We Reach for Certainty. It isn't There.
An update on certainty over at:
I'm moving most of my posts over to that blog. Enjoy!
Continue reading "We Reach for Certainty. It isn't There." »
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Just a Moment to Express Gratitude
Over the past week, as I have attempted to recover from food poisoning/salmonella, I've realized how ungrateful I can be for the body I have and for my mind. There's nothing like a good illness to humble a person. Strangely enough, being sick has been a blessing as I've remembered how much my health means to me.
During this time I've been the recipient of a lot of kindness from Ariel, in particular, who managed chart school (my daily market updates) more professionally than I do, and who jumped at the chance to help out. He is not only a kind friend but one of the best traders I have ever known. What makes him great isn't the number of dollars he can rack up in his account every day (although he can do that very well); it's that he can rack up those profits and stay true to his family and himself.
Speaking of family, after a week spent the week with my kids, instead of trading, I've come to the conclusion that a week sick with the kids is better than a healthy week working away from them. Most of all this week I've been grateful just to be home.
What We Can Control
Today we were talking on TraderRadio about what we can and cannot control. So I drew this image to sum up how I feel.
The Quest for More
Every time I work with a trader who realizes that he or she can trade profitably, the first thing that the trader starts doing is thinking about scale. Here are some examples:
If I can do this with one currency pair, imagine what I can do if I trade two! Or ten! Wow! I can make some pips just trading during the morning! What if I traded all day!
And so on. We think about increasing the scope of what we do, in order to make even more money from what we have realized we can do. The problem is that sizing up in lots, or in currency pairs, or in time to trade -- all of that is one of the hardest things to do.
A great way to ruin your performance is to make the assumption that just doing more of it will make you insanely wealthy. Next time you're tempted to increase the scope of something you do, I implore you to think instead of decreasing what you are doing. Do less. Cut down what you do. Keep it simple. Manageable. And build your account step by step, safely and sanely.
The Family of Traders
I'll have a lot more to say on this topic in coming weeks, but I just wanted to post briefly about it now, as we are on the way to Hawaii for the seminars.
It comes to mind that over the past few months I have become a better trader myself because of the family of traders that comes to the radio show, or emails me, or is part of the free seminars that we have been doing, or the web-based training that we do. What an amazing group of people who are generous and kind to one another! These people have as a main goal is not only to become better traders, but to help others do the same.
If you are new to the blog here, or to the radio show, then welcome to the family! You are part of a growing community of traders worldwide -- and it's only going to get a lot bigger, and a lot more fun. Thanks!
Things I Try to Remember
Planned, patient trading always makes more money in the long term over quick, short term manic trading.
The currency pair doesn't HAVE to do ANYTHING after the red line crosses the blue line. It can do ANYTHING, including something you have never seen it do.
Learning a lot about a few things is a marvelous way to make a career as a trader.
Your favorite currency pair and favorite setup(s) will make you more money in the next four years than every other currency pair combined.
It is possible to get 300 pips a day on the GBP/JPY. It is also possible to lose 500 pips a day on the GBP/JPY.
Trading begins before you push the “buy/sell” key.
Trading because you want to make money is an excellent way to lose money.
You trade your beliefs, even if you think you are trading a plan.
Knowing yourself will make you more money than “knowing the market.”
Great traders are sometimes lazy people.
What Does a Trader Do?
What does a trader do?
One thing that I couldn't accept as an attorney (for the five minutes I seriously considered that as a profession) was that I'd be confronted with the temptation to make money from projects and clients with whom I did not want to work. The wealth that is created from doing a law-job is wealth that comes from the support of, allegiance to, and active promotion of a client's business.
How is trading different?
A trader creates wealth from scratch. When you produce income from trading, you are creating wealth from the following ingredients:
Charts
Fundamental information
Price
YOUR MIND
Some would argue that trading is a zero-sum game, and what you win is someone else's loss. I think that's an immature description of trading. It's far more productive to view trading as the opportunity to use your mind, your talents, your discipline, and your friendships to create wealth.
When you produce income in this way, you're not extracting (consuming) a piece of someone else's pie. You're not feeding off the labor of others, or piggybacking on the business interests of some other party. Or earning wages from the support of a cause that you cannot support. Or befriending others for the purpose of winning their business rather than because you have shared goals. The cause is the support of you and your family. Of your ideals. The cause is the charities that you support, the friendships you can foster through trading, and the development and strengthening of your own talents.
In summary, a trader is self-sufficient. The practice of using ingredients like charts, fundamentals, price, a computer, and your mind to produce wealth enhances your ability in the long term to be completely independent.
What is the Purpose of Trading?
What is the purpose of trading?
It seems clear, doesn't it? The purpose of trading is to make money. The trade is planned, entered, and exited with the goal of increasing the size of one's trading account. What other purpose would there be?
The dictionary says this about purpose:
"something set up as an object or end to be attained : intention b: resolution, determination"
What about:
The purpose of trading is to not lose money.
The purpose of trading is to practice discipline.
The purpose of trading is to use my talents.
The purpose of trading is to grow.
Or how about:
The purpose of trading is to express my true nature. I was meant to be a trader.
Maybe the purpose of trading is simply to trade. Because that is what you have been called to do, or what you are meant to do, or it's the highest expression of your nature as a producer rather than a consumer. When you trade successfully, you are disciplined, you are growing, you are using and developing your talents, you are making money, and you are creating wealth from scratch. But most of all, you are trading because it's the right thing to do for you.
List of Things I Do When I Plan a Trade
1. My better trades come when I have found a place to quietly think about the trade idea, before I take the trade. I lay down for a few minutes and let my mind roam. This settles me down at an otherwise tense moment. It also allows me to clearly consider what I like or don't like about the trade.
2. It's important to me to ignore outside influences when I am planning a trade. I'd rather pay attention to my own reasons for the trade, instead of someone else's views of the currency pair that have nothing to do with the indicators and other things that I look at when wanting to buy or sell.
3. It's one thing to have a rule- or principle-based trading methodology. It's another thing to actually trade that system with a clear and rational mind.
4. Sometimes I realize that I have become very anxious about a trade idea, or a trade plan. These are good times to find a quiet place and get away from the computer, until I've sorted out the reason for the anxiety. I take plenty of trades when I'm anxious, of course, but I've at least thought about the reasons behind the anxiety first.
5. How many losses I've taken recently is the last thing on my mind.
Continue reading "List of Things I Do When I Plan a Trade" »
What to Do on Your Day Off
What do you do on your day off from trading? I don't mean Saturday. I'm talking about the day you take off from trading, on a weekday, to get away from the screens and the charts and the trading and the stress.
Taking a day off gives you a chance to step back and reclaim some of your personality. Here are two examples:
1. My friend Ariel took a couple days off from trading to go to an Expo, to meet with friends, to visit New York. He didn't even bring his computer. He was rewarded with a fresh perspective, good food, and he even say Erin Burnett at a restaurant in Manhattan. He didn't go to the Expo to learn new things about trading. He went to talk to his friend and recharge his batteries.
2. Another friend took a trip to the Red Sea (he lives in the Near East) to get away from trading during a time when he just did not feel like he was in sync with the market. He reclaimed his sense of place in the markets, felt that he got back his clarity of mind, and resumed making money when he returned.
It makes sense to give yourself a chance to think about something else besides trading. If you do it during the week, you prove that you are not owned by the markets, but that you own your own schedule, that you have the discipline to walk away every once in a while. Give it a try.
When Things Go Wrong
So things sometimes don't go the way you wanted.
The trade falls apart. The stop loss gets hit, but your dealer doesn't get you out of the trade. Or the spreads widen. Or you forget you have an order in the system and it triggers, and you're on vacation, and you're just having a great time until you are on the White Knuckler roller coaster ride and you think to yourself:
Holy crap! Did I have an open position on the GBP/JPY when I left the house?
What do to in times like that? What do you do?
Trading is much like holding a fire in your hand.
At the same time, it's beautiful and mesmerizing (for some of you at least). It hurts, too. When you have a bad trade, you are holding fire in your hands, so to speak. What are you going to do with it? Take a picture of it? Hide from it? Close your hand on it? Blow on it? Pour gasoline on top of it?
We don't always react in the best of ways to the unexpected trade. Especially if the trade is a loser, or a mistake, we are likely to try to hide from it first. We flee from the scene of the crime.
If things don't go your way in trading, tackle the situation. Get on top of it. Figure something out, and do it with friends, and do it sooner rather than later. You'll be happy you put out the fire in your hand.
Walking Away from an Ugly Trade
Over the next 12 months, it's possible that over a million US residential mortgage-holders are going to walk away from their homes. They're going to walk away from all the payments they have made, from the work they've put into making the house look nice, walk away from everything except (probably) their belongings inside. Why would they do that?
They'll do it because they owe more on the mortgage than the house is worth. They bought at the top of the market, they bought with mortgage rates that have climbed as their incomes have fallen, or simply because they have to move for work or other reasons, and can't sell the house.
Thinking about this today brought to mind bad trades. There is a temptation that I've had in my trading career to walk away from a bad trade. Just let it rip. Walk way from it, push it out of my view, put as much distance between me and the bad decision. I call this Possum trading, and you can read about it in my ebook The Woodchuck and the Possum by clicking here.
I think we are tempted to walk away from a bad trade for understandable reasons (like I've described above). Just because the reasons for walking away from a home underwater, I can see why a trader would prefer to close his eyes to the ugliness of a poor trading decision.
This type of behavior has deep, long term negative consequences. When faced with an ugly trade, it is much better to do any or all of the following:
1. Talk to a trading friend and frankly disclose the entire situation;
2. Calculate how close you are to a margin call;
3. As a person who trades for a living what they would do;
4. Immediately admit that you might need to take the loss, but don't necessarily immediately close the trade;
5. Following up on #4, don't panic;
6. Write down or record your thoughts on a regular (daily or hourly) basis about the experience;
7. Stay present in the situation and face it head-on.
The result may be that you close the trade and take a loss. But you do it with integrity, and you learn from the experience. But there is a chance that if you follow some of these steps, you get yourself out of a tight situation -- with help -- and you turn what could otherwise be an unecessary loss (due to panic) into a positive.
The Beginning Trader
Most people who call themselves traders lose money, and you've heard that a thousand times. It's not even interesting to hear people talk about it anymore, although we could all use a dose of that reality more often. It's questionable whether most people who call themselves traders are actually really embarking on a new career as opposed to a hobby. That's a discussion for another time, perhaps.
