Growing Forex Diary
11 Fascinating Market Correlations You'll Want to Use
Saturday, October 27, 2007 - - 0 Comments
Written by Jim Wyckoff
Experienced futures traders know there are many correlations among futures markets - some of which are valuable guides in helping to determine specific market trends, and some of which are fickle. This educational feature will examine some basic correlations among futures markets, and will likely be most beneficial to the less-experienced traders. However, it just might be a good refresher for the experienced traders who may have forgotten a few of the market correlations.
It is important to emphasize that market correlations are never 100% predictable, and that some market correlations can and do make 180-degree turns over a period of time.
U.S. Dollar-Gold: The gold market and the dollar usually trade in an inverse relationship. This has been the case for many years. During times of U.S. economic prosperity and lower inflation, the dollar will usually benefit as money flows into U.S. paper assets (stocks and bonds), while physical assets (gold) are usually less attractive. Conversely, during times of weaker U.S. economic growth, higher inflation or heightened world economic or political uncertainty, traders and investors will tend to flock out of "paper" assets and into "hard" assets such as gold. Inflation is a bullish phenomenon for gold.
U.S. Dollar-U.S. Treasury Bonds: Usually, a stronger dollar means a stronger bond market because of good demand for U.S. dollars (from overseas investors) to buy U.S. T-Bonds. T-Bonds are also seen as a "flight-to-quality" asset during times of economic or political instability. In the past, the U.S. dollar has also benefited from "flight-to-quality" asset moves. However, since the major terrorist attacks on the U.S. and the resulting damage to the U.S. economy, the safe-haven status of the "greenback" has been much less pronounced.
Crude Oil-U.S. Treasury Bonds: If crude oil prices rally strongly, that is a negative for U.S. T-Bond prices, due to notions that inflationary pressures could reignite and become problematic for the economy. Inflation is the arch enemy of the bond market. Rising crude oil prices are also bullish for the gold market.
CRB-U.S. Treasury Bonds: The CRB Index is a basket of commodities melded into one composite price. A rising CRB index means generally rising commodities prices, and increasing inflation. Thus, a rising CRB Index is negative for U.S. Treasury Bond prices.
U.S. Stock Indexes-U.S. Treasury Bonds: Since the bull market in U.S. stocks ended just over two years ago, stock index futures prices and U.S. Treasury bond futures prices have traded in an inverse relationship. When stock prices are up, bond prices are usually down. However, during the long bull market run that preceded the current bear market, stock and bond prices traded in tandem. In fact, years ago, before all the electronic overnight futures trading had begun, the best way to get a good read on how the stock indexes would open was by early trading in the T-bond market. (T-Bond trading opens 70 minutes before the stock indexes).
Silver-Soybeans: This corollary may be more fiction than fact, at least nowadays. But during the "go-go" days of soaring precious metals and soybean prices, it was said that if soybean futures would lock limit-up, bean traders would buy silver futures.
Cattle-Hogs: The point to mention here is that if strong price gains or losses occur in one meat futures complex, there is likely to be somewhat of a spillover effect in the other meat complex. For example, sharp losses in the cattle or feeder cattle futures will likely weigh on the hogs and pork bellies.
Currency Futures-U.S. Dollar Index: Most major IMM currency futures contracts are "crossed" against the U.S. dollar. Thus, when the majority of the currencies are trading higher, it's very likely that the U.S. Dollar Index will be trading lower. It's a good idea for currency traders to keep a watchful eye on the U.S. Dollar Index, as it's the best barometer for the overall health of the U.S. dollar versus major foreign currencies.
U.S. Stock Indexes-Lumber: Lumber is a very important commodity for the U.S. economy. It is literally a building block for the nation. If the stock market is sharply higher, lumber futures prices will be supported. A big sell off in the stock market will likely find selling pressure on lumber futures.
N.Y. Cocoa-British Pound: London cocoa futures trading is as important (or even more important) than New York cocoa futures trading, on a worldwide basis. London cocoa futures trading is conducted in the British pound currency. Thus, big fluctuations in the pound sterling will impact the price of U.S. cocoa futures, due to the cross-currency fluctuations of the British pound versus the U.S. dollar. Keep in mind there is constantly arbitrage taking place between the New York and London cocoa markets, and thus the currency cross-rates between the pound and the dollar are very important.
Grains-U.S. Dollar Index: A weaker U.S. dollar will be an underlying positive for the U.S. grain futures markets because it makes U.S. grain exports more competitive (cheaper prices) on the world market. Larger-degree trends in the U.S. dollar will have a larger-degree impact on the grains.
Experienced futures traders know there are many correlations among futures markets - some of which are valuable guides in helping to determine specific market trends, and some of which are fickle. This educational feature will examine some basic correlations among futures markets, and will likely be most beneficial to the less-experienced traders. However, it just might be a good refresher for the experienced traders who may have forgotten a few of the market correlations.
It is important to emphasize that market correlations are never 100% predictable, and that some market correlations can and do make 180-degree turns over a period of time.
U.S. Dollar-Gold: The gold market and the dollar usually trade in an inverse relationship. This has been the case for many years. During times of U.S. economic prosperity and lower inflation, the dollar will usually benefit as money flows into U.S. paper assets (stocks and bonds), while physical assets (gold) are usually less attractive. Conversely, during times of weaker U.S. economic growth, higher inflation or heightened world economic or political uncertainty, traders and investors will tend to flock out of "paper" assets and into "hard" assets such as gold. Inflation is a bullish phenomenon for gold.
U.S. Dollar-U.S. Treasury Bonds: Usually, a stronger dollar means a stronger bond market because of good demand for U.S. dollars (from overseas investors) to buy U.S. T-Bonds. T-Bonds are also seen as a "flight-to-quality" asset during times of economic or political instability. In the past, the U.S. dollar has also benefited from "flight-to-quality" asset moves. However, since the major terrorist attacks on the U.S. and the resulting damage to the U.S. economy, the safe-haven status of the "greenback" has been much less pronounced.
