically in New York. And then as New York winds down as London closes, then we get back into sort of a spot trade a nice smooth 15-minute chart. So, again, I break the day down into segment and each segment has its own personality whether London is open, whether New York is opening or whether those markets are closing. If they have different personalities, I look at the market differently. I treat it like it has a different personality and then I trade based on what I see in that personality through that particular moment or that segment.

Tim Bourquin: Let's talk about that risk management. How are you setting stops, if you are setting stops, and how far away?

Wayne McDonell: Well, Tim, I always have a stop-loss. The stop-loss is for catastrophic failure. So if I have a heart attack and drop dead, I need to make sure that my children and my family are taken cared of. If I didn't have a stop loss, I'd lose the family fortune. Or if the power goes out, you know, and I can't, for some reason, call my brokers and I can't do anything, I want to make sure that no matter what happens, I'm protected. So for me personally, since I trade while I'm watching the charts, I have a stop loss that's at 50 pips. It's an arbitrary number and it's not because I don't do sort of deeper analysis on where I put my stop loss but I'm trying to be very quick. It's quite often I'll pull the trigger based on currency correlation or intermarket analysis. I might pull the trigger, you know, four or five times within a minute because I see something happening. So, I need something very, very quick as a basket trader. So, I'll put my stop loss very quickly at 50 pips but I have no intention of getting knocked out with a 50-pip stop loss. It's just there just in case. Now, I love pulling the trigger. I love pulling the trigger to get into a trade. I love to pull the trigger to get out of the trade. For a profit or loss, it doesn't really matter. So, if I'm in a trade and I see little bit later on that something's changed, OK? If I see a ship in momentum that looks like it's going to go against me, I simply exit the trade and remove the stop. And again, I don't care if it's for 50-pip win or a 12-pip loss. If I'm in a trade because I see momentum moving and I place the trade and the momentum stops, I will just simply exit the trade technically because my charts told me so, not because I have fear or emotion on the trade or because the stop loss is hit. I have that stop to protect through the worst-case scenario, but other than that, I enter a trade and I exit a trade manually.

Tim Bourquin: When you mention those terms, in terms of protecting the family, it does make sense to put a hard stop on there even if you are sitting there watching the charts the entire time. That totally makes sense. Now, let me ask you about what you talked about in terms of getting out, how do you determine how much profit you want to make and do you have trailing stops that you move up if you are on the money?

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Wayne McDonell: Well, how do I determine profit? Well, I'll look at average daily range for the currency pairs so I'll have a general idea of how much each pair will pay off on a normal day. I'll look at pivot points both daily and weekly. I'll also use Fibonacci to see if there is any overlap on those pivot points. Of course, the longer-term analysis will tell me where the strong support and resistance is. So, I'm looking for a cluster of these support and resistance lines, Fibonacci, extension lines, weekly and daily pivot points. And so, quite often, the market is fairly predictable. It's very rare that Forex just flat out lies to you. It's fairly predictable where the top or the bottom is going to be. I mean that's what pivot points are. They project the top and the bottom. So, when I get in that pivot profit zone, that's how I label it in the book, so when I get to that pivot profit zone for the day, then I simply exit.

Tim Bourquin: Would you be willing to share with us anyway about how often your trades are winners versus losers, a percentage, if you will?

Wayne McDonell: Well I don't have a percentage that I throw out there because I'm an educator first and foremost. I mean I do trade my own funds but I teach and I coach and, you know, the exact winning and losing for me personally, I think is irrelevant. I don't like getting members of FxBootcamp distracted, you know. If I had a much greater winning percentage than they, I don't want some of them to feel like they're not a good trader. How could they be if they're starting? They're learning and growing. But the nice thing about Forex though, is once you learn the technical and fundamental analysis as a first step and then really learning on how to be a trader, which is the more difficult part. Once they get that together and they get a few years under their belt, Forex is a profitable business most days, you know. Every single day, you can sit down and there are opportunities to profit.

Tim Bourquin: And does your trading plans talk about specific dollar amounts that you want to make each year or how much you want to see your account grow?

Wayne McDonell: We never talk about money OK, because to me in Forex, you can place one mini lot or you can place 500 standard lots. The trade plan is going to be the same. So we always talk about pips because it removes the money factor and, of course, a lot of newer traders get very emotional over money. And so, I try to extract that part. So what we talk about is pips. So, when I talk about a minimal acceptable performance, what I'm trying to do is if I'm spot trading, Tim, I'm looking for a profit goal of somewhere between 30 and 45 pips on a spot trade, let's say on a 15-minute chart. And if I can't see a reasonable chance of 30 to 45 pips on that trade setup, then I simply walk. I just don't trade because it's too risky. Now, out of that trade setup, my number one goal is to get my stop to break even and then get my stop to protect 15 pips, OK? So 15 pips is my minimal acceptable performance for a trade setup that is likely to yield 30 to 45 pips. Now, I have to assume my entries can't be perfect and I have to assume my exits can't be perfect and then, of course, sometimes, you know, the trade setup just doesn't yield what you think it should. So, out of that 30 to 45 pips, you should be able to extract that minimal acceptable performance of 15 pips and that's what I'm looking for and then the goal is to repeat that over and over and over again.