Tonight, as I was on my flight to Arizona to do a seminar, I thought about some recent "new traders" that I have worked with and known. One is a PhD in organic chemistry. Another is an analyst/researcher at a Wall Street firm. Both are students of mine and I would consider them the best kind of friends in the world.
What impresses me about these "beginning traders" is that they have a fresh, inquisitorial perspective. They are flexible. They are open-minded. They are approaching trading as a new career, with vigor, energy, dedication, responsibility and also generosity (as they share with others that which they have learned). And another thing: neither of them is likely to lose their entire first account. Both of them have been making money, have taken money out of their accounts. Neither of them have had trading experience in the past.
So what makes the difference here? They are beginning traders but they're not psycho-risk-taking crazy gambling currency dudes. Instead, there is something about them that makes a difference.
Right now I can only account for their success (and they are at the beginning, I know) by saying that they are getting the best out of being beginners. This fresh, new, open minded stance they are taking is what creates the very success they are having.
I have a lot more to say about this, and I'd like to hear what you have to say too.
Risking So Much
What is a person attempting to achieve when he risk so much that he gets a margin call?
It happens to hedge funds, major investment banks, prop traders, CEOs, even Governors (in a more personal, but still very similar, way).
Respect Your Trading, Respect Yourself
A good friend tonight said, to paraphrase:
"Your trading is an extension of yourself."
If you don't respect your trading, you don't respect yourself. If you play around with lot sizes like you were at a carnival, or if you move between systems like some kind of "trading strategy floozy" then you are just hurting yourself, and the important thing is to get some help for you, for your mind, your heart, your soul, before you look for help with your trading account.
Dave and did a radio show from the New York Trader's Expo, and we talked for an hour about the fact that if we don't get our lives in order, profitable trading might as well be impossible.
Risk
It is all that matters. Period.
Charlie Munger Said
I was reading some quotes from Charlie Munger tonight. This one struck me.
He said that the ordinary investor "underestimates the number of possible outcomes for unwanted events. Includes underestimating the probability and severity of rare or extreme events."
Here’s what he just said: he said that we tend to ignore that we could blow up our account trading the Non Farm Payroll account. We just simply don’t ever get a grasp on how dangerous and risky trading can be even after a bad trade! We think about how much money we are going to make and we don’t think about what could happen if it all goes wrong. This is what got Long Term Capital Management into trouble in the late 1990s, and it was run by Nobel Prize winners. This is what got Bear, Stearns into trouble in 2007 in the subprime market. And Merrill Lynch. And Morgan Stanley. And UBS. And the list goes on.
Not Acting Until Crisis
It's normal for humans to do nothing about a problem until it becomes a crisis. But why is that?
Why is it that a trader will compound a losing position with massive trades, but only after he has nearly exhausted his financial resources, will he actually admit that he should have simply dumped the trade when it was not working out early on? Why does a Wall Street investment firm turn a blind eye to risk problems, and only face up to the true nature of the problem when they have to write off zillions of dollars in bad credit/mortgage/SIV investments?
Humans want to give their genius ideas a chance to succeed. We naturally want to believe that if we let it go a bit longer, that things can turn around. We also naturally believe that if we cut off everything the moment something goes wrong, that we're quitters. Giving up fast is not something that gains us a lot of respect, but it's exactly what can make a so-so trader into a great one: the ability to give up when it's necessary. And give up fast.
Spaghetti Sauce and Trading
I think Malcolm Gladwell shares some insights here about spaghetti sauce that are applicable to trading. Here's the video:
Now, having watched the video, here are some questions:
1. Do you believe that there is ONE best way to trade, and if you could just find it, you would be successful?
2. What kind of experimentation and testing do you do?
3. Why is it that a trading system that can work for you can't work for someone else?
4. What if there is no trading system that can, over time, beat the S&P 500 index? What consequences would there be for your own trading -- does that mean that YOU can't individually use a trading system and beat the S&P? How would you find and build and trade such a system?
Gaining Even When Losing
A quote from David Sklanksy's The Theory of Poker:
Any time you make a bet with the worst of it, where the odds are in your favor, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favor, you have lost something, whether you actually win or lose the bet.
Today I took a sell trade on the EUR/JPY from the 5 minute chart, before the actual signal arrived; I had to endure the trade all morning long while it just plodded along against me, but not quite hitting my stop. Whether this trade wins or loses, according to the above quote, I've lost something. I lost a little bit of discipline by getting in too early when I knew I should wait a bit longer.
UPDATE: Yes, I could have gotten out of the early-entry trade right away, but it did give the signal not long after, so I would have been in the trade anyway.
Good Testing Leads to Good Trading
My friend from Europe just finished several weeks of testing, followed by several weeks of demo trading. This friend only traded his demo account during the hours that he would be awake, and for many weeks he traded the practice account with one set strategy across 5-10 currency pairs. He sent me his trade ideas every day, with a chart attached so that I could look over his plans.
He sent an email at the end of every week with a summary of his results. He stayed in touch often and he asked for help and he made his own suggestions about how he thought that I could improve my own trading systems. I feel like he is a partner, and a friend. The most important thing that I have noticed about M.D., this friend, is that he was very disciplined in his approach; he followed a plan and even when he had a losing week, he did not change everything all at once in a mass of frustration.
Last week was his first week live. Here's his email to me, that he sent today:
Dear Rob, Last week was my first real money forex trading week. 5 winner 1 looser biggest winner +122 biggest looser -90 one trade not make (+171, i write a separate mail about it) overall: +257 one trade with 2minilots, 5 with one minilot one open trade stop @ +62
M.D. earned the right to these results because he followed a set plan to test before he traded.
Most People Won't Do the Work
I received an email from a frustrated student today. Let's call him Mortimer. That's not his name, but I like the name so that's what we're going with.
Mortimer wrote me to say that:
I created a personal web blog at [then he tells me his blog address which he is keeping private] to track my progress. Only you, my wife and Fred [a mutual friend] know it exists. As you can see I stalled out.His frustration comes from having "stalled out." After a month of posting, and planning, and trading, he feels that he has backtracked, or not made enough forward progress, or that he was doing just fine and things kind of fell apart. He was looking at about 10+ currency pairs, but he's now looking at just 5. He is following the same system every day. he is consistently applying the same rules to the charts. He is doing his best to practice trade in a trade simulator (although this has not appealed to him as much).
My advice to Mortimer is this: you are doing what it takes to become successful. I would strongly encourage/beg you to not give up on the simulated testing. But other than that, you are putting an amazing amount of work into your goal of trading for a living. Most people don't want to do this kind of work. Let's reflect on a quote from Michael Covel's new book "The Complete Turtle Trader":
To cultivate that extra drive [exhibited by successful traders], however, requires deliberate practice. Berkshire Hathaway's Charlie Munger has lived it; he has said, "In my whole life, I have known no wise people over a broad subject matter area that didn't read all the time -- none, zero." Most people do not want the real work that comes with real success.That quote sums up much of what I feel about unsuccessful traders. It's not about your math skills. It's not about having some innate gift for trading. It's about work and practice.
Mortimer, you're on the right track. Keep yourself on it.
The "Perfect" Trade Doesn't Exist
Alan Farley writes in his book The Master Swing Trader:
The perfect opportunity rarely exists. Learn to trade in shades of gray ... get off the sidelines and act when enough ducks sit in a row.It's counterintuitive. But it's true that the most beautiful divergence trade, or the "perfect" moving average crossover, can sometimes just flame out in a brilliant display of the power of the market to destroy your hopes. I sometimes step back when something looks "too good to be true," and ask myself, "am I getting wildly excited about this trade?" The ones that I think can't fail are generally the ones that once again prove that the charts are just a picture. Sometimes a pretty picture can be deceiving.Perfect patterns carry the greatest risk for failure ... look closely for failure when perfection appears.
The Blow-Up Artist
John Cassidy wrote a brilliant piece about Victor Niederhoffer for the New Yorker last week. I quote:
Even by Niederhoffer’s generous standards, going short a billion dollars of stock futures was a large bet, but it worked out well. Not long after the markets reopened on Monday, the bond yield climbed to five per cent, and stocks and stock futures tumbled. On Wednesday, the morning of my visit, shortly after the opening bell sounded on Wall Street, Niederhoffer repurchased the futures he had sold, making more than five million dollars.
Mr. Niederhoffer is, arguably, one of the best traders of all time. He has an intuitive sense of the markets combined with an amazing ability to process quantitative information as well. Everything I've ever read about him and from him has impressed me that he has a unique ability to combine these skills; the processing of math combined with a feeling about what the market is about to do.
The problem is that Mr. Niederhoffer has a tendency to blow up his hedge funds.
It's one thing to be a great trader. It's another thing to be a great money manager. He says of his own trading, and of managing money in general:
“The idea that you can make a lot of wealth in a steady, unspectacular fashion, with no great gyrations, is a canard ... If you are going to try and make forty or fifty per cent a year, tremendous variations are inevitable.”
Read the entire article here. And please don't risk very much on each trade that you take. Please.
This is How We Test
James Brown, a friend and student, did a round of backtesting today and I just couldn't resist sharing it with you.
James says:
Here is some of the back testing I did last night on the surprise trade as per our discussion yesterday. Interesting how something with a terrible win/loss ratio still makes good profit over time.
It's not just about the win percentage! James did a round of testing on a system that I teach. He wrote down some rules, he followed those rules, and tracked his results. He has more testing to do, but this is a wonderful start; most people never test 1 trade, but James is on his way to becoming a great tester.
Pip Value Spreadsheet
Click here for a link to a simple pip value spreadsheet that helps you calculate the value per pip to be traded if you are only risking 1% of your account per trade. For many of you, you already do this math in your head. The spreadsheet might make it a bit easier.
Bending the Trading Rules
A smart and inquisitive student wrote me today to ask why I sometimes seem to bend my own rules for indicator-based, discretionary trade setups. In response I wrote:
I think it's important to make sure you understand, not just hear me, when I say that the rules are guidelines. The charts are just 2D representations of a bunch of 1s and 0s flying around through internet lines -- millions of trades all combining to make the current price, every second of the day.
With all these bits and bytes flying around, we try to draw something on the charts to represent the world of currency trading. We call this drawing a "chart". And then we dream up systems to show us when to trade. And then, we start getting stuck on what the drawing says, rather than what our instinct is telling us based on past patterns.
When you study and follow one system, over and over again, for thousands of trades, you start to see something that isn't quite perfect from an aesthetic perspective. But it makes sense to you because it "looks good enough," or the market is going through a rough approximation of a pattern that you look for.