Crude Oil-U.S. Treasury Bonds: If crude oil prices rally strongly, that is a negative for U.S. T-Bond prices, due to notions that inflationary pressures could reignite and become problematic for the economy. Inflation is the arch enemy of the bond market. Rising crude oil prices are also bullish for the gold market.
CRB-U.S. Treasury Bonds: The CRB Index is a basket of commodities melded into one composite price. A rising CRB index means generally rising commodities prices, and increasing inflation. Thus, a rising CRB Index is negative for U.S. Treasury Bond prices.
U.S. Stock Indexes-U.S. Treasury Bonds: Since the bull market in U.S. stocks ended just over two years ago, stock index futures prices and U.S. Treasury bond futures prices have traded in an inverse relationship. When stock prices are up, bond prices are usually down. However, during the long bull market run that preceded the current bear market, stock and bond prices traded in tandem. In fact, years ago, before all the electronic overnight futures trading had begun, the best way to get a good read on how the stock indexes would open was by early trading in the T-bond market. (T-Bond trading opens 70 minutes before the stock indexes).
Silver-Soybeans: This corollary may be more fiction than fact, at least nowadays. But during the "go-go" days of soaring precious metals and soybean prices, it was said that if soybean futures would lock limit-up, bean traders would buy silver futures.
Cattle-Hogs: The point to mention here is that if strong price gains or losses occur in one meat futures complex, there is likely to be somewhat of a spillover effect in the other meat complex. For example, sharp losses in the cattle or feeder cattle futures will likely weigh on the hogs and pork bellies.
Currency Futures-U.S. Dollar Index: Most major IMM currency futures contracts are "crossed" against the U.S. dollar. Thus, when the majority of the currencies are trading higher, it's very likely that the U.S. Dollar Index will be trading lower. It's a good idea for currency traders to keep a watchful eye on the U.S. Dollar Index, as it's the best barometer for the overall health of the U.S. dollar versus major foreign currencies.
U.S. Stock Indexes-Lumber: Lumber is a very important commodity for the U.S. economy. It is literally a building block for the nation. If the stock market is sharply higher, lumber futures prices will be supported. A big sell off in the stock market will likely find selling pressure on lumber futures.
N.Y. Cocoa-British Pound: London cocoa futures trading is as important (or even more important) than New York cocoa futures trading, on a worldwide basis. London cocoa futures trading is conducted in the British pound currency. Thus, big fluctuations in the pound sterling will impact the price of U.S. cocoa futures, due to the cross-currency fluctuations of the British pound versus the U.S. dollar. Keep in mind there is constantly arbitrage taking place between the New York and London cocoa markets, and thus the currency cross-rates between the pound and the dollar are very important.
Grains-U.S. Dollar Index: A weaker U.S. dollar will be an underlying positive for the U.S. grain futures markets because it makes U.S. grain exports more competitive (cheaper prices) on the world market. Larger-degree trends in the U.S. dollar will have a larger-degree impact on the grains.
Don't Hold Your Breath Too Long While Under Water
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The headline of this educational feature pertains not to swimming but to trading. Most professional traders do not hold onto their losing positions for very long. Once a trading position goes "under water" most professional traders will immediately begin looking for an exit strategy-if they do not already have one in place (and most do) via protective stops.
I had lunch with my trading mentor the other day and he shared a very good story with me. It went something like this: There once was a trader whose trading decisions were based upon using a "plumb-bob." (For those who have never worked on a construction site or in the land-surveying business, a plumb-bob is a turnip-shaped weight that is attached to a string to help determine if a structure is straight.) When this trader dangled the plumb-bob and it swung back and forth from north to south, he would buy. If the trader dangled the plumb-bob and it swung back and forth from east to west, he would sell. The trader had success using this methodology--with one simple rule applied: At the end of the first day, if his position was "under water," he exited his trade first thing the next trading day.
The moral of the story is: Traders can (and do) have all kinds of trading strategies, but prudent money management is paramount. In other words, cut losses short!
Over the years I have received emails and telephone calls from traders who were way "under water" and had not prudently liquidated their losing trading positions. These traders were "hoping" the markets would turn around and losses would be reversed. Any time a trader has losses which are so big that "hope" comes into play, it's usually a situation where prudent money management has not been employed.
It's also important to mention that traders who know they have waited way too long to exit a losing position should not think already-big losses can't get even bigger--much bigger. I've heard many traders say, "Well, I've lost so much already that now I might as well wait for the market to turn around because it can't go much farther against me." That's a recipe for disaster and potential financial ruin. This is where the saying, "Never meet a margin call" comes into play. If a trader gets a margin call from his or her broker, it's best just to close out the losing position and look for trading opportunities in other markets.
I've often mentioned the old trading adage: "A market will do anything and everything possible to frustrate the largest amount of traders." Guess who are the traders that get most frustrated? It's the ones who are hanging on to losing trading positions, waiting and hoping for the market to turn around so they can get their money back. "I just want to get back to even" is a desperate quote that comes from some traders who are under water. That "hope" is usually never realized.
One of the most interesting aspects of trading futures is that there are a few basic and effective rules that have been used by successful traders for years. However, adhering to these rules on a continual basis can be most difficult for many traders--including the experienced veterans. Why is this? It is because some of the most effective rules in futures trading go against the grain of human nature. Indeed, the "psychology of trading" plays such an important role in trading success.
Jim Wyckoff
I had lunch with my trading mentor the other day and he shared a very good story with me. It went something like this: There once was a trader whose trading decisions were based upon using a "plumb-bob." (For those who have never worked on a construction site or in the land-surveying business, a plumb-bob is a turnip-shaped weight that is attached to a string to help determine if a structure is straight.) When this trader dangled the plumb-bob and it swung back and forth from north to south, he would buy. If the trader dangled the plumb-bob and it swung back and forth from east to west, he would sell. The trader had success using this methodology--with one simple rule applied: At the end of the first day, if his position was "under water," he exited his trade first thing the next trading day.
The moral of the story is: Traders can (and do) have all kinds of trading strategies, but prudent money management is paramount. In other words, cut losses short!
