25 RULES OF FOREX TRADING DICIPLINE (PART 3)
Wednesday, October 21, 2009 - - 3 Comments
#11 - #15
Once you come to the realization that your trade is no good it.s best to exit immediately. .It.s never a loser until you get out. and .Not to worry, it.ll come back. are often said tongue in cheek, by traders in the pit. Once the phrase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time to exit.
#12 DON’T HOPE AND PRAY. IF YOU DO, YOU WILL LOSE.
When I was a new and undisciplined trader, I can.t tell you how many times that I
prayed to the .Bond god.. My prayers were a plea to help me out of a less-than-pleasant trade position. I would pray for some sort of divine intervention that, by the way, never materialized. I soon realized that praying to the .Bond god. or any other .futures god. was a wasted exercise. Just get out!
#13 DON’T WORRY ABOUT NEWS. IT’S HISTORY.
I have never understood why so many electronic traders listen to or watch CNBC, MSNBC, Bloomberg News or FNN all day long. The .talking heads. On these programs know very little about market dynamics and market price action. Very few, if any, have ever even traded a one lot in any pit on any exchange. Yet they claim to be experts on everything. Before becoming a .trading and markets expert,. the guy on CNBC reporting hourly from the Bond Pit, was a phone clerk on the trading floor. Obviously this qualifies him to be an expert! He, and others, can provide no utility to you. Treat it for what it really is.. entertainment. The fact is: The reporting that you hear on the business programs is old news.. The story has already been dissected and consumed by the professional market participants long before the .news. has been disseminated. Do not trade off of the reporting. It.s too late.
#14 DON’T SPECULATE. IF YOU DO,YOU WILL LOSE.
In all of the years that I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently
print large winners. Don.t be a speculator. Be a trader. Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased if you trade short term: small winners and even smaller losses.
#15 LOVE TO LOSE MONEY.
This rule is the one that I get the most questions and feedback on by traders from all over the world. Traders ask, What do you mean, love to lose money. Are you crazy?. No, I.m not crazy. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you a lot of trading capital and will make you a much better trader.
By : Doug Zalesky is CEO of eLocal, L.L.C., www.elocaltrading.
SFO
25 RULES OF FOREX TRADING DICIPLINE (PART 2)
Wednesday, September 30, 2009 - - 1 Comments
(#6 - #10)
# 6 DEVELOP A METHODOLOGY AND STICK WITH IT. DON’T CHANGE METHODOLOGIES FROM DAY TO DAY.
I require my .students. to actually write down the specific market prerequisites (setups) that must take place in order for them to make a trade. I don.t necessarily care what the methodology is, but I do want them to make sure that they have a set of rules, market setups or price action that must appear in order for them to take the trade. You must have a game plan. If you have a proven methodology but it doesn.t seem to be working in a given trading session, don.t go home that night and try to devise another one. If your methodology works more than one-half of the trading sessions, then stick with it.
# 7 BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
In all of my years as a trader I never traded more than a 50 lot on any individual trade. Sure, I would have liked to be able to trade like colleagues in the pit who were regularly trading 100 or 200 lots per trade. However, I didn.t possess the emotional or psychological skill set necessary to trade such big size. That.s OK. I knew that my comfort zone was somewhere between 10 and 20 lots per trade. Typically, if I traded more than 20 lots, I would .butcher. the trade. Emotionally I could not handle that size. The trade would inevitably turn into a loser because I could not trade with the same talent level that I possessed with a 10 lot. Learn to accept your comfort zone as it relates to trade size. You are who you are.
#8 YOU ALWAYS WANT TO BE ABLE TO COME BACK AND PLAY THE NEXT DAY.
Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds. I require my students to place daily downside limits on their performance. For example, your daily loss limit can never exceed $500. Once you reach the $500 loss limit, you must turn your PC off and call it a day. You can always come back tomorrow.
#9 EARN THE RIGHT TO TRADE BIGGER.
Too many new traders think that because they have $25,000 equity in their trading account that they somehow have the right to trade five or ten e-Mini S&P contracts. This cannot be further from the truth. If you can.t trade a one lot successfully, what makes you think that you have the right to trade a 10 lot? I demand that my students show me a trading profit over the course of ten consecutive trading days trading a one lot only. When they have achieved a profitable ten-day period, in my eyes, they have earned the right to trade a two lot for the next ten trading sessions. Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
#10 GET OUT OF YOUR LOSERS.