When I bend the rules on my charts in the rules or updates, it's because I am seeing something that is not fully or adequately represented by the 2D drawings of the 1s and 0s -- the charts -- that I can still "see". It comes with experience. It's bending the rules, of course, but a person earns the right to bend the rules when he or she is following something for years.
What To Do In Times Like These
Currencies all over the world have been more volatile this week than in any week in the last year, or two years, or three years. A 900 pip daily candle this week was a good sign that people were just simply freaking out.
If you stop and think for a moment, and I know you're the "stop and think" sort of person, you'll remember that right now the interest rate picture around the world looks like this:
Bank of Canada 4.50%
Bank of England 5.75%
European Central Bank 4%
Federal Reserve 5.25%
Swiss National Bank 2.5%
Reserve Bank of Australia 6.5%
Reserve Bank of New Zealand 8.25%
Now compare ANY of those numbers to:
Bank of Japan 0.5%
What's happening right now is that people are selling off high interest currencies and buying the world's lowest interest rate currency. Panic can only take this down so far; that's why this morning we saw the GBP/JPY rise 800 pips off its lows in just a matter of 6 hours. That's why we saw the EUR/JPY jump up 300 pips this morning in 3 hours.
At times like this there are pie in the sky traders who start believing that we'll see this sort of activity forever now, and a month from now they'll still be taking trades and hoping for 900 pip moves. Please keep in mind that this sort of movement is unusual, it won't last forever, and you shouldn't be altering your rules now to try to get rich quick.
In the near term, can expect more volatile movement up and down. We can expect a lot of uncertainty. We can also expect that we'll see disruption not just in the currency markets, but in all markets. So what do we do?
First of all, we never risk more than a small fraction of our account on a single trade. If you risk 1% or less per trade, and you stay true to your stops, none of this stuff matters. If, on the other hand, you start risking a lot, thinking that you are going to make a fortune in the short term, you are going to go broke. You will be, in other words, gambling.
Second, we're going to keep trading our system. Our rules don't change. Maybe the volatility increases. But soon enough people will get in touch with their senses, things will calm down, and we'll still be trading our rules, still be risking 1% or less per trade, and still happy.
Dave on Euphoria
Dave writes:
Have you ever felt that your system was SOOOO FREAKIN COOL that you were invincible? And then you say something like this:
"You know what? I did it last time...now I am going to double up on my trade and double my earnings...I am going to knock it out of the park!"
What happens? You double up and then the market doesn't react the way you wanted it to. Suddenly this horrible flushing sound of your account going in the toilet rings in your ears - oh yeah...it sucks.
The problem is that we want to feel the dopamine rush that comes right before an anticipated trade and the sweet euphoria that comes afterwards. So we make any excuse to get it again. That is the inner stunt monkey. Get that monkey off your back. Stick to sound money management.
This is no different from when you have some losing trades. I don't know how many times people have told Rob and myself that they were feeling so bad about their trades that they missed the good ones. Well, that can happen when you make good trades too. You can get too euphoric and think that you can afford to just "knock it out of the park." Don't do it.
Here is what you should do.
1. Stay disciplined. Stick to the backtested plan or system If you don't you are going to get margin called - sorry. Go read Rob's ebook "The Miracle of Discipline". It will help you get back on track.
2. Backtest your strategy even more. It is not practice that makes perfect, it is perfect practice that makes perfect.
3. Take money out of your account as you become profitable, and protect your earnings.
4. Stay humble. Just remember...NOBODY can predict what market is going to do exactly. All you need to do is protect your account and follow your plan.
Is Pink the New Black?
Walter, a friend and trader, writes:
Did you know that immediately preceeding market downturns specifically, and in general, just bad economic times, the color pink becomes extremely fashionable?I noticed this in Australia in 2003 - all these guys in pink shirts.
I thought it was funny.
But it has only gotten worse. It is everywhere.
Didn't seem so bad in the states when I was over there, but noticeable (especially when you are looking for it, like I am - always).
Basically pink is a color that we are attracted to when we are in debt. It is a soothing color. Makes everything ok.
I remember wearing a pink tuxedo as a kid, as a young professional magician and then a few months later – Black Monday.
It turns out that throughout history pink experiences a great increase in popularity – and then the economic bad times come about…
I can't believe how leveraged people are now, scrambling to buy homes in Australia, and then going out and buying pink clothes with the second mortgage they have taken out on the home.
I can't help myself, but I love asking people in pink how many credit cards they have.
I wonder if it is a bad sign that the CFOs in the US are wearing pink ties?
Principles
Shelby kindly sent this quote to me today:
"As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble." - Ralph Waldo Emerson
Agreed. In your trading, focus on the big principles (money management, disciplined execution of a system, keeping a schedule).
Hey! Your Glasses Don't Work!
Dave, Richard, Don, Jacob, Bob, and Darin and I were talking today at the office (why aren't you here, too?) and discussing that some people will often write me and say, "So and so's strategy doesn't work. He shows charts, and indicators, and whatever, but when I do it, it doesn't work."
Why is that?
How can a system work for one person and not the other?
The issue is that when you are trading a discretionary system, and you do enough testing to make it your own (this is a lot of testing -- at least 1,000 trades), you are essentially fitting yourself for a pair of glasses.
These glasses, once you fit yourself for them, work for you. They're your glasses. If you hand them to your friend while he's driving, he's likely to crash. What if he said to you, "These glasses don't work! They are terrible glasses!"
You'd say, "These glasses are not for you. They're mine." When you learn a system from someone else, from a book, a Web site, or a newsletter, you have to remember that in order to make it your own, you have to have your own experiences with the system. You can't just take it out of the box, and put it on like a pair of someone else's glasses.
Google and the Carry Trade, Part II
A few days ago we talked here about the Global Appetite for Risk and the carry trade and Google and hamburgers. Today Google, the EUR/JPY, and probably everything else except oil futures took a dive.
You can click on the chart to make the abhorrent damage look even bigger:
Like we said the other day, when traders around the world give up on risk, they give up on it across the board. They don't just freak out in one sector. They vomit their investments out all over the place.
Focus
Steve Cohen says to Jack Schwager, in Stock Market Wizards
:
:
Most traders want to trade everything. One minute they are trading Yahoo!, the next Exxon. They're traders! My place operates differently. I want my traders to be highly focused. I want them to know a lot about something, instead of a little about everything.
Wisdom from a guy who traded well enough to pay $143.5 million for a painting last year.
For more on Steve Cohen, click here.
How Many Indicators?
Parker writes:
you mention that it is better to have only a few indicators (2?) on your chart to trade. which indicators do you recommend when trading currencies, grains and index futures and which time frame(s) are you looking at, will one time frame have stronger signals than others?
It's likely that every beginning trader asks himself a similar question.
The answer is simple: I think you'll do better with fewer indicators. It's possible to become attached to having a lot of indicators on your charts, simply as a means of double- and triple-checking a trade idea. But with more indicators comes more complexity.
What works better in my opinion is when you sit down with just one or two indicators, one time frame, and just one financial instrument (like the GBP/JPY, or Wheat futures, or IBM stock) and you go back in time and learn, candle by candle, how the financial instrument reacts and interacts with the indicators you have plotted. Over time you can learn to use the indicators (just one or two) as a framework for understanding the market. The less you focus on, the more of an expert you become in what you actually do pay attention to.
Good Trading and Good Poker
Brad wrote me today and said:
The other piece to it is that you tend to emphasize that you should wait for the better trades instead of over-trading. That's directly applicable to poker because if you're trying to have a $500+ day you need to play more marginal hands (suited hands trying to build and win a big pot with a flush, etc). If you're just going for $200 you just wait for the premium ones, get in, win a $100 pot instead of a $400 one, etc.What Brad is saying is that when he reduced his expectations for what he had to win in poker, he actually played better. When he realized that he could wait for the best hands and play those ones intelligently, that he did better (bluffing not covered here). I love the analogy. It's true that as a trader you can gain a lot of ground right now by doing some of the following: 1. Reduce your expectation for what you have to make on every trade; 2. Reduce your expectation for how many trades you need to take every day/week; 3. Concentrate your efforts on waiting for the best trades, and avoid the second-rate tempting ones; 4. Risk less per trade and survive longer. Thanks to Brad for allowing me to share this with everyone.
The Tale of Two Emails
One email I received today was from a dejected and disappointed trader who admitted that his heart really wasn't in trading. He was on the verge of finally testing regularly and consistently. Probably just a few months away, at most, from consistent, stable returns. But he gave up.
Another email I received today was inspiring. Nick, a student of mine who has much to teach us all, writes:
Also, I have been getting up at 4:00AM PST in order to catch as much of the NY Session as possible. It is definitely a sacrifice, but I have been able to catch trades that I would have otherwise been unable to make. I'm sure there are several factors that determine whether or not someone can be a profitable trader. From my experience over the past few months, the two factors that stick out the most are:What's your level of motivation? Willingness to sacrifice?#1 Motivation: it is easy to lose your motivation while trading forex because losing trades are fairly common and you can go days without making a trade. A trader must be able to remain motivated during these times, otherwise they are destined to get frustrated and lose their entire account.
#2 Willingness to Sacrifice: It is very difficult to wake up and monitor the market for a few hours, then go to work for 10 hours and then come home and backtest for a few hours. I've been doing this for a while and I definitely have to make sacrifices, but in exchange I am catching profitable trades and getting closer to my trading goals. No form of success can be acheived without some form of sacrifice.
Why Do We Trade, Anyway?
This week I've been home for the first time in weeks, and simply put, it's great to be here. All week long I've been watching my two children as my wife has taken some much-deserved "break from the kids time," and it has brought up some thoughts I'd like to share with you:
1. I trade first and foremost to make money;
2. But I make the money so that I can do things that I care about, first of which is spend time with my family.
Over the last four months, I have traveled all around the U.S. (Florida, California, New York, Washington, DC, and more), to England, Scotland, Canada, Australia, and Japan. During these trips I spent a great deal of time with traders who nearly universally said that trading, for them wasn't just about the money. It was about what the money could bring them (time with their loved ones).
When you think of why you are really doing this, why you are busting your behind to become successful as a trader, what's the real answer? After you say, "money," what's the other, deeper answer?
NOTE: There is nothing better in the world than taking a walk with my children in the warm summer weather, hearing my 2-year old ask, "What's that?" every 60 seconds.