Over the years I have received emails and telephone calls from traders who were way "under water" and had not prudently liquidated their losing trading positions. These traders were "hoping" the markets would turn around and losses would be reversed. Any time a trader has losses which are so big that "hope" comes into play, it's usually a situation where prudent money management has not been employed.
It's also important to mention that traders who know they have waited way too long to exit a losing position should not think already-big losses can't get even bigger--much bigger. I've heard many traders say, "Well, I've lost so much already that now I might as well wait for the market to turn around because it can't go much farther against me." That's a recipe for disaster and potential financial ruin. This is where the saying, "Never meet a margin call" comes into play. If a trader gets a margin call from his or her broker, it's best just to close out the losing position and look for trading opportunities in other markets.
I've often mentioned the old trading adage: "A market will do anything and everything possible to frustrate the largest amount of traders." Guess who are the traders that get most frustrated? It's the ones who are hanging on to losing trading positions, waiting and hoping for the market to turn around so they can get their money back. "I just want to get back to even" is a desperate quote that comes from some traders who are under water. That "hope" is usually never realized.
One of the most interesting aspects of trading futures is that there are a few basic and effective rules that have been used by successful traders for years. However, adhering to these rules on a continual basis can be most difficult for many traders--including the experienced veterans. Why is this? It is because some of the most effective rules in futures trading go against the grain of human nature. Indeed, the "psychology of trading" plays such an important role in trading success.
Jim Wyckoff
Seven Time-Tested Money Management Rules to Insure Survival over the Long Run
Sunday, October 21, 2007 - - 0 Comments
Articles Library | Money Management Articles | Written by Robert Colby |
Seven Time-Tested Money Management Rules to Insure Survival over the Long Run
1. Always Preserve Capital. Traders should limit loss to 1% of total capital for any one position.
2. Always trade in the direction of the larger trends, with the most emphasis on the Primary Tide that lasts many months or years. In a Bull Market, look only for opportunities to enter long and close long. In a Bear Market, look only for opportunities to enter short and close short.
3. Always use Actual Stops. Short-term traders should limit losses to a maximum 2% for each position. Longer-term traders and investors should limit losses to 7.2% on the long side and 8.4% on the short side for each position. (See my book, Swing Filter, pages 680-681, and Cycles, pages 178-179.)
4. Always exit losing positions before the close of the day for short-term Ripple traders (with a time horizon measured in days). Longer-term traders should also set a time stop appropriate to the cycle they are trying to capture, in order to avoid tying up capital in positions that are not moving as expected. (See my book, Cycles of Time and Price, pages 176-188.)
5. Always consider Bet Size and Diversification. Commit a maximum of 5% of total capital to any one position.
6. Always calculate your Reward/Risk Ratio. Enter a position only when your analysis indicates 3 points of potential reward for 1 point of risk.
7. Always take a time out from trading any time you lose 5% of your capital. This breaks bad momentum and limits negative spirals into deep holes. It gives us time to calmly reevaluate the situation. A few days off helps clear the head. A time out helps limit revenge trading. The desperate attempt to quickly make back the loss most often causes even more trouble.
Capital conservation should be the first rule in trading and investing. Capital takes time to accumulate, but it can disappear fast if the technical trading rules are not well known and respected. Beginners particularly would be well advised to take these rules to heart and to start trading only a small fraction of their capital using the minimum size orders until they acquire their real-time market education as inexpensively as possible. Ignore this, and the tuition could be substantial.
Seven Time-Tested Money Management Rules to Insure Survival over the Long Run
1. Always Preserve Capital. Traders should limit loss to 1% of total capital for any one position.
2. Always trade in the direction of the larger trends, with the most emphasis on the Primary Tide that lasts many months or years. In a Bull Market, look only for opportunities to enter long and close long. In a Bear Market, look only for opportunities to enter short and close short.
3. Always use Actual Stops. Short-term traders should limit losses to a maximum 2% for each position. Longer-term traders and investors should limit losses to 7.2% on the long side and 8.4% on the short side for each position. (See my book, Swing Filter, pages 680-681, and Cycles, pages 178-179.)
4. Always exit losing positions before the close of the day for short-term Ripple traders (with a time horizon measured in days). Longer-term traders should also set a time stop appropriate to the cycle they are trying to capture, in order to avoid tying up capital in positions that are not moving as expected. (See my book, Cycles of Time and Price, pages 176-188.)
5. Always consider Bet Size and Diversification. Commit a maximum of 5% of total capital to any one position.
6. Always calculate your Reward/Risk Ratio. Enter a position only when your analysis indicates 3 points of potential reward for 1 point of risk.
7. Always take a time out from trading any time you lose 5% of your capital. This breaks bad momentum and limits negative spirals into deep holes. It gives us time to calmly reevaluate the situation. A few days off helps clear the head. A time out helps limit revenge trading. The desperate attempt to quickly make back the loss most often causes even more trouble.
Capital conservation should be the first rule in trading and investing. Capital takes time to accumulate, but it can disappear fast if the technical trading rules are not well known and respected. Beginners particularly would be well advised to take these rules to heart and to start trading only a small fraction of their capital using the minimum size orders until they acquire their real-time market education as inexpensively as possible. Ignore this, and the tuition could be substantial.
Some Practical Thoughts About Money Management
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Articles Library | Money Management Articles | Written by Chuck LeBeau |
We get a lot of questions about various complex money management (MM) formulas and our preferences. We don't comment on this subject very often because money management is such a personal issue that it would be impossible to give any universal advice that would be specific enough to have value. Everyone seems to have different goals and tolerances for risk, not to mention varying amounts of capital for trading.
However we do have some basic thoughts and opinions that might be helpful in picking a suitable MM strategy that will help you to become a winner.
Be careful about trying to use formulas that are designed to optimize the returns. In my experience I have found that the most successful traders, over the long run, are not seeking to maximize their returns. The best traders are always seeking to carefully control their risks and to achieve as much consistency as possible. They look for methods to achieve consistent returns with low drawdowns and they are willing to accept smaller returns in the process. My policy has always been to worry about the risk and the consistency first and then to accept whatever returns that prudent approach will allow. I'm sure I will never win any trading contests and I have never bothered to enter one. In my opinion, no one should ever trade like the winner of a trading contest. I apologize for getting off on a different subject here. Lets get back on track and talk about trading in the only contest that matters - the trading that you do every day.
