25 RULES OF FOREX TRADING DICIPLINE (PART 3)
#11 - #15
#11 THE FIRST LOSS IS THE BEST LOSS.
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.
3812 Cedar Heights Drive Cedar Falls , IA 50613
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)
(#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)
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?
Whether trading stocks, futures, options or FX, traders confront the single most important question: to trade trend or range? And they answer this question by assessing the price environment; doing so accurately greatly enhances a trader's chance of success. Trend or range are two distinct price properties requiring almost diametrically opposed mindsets and money-management techniques. Fortunately, the FX market is uniquely suited to accommodate both styles, providing trend and range traders with opportunities for profit. Since trend trading is far more popular, let's first examine how trend traders can benefit from FX.
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.
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.
British Pound Rises Versus Euro as BOE Lifts Inflation Forecast
By Kim-Mai Cutler
Feb. 13 (Bloomberg) -- The pound climbed to a two-week high against the euro after the Bank of England raised its inflation forecast, prompting traders to pare bets on interest-rate cuts.
Britain's currency also traded near the highest level in a week versus the dollar after the central bank forecast in its quarterly inflation report today that price growth will overshoot its 2 percent goal in two years even as ``downside'' risks to the economy remain. The pound also gained as a government report showed unemployment fell to a three-decade low in January.
``Sterling rallied because the market is going to focus on slightly higher rate expectations,'' said Adrian Schmidt, a London-based senior foreign-exchange strategist at Royal Bank of Scotland Group Plc, the fourth-largest currency trader. ``But they've also talked about downside risks for growth.''
The pound climbed to 74.15 pence per euro, the strongest since Jan. 30, and was at 74.28 pence by 4:39 p.m. in London, from 74.41 pence yesterday. It rose to $1.9655, the highest level since Feb. 6, before trading little changed at $1.9611.
It's ``odds on'' inflation will exceed 3 percent, Bank of England