Lessons on Trading from Golf
This is a longer post so bear with me. But I've got to share it with you because I think it can really make a positive difference in the way we think about trading. It's from a student of mine, Brett Armstrong, who has been progressively doing better and better, planning more regularly, and having consistent success. Here's what he writes:
July 7 was my birthday, in typical fashion I had made prior arrangements with my usual foursome for a round of golf. I had joked with my wife the night before that with the numbers aligned 07/07/07, we really should have been headed to Vegas. I figured that if there was ever a day to try my luck it would be on my birthday with lucky number 7 working in my favor, that notion soon dissipated as I reminded myself that I’m an investor not a gambler and would rather opt to try my luck on the golf course.One of the best emails I've received. Ever. From someone who does his testing, maintains contact with me on a regular basis, and follows the principles of his trading strategy consistently and with discipline. You will hear more about Brett in the future. He is on the road to trading for a living.With that thought in mind we met at Talon’s Cove where I shot the lowest score of my life (76, four strokes over par for 18 holes). 6 strokes better than my previous personal best, immediately following the round everyone began making comments about the numbers being aligned. I too fell victim to the superstition, wondering if I’d ever shoot that low again.
The more I thought about the round I began to realize that my success on the golf course that day was much like my recent successes trading. Here are a few of my conclusions.
1- I’ve spent the time now the knowledge is mine (hey it rhymes)- After years studying in each discipline, the knowledge is now ready for practical application. In both cases I have found myself acting more instinctually rather than mechanically… I believe a mechanical approach gets in the way of true success and fluid performance.
2- There is no perfect swing/system- I had to find what worked for me, there is no one perfect fit for every golfer/trader. I had to find a style that I was comfortable with and that would suit my basic personality.
3- Quit relying on luck… If you plan your trades/shots thinking first no luck needed, even on 07/07/07.
4- If it’s to be it’s up to me- the realization that any success or failure is entirely my own. I can place no blame on a trading group, foursome or outside circumstances. Not every swing will be perfect, but it is mine none the less as is my response.
5- The adage that the secret to golf is to never hit two bad shots in a row applies equally to trading. When you encounter setbacks, it does no good to seek revenge, to be a hero and try to redeem yourself… take your medicine learn from the situation and move on.
6- Success begets confidence and added success- on the last hole of the day I found myself buried in a sand trap. It was a situation that under other circumstances could have been devastating to my game, that day however I knew I had the ability to finish strong. I found my way our of the sand and finished with a par, I have found this true of trading so long as I temper my confidence with humility… I find myself making better trades and taking fewer losses. I
7-Swing easy… rather than looking for massive drives or huge gains, my focus has recently been on smaller more controlled profits of 30-50 pips. I have seen far too many beginner golfers and traders alike step up to the box swinging with all there might only to find failure and discouragement. In many cases it will take years before they realize that success is not the result of swinging harder, but being more consistent in approach.
I know I’m not sharing anything new, but it is interesting how life lessons can be found in some many parallels’ if we just take the time to look.
Underestimating the Long Term
Today I was reading through my emails and came across a treasured comment:
As you mentioned it seems that nothing really happens in the beginning [profits come slowly at first and then start to exponentially increase] but then it starts to balloon. Is that what you were alluding to at the seminar? All it takes is patience. What I am really saying is that so many of us overestimate the short-term and massively underestimate the long term.My friend Ifty also sends a link to a great article from Fortune Magazine. It's old but super relevant to your progression as a trader. And a quiz about fear of success.
More from Mo
Mo wrote me a message today while he was sitting across from me. I feel compelled to share it with you:
Rob,It would be interesting to straight out tell someone who is still new to trading the following straight out:
Forex is a risky business
You will lose money
There is no perfect system
You cannot, ever, predict the market
Your emotions will get involved as trades move up and down
There is no such thing as bad margin as a universal law
The market isn't moved by rational reasons
More information will not necessarily help you become a profitable trader
Good luck!
Good advice from a thoughtful and generous person.
Reflections of Reflections
Today we started a three-day seminar in London with just 5 students. While having lunch with the impressive group, my good friend and trader Mo said to everyone:
What we see on the charts -- the market -- is simply a reflection of our own beliefs about the market.
He didn't say it exactly that way (it was far more eloquent) but the statement has remained in my mind for the rest of the day.
Deliver the Bad News Fast
A friend of mine is a trader and the commander in the Royal Navy. He writes to his crew:
While you might occasionally feel the need to shield me from bad news, rest assured that I would far rather be involved early in any difficult issues or decisions. Therefore, if your instinct tells you that I ought to be fully appraised of a given situation or might learn of it from another quarter, act on that instinct and involve me early.
This is brilliant advice for traders. Get the bad news out fast, and get it all out. Don't allow your own worries about breaking bad news (or admitting that a trade has gone poorly) keep your from seeking out the advice and help of other traders who you trust. In the same way, if you've taken a massive or damaging loss, it's important to break the news quickly, honestly, and completely to all involved (this would include your spouse, for example).
If you've been reading about hedge funds in the last year, you have read about Brian Hunter's $6 Billion blow-up at Amaranth Advisors in 2006, or recent huge losses in Bear Stearns' hedge funds that invested in the subprime mortgage market. In both of these instances, and many others not mentioned, good analysis at the start, vigilant management throughout, and honest evaluation of the situation could have prevented (easily, really) these problems.
Technical Analysis as a Framework
A very intelligent, and understandably frustrated, trader emailed me recently and it brought to mind the tension that exists between obeying rules and following instinct.
The hardest thing in the world for a discretionary trader to do (after learning to risk less) is find a balance between . following strict rules and following his instinct. Why? I think it's because he feels that if he strays away from a set of "rules," then he is bending rules that were meant to work. And if he sticks to the rules and fails to make a profit, he is upset because he sensed that something wasn't working but he didn't do anything about it. So he returns to changing the rules a bit, but he feels like he's out in the great wide open and floating aimlessly, without any solid rules.
In short, rules make the trader feel comfortable (not to mention able to hold the rules responsible for the losses, while giving credit for the wins to his instinct). But a lack of instinct or flexibility in applying the rules leads to enormous frustration when applying the rules robotically doesn't work.
The point here is that any discretionary trading system that you can learn (and there are hundreds freely available in books and on the Web ) is meant to be a framework from which a trader can start to form his own opinions. Such as:
1. Hey, the [insert name of trading strategy here ] is cool! I am going to use these basic rules as a starting point for my analysis.
2. But I don't like trading the strategy around newstime. But I do like trading the strategy on a particular currency pair, on a certain time frame, when these other conditions are also met. But I'm going to watch out for price patterns and make sure I'm not getting into the market when there is a "wild boar" candle pattern or some such thing.
The basic rules of the system thus become a starting point. And when you use the rules as a starting point, you start to learn how a currency pair behaves and operates when held up against a framework/set of indicators (rather than using the indicators as if they could predict every move).
Now that I've said all this, I want to ask you:
1. Do you feel that you are meant to be a mechanical trader or a discretionary trader? Does the thought of being a mechanical trader bore you to tears?
2. Do you feel that there is a set of indicators or method that bank traders or successful traders use, and if you could just learn it you would be successful too?
3. Do you feel that NOT having a strict set of rules would leave too much open to interpretation? If yes, would you be willing to sacrifice discretion in order to trade something strictly? Or is having flexibility that comes with a "framework" mentality really important to you, because you will have a sense of "involvement" in the trading decisions?
Living Comfortably
Living comfortably isn't about trading a $1,000,000 account and trading for $100 per pip. It's not about buying a huge house in the Hamptons or driving a Bentley or having a jet. It's not about being able to afford first-class plane tickets and staying at the Four Seasons.
So many retail traders are focused on what they will be able to buy once they start trading "big time." When I talk to them about trading for $1 per pip to start, and then working up from there, they are positively underwhelmed. Everything else I say is drowned out by the fear of not being able to get rich enough to live comfortably within a very short period of time.
The truth is that living comfortably isn't about all of those other things. It's about being comfortable living with less. It's about saving, not earning; about not risking rather than taking the big risk for the big score; it's about compounding gains over time rather than the lottery win. One of the best things a new trader can do for himself is to reduce his standard of living.
What is also fascinating to me is that by learning to compound gains over time, a trader becomes truly self-sufficient -- as opposed to hitting the jackpot on a single trade (which is not something easily replicated).
If you haven't seen the price and time curve that I did a while back, you might find it interesting. Click here to take a look.
Do Intellingent People Trade Worse?
A great post today in the WSJ's Informed Reader blog got me thinking. The post discusses the fact that "highly intelligent" Presidents have not necessarily performed better. The post states:
Furthermore, many of the situations that presidents face are defined by uncertainty, rather than complexity.
This is true of traders as well. Highly intelligent people that i have worked with, often have a tendency to over-think a trading situation. They believe that trading is complex, which then leads them to create highly complex trading systems with endless parameters. In my experience, simple systems work better. When I have visited traders that work on Wall Street, I have found them to be highly disciplined, willing to take responsibility for their decisions, firm in their management of risk. But they don't care if they are viewed as the smartest people in the room. Being right to them, in other words, isn't as important as making money.
Franticism
Not all beginning traders need to make $10,000 in the first week of trading. But some do -- some really need to come up with thousands of dollars in a very short period of time. Many of these traders don't have any trading experience, a small trading account, and are hoping to be able to get themselves out of a financial predicament by trading.
The word I am going to use describe this attitude towards trading is Franticism. Of course I had to make up that word, but I think it fits because it incorporates the word "Frantic" and "Ism". These traders are, in other words, frantically attempting to build capital. Here are some signs that you're talking to a Franticist Trader:
1. Double-Trouble. He wants to double his account or better in less than seven days.
2. Mistaking Desire for Success for Deserving Success. He says things like "Trading has to work. It just has to work." Or, "I really want trading to work out," as if wanting it alone was going to be enough to give them huge gains in a short period of time.
3. Avoidable Mistakes. He attempts to make trades without fully learning how his trading platform operates (the charts, the orders) and makes completely avoidable mistakes.
4. Reactive. He trades reactively -- a bad trade happens, he goes right back to the computer because now he "knows which way the market is really going," and doubles up on the trade size.
5. Lottery Mentality. He is unimpressed and uninterested in compounding as opposed to the big score (more on this later).
4. Franticide. Eventually, he commits Franticide, which is the act of blowing up one's account in frantic trading.
It's Sunday here, and perhaps on a traditionally religious day in the States, it's appropriate to ask: Are you a Franticist?
Saturday is a Special Day
Some people are so addicted to trading (and I was one of these people for lot of years) that they are upset on Friday when the market is closing. And they are excited about Monday coming.
Nowadays, I am thrilled for Saturday. There isn't a thing I can do about my open trades. There isn't a chart that I can look at and plan anything that wasn't able to be planned yesterday. Stephen Covey, the self-help business author, recommends that you take some time to "Sharpen the Saw," or, in other words, get away from your business (trading) life, and get your mind and body in shape.