In recent years the strategy of risking a small percentage of capital on each trade has become quite popular and deservedly so. This MM strategy, often referred to as fixed fractional trading, reduces our dollar amount of risk as we experience losses and increases our risk level as we earn profits. The possibility of ever going to zero with such a strategy is virtually nonexistent. However this strategy has an inherent weakness that tends to constantly work against us. If we assume an equal number of winners or losers in a sequence this popular strategy produces net losses if the winners are not larger than the losers. To keep things very simple lets just look at a series of five wins followed by five losses with the wins being equal to the amount we risk. Lets also keep the math really simple and begin with starting capital of 100 and risk 5% of our current capital on each trade. I think that most traders would assume that if they had five losers followed by five winners they would be even. Unfortunately that is not the case.
Here are the numbers: Risk is always 5% of current capital. (I'm going to round the numbers to two decimals.)
Capital $ Risk W/L Account balance
100.0 5.00 L 95.00
95.00 4.75 L 90.25
90.25 4.51 L 85.74
85.74 4.29 L 81.45
81.45 4.07 L 77.38
OK we are already tired of losing. Let's have five winners in a row and see if we can get our money back.
Capital $ Risk W/L Account balance
77.38 3.87 W 81.25
81.25 4.06 W 85.31
85.31 4.27 W 89.58
89.58 4.48 W 94.06
94.06 4.70 W 98.76
As you can see we had an equal number of winners and losers yet somehow we lost money. Perhaps it is because we had bad luck and got started in the wrong direction. Lets reverse the sequence of trades so that we start out on a winning streak instead of losing. Maybe that will help.
Capital $ Risk W/L Account balance
100.00 5.00 W 105.00
105.00 5.25 W 110.25
110.25 5.51 W 115.76
115.76 5.79 W 121.55
121.55 6.08 W 127.63
Looks good so far. Starting off with winners looks much better than starting with losses. But now we have five losers coming up.
Capital $ Risk W/L Account balance
127.63 6.38 L 121.25
121.25 6.06 L 115.19
115.19 5.76 L 109.43
109.43 5.47 L 103.96
103.96 5.20 L 98.76
Hmmm. It doesn't seem to matter if we start out with a string of winners or a string of losses. Somehow we wound up losing the same amount of money either way.
Obviously we don't have a very good system at work here but it is not a losing system. With the proper MM strategy we should break even. Our winning trades are only equal to our risk and to have a winning system the winners need to be bigger than the losers. We are winning on only half of our trades and we would be profitable if we could win on more than half. Even though our system is not a good one you would think that it would at least be a breakeven proposition (we haven't included any costs) because the winners are always equal to the amount at risk and we win 50% of the time. That sounds like a breakeven system, doesn't it? But if we employ the popular money management strategy of risking a fixed percentage of our current capital we manage to turn the system into a loser. However, if we risked a fixed dollar amount on each trade the system results would improve and we would break even.
The fixed percentage of risk approach to MM is a good one because it keeps us from going broke and it compounds our profits rapidly. Both of those are desirable characteristics but we need to be aware that they come at a price. We should realize that our recovery from drawdowns might not be as fast as we would like and that we can give back profits even faster than we made them.
One strategy that can help solve the problem of giving back the profits too rapidly is to periodically sweep some of the profits out of the account and place them in some other place where they are adding to our diversification and reducing our risk. Now and then we should take some of the profits out and spend them on something that improves our quality of life. This important step gives the dollars at stake a new meaning and boosts our morale tremendously. What is the point of winning and losing and accumulating profits only to give them back at some later date? If we make it a practice to routinely sweep some of the profits our account will continue to grow but it will be compounding at a slower rate than if we left our profits at risk. However if we stumble into a losing streak we will be glad that we took out some of the profits and reduced our bet size.
If we are good traders and we make it a practice to withdraw some of our profits on a regular basis we will eventually reach the point where we have taken out more than we started with. There are very few traders, particularly in futures, who can claim that they have truly beaten the market. Until you have taken out more than you started with the market can still beat you. Trading futures is a zero sum game and winners are few and far between. Taking out profits now and then rather than getting carried away trying to optimize the gains to infinity is contrary to what is being taught these days. Everyone is obsessed with finding formulas to optimize the returns. We need to remember that the trader who has the optimum gains today could easily be tomorrow's biggest loser. That is a game we don't need to play.
I think we all need to take a step or two back and look at the big picture. Trading is not really just a game. The money is real. Lets make sure that we are true winners and not just habitual players. Take some profits now and then and put them out of harms way. When we have done this I can assure you that the game is a lot more fun and our trading will improve. Nothing builds confidence like knowing for sure that you are indeed a winner.
Good Luck and Good Trading
We get a lot of questions about various complex money management (MM) formulas and our preferences. We don't comment on this subject very often because money management is such a personal issue that it would be impossible to give any universal advice that would be specific enough to have value. Everyone seems to have different goals and tolerances for risk, not to mention varying amounts of capital for trading.
However we do have some basic thoughts and opinions that might be helpful in picking a suitable MM strategy that will help you to become a winner.
Be careful about trying to use formulas that are designed to optimize the returns. In my experience I have found that the most successful traders, over the long run, are not seeking to maximize their returns. The best traders are always seeking to carefully control their risks and to achieve as much consistency as possible. They look for methods to achieve consistent returns with low drawdowns and they are willing to accept smaller returns in the process. My policy has always been to worry about the risk and the consistency first and then to accept whatever returns that prudent approach will allow. I'm sure I will never win any trading contests and I have never bothered to enter one. In my opinion, no one should ever trade like the winner of a trading contest. I apologize for getting off on a different subject here. Lets get back on track and talk about trading in the only contest that matters - the trading that you do every day.