You are not a .loser. because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. It.s amazing to me how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then it.s probably no good. Time to exit. Every trader has losing trades throughout the session. A typical trade day for me consists of 33 percent losing trades, 33 percent scratches and 33 percent winners. I exit my losers very quickly. They don.t cost me much. So, although I have either lost or scratched over two-thirds of my trades for the day, I still go home a winner.
By : Doug Zalesky is CEO of eLocal, L.L.C., www.elocaltrading.
SFO
25 RULES OF FOREX TRADING DICIPLINE (PART 1)
Friday, September 25, 2009 - - 0 Comments
PART 1
(# 1 to #5)
#1 THE MARKET PAYS YOU TO BE DISCIPLINED.
Trading with discipline will put more money in your pocket and take less money out. The one constant truth concerning the markets is that discipline = increased profits.
#2 BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU. BUT DON’T CLAIM TO BE DISCIPLINED IF YOU ARE
NOT 100 PERCENT OF THE TIME.
Being disciplined is of the utmost importance, but it.s not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in a while, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you can.t claim to be a disciplined
trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on every trade. When I state that .the market will reward you,. typically it is in recognizing less of a loss on a losing trade than if you were stubborn and held on too long to a bad trade. Thus, if I lose $200 on a trade, but I would have lost $1,000 if I had remained in that losing trade, I can claim that I .saved. myself $800 in additional losses by exiting the bad trade with haste.
# 3 ALWAYS LOWER YOUR TRADE SIZE WHEN YOU’RE TRADING POORLY.
All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to a one lot on your next trade? If I have two losing
trades in a row, I always lower my trade size down to a one lot. If my next two trades are profitable, then I
move my trade size back up to my original lot size.
It.s like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two . or even scratch the trade . and then raise your trade size after two consecutive winning trades.
# 4 NEVER TURN A WINNER INTO A LOSER.
We have all violated this rule. However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold onto the trade in the hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss. There.s no need to be greedy. It.s only one trade. You.ll make many
more trades throughout the session and many more throughout the next trading sessions.
# 5 YOUR BIGGEST LOSER CAN’T EXCEED YOUR BIGGEST WINNER.
Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S&P points, then do not allow a losing trade to exceed those five points. If you do allow a loss to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and
biggest loss is a net loss on the two trades. Not good.
By : Doug Zalesky is CEO of eLocal, L.L.C., www.elocaltrading.
com. ELocal provides physical and electronic execution,
brokerage and clearing services to all major futures
and equities exchanges. They service electronic Internet
traders, floor traders and institutional trading firms. For
additional information on the firm and Doug.s 25 Rules of
Trading Discipline please contact Doug at
doug.zalesky@elocaltrading.com
SFO
Provided by permission of SFO Magazine February 2003. © 2003 Wasendorf & Associates, Inc. .
Trading Trend Or Range?
Thursday, February 21, 2008 - - 2 Comments
Trend
What is trend? The simplest identifiers of trend direction are higher lows in an uptrend and lower highs in a downtrend. Some define trend as a deviation from a range as indicated by Bollinger Band "bands" (see Using Bollinger Band "Bands" to Trade Trend in FX). For others, a trend occurs when prices are contained by an upward or downward sloping 20-period simple moving average (SMA).
Regardless of how one defines it, the goal of trend trading is the same - join the move early and hold the position until the trend reverses. The basic mindset of trend trader is "I am right or I am out?" The implied bet all trend traders make is that price will continue in its present direction. If it doesn't there is little reason to hold onto the trade. Therefore, trend traders typically trade with tight stops and often make many probative forays into the market in order to make the right entry.
By nature, trend trading generates far more losing trades than winning trades and requires rigorous risk control. The usual rule of thumb is that trend traders should never risk more than 1.5-2.5% of their capital on any given trade. On a 10,000-unit (10K) account trading 100K standard lots, that means stops as small as 15-25 pips behind the entry price. Clearly, in order to practice such a method, a trader must have confidence that the market traded will be highly liquid.
Of course the FX market is the most liquid market in the world. With US$1.6 trillion of average daily turnover, the currency market dwarfs the stock and bond markets in size. Furthermore, the FX market trades 24 hours a day five days a week, eliminating much of the gap risk found in exchange-based markets. Certainly gaps sometimes happen in FX, but not nearly as frequently as they occur in stock or bond markets, so slippage is far less of a problem.
High Leverage - Large Profits
When trend traders are correct about the trade, the profits can be enormous. This dynamic is especially true in FX where high leverage greatly magnifies the gains. Typical leverage in FX is 100:1, meaning that a trader needs to put down only $1 of margin to control $100 of the currency. Compare that with the stock market where leverage is usually set at 2:1, or even the futures market where even the most liberal leverage does not exceed 20:1.