Saturday is a perfect day for that. Read a good book (not about trading). Spend time with your family. Wake up early and go for a walk. Clear your mind. Take a one-day sabbatical from the business of trading. You can find that you have breakthroughs and epiphanies about trading when you become deeply involved in something else.
Get the Led Out: Your Daily Routine
Today I heard from one of my best trading friends, who introduced me to some of the world's best pizza (for those of you interested, and someplace near New England USA, click here).
Anyway, this trader and friend got himself in the right frame of mind for trading and studying in the morning by cranking up the music -- it blares through his entire house. When I went to see him for a visit, Led Zeppelin was blasting over the speakers and I admit, it did set the energy level for the rest of the day. My friend writes, in the form of a goal:
I must create a routine to increase energy and become more receptive to creative impulses. Getting the Led out got me unexpectedly juiced up in the morning. This implies there are other useful actions to be discovered for inducing good vibrations.What's your daily routine?
The Paralysis of Analysis: Profitable Trades
When you find yourself in a profitable trade, it's easy to start over-analyzing what's going on.
Often traders in a profitable trade will:
1. Do a ton of analysis. They look at different time frame charts, or "correlated" currency pairs, or additional indicators.
2. Believe that an optimal exit rule can be written for most circumstances, so they do the analysis to find out which rule would be best. They end up writing me and say, "for this instance, I should have done X." But then a week later, they change the rule again because another trade comes along and they should have done Y.
3. When their analysis becomes too confusing (no clear answer), they start letting their winning trades stay open forever and often these trades become losers.
Going down this path may end up giving you 500 different rules for all kinds of situations. So my recommendation to you is that instead of trying to figure out specific rules to make sure that you "know how" to deal with every possible scenario of having a profitable trade, you might just want to stop yourself from over-analysis. When you are looking at an open trade, ask the following questions:
1. Would I be happy to take the profit that I have now?
2. If I don't close this trade, what are the risks?
3. How much of the profit am I willing to give back in order to try for more?
4. If I don't know what is going to happen next, or if I'm obsessing about it, why not just close the trade?
5. What is my goal with this trade? A profitable trade? A certain dollar amount gained? A certain number of pips? Was one of my goals to make sure I risked as little as possible?
6. Have I gained more than I originally risked (what many call "better than 1 to 1")?
The last question is essential. Often we'll feel tempted to close a winning trade because we need the psychological boost that comes from a winner. But we close it with just a few pips (and we say that next time we'll let it ride). This is just another example of not really having a plan, or any type of exit strategy when the trade is taken. This type of trade exit might make you feel better but it places you on the road to ruin because you're simply proving that the minute something good happens to you (a profitable trade) you are so incredulous about your skills that you close the trade and end up with a terrible SOL Quotient.
Continue reading "The Paralysis of Analysis: Profitable Trades" »
The Classification of Traders
In Australia, while doing the seminar, I realized that there are a few types of traders who come to a seminar.
1. The Risk Taker. This type of trader simply isn't going to obey any principles of money management. Of course they'll nod their heads and say that they're going to trade differently when it's for real, but during the seminar, while testing, they show how much they are addicted to taking huge amounts of risk. This is a very small percentage of the attendees, never more than 10% of the group. They are the hardest to help because if they don't manage their risk, it's not going to matter what they trade or when or how. These traders want to take a lot of trades. They want to ratchet up the lot size quickly.
2. The Perfectionist. Usually this person has been looking for a trading system for at least two to three years. He often knows how to program automated trading systems. Generally these are the highest IQs in the room. They are neat, professional, quieter than the other students, and they are at the end of their rope: they have tested so many different systems that they are simply unable to have confidence in any system. By looking for the "best" system, and realizing over time that it's so very hard to trade automatically, they have become very skeptical of all systems. Don't get me wrong: these are some of my favorite traders. But they can stare a profitable system in the face, and pass it by because it is seemingly too simple to really actually work. What helps a trader in this position? An easing of the expectations.
3. The Beginner. This person often has trouble using a computer, let alone learning a trading system. And they are often the most successful traders after the seminar, because they don't know enough to complicate the trading systems, and they are risk-averse so they tend to not even think about breaking money management rules.
4. The Systems Collector. Similar to the Perfectionist, with one difference: the Collector isn't trying to get one system to work perfectly, but is rather trying to get many systems running at the same time. They often don't spend long enough on one system to ever see it through. They often lose their profits on a good trading system by trading another trading system at the same time. By trying to do many things well, they do nothing very well.
There are more classes of traders that I'll bring up in the coming days. This just scratches the surface. I'll have more to say, and maybe I'll put it all into an ebook or something if I get really ambitious.
Rob, What's Your Strategy?
I received and replied to a series of emails today. Here's how it went:
Trader: Thanks for great e-books. I wanted to ask you how many pips on average your system is doing in trade, day or month on given currency pair. Thanks for answer.
Me: It depends. I try for between 50 and 100 pips per week. But it's more important to me that I don't lose.
Trader: how many currency pairs you trade? and which ones?
Me: i plan trades on up to 12 currency pairs per day. i take 2-5 trades per week at most.
Trader: what is your strategy?
Me: To not lose money.
Was I just joking around? No. I get more and more email every day from people asking me what my "strategy" is. My strategy is to not lose money. As much as I say that, it still doesn't make sense to some people. I'll try to write some additional posts to clarify this even further.
Pink Songs that Describe Your First Trading Account
"Pink" songs that describe one's first trading experiences:
Ur + Ur Hand
Runaway
Conversations With My 13 Year Old Self
Nobody Knows
Who Knew
I Got Money Now
You can see Pink below, after her short GBP/JPY trade was stopped out after BoJ intervention:
Continue reading "Pink Songs that Describe Your First Trading Account" »
Getting a Front Row Seat
Sydney, Australia, is fantastic. I feel like I'm on the front row of the edge of the planet.
Speaking of being on the front row, here's a comment I received for a trader-friend-student who has had some recent breakthroughs and very consistent and profitable trading:
The main thing that I do every day as a trader is : Show Up. Literally. Most of the people I have showed this strategy to follow it for a couple of days, weeks, maybe a month, but if it doesn't give them non-stop, perfect set up trading action, they leave it by the wayside. Sort of like serial monogamy.... if you don't at some point just find someone who is basically a good person and commit to the whole ride, you'll end up with a string of 1-2 year relationships that feel good initially but never really give you the depth, the wisdom, the satisfaction, of really having worked for something and gotten to know it on a deep level. There may be no great setups for two weeks straight, but if I just make sure that I show up every day, I know I will have a front row seat when something fabulous does appear, and I know that I will know exactly what to do.
Are you on the front row? Are you willing to let a week (or more) go by without a trade?
Instructing Pictures
A trader whom I highly regard sent an email today with an insightful quotation. It comes from the renowned mathematician Benoît Mandelbrot:
Pictures can deceive as well as instruct. The brain highlights what it imagines as patterns; it disregards contradictory information. Human nature yearns to see order and hierarchy in the world. It will invent it where it cannot find it.
This is a quote that I had heard years ago, but today when I read it again (thanks Mark!) it made me think longer about our own willingness, not only as traders but also as human beings, to seek out confirmation of our own opinions, and repel opinions/charts/information that does not positively correlate with our own world view.
As traders, we often invent order where it does not exist. Often I will see a trader point to a chart from an economic news report and say something like, "See what it did? This is what it always does," when in reality it was just a bunch of chaos resulting from the whack-out, crackhead trading that goes on immediately after economic news. I have been guilty on many occasions in my early trading career of attempting to find order and patterns where they did not exist, or to find "order" in a very small sample set and then apply it universally. To put it another way, I would see one example of currency movement and assume that it worked most of the time, rather than take the time to study movements that happened most of the time and then apply it to current market conditions.
Thanks again to Mark for the quote. And here's an interesting Wikipedia entry about Mr. Mandelbrot. If you click here you can skip to the interesting part about fractals and "regular roughness."
Collaboration
Think for a moment: do you trade with other people in the room? Is there someone that oversees your trading (like a boss, someone who can fire you if you screw up/lose too much money)? Take a look at the trading desk below:
One of the reasons that people find it so difficult to trade at home: they're alone. They not only lack supervision, but they don't have others with whom to plan, to speak, to trade. To yell at.
Collaboration is a big deal.
Field Sense and Mind Games
In the new Wired Magazine for June, there is a cool article about "field sense," the ability that some athletes have for sensing a play before it happens. Click here to read the article.
Here is a quote I thought you might find interesting:
Farrow [the researcher profiled in the article] has found that players who make poor decisions tend to glance at targets, rather than pausing on them. They're also more drawn to motion. "In a lot of team sports, you're attracted to the area of greatest movement," Farrow says. "But just be-cause there's a person running fast and waving his arms doesn't mean he's the best person to kick to."
We do this as traders, too. We are so focused on the money that we want to make, the target, that we can't see the pathway to arrive there.
Some traders seem to be "natural" at trading. They seem to effortlessly trade profitably. I believe that when a trader is so primarily and singly focused on the profit she wants to make, that she cannot actually see the pathway there. Hence, traders who say:
1. "I should have seen that trade coming! I can't believe I missed it!" 2. "The charts used to make sense, but now it is all jumbled up and confusing." 3. "It's just easier for some people. It's much harder for me."
It can become easier to trade if we focus on the big picture. This would include:
1. Balancing our attention across a wider field of vision. This means that we are not entirely focused on reading materials about trading -- we are also reading about traveling, spirituality, relationships, sports -- other stuff. 2. Making sure that we eat right and sleep well. 3. Even if we have financial pressure, that we are willing to allow ourselves time and experience. 4. Waiting for the right trading setups, not "any" trading setup.
I hope to read more about this type of thing. If you have interesting articles/books about this subject, let me know.
The Complexity Curve
It's not really a curve at all. It's a straight line. The more complexity you add to your trading -- by looking at more time frames, indicators, currency pairs, systems, at all hours of the day -- the more difficult it becomes to actually implement a profitable trading strategy.
There is a big difference in trading between keeping things simple and being simplistic. Simple means that you specialize in one type of trading, on one time frame, on just a few currency pairs, and that you keep a normal human trading schedule (remember, even Wall Street currency traders work in shift -- no one stays up for 24 hours a day to trade). Simplistic means that you expect to make money without doing any backtesting or homework or planning of any kind (not possible).