In recent years the strategy of risking a small percentage of capital on each trade has become quite popular and deservedly so. This MM strategy, often referred to as fixed fractional trading, reduces our dollar amount of risk as we experience losses and increases our risk level as we earn profits. The possibility of ever going to zero with such a strategy is virtually nonexistent. However this strategy has an inherent weakness that tends to constantly work against us. If we assume an equal number of winners or losers in a sequence this popular strategy produces net losses if the winners are not larger than the losers. To keep things very simple lets just look at a series of five wins followed by five losses with the wins being equal to the amount we risk. Lets also keep the math really simple and begin with starting capital of 100 and risk 5% of our current capital on each trade. I think that most traders would assume that if they had five losers followed by five winners they would be even. Unfortunately that is not the case.
Here are the numbers: Risk is always 5% of current capital. (I'm going to round the numbers to two decimals.)
Capital $ Risk W/L Account balance
100.0 5.00 L 95.00
95.00 4.75 L 90.25
90.25 4.51 L 85.74
85.74 4.29 L 81.45
81.45 4.07 L 77.38
OK we are already tired of losing. Let's have five winners in a row and see if we can get our money back.
Capital $ Risk W/L Account balance
77.38 3.87 W 81.25
81.25 4.06 W 85.31
85.31 4.27 W 89.58
89.58 4.48 W 94.06
94.06 4.70 W 98.76
As you can see we had an equal number of winners and losers yet somehow we lost money. Perhaps it is because we had bad luck and got started in the wrong direction. Lets reverse the sequence of trades so that we start out on a winning streak instead of losing. Maybe that will help.
Capital $ Risk W/L Account balance
100.00 5.00 W 105.00
105.00 5.25 W 110.25
110.25 5.51 W 115.76
115.76 5.79 W 121.55
121.55 6.08 W 127.63
Looks good so far. Starting off with winners looks much better than starting with losses. But now we have five losers coming up.
Capital $ Risk W/L Account balance
127.63 6.38 L 121.25
121.25 6.06 L 115.19
115.19 5.76 L 109.43
109.43 5.47 L 103.96
103.96 5.20 L 98.76
Hmmm. It doesn't seem to matter if we start out with a string of winners or a string of losses. Somehow we wound up losing the same amount of money either way.
Obviously we don't have a very good system at work here but it is not a losing system. With the proper MM strategy we should break even. Our winning trades are only equal to our risk and to have a winning system the winners need to be bigger than the losers. We are winning on only half of our trades and we would be profitable if we could win on more than half. Even though our system is not a good one you would think that it would at least be a breakeven proposition (we haven't included any costs) because the winners are always equal to the amount at risk and we win 50% of the time. That sounds like a breakeven system, doesn't it? But if we employ the popular money management strategy of risking a fixed percentage of our current capital we manage to turn the system into a loser. However, if we risked a fixed dollar amount on each trade the system results would improve and we would break even.
The fixed percentage of risk approach to MM is a good one because it keeps us from going broke and it compounds our profits rapidly. Both of those are desirable characteristics but we need to be aware that they come at a price. We should realize that our recovery from drawdowns might not be as fast as we would like and that we can give back profits even faster than we made them.
One strategy that can help solve the problem of giving back the profits too rapidly is to periodically sweep some of the profits out of the account and place them in some other place where they are adding to our diversification and reducing our risk. Now and then we should take some of the profits out and spend them on something that improves our quality of life. This important step gives the dollars at stake a new meaning and boosts our morale tremendously. What is the point of winning and losing and accumulating profits only to give them back at some later date? If we make it a practice to routinely sweep some of the profits our account will continue to grow but it will be compounding at a slower rate than if we left our profits at risk. However if we stumble into a losing streak we will be glad that we took out some of the profits and reduced our bet size.
If we are good traders and we make it a practice to withdraw some of our profits on a regular basis we will eventually reach the point where we have taken out more than we started with. There are very few traders, particularly in futures, who can claim that they have truly beaten the market. Until you have taken out more than you started with the market can still beat you. Trading futures is a zero sum game and winners are few and far between. Taking out profits now and then rather than getting carried away trying to optimize the gains to infinity is contrary to what is being taught these days. Everyone is obsessed with finding formulas to optimize the returns. We need to remember that the trader who has the optimum gains today could easily be tomorrow's biggest loser. That is a game we don't need to play.
I think we all need to take a step or two back and look at the big picture. Trading is not really just a game. The money is real. Lets make sure that we are true winners and not just habitual players. Take some profits now and then and put them out of harms way. When we have done this I can assure you that the game is a lot more fun and our trading will improve. Nothing builds confidence like knowing for sure that you are indeed a winner.
Good Luck and Good Trading
I See The Future And The Successful Trader Is Me!
Monday, October 15, 2007 - - 0 Comments
"Mental Fitness for Traders" Series Article Six
Believe it or not, it's true what they say …
Visualizing your future the way you want it, is much more likely to make that future a reality.
I'm a "doubter" by nature and this notion of visualizing didn't really make much sense to me when I heard about it the first hundred times.
I mean, come on!
Sit in a quiet place and wish and hope and pray and all your dreams will come true? I think not. That's what my mathematician brain told me (University of Cincinnati, 1973, BA Mathematics).
Then I met a subconscious trainer (whom I later married), who sat me down and stated, "Thoughts are things."
OK, what kind of things?
I've seen Kreskin and other guys bending spoons with their thoughts… it that what she means?
Rather than give you the entire exchange of words (I don't know that I remember all of them, as I was falling in love while I was listening), I'll give you the capsule.
According to her, there is this stream of consciousness somewhere up there that you can plug into, and then, by directing your thoughts, you can harness this consciousness somehow to get what you want (as long as what you want is positive… you can't wish someone a losing trade!).
This, combined with the notion that time, as we know it, is not linear, we can affect the future from the present through this universal consciousness!
That's all I'll say about that.
Excuse me while I hug a tree…
I'm back.
