Brian Twomey is a full-time trader, author of "?Inside the Currency Market" published by Wiley and a new upcoming book, "?Using the Z-Score to Trade Foreign Exchange and Other Financial Instruments". Brian has a very unique self-developed method of applying statistical analysis, and in particular Standard Deviation calculations, to plan his trades.
Brian sat down with the DailyForex.com Senior Analyst, Huzefa Hamid, to discuss his views on the market.
[DF] What was your professional background prior to trading?
[BT] I've been teaching college since 1996 in Florida & South Carolina, teaching Political Science; I taught classes such as Public Administration, International Relations, American Government, Political Parties and Political Philosophy. I was actually a stockbroker in my early twenties for a few years; I grew up with stocks & bonds because my grandfather was an investor – I grew up reading the Wall Street Journal all my life.
[DF] How did your journey into trading begin?
[BT] By sheer accident! One day in late 2004 I was watching CNBC in the afternoon waiting for class, and I was watching the Japanese Yen and watching the prices and then the next day and the day after that and so on. I thought to myself there's money to be made in this but I don't know. So I started a research journey first. I placed my first live trade in Forex in mid-2005.
[DF] You made some interesting public trade calls recently. Tell us a little about that.
[BT] I did that based on a conversation with a guy about how mathematics and statistics can predict markets. So over October 2012, I made 20 public predictions with entries and targets in the members' section of a leading Forex portal; all 20 trades hit their targets.
[DF] One of the backbones of your trading is Standard Deviation. In simple terms, what does Standard Deviation measure and why is it effective?
[BT] Standard Deviation is the spread of price from the mean or average. Currency prices align so perfectly with Standard Deviations. I would not consider using anything else, ever, in its place.
[DF] You also use Moving Averages extensively. How do you use them?
[BT] I only use Simple Moving Averages. The others – Exponential, Weighted etc. are distortions. Simple MAs based on closing prices are a clean tool. The shortest MA I use is 5 SMA and the longest 253 SMA.
[DF] What timeframes do you use to plan your trades?
[BT] I use Daily closing prices to calculate my MAs. And then I calculate my Standard Deviations from those Moving Average calculations.
[DF] Tell us a little more about your two books and what they offer traders.
[BT] With the first book, Inside the Currency Market, I wanted a book that would bring an understanding of the currency market from many different perspectives that hasn't been covered as thoroughly before. For example, how many people know the relationship of Australian bonds to the Australian yield curve, or the relationship of Australian bonds & yields to the Australian bank bills? How many understand what New Zealand's OCR rate does and how it operates? The most important interest rate in Canada is the Overnight Money Market Financing Rate, or OMMFR. How many understand that compared to a market interest rate? I wanted to cover factors that nobody knew about, talked about, but were pertinent to currency markets and prices in particular.
My second book, Using the Z-Score to Trade Foreign Exchange and Other Financial Instruments, is a complete statistical strategy to trade currency prices, to understand currency prices in terms of averages, Standard Deviations, Z-Scores, Standard Deviations of average ranges, and Standard Deviations of price distributions. I'm in love with the topic.
[DF] Over the years, have the markets changed in terms of how you can apply your methods?
[BT] It works in all market, anytime. It works without fail. It'll work in equities, for example. But I'd rather trade something volatile such as the NASDAQ rather than say the S&P. You want an index or a price that moves so you can catch the deviations in the averages.
[DF] Are there any market conditions when your strategy does not perform well?
[BT] It's perfect for a trend but it still catches small ranges. It catches every market price that records, but it's a beautiful trend system. It catches great 50 pip moves all the way up to 200 to 300 pip moves.
[DF] How does news & fundamentals effect affect your trading?
[BT] Volatility is seen in the numbers. I call volatility information already priced in the market. For example, today Mario Draghi made comments after the ECB rate decision and sent the market spinning 50 pips. But my system saw it coming. In the morning I will see what's happening with NFP before NFP is released.
[DF] What trading hours do you keep?
[BT] I'm up just after the European Open, around 3am Eastern Time and I'm up until the afternoon when I often do a little more research or work on another project. I'm in love with information and research. Once I place a trade, I let it run; I don't worry about it. If a position goes against me on those rare days, I just add to the position with the same target objective. Usually a trade is 1-2 days but it could be longer.
[DF] What platform do you favour for executing your trades?
[BT] FXCM TradeStation – I keep it as simple as simple because I'm not a huge computer guy.
[DF] What mistakes do you still make today as a trader?
[BT] I may mistime an entry. For example, the markets were closed for Thanksgiving for 2 days; when it reopened, it opened wildly against me by about 100-150 pips (I placed the trade the night before Thanksgiving). Don't trade when bond markets are closed because currency prices won't price correctly due to its price misconnection to a bond or yield price. And never trade when banks are closed. Trade Sunday through to Thursday and only take short-term trades on Fridays.