The Woo-Hoo Timeline
The Woo-Hoo Timeline of Progression is a simple graph that explains the trajectory by which most traders make progress to trading for a living. There is a myth that progress as a trader is linear, meaning we see a trader make small gains, day after day, until one day they have morphed into a full time trader who can support themselves by their trading profits alone.
In reality, the progress of a trader towards trading for living looks more like this:
In other words, it's all about long periods of plateaus (the Ho-Hum times) interrupted by Woo-Hoo moments and breakthroughs. Many traders don't succeed because they give up during the Ho-Hum times. Their system is "not working like it used to," or "My schedule has changed," or "I am just breaking even and not making progress." At times like this, traders start to do all kinds of terrible things to try to force the progression upward, and that invariably fails.
The Ho-Hum moments are when traders lose hope.
The Woo-Hoo moments are when a trader finally understands that risking less on every trade means that long-term, he will make more money. Or when a trader finally admits that he cannot trade from the 5 minute chart, but instead needs to look at longer term setups because he has a full-time job. Or when he realizes the power of backtesting, or being disciplined in all areas of his life, or of keeping good records of his trades.
Your Research and Development Budget
The quest for the perfect system is much like Linus waiting for the Great Pumpkin. Linus is much like some traders that I meet who:
1. Are reluctant to trade any system, until they have perfected their "own" system.
2. Want to build their "own" system and feel like they are "cheating" if they trade someone else's system.
We worked with a brilliant trader last week, and he straight-up confronted this attitude and pounded it into oblivion. He realized that he could trade right now using what he already knew and could learn from others. And then he could spend lots of time building his own system. This individual taught me that a trader can vanquish bad attitudes and put himself on the right path. It was inspiring to watch.
Your standard, ordinary, day to day systems can throw off revenue for you to explore the deeper questions of “a better trading system,” or a better money management strategy, etc. It is worth spending a lot of time getting one trading system -- even one that you can learn from others -- set up correctly so that it can work and so that you can produce reliable income consistently. This income that your ordinary system produces will throw off a research and development budget, with which to explore uncharted trading territories.
The Tangerine You're Eating
For about a year, I've read a blog from an insightful individual who doesn't have anything to do with trading (note to self: write a post about the well-rounded trader who learns from all disciplines, not just trading books). One post mentioned a book on meditation by Thich Nhat Hanh called The Miracle of Mindfulness. Here is a quote from the book that I would like to share with you:
. Here is a quote from the book that I would like to share with you:
I remember a number of years ago, when Jim and I were first traveling together ... we sat under a tree and shared a tangerine. He began to talk about what we would be doing in the future. Whenever we thought about a project that seemed attractive or inspiring, Jim became so immersed in it that he literally forgot about what he was doing in the present. He popped a section of tangerine in his mouth and, before he had begun chewing it, had another slice ready to pop into his mouth again. He was hardly aware he was eating a tangerine. All I had to say was, "You ought to eat the tangerine section you've already taken." Jim was startled into realizing what he was doing.
Some traders we work with (and me for a long time) were more worried about the "perfect" system they have not yet found, instead of the system that they have available to them now, which can make them money. They are "eating" the "perfect" future system that they haven't finished building (and may never finish) and they are never using the system they have available now. They are endlessly searching and never finding. Always eating and never satisfied. So focused on "next" that they never get around to trading the now, which Bill Williams so brilliantly teaches.
Lazy Traders
From the New Yorker article I pointed to in the last post, I found this wonderful quote:
At Empirica (a hedge fund), then, there are no Wall Street Journals to be found. There is very little active trading, because the options that the fund owns are selected by computer. Most of those options will be useful only if the market does something dramatic, and, of course, on most days the market doesn't. So the job of Taleb and his team is to wait and to think. They analyze the company's trading policies, back-test various strategies, and construct ever-more sophisticated computer models of options pricing. Danny, in the corner, occasionally types things into the computer. Pallop looks dreamily off into the distance. Spitznagel takes calls from traders, and toggles back and forth between screens on his computer. Taleb answers e-mails and calls one of the firm's brokers in Chicago, affecting, as he does, the kind of Brooklyn accent that people from Brooklyn would have if they were actually from northern Lebanon: "Howyoudoin?" It is closer to a classroom than to a trading floor.
Remember, you don't make more money by being more frantic about your trading. You make more money as you relax and think about what you are doing, how you are doing it, and then watch some TV, read some poetry, play some video games, have fun with your family or friends, eat good food, sleep a deep sleep, and then get up and do it all over again.
Are you thinking deeply enough? Resting your mind well enough?
The Turkey Trader
I am reading The Black Swan by Nassim Taleb, and enjoying it very much. Here's a line that I want to share with you:
by Nassim Taleb, and enjoying it very much. Here's a line that I want to share with you:Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race "looking out for its best interests," as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief ... What can a turkey learn about what is in store for it tomorrow from the events of yesterday? A lot, perhaps, but certainly a little less than it thinks...
Of course this paragraph assumes that a turkey can think, but if you can suspend your judgment for a moment, you can consider that traders get the same way. There are many traders out there looking for a system with "x percentage of wins," or an average win bigger than the average loss, or that trades a certain number of times, or that has a certain profit factor. And the list goes on. What really matters, in my mind, is that you consider what happens in a worst case scenario. What is your plan for what you will do if a Wednesday-before-Thanksgiving situation occurs? I know we would like to think it won't. But it will.
Ego and Fear
Another brilliant email from an up and coming trader and a long time friend. Brian kindly allowed me to quote a big chunk of his thoughts on ego and fear in trading. Worth reading several times.
But of course "ego" in trading reveals itself in subtler ways. I came to realize that after watching any chart for a while I would form an confident opinion about where the price was headed. "Okay, that's a bottom there." "Now the price is going to reverse and test that last support level." Thinking I could predict the market was clearly egotistical.
So one big change has been to no longer guess where the price is going. I wait for trends where ANYBODY can see the price is going somewhere, and trade that trend. Makes for a lot more quiet periods of no trades but more successful trades when they do occur.
"Fear" is another big issue for traders and for me the issue is "not having enough of it". I've been willing to bet the bank on a hunch and have been working to change that. Now when I enter a trade I use mental imagery to escalate my fears so that I trade more responsibly. Have you seen the iMax films "Everest" or "The Alps". Currently I imagine I am high up the sheer face of a rock cliff and the only thing keeping me alive is my attention to the security of the pitons and the condition of the ropes. This helps me be more selective in my entries and in placing my stops.
How do fear and ego enter into your trading? Are you still trying to guess where price is going? Are you imagining yourself on the edge of a cliff, or are you already spending the profits you haven't yet banked?
Trading Less Rocks. It Rocks Hard.
I received an email from a good friend and a rising trader -- someone who is getting it. Who is making leaps in the mental arena and understanding what really matters. I want to share a quote from his email to me.
it seems to me that i have taken way less trades lately. i am down to 1 or 2 trades per week versus 1 or 2 trades per day. this is probably the first step in being successful.
Now thatis a wonderful realization.
The Fear Factor
I was chatting with a friend tonight about trading and she said she still had the "fear factor" when it came to pulling the trigger and taking a trade. It made me think. There are only a few reasons that people fear taking a trade:
1. Their trade size is too big. If the monetary loss if your stop is hit is frightening you, then lower the trade size. If the loss if your stop is hit is greater than 1%, take a long hard breath, think about your spleen, and reduce the trade size.
2. They haven't really tested their system. No testing = very little confidence.
3. They are afraid of being wrong. This usually relates back to #1 or #2 above.
Some Well Planned Trades
A friend Craig sent me some charts in the last few days, to plan his trades. This morning it struck me why it is that I like what he is doing.
I wrote to him:
What I like most about your charts is that it is clear that you are thinking through your plans. You are not just bouncing around the charts looking for justification to take trades. You are careful about your entries -- you are not just jumping into the market, but "asking" the currency pair to do something particular before you get into a trade.
It's impressive to see a trader take his time with his trade planning. To hunker down and wait for the market to produce an opportunity. And then, when he has an opportunity -- when the market shows its hand, so to speak -- then he pounes. He's ready to trade. He knows what he wants to do, and there aren't any unanswered questions about his stop loss, or his profit target.. He's made those plans in advance and he doesn't have to hesitate because this is what he's been waiting for.
Doing and Not Doing
Becoming consistently profitable as a trader has as much to do with learning to not do some things as much as it has to do with learning to do some other things.
Overcoming the negative behaviors can be made much easier by making a routine for doing the positive behaviors.
The more you test, you less you trade (this is good). The more you study risk control, the less you feel compelled to increase your trade size erratically. The more you keep records of your trades, the less arbitrary your decisions will become. The more you do your own homework and research, the less you will depend on someone else to tell you what to do. The more often you get up on time, eat what you should, keep your body healthy, the more likely it is that your mind will be clearer. It's the simple routines that matter in trading.
It's not too late for you to change your routine. What are you going to change?
Getting a Routine
I read today about Mikhail Botvinnik, the 5th world champion of chess, and one of the greatest players of all time (although not considered the greatest). This part of what I read struck me as very applicable to traders:
Botvinnik's consistency is something which all chessplayers desire, although not all chessplayers are as disciplined as Botvinnik in their search for this consistency. Most players' superstition, arguably, comes about due to the yearning for consistency: A player might happen to play a good game, after which he sticks to using the same pen until a painful loss occurs.
You can find the full text where I read the above by clicking here.
That is fantastic advice for traders. So many traders switch trading systems on a whim, or just because they experienced a recent loss (especially when they never tested their performance in the first place).
I'll have more to say about this later. We've just scratched the surface on the subject of routine.
The Fruits of Your Trading Success
I re-read a quote from Jesse Livermore today:
The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.
I find time and time again that losing traders are making the same mistakes:
1. They don't keep any records.
2. They do no testing.
3. They become euphoric about (and increase risk wildly after) wins.
4. They become despondent about (and decrease risk wildly after) losses.
5. They focus on how much money they want.
6. They rarely / never think about how much they stand to lose on a trade.
7. They set their stop loss based on a 1:1 or 1:2 risk to reward ratio, just to make the ratio look good.
8. They discount the importance of psychology.
9. They over-value the importance of the trading "system."
10. They have no routine.
Do One Thing Right
Traders do better when they try to do one thing perfectly right. Traders do worse when they spread themselves too thin, between many indicators, financial instruments, time frames, and trading systems.
Do less. Focus more. You'll do everything better.
Trade Less
Lately I see more and more people struggling to keep their profits because they overtrade. One thing that every new trader can do to immediately improve his results is to take half as many trades on a weekly or monthly basis.
If you knew you could only trade 3 times per month, would you be more thoughtful about the trades you take?