I don't know that I understand all of this, let alone believe it, but I'll tell you one thing I DO KNOW…
If you get your brain into an alpha brain wave state and you tell yourself (of have someone else suggest to you) what you'd like to happen in the future, say, the picture of you as a successful trader… you WILL head in the direction of that picture you've created in your head.
At least that's what happened to me, and just about every successful trader I know.
There are different ways to visualize. During a quiet time (I know You can't imagine any quiet time… so start while seated in the bathroom), …
Now, just see yourself living the "Life of Riley" (am I showing my age… for those of you that don't recognize that phase, it means "the good life) and having people around you recognize you as that successful trader whom everybody is talking about.
You can move up the effectiveness ladder (get off the pot?) as you get used to the notion of visualization and get more and moreaffective with your thinking, but the idea is to get started.
Once you start creating pictures of the money-bulging-pocketed-successful-trader-you, you will actually become less likely to allow your emotions to lead you to trading mistakes… because…"doing the wrong thing", like pulling your stops when the market comes close to them, or not taking your profit when your system tells you to, becomes inconsistent with your picture of who you are.
Eventually, if you keep up your visualizations, you become that picture.
Now THAT makes sense!
Norman Hallett, was a very successful Trader/CTA for 21 years and is currently the President of Subconscious Training Corporation in Parkland, Florida. "TradingMind Software" is one of his company's most respected software titles
Believe it or not, it's true what they say …
Visualizing your future the way you want it, is much more likely to make that future a reality.
I'm a "doubter" by nature and this notion of visualizing didn't really make much sense to me when I heard about it the first hundred times.
I mean, come on!
Sit in a quiet place and wish and hope and pray and all your dreams will come true? I think not. That's what my mathematician brain told me (University of Cincinnati, 1973, BA Mathematics).
Then I met a subconscious trainer (whom I later married), who sat me down and stated, "Thoughts are things."
OK, what kind of things?
I've seen Kreskin and other guys bending spoons with their thoughts… it that what she means?
Rather than give you the entire exchange of words (I don't know that I remember all of them, as I was falling in love while I was listening), I'll give you the capsule.
According to her, there is this stream of consciousness somewhere up there that you can plug into, and then, by directing your thoughts, you can harness this consciousness somehow to get what you want (as long as what you want is positive… you can't wish someone a losing trade!).
This, combined with the notion that time, as we know it, is not linear, we can affect the future from the present through this universal consciousness!
That's all I'll say about that.
Excuse me while I hug a tree…
I'm back.
I don't know that I understand all of this, let alone believe it, but I'll tell you one thing I DO KNOW…
If you get your brain into an alpha brain wave state and you tell yourself (of have someone else suggest to you) what you'd like to happen in the future, say, the picture of you as a successful trader… you WILL head in the direction of that picture you've created in your head.
At least that's what happened to me, and just about every successful trader I know.
There are different ways to visualize. During a quiet time (I know You can't imagine any quiet time… so start while seated in the bathroom), …
Now, just see yourself living the "Life of Riley" (am I showing my age… for those of you that don't recognize that phase, it means "the good life) and having people around you recognize you as that successful trader whom everybody is talking about.
You can move up the effectiveness ladder (get off the pot?) as you get used to the notion of visualization and get more and moreaffective with your thinking, but the idea is to get started.
Once you start creating pictures of the money-bulging-pocketed-successful-trader-you, you will actually become less likely to allow your emotions to lead you to trading mistakes… because…"doing the wrong thing", like pulling your stops when the market comes close to them, or not taking your profit when your system tells you to, becomes inconsistent with your picture of who you are.
Eventually, if you keep up your visualizations, you become that picture.
Now THAT makes sense!
Norman Hallett, was a very successful Trader/CTA for 21 years and is currently the President of Subconscious Training Corporation in Parkland, Florida. "TradingMind Software" is one of his company's most respected software titles
Develop a System that Fits You.
Thursday, October 11, 2007 - - 0 Comments
by : Van K. Tharp, Ph.D.
My book, Trade Your Way to Financial Freedom, is all about the subject of system development. It's about constructing a system that fits you, and then testing that system so that you have confidence in it. Confidence in your system is a part of having faith. Following is a quote from the conclusion of the book in which I was having a conversation.
"Nothing is exact. You can never know how it will really turn out. Instead, trading is very much a game of discipline, of being in touch with the flow of the markets, and of being able to capitalize upon that flow. People who can do that can make a lot of money in the markets.
Why test at all?
"So you can get an understanding of what works and what doesn't work. You shouldn't believe everything I've told you. Instead, you need to prove to yourself that something is true. When something seems reasonably true, then you can develop some confidence in using it. You must have that confidence or you'll be lost when are dealing with the markets.
"You probably cannot be exact. But no science is exact. People used to think that physics was exact, but now we know that the very act of measuring something changes the nature of the observation. Whatever it is, you are a part of it. You cannot help that because it probably is the nature of reality. And it again illustrates my point about the search for the Holy Grail System being an inner search."- page 317
Faith is empowerment. The primary source of faith is from God. This involves opening up your heart and mind to your spiritual nature. It is tuning into the God Presence within you. When you realize that an Infinite Presence is the source of your faith, it gives your faith real power. Your system is not the source of your abundance or of your trading success-the God Presence within you is the source of that success. Understanding and truly believing that principle is the basis of real faith.
Now when I talk about God, I’m dealing with spiritual beliefs. These beliefs are at the core of most human beings (even when you think you don’t believe in God) and who they are. People fight wars over spiritual beliefs. They fly airplanes into buildings over spiritual beliefs. Thus, I know I’m treating on sensitive ground here. However, if you don’t like the way I’ve phrased the beliefs, then rephrase them to fit your own beliefs. The beliefs I’m giving you are very useful if you use them and apply them. With that said, let’s go on.
When you have confidence in that God Presence assisting you, then you'll begin to develop a lot more confidence in yourself. Lastly, when you develop confidence in yourself, then you'll develop extensive confidence in your system and your ability to make money from your system. However, none of this works as real faith without thoroughly understanding the Source of everything.