Tim Bourquin: Have you tried any of your strategies on any other markets that feature stocks and anything like that?

Wayne McDonell: Absolutely Tim. In fact, I use intermarket analysis as a commodity is traded and as advice, you know. I've learned to use these other markets to actually find opportunities in Forex. So, I'll look at the 10-year T notes. I'll look at gold. I'll look at oil. I'll look at the Nikkei, The DAX, the FTSE, the S&P 500 and so on and so forth, and guess what? The same methodology that I apply in Forex works fantastic in these other markets. It's really cool to see these technical levels of that are so important in Forex, let's say, like a reversal pivot point. It's great to see the S&P 500 come down and hit that same reversal pivot point and reverse.

Tim Bourquin: Wayne, you know, you're an excellent trader I'm sure, and you make it sound very easy to find opportunities each day. Why do you think traders have such a hard time trading? Why do you think so many of them wash out of the market, especially in forex?

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Wayne McDonell: I think it's because they don't give themselves enough time. I talk to a lot of traders that seem to be, you know, their backs against the wall. They hate their day job and they need Forex to liberate them and they give themselves exactly six weeks and exactly $10,000 to figure it all out, and they just burn through the cash and they're gone. The ones that are a little bit smarter are the ones that give themselves more time to learn. They come in a little bit more humbled. They look at their experience in Forex as sort of an education and they give themselves more time. But even in that case, the failure rate is still very high because they focus on learning technical analysis first and I think most people will agree that even after a few months or maybe even their first year, their technical analysis gets pretty darn good. They're pretty good at reading the market technically yet they still, you know, lack success. And so, perhaps, if they move to the next stage in the development as a trader, they start to learn the fundamentals, OK? And they start looking at why news is important and how the economics affect the value of a currency, and what interest rates mean and how they affect things and they get better and better and better. But even so, even if you've mastered technical and fundamental analyses, there is still a piece missing and that's learning how to be a trader because you can learn technical and fundamental analysis and be a great analyst. I think there are fantastic analysts out there, but they probably can't trade worth a darn. And people are finding this as they're trying to learn how to trade their own money and trade the market every single day that there's more to it. What it is, is learning to be a trader. How to improve, you know, their own consistency, how to improve their own confidence and, of course, how to control their own emotions so that things don't get out of hand. Everyone talks about greed and fear. Well, greed and fear is always there. So, it's that last piece that I think 95% of new retail traders, they never get that far. Either they didn't give themselves enough time and they're just trying to wing it and figure it out themselves or maybe they only get as far as technical analysis or maybe they only get as far as learning fundamentals on top of technicals. At the end of the day, they really need to learn how to be a trader and that, you know, that takes a lot of time to get to that maturity because for most people, that means you have to fail a few times, stand up, wipe the dust off your shoulders, and keep going. You have these epiphanies. You have to look yourself in the mirror and search your own soul to say, "You know, why am I holding myself back from success?" and it's really you can't skip the experience part, Tim. You have to learn how to be a trader to be successful.

Tim Bourquin: And I know it's different for each person, but I'll finish up with this question: How long did it take you to get that confidence that you felt, "On a monthly basis, I can make money in this market every time."?

Wayne McDonell: You know, Tim, I traded a demo account for two years, OK? It took me a long time. Now, I happened to have a very good job. It was actually my dream job. I was making a six-figured salary. I was doing what I felt like I wanted to do the rest of my life. I had that big beautiful office on top of the skyscraper with views of the San Francisco Baby, you know. I thought I was on top of the world and then I ran into Forex. And so, I had that luxury of time and I gave myself years to slowly figure it out and it did take me years, Tim. It took me a long time. I failed at I think everything you can possibly fail at and maybe even learned a few new mistakes that people could make. But, because I gave myself time, I did get better. I did mature as a trader. I did get better at technical analysis. I did get better at fundamental analysis and I did become a success. You know, I worked at a firm that had 300 employees in it, you know. I had my door wide open and there was a buzz out there and I felt like I was on top of my game in the business world. And suddenly, you know, I had to sit down with my wife, and I said, "Honey, I'm vice president of the firm, but I want to leave," because I want to trade full time out of my house. I want to become a Forex trader full time. And I took that leap of faith and it was probably the best thing I have ever done in my entire life.

Tim Bourquin: Great. A good story Wayne. Thanks very much for your time and of course, listeners, if you want to find out more about Wayne and his book and that sort of thing, We'll link to it in the show notes. Wayne thanks for your time today.

Wayne McDonell: All right. Thank you Tim.

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