Warren Buffett's Annual Letter
Warren Buffett just released his 2006 letter to shareholders. It's got some great wisdom that I think is useful to traders and anyone who has ever invested in anything. Click here to read the letter.
Stress-Strain Curve for Traders?
In the last few days I've been having lots of ponderous, deep-style thoughts about how so many traders attempt to fight the market, and struggle with their own ability to simply (as Bill Williams brilliantly articulates) want what the market wants. Now you might think that I'm off the ranch and thinking more deeply -- or maybe what I'm now blogging about is esoteric and unmeaningful. But did cause a lot of thoughts this evening, and I hope that maybe it will lead you to think more often about your own ability or willingness to make sense of whatever market you trade.
I was thinking about the ability of a trader to bend with, or comply with, what the market wants, instead of swimming against the current, so to speak. Then I found this link on Wikipedia:
http://en.wikipedia.org/wiki/Stress-strain_curve
A stress-strain curve measures the amount of energy a material can absorb before rupturing. It makes me wonder if there could be a stress-strain curve drawn for traders -- the amount of pressure that a trader could withstand before rupturing.
And here's another link that I hardly understand at all, but sort of brings up similar thoughts:
http://en.wikipedia.org/wiki/Young_modulus
The Young Modulus is a method for measuring the load under which a particular material will buckle under compression. Could there be a Young Modulus to forecast the pressure at which a trader will collapse? I am positive that you are wondering what kind of crack I've been smoking, but I'm serious here. Don't you know a trader who has buckled under the pressure of a losing trade, after fighting the market and arguing about the fact that the trade "should have worked out"? Don't you know a trader who regularly says things like "look what the market did after I finally closed the trade at a huge loss -- it turned around and did exactly what I thought it would do."
These comments tell us a lot about a trader immediately. We can say about these individuals that they are willing to withstand enormous amounts of negative pressure but they refuse to give into it until they rupture their account. We could call the measure of their stiffness, or inflexibility, the Trader Modulus.
I have been re-thinking lately about how dangerous inflexibility, as personality trait, can be for traders. The market does not reward us for going against the grain. I'm not talking about trading with the trend, which is an oft-quoted maxim that has little or no meaning without context. Instead of talking about trading with the trend, I believe it's more valuable to talk about (as Dave Murphy intelligently puts it) getting in sync with the market?
This isn't the last I am going to say about the subject.
Double-Decker Response
I received a very thoughtful and important response to my double-decker post a few days ago. It's one that I believe is important enough to post in the main section. It's from a friend of mine, a full time trader who makes a living from his pips. This is what he says in response to our double-decker friend:
I would like to add my thoughts to this dialog with the understanding that we have never met and by no means do I mean you any harm or bad feelings.
I went through a similar phase some time ago and came to the realization that was afraid to break out of my self imposed comfort zone.
I grew quite attached to having a cretain amount of struggle in my life in many areas. It allowed me to be a martyr of sorts. I could give wonderful speeches about how tough the world was and how I was fighting back with all my might. I grew to love the conflicting issues in my life - and never took the time to accept the fact that I was where I was because of MY decision to stay there.
Trading well and having some financial success from it could make many of these self imposed ills go away. If these issues were to suddenly vanish I could no longer be the "warrior" I convinced my self I was and my self imposed comfort zone (which was actually very UNcomfortable) would be gone. If the struggles in my life were gone what would I do with myself? I honestly didn't know! I had never tried to really see myself in a stress free existance and embrace the freedom it provided.
At some point I had to decide how I wanted to REALLY LIVE and ask my self if my current course of action would get me there.
I realized that I had to move in a new direction and create NEW comfort zones if I wanted my life to change. That's when trading took on a new importance in my life.
I stopped loking at the "pie in the sky" returns many of the book/course sellers entice you with and began to ask if I could take small steps to get myself in tune with the market and work for consistancy rather than occaisonal big wins.
I took a small household bill and made it a sort of game to see if i could just pay that one bill via my trading efforts. It didn't require a large amount of pips bit it did require that spend the time needed with the charts to make the pips necessary. It gave me the needed focus without the added stress of of thinking that I "had" to succeed. If I didn't make the pips needed my light bill would have been paid anyway.
What it did was give me a sort of interesting hobby that I felt had the possibility of turning into something really big.
As time went on my trading (and sttitude) got better and now I am trading fulltime and having fun doing it.
Decide to change
Let go of your need to have self imposed pain and conflict. Every second of your life is an oppourtunity to decide how you want to live that day. Choose the things that ring true to you.
Don't surrender your dream without a fight. And I mean a knock down drag out spitting, biting, kicking head punching affair. Your future will depend on you willingness to defend you goals. You don't have to give up being the warrior I mentioned in the beginning - you just have to give him something REAL and MEANINFUL to go to war for.
Your dreams and goals as a trader would be a great place to start.
Take small steps - you didn't get into this mess overnight - don't expect to get out overnight.
Look at it as an experiment rather than a do or die situation.
Change your beliefs about the market.
The market will absolutely give you whatever YOU believe it will. Become friends with the market and you'll see what I mean.
I hope this helps and I wish you well.
On the Beat for Pips
I have the honor to work with a student right now who is also a police officer in one of the largest cities in the world. He has a dangerous job. I in no way want in this post to compare the importance of the job of police officer with the importance of being a trader (one job saves lives, the other saves pips -- no comparison).
But here are some thoughts that I offered to my friend today, as he starts his journey to be a trader.
You are in a great position to accept any shift in thinking that is required for you to be successful at trading. I would not be surprised if your success in trading starts to have an effect on your perspective on the street as an officer. Trading well will shift the way you look at many, many things.
1. Do you ever wonder why a person who has done something wrong on the street doesn't want to admit it at first? Why don't they just come clean? I suspect that can be frustrating. Well, that bad dude is like a bad trader that won't admit they made a bad trade -- and so they just keep letting it get worse and worse.
2. Do you believe that work as an officer can be chaotic? But at the same time, you've pretty much seen it all? It's that strange dichotomy that exists in trading, too. The market is chaos, but once you dive in and start to understand the underlying patterns, there is not much that surprises you. Let me put it another way:
3. Do you feel that on a rough evening as an officer, you just have to "go with the flow," that to fight the negative stuff coming your way is just going to be counter-productive? Well, it's the same in trading. You don't fight the market. You put yourself in a position to stand back and take advantage of what comes your way, or you make sure that you stay out of the way of the bad stuff (this is where you have a choice in trading that you don't as an officer).
4. Would it be fair to say that the best officers understand the "mental" side, the "psychological" side of their jobs just as much as they are in good physical shape? They have both mental and physical strength? Well, it's the same for trading. You need the mental side AND the skill set. You can imagine that the dumbest guy who is in great shape can never be a police officer. Well, the dumbest guy with the greatest trading system in the world is not going to make any money. You can imagine, too, that there have been some great officers and detectives who were not necessarily Jack LaLane or Mr. Universe. Well, that's the same for the best traders: they have a valid mental perspective and that can compensate for the fact that they might not know some "secret" trading system, or some amazing skill.
Double-Decker Thoughts
I get quite a bit of criticism sometimes for repeating advice that some people view as "obvious." The longer I am in the business of trading and teaching, I realize that the most important advice is the "obvious" advice because it's the advice that the least amount of people actually pay attention to. Tonight I received an insightful email from a good friend who is still on his journey to become a successful trader. Here is what he wrote to me. I sincerely appreciate that he gave me permission to post his thoughts here:
As I was coming back from my night job, I was on the top deck of the bus slumbering. I suddenly woke up with the fear that i had missed my stop, but i did not. Then the thought creep into my mind again - forex. I had a kind of dialogue within myself.He: Hey! Tell me for how long are you going to do this.
Me: What do you mean?
He: Doing what you don't like, not having enought time to rest, going home at the odd time, not having enough food and no cloth on your back!
Me: Well i don't really know. I have tried to change this buy doing forex.
He: But do you ever succeed?
Me: NO!
He: Why?
Me: It's not because I don't have a good system; I am not discipline.
He: Why are you not discipline.
Me: I don't want to talk about it!
He: If truely you don't like what you are doing then you will follow the rule of playing the forex game successfully. If not, you will keep doing the same thing the same way and achieving the same result.
Me: Whatever!My response to the questions i received through the dialog shows that i am fretting over my failure. I keep thinking, why am i not successful. Why do I put aside my plans and do something else? Why do i keep making money on demo and not in live account? When i do a backtesting, i don't look at the news, why do i look at the news when it's time to trade this system live? Why can't i just listen to my inner mind? Why do i refuse to take little money off the table. Why don't i stick to my plan?
Have you ever asked yourself these questions?
Knowledge and Confusion
I've learned for myself, and seen it in many others, that the more they or I learn and then try to apply, the more confused we can become.
To me, this doesn't mean that we have to stop learning or reading books or investigating new methods. What it does mean is that it's important to separate the learning process from the application of the learning. I make the analogy that trying to follow multiple trading systems can be like trying to drive a car with multiple steering wheels. It just won't work. It becomes confusing and it's overcomplicated.
The statemens about stepping back and having an open mind, and about you having to learn for yourself, that was quoted in this thread, are so very true in my experience. Through your own observations, and open-minded (so well put!) interaction with new ideas, and reading, etc, you are going to get an idea of what indicators or methods make the most sense to you.
And then you have to do more than observe -- of course this is my opinion and I am excited to hear what others have to say -- then you have to test the methods that you learn. You go back in time and you apply what you have learned and you prove whether it works or not. You learn whether the method experiences drawdowns that are unnacceptable, or whether it has a great win percentage but a bad average winner to loser size, or whether it requires you to keep an unrealistic schedule that negatively affects your health. This process of learning, making a hypothesis, and then testing that hypothesis, can take a long time. That's why so many traders fail, I think: they realize how much effort can go into "making a system your own" and instead they just start trading again, because of financial pressures, an addiction to trading, or because they simply feel that all that testing is unnecessary.
The Case of the Honest Traders
I spoke at the FXCM expo yesterday. There were approximately 600, maybe even 700, traders in the room, and we brought free stuff -- but not enough of it. I expected 100-200 people and we brought way too few CDs and t-shirts and smoking monkey figurines (more about that later).
Before I started my presentation, I took $700 in cash out of my pocket and set it on the table in front of me, next to all the free stuff. At the end of the presentation, a mob of people descended on the table and grabbed all the free stuff they could. And you know what? Even with 50 traders all standing around the table, not one person touched the money. Not one. It would have been easy to do, but no one took it.