Assignment for the Week:
Spend 20 minutes meditating each day. At the beginning of that meditation, affirm your source. You might say something like,
"God's magnificence is empowering me now. It is closer to me than my breath. It fills me with Love, Abundance, and all that I desire. I know that it is the Source of All my Good and I give thanks for Its Presence."
Repeat the thought several times until it becomes a part of you and then spend 20 minutes in silence. If you become distracted, simply repeat the thought.
When you trade, remember the Source of your abundance and have faith in that source. Remember that the God Presence within You is your Source, not the next trade. Notice what impact this thought has upon your trading.
Much success to you and let me know about your experiences in practicing this all-important principle.
My book, Trade Your Way to Financial Freedom, is all about the subject of system development. It's about constructing a system that fits you, and then testing that system so that you have confidence in it. Confidence in your system is a part of having faith. Following is a quote from the conclusion of the book in which I was having a conversation.
"Nothing is exact. You can never know how it will really turn out. Instead, trading is very much a game of discipline, of being in touch with the flow of the markets, and of being able to capitalize upon that flow. People who can do that can make a lot of money in the markets.
Why test at all?
"So you can get an understanding of what works and what doesn't work. You shouldn't believe everything I've told you. Instead, you need to prove to yourself that something is true. When something seems reasonably true, then you can develop some confidence in using it. You must have that confidence or you'll be lost when are dealing with the markets.
"You probably cannot be exact. But no science is exact. People used to think that physics was exact, but now we know that the very act of measuring something changes the nature of the observation. Whatever it is, you are a part of it. You cannot help that because it probably is the nature of reality. And it again illustrates my point about the search for the Holy Grail System being an inner search."- page 317
Faith is empowerment. The primary source of faith is from God. This involves opening up your heart and mind to your spiritual nature. It is tuning into the God Presence within you. When you realize that an Infinite Presence is the source of your faith, it gives your faith real power. Your system is not the source of your abundance or of your trading success-the God Presence within you is the source of that success. Understanding and truly believing that principle is the basis of real faith.
Now when I talk about God, I’m dealing with spiritual beliefs. These beliefs are at the core of most human beings (even when you think you don’t believe in God) and who they are. People fight wars over spiritual beliefs. They fly airplanes into buildings over spiritual beliefs. Thus, I know I’m treating on sensitive ground here. However, if you don’t like the way I’ve phrased the beliefs, then rephrase them to fit your own beliefs. The beliefs I’m giving you are very useful if you use them and apply them. With that said, let’s go on.
When you have confidence in that God Presence assisting you, then you'll begin to develop a lot more confidence in yourself. Lastly, when you develop confidence in yourself, then you'll develop extensive confidence in your system and your ability to make money from your system. However, none of this works as real faith without thoroughly understanding the Source of everything.
Assignment for the Week:
Spend 20 minutes meditating each day. At the beginning of that meditation, affirm your source. You might say something like,
"God's magnificence is empowering me now. It is closer to me than my breath. It fills me with Love, Abundance, and all that I desire. I know that it is the Source of All my Good and I give thanks for Its Presence."
Repeat the thought several times until it becomes a part of you and then spend 20 minutes in silence. If you become distracted, simply repeat the thought.
When you trade, remember the Source of your abundance and have faith in that source. Remember that the God Presence within You is your Source, not the next trade. Notice what impact this thought has upon your trading.
Much success to you and let me know about your experiences in practicing this all-important principle.
myLot User Profile
Forget Gurus… Your Experiences Are The ONLY Ones That Count
Friday, October 5, 2007 - - 0 Comments
by Norman Hallett
You read about the Gurus of trading.
There's a group of them that started with their last few dollars and ran it up to millions because of a simple strategy they can teach you.
There's another group of Gurus that claim hard work, long study and signing up for their newsletter will lead you to where you want to go.
All Gurus want you to "learn from their mistakes."
They ask, "Why should you make all the mistakes I've made, when you can benefit from my experiences?"
Now being somewhat of a Guru myself, I think there IS a certain truth to this query, but not the way you probably think.
Other trader's experiences can make you aware of what to expect as you embark upon your trading.
Knowing what to expect should translate into having less "blindside" occurrences.
However, when you come across the forewarned learning experience, emotions will come up. These emotional situations (fear, overconfidence, freezing) are up to YOU to handle.
Here, if your going to be a successful trader, is where the learning takes place… in dealing with your emotions so that you can follow your trading plan.
If you blow the situation, your supposed learn from it and go on.
And learn from it, you must... or even the best trading system won't save you from doom.
Your Mental Toughness is going to be the key to whether you make it or break it as a trader. I know of two MAJOR things that you can do to develop your Mental Toughness for trading.
The first is to keep a Journal.
I know that sounds like work, and who wants more paperwork at the end of the trading day?
However, soon after you force yourself to start writing down your day's trading experiences, you will see the power of the technique.
It becomes the place where you will be honest with yourself. You'll find after just a week or so of keeping a Journal of your trading experiences, mistakes and all… especially mistakes… that when you are confronted with a trading situation that you blew before… in the back of your head you'll knoq that if you do the same stupid thing again you're going to have to report it to yourself… in your Journal… and…THAT will give you the strength to "do the right thing."
That's the power of keeping a Journal.
Whether you just buy a spiral notebook (like I do) and start writing, or you make it a religious experience and buy something leather-bound…
You will find that the discipline of keeping a journal, is a practice that will flat-out make you a better trader.
The other way to get Mentally Tough is to train your mind with as much intention as exibit when you test and run your trading system.
There are a few psychologists I've bumped into over the years that seem to have enough of a handle on what training is … so they may be qualified to help a trader.
But I prefer the process of literally programming the mind for discipline and focus, via putting the mind in an alpha brainwave state and then submitting the right suggestions to it.
If you were to learn the simple rudiments of self-hypnosis, that, in my opinion, would be a great way to go.
This way you could tell yourself exactly what you wanted!
This is what Tiger Woods does for his golf game. Why not do something similar with your trading?
Mental Toughness is my business.
Make it part of yours.
Keep a journal. Feed your mind.
There's a group of them that started with their last few dollars and ran it up to millions because of a simple strategy they can teach you.
There's another group of Gurus that claim hard work, long study and signing up for their newsletter will lead you to where you want to go.
All Gurus want you to "learn from their mistakes."
They ask, "Why should you make all the mistakes I've made, when you can benefit from my experiences?"
Now being somewhat of a Guru myself, I think there IS a certain truth to this query, but not the way you probably think.
Other trader's experiences can make you aware of what to expect as you embark upon your trading.
Knowing what to expect should translate into having less "blindside" occurrences.
However, when you come across the forewarned learning experience, emotions will come up. These emotional situations (fear, overconfidence, freezing) are up to YOU to handle.
Here, if your going to be a successful trader, is where the learning takes place… in dealing with your emotions so that you can follow your trading plan.
If you blow the situation, your supposed learn from it and go on.
And learn from it, you must... or even the best trading system won't save you from doom.
Your Mental Toughness is going to be the key to whether you make it or break it as a trader. I know of two MAJOR things that you can do to develop your Mental Toughness for trading.
The first is to keep a Journal.
I know that sounds like work, and who wants more paperwork at the end of the trading day?
However, soon after you force yourself to start writing down your day's trading experiences, you will see the power of the technique.
It becomes the place where you will be honest with yourself. You'll find after just a week or so of keeping a Journal of your trading experiences, mistakes and all… especially mistakes… that when you are confronted with a trading situation that you blew before… in the back of your head you'll knoq that if you do the same stupid thing again you're going to have to report it to yourself… in your Journal… and…THAT will give you the strength to "do the right thing."
That's the power of keeping a Journal.
Whether you just buy a spiral notebook (like I do) and start writing, or you make it a religious experience and buy something leather-bound…
You will find that the discipline of keeping a journal, is a practice that will flat-out make you a better trader.
The other way to get Mentally Tough is to train your mind with as much intention as exibit when you test and run your trading system.
There are a few psychologists I've bumped into over the years that seem to have enough of a handle on what training is … so they may be qualified to help a trader.
But I prefer the process of literally programming the mind for discipline and focus, via putting the mind in an alpha brainwave state and then submitting the right suggestions to it.
If you were to learn the simple rudiments of self-hypnosis, that, in my opinion, would be a great way to go.
This way you could tell yourself exactly what you wanted!
This is what Tiger Woods does for his golf game. Why not do something similar with your trading?
Mental Toughness is my business.
Make it part of yours.
Keep a journal. Feed your mind.
Enjoying Your Trading
- - 0 Comments
Written by Jay Lakhani
At Bindal FX, we believe that 90% of trades lose money, It is not that they do not know the strategies or are not aware of the iron-clad trades that they see.
The reason most traders fail, is because of their psychology and not having a correct mindset.. In the E Course, we cover most areas of the Trading Psychology, such as Fear, Discipline, Having a Trading Plan and so on.
Every week we will cover, important areas of Psychology that will help the trader in his quest for profits.
Enjoying Your Trading
Trading requires commitment and persistence. One must build up skills to the point that a trade can be executed effortlessly, with precision, over and over again. It is essential to enjoy trading and trade because it is your passion. The profits should be less important than the fulfillment that trading offers.
You’ve got to want to trade with a passion. If you worry about profits, you’ll never make them. You will want to leave the game before you’ve really started. Sure, you can make a few winning trades, but it’s trading consistently, and over the long haul, that really matters. And that requires commitment, the kind of dedication that is rare.
Rather than considering how trading profits can change your life, focus on how enjoyable the process of trading is. It’s fun; it’s challenging; and when you devote enough time and energy to it, it can be fulfilling.
You should always commit yourself on a regular basis to learn about trading, Repetition is the mother of all skills.
Professional traders put in much less time and effort. And more important, they make huge profits, You know exactly where you stand, and that’s one of the biggest advantages of trading for a living.
Keeping this advantage in mind will help motivate you to continue improving your trading skills until you master the markets.
The only expectations you need to satisfy are your own, and you can set those expectations to suit your needs. It’s just you, the markets, and no one else. You have complete freedom, and if you can develop winning trading strategies, you will receive immediate rewards with no professional obligations. Almost no other profession offers such freedom. So when you are scouring over charts, and spending long hours honing your trading skills, motivate yourself by remembering that trading offers clear and immediate payoffs.
At Bindal FX, we believe that 90% of trades lose money, It is not that they do not know the strategies or are not aware of the iron-clad trades that they see.
The reason most traders fail, is because of their psychology and not having a correct mindset.. In the E Course, we cover most areas of the Trading Psychology, such as Fear, Discipline, Having a Trading Plan and so on.
Every week we will cover, important areas of Psychology that will help the trader in his quest for profits.
Enjoying Your Trading
Trading requires commitment and persistence. One must build up skills to the point that a trade can be executed effortlessly, with precision, over and over again. It is essential to enjoy trading and trade because it is your passion. The profits should be less important than the fulfillment that trading offers.
You’ve got to want to trade with a passion. If you worry about profits, you’ll never make them. You will want to leave the game before you’ve really started. Sure, you can make a few winning trades, but it’s trading consistently, and over the long haul, that really matters. And that requires commitment, the kind of dedication that is rare.
Rather than considering how trading profits can change your life, focus on how enjoyable the process of trading is. It’s fun; it’s challenging; and when you devote enough time and energy to it, it can be fulfilling.
You should always commit yourself on a regular basis to learn about trading, Repetition is the mother of all skills.
Professional traders put in much less time and effort. And more important, they make huge profits, You know exactly where you stand, and that’s one of the biggest advantages of trading for a living.
Keeping this advantage in mind will help motivate you to continue improving your trading skills until you master the markets.
The only expectations you need to satisfy are your own, and you can set those expectations to suit your needs. It’s just you, the markets, and no one else. You have complete freedom, and if you can develop winning trading strategies, you will receive immediate rewards with no professional obligations. Almost no other profession offers such freedom. So when you are scouring over charts, and spending long hours honing your trading skills, motivate yourself by remembering that trading offers clear and immediate payoffs.
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