It's not unusual to see FX trend traders double their money in a short period if they catch a strong move. Suppose a trader starts out with $10,000 in his or her account, and uses a strict stop-loss rule of 20 pips. The trader may get stopped out five or six times, but if he or she is properly positioned for a large move - like the one in EUR/USD between Sept and Dec 2004 when the pair rose more than 12 cents, or 1,200 pips - that one-lot purchase could generate something like a $12,000 profit, doubling the trader's account in a matter of months.
Of course few traders have the discipline to take stop losses continuously. Most traders, dejected by a series of bad trades tend to become stubborn and fight the market, often placing no stops at all. This is when FX leverage can be most dangerous. The same process that quickly produces profits can also generate massive losses. The end result is that many undisciplined traders suffer a margin call and lose most of their speculative capital.
Trading trend with discipline can be extremely difficult. If the trader uses high leverage he or she leaves very little room to be wrong. Trading with very tight stops can often result in 10 or even 20 consecutive stop outs before the trader can find a trade with strong momentum and directionality.
For this reason many traders prefer to trade range-bound strategies. Please note that when I speak of ‘range-bound trading' I am not referring to the classic definition of the word 'range'. Trading in such a price environment involves isolating currencies that are trading in channels, and then selling at the top of the channel and buying at the bottom of the channel. This can be a very worthwhile strategy, but, in essence, it is still a trend-based idea - albeit one that anticipates an imminent countertrend. (What is a countertrend after all, except a trend going the other way?)
Range
True range traders don't care about direction. The underlying assumption of range trading is that no matter which way the currency travels, it will most likely return back to its point of origin. In fact, range traders bet on the possibility that prices will trade through the same levels many times, and the traders' goal is to harvest those oscillations for profit over and over again.
Clearly range trading requires a completely different money-management technique. Instead of looking for just the right entry, range traders prefer to be wrong at the outset so that they can build a trading position.
For example, imagine that EUR/USD is trading at 1.3000. A range trader may decide to short the pair at that price and every 50 pips higher, and then buy it back as it moves every 25 pips down. His or her assumption is that eventually the pair will return to that 1.3000 level again. If EUR/USD rises to 1.3500 and then turns back down hitting 1.3000, the range trader would harvest a handsome profit, especially if the currency moves back and forth in its climb to 1.3500 and its fall to 1.3000.
However, as we can see from this example a range-bound trader will need to have very deep pockets in order to implement this strategy. In this case employing large leverage can be devastating since positions can often go against the trader for many points in a row and, if he or she is not careful, trigger a margin call before the currency eventually turns around.
Solutions for Range Traders
Fortunately, the FX market provides a flexible solution for range trading. Most retail FX dealers offer mini lots of 10,000 units rather than 100K lots. In a 10K lot each individual pip is worth only $1 instead of $10, so the same hypothetical trader with a $10,000 account can have a stop-loss budget of 200 pips instead of only 20 pips. Even better, many dealers allow customers to trade in units of 1K or even 100-unit increments. Under that scenario, our range trader trading 1K units could withstand a 2,000-pip drawdown (with each pip now worth only 10 cents) before triggering a stop loss. This flexibility allows range traders plenty of room to run their strategies.
In FX, almost no dealer charges commission. Customers simply pay the bid-ask spread. Furthermore, regardless of whether a customer wants to deal for 100 units or 100,000 units, most dealers will quote the same price. Therefore, unlike the stock or futures markets where retail customers often have to pay prohibitive commissions on very small size trades, retail speculators in FX suffer no such disadvantage. In fact a range-trading strategy can be implanted on even a small account of $1,000, as long as the trader properly sizes his or her trades.
Conclusion
Whether a trader wants to swing for homeruns by trying to catch strong trends with very large leverage or simply hit singles and bunts by trading a range strategy with very small lot sizes, the FX market is extraordinarily well suited for both approaches. As long as the trader remains disciplined about the inevitable losses and understands the different money-management schemes involved in each strategy, he or she will have a good chance of success in this market. Next month, we'll examine the various currency pairs to determine which ones are best suited for trend strategy and which are best suited for range.
by Boris Schlossberg
Boris Schlossberg runs BKTraderFX, a forex advisory service and is the senior currency strategist at Forex Capital Markets in New York, one of the largest retail forex market makers in the world. He is a frequent commentator for Bloomberg, Reuters, CNBC and Dow Jones CBS Marketwatch. His book, "Millionaire Traders" (John Wiley and Sons) is available on Amazon.com, where he also hosts a blog on all things trading.