I think that it says a lot about people like you, who are trying to make a living from trading. As much as any of those traders wanted to make money, not one of them would have considered for a second that stealing was the answer. A lesson to me, and hopefully to all, that the great majority of forex traders are good, honest people.
Testing Works -- Everywhere
Google is now encouraging you (semi-officially) to do testing to see what pages on your Web site are working the best. If you look at that from a different perspective, then you could say that Google is encouraging you to do backtesting. Or forward testing. Or just plain and simple, they're saying:
When in business, it pays to find out what works best, before you commit to large amounts of resources to a product or service launch.
Here is the link so you can see what they are doing.
Why would it be any different for you as a trader?
Can You Really Do This?
The question people ask me most often is:
Can I really trade for a living?
And I always tell them yes, as long as they are willing to focus themselves, obey money management principles, and engage in a regular regimen of backtesting. Most people ignore everything that I said in the previous sentence, and move on, having heard what they want to hear.
But then, most people still fail at trading. In fact, they fail miserably. The root cause of this is NOT one of these things listed below:
Scaling Up or Down?
Boris Schlossberg recently wrote an excellent article for Investopedia.com on the subject of "scaling up," the practice of adding to a winning position instead of "scaling down," which refers to the technique of adding to a losing position in the hopes of lowering the average price of your trade entry.
In my new book, Adventures of a Currency Trader, which should be released in early 2007, the lead character in the book employs the strategy of scaling up in order to reap fairly significant profits from a trade -- and I can't wait to share that story with you. I wish it didn't take so long to publish a book!
Anyway, I am a huge fan of increasing position size when you are right. This doesn't mean that I do it all the time. It doesn't mean that you should do it right now. But I think Boris has written an article worth reading. Here's the link so you can read it for yourself:
Is Pressing The Trade Just Pressing Your Luck? by Boris Schlossberg
Hot Times! Hot Scoring!
Mike M, from who knows where, scored 201 on the Biz-Nizzle Card Game! That is a hot score!
Way to go, Mikey! I am sending Mike a copy of Kathy Lien's book, Day Trading the Currency Market. If he already has Kathy's book, he is now going to have two copies! Wooohoo! One for the bathroom!
The Biz-Nizzle Card Game
If you're looking for something to do while your trade is open and you don't want to touch it, then the business card game is for you.
The highest score I've seen so far is 67 (by me). If you can get higher than 200, I have a special prize for you (and it is not a lame prize). Send in a screen shot if you can do it. If I get there first, I'll post it here. Enjoy!
Watch Out: Trading Euphoria
A lot of people have done well trading the short term systems this week and I've received a lot of email from people who are really impressed with their own performance. In one of the chats that I was in this morning, I heard someone say, "We all have to watch out for ourselves. We're getting a bit euphoric about all of this, and that can lead to problems later."
When we have trading euphoria, we start to trade huge lot sizes, take too many trades, and we do it all because we think that we are unstoppable. And we feel like we have a bunch of pips that we just earned, and we're going to take those pips out for a ride. Next thing you know, we've ridden them to the garbage dump.
Keep your gains! Keep your gains! Gaining pips is easy. Keeping them is tough.
You Are Not Your Trades
Today I received a trader's-heart breaking email from a good friend. He just went live after weeks of making sure he was ready on a demo account. He has a bright future ahead as a trader. But today, he got emotional and lost 3% of his account. If you've ever been in the same position, it can be a devastating feeling. My friend wondered if he was just going to have to "hang it up" and do something else. I know that feeling very well -- and remember asking myself the same question. This is the email that I wrote back.
1. Get over it. You are going to have mistakes like this along the way.
2. So what? One trade does not a good or bad trader make. You are not your trades. You direct them, and every once in a while, no matter what, you are a putz. This does not mean you are a putz all the time. You probably made a mistake at work in year 5 of your job, but that did not put in question your ability to work at all.
Stay Focused!
Stay focused!
I got an email from a student today and it thrills me to read it. I've read it four times now. This is something worth sharing. The email is answering my question about how his trading is coming along.
Your Schedule, Your Pips
This is an email that I sent to a prospective student yesterday. He just could not set aside one consistent time each day to look at charts or study the market or make trades. He is a brilliant individual. Has enormous potential to be a great trader. But if he is not able to focus on one set system, and set aside at least a bit of time each day to do his planning, he can't expect great things from trading.
Here's what I told him, and I think there are a few of you out there who might benefit from the same advice. I know I needed to hear it when I started.
Superman Complex
Today I'm answering a lot of emails from 1 on 1 students who had great weeks. One guy ended this week +470 pips, last week +280. Another ended Friday of this week with +118 and +67 on two different trades. And the list goes on -- more people did well this week than any other week I can remember. These are great results, and with the huge moves on Thursday and Friday (with Ben Bernanke's speech, especially), it seemed easier to get the gains.
The challenge is now to keep those gains. Getting the gains can become the easy part. Keeping the gains is what makes you rich. If you had a spectacular week last week, then consider not trading at all on Monday. Consider withdrawing some of those gains into your bank account!
Remember, it is far more difficult to keep your profits than it is to make them in the first place.
You are an Apprentice
I got an email from a friend today that said that even though he had been discouraged about missing out on some of the trades he planned, he realized that, at this stage, he's really just like a Carpenter's apprentice. He has to make a thousand practice cuts on the wood before he can be trusted to do some of his own work. And everything is supervised.
This makes a ton of sense. We are all too anxious to take our trading to the next level, when in reality we should enjoy the ride as we have it...and right now, you might be in "learning mode," and in a couple of months you might be getting 100-150 pips per week. But if you are in learning mode, enjoy the apprenticeship for what it is.
Why are you trading tomorrow?
Hey! Are you thinking of trading on February 28?
That sounds like a great idea unless you are already profitable for the month of February. If you are, then you should stop trading immediately. Shut it down. Preserve your profits.
Getting the pips is easy (if you don't believe this, then you are never going to be successful). It's keeping the pips that is really difficult.
Are You a 20 Pipper?
Happy Wednesday night! I had an epiphany today. I was thinking: what if I told you that I would give you $1,000 USD if you ended next week at positive 20 pips? Would you be able to do it? You’d say yes.
Most people I’ve taught in the past 3 years would say yes. But you know what? Most traders out there can’t bring themselves to just end the week with a few positive pips. They have a misconception that they have to end the week with 200 pips or something. That’s insane.
If you’re a 20 pip a week trader, then so be it. If you are a 100 pip a week trader, then that’s great too. Be your best trader.
But most importantly, be yourself.
What's the best thing that could happen to you?
Is it taking a loss?
Lots of traders say that they learn more from their losses than their gains. This has always seemed stupid to me. But I just read the following from the the disturbing book Goal-Free Living
The best things I have ever done in my career came shortly after I decided that the best thing that could happen to me is that they would fire me. As long as you are sitting there saying to yourself, "Shoot, if I do this I might get a bad review," or "I might not get a promotion," or "Someone might fire me," you are never going to take the risk. Instead, go and do what you want because you think there is value in it ... some of [these big risks in my life] did not pay off, but I never got beat up. In some cases they turned out to be big wins.
For a long time I have taught that stupid losses carry no benefit. I am wondering what I think now. What do you think?
Continue reading "What's the best thing that could happen to you?" »
Say no to crack. Trade on active days.
I got an email tonight from a brilliant-trader-in-the-making. He has made extraordinary progress in just the last few weeks. This was one of his big breakthroughs, and I want to share it with you. Here is what he wrote to me this evening:
Rob, I just wanted to let you know, I've heeded your advice about good and bad trading days and so far things are in the positive (Friday's trades kicked ass, btw). It's funny, but part of the problem I've had is wrapping my head around the idea that not every day is a good day to trade, which leads me to believe that realistically, I might only have 2 or 3 days a week that are optimal trading days. That's great and everything, but I'm used to being someone's slave working 12+ hour days at all hours of the day and night. Working only 2 or 3 days a week and making ungodly sums of money is just...weird. That would likely explain my "trading frenzy" the past few weeks. Now, I'm just chilling out (saying NO to crack) and waiting for the right trade or day to trade then stopping when I get a positive trade or I reach my pip goal.
I have nothing to add. That was pure genius.
Tested System After a Loss
This was an excellent question that I received tonight:
If you have a proven system that is working for you and your sticking to it, then if you have 1 or 2 bad trades from this system, how do you learn from your mistakes? I mean I know you should always try and learn from your mistakes, but your system's not going to win all the time even though you have to stick to it.
Here was my answer:
you might go back and ask:
1. did i trade on a day with no econ reports, or in a week when there was no econ reports? that would have told me to watch out 2. did i trade too many or too few lots? am i staying on track with my risk exposure? 3. was i tempted to enter again after the loss? how did i deal with that?
questions like that. make sense? maybe you don't alter your entry rules. but maybe you think more about the time of day you trade and your money management and your emotions.
End of Year Thoughts, Part II
I have something I want to get off my chest, and although most of you will feel that this more of the same from me, I really want you to read this. It’s important.
In the past 4 months, I have worked with about 30 traders in the web-based training and another 50 traders in the live training. These traders are from every continent on the globe. They are from all different economic and educational backgrounds. Some had trading experience. Some did not. Some I thought would be failures. There was one in particular, at a live training event, that I specifically considered to be totally unfit for trading, and this person has been the 2nd most successful trader of this year – and is now making a living from trading.
End of Year Thoughts, Part I
Here are some thoughts I had today. Many more of these thoughts will be coming in the next 2 weeks.
1. Traders don't know what the crap to do. There is a lot of confusion in London and on Wall Street about "where next" with the USD. Rising interest rates? Maybe. Rising Trade Deficit? Surely. This could be a choppy market for the next 1-2 months.
2. Oil is going to fall to at least $50 per barrel. That's my opinion. I think this will reduce inflationary pressures in the US, and it will have some ancillary effects:
The Edge of Success
I just exchanged emails with a favorite student of mine (ok, everyone is a favorite, but I really like Brian and think he has enormous potential). He figured something out and I want to share it with you. Here is what he wrote:
"Just checking in to let you know what I've been up to. I was on a fairly good roll for about a month - up about 200 PIPS. Then I fell back into my old patterns and lost most of it. I think my biggest problem is waiting for the trades to come to me. I work during the day so I have the mindset that I need to trade when I have a few minutes to look at the charts."
Wow! Did you catch the super important thing that Brian said? Here it is again:
I think my biggest problem is waiting for the trades to come to me.
Wow again! Here is my response:
Are You a Currency Nerd?
Are you so wrapped up in trading that you can't talk about anything else? I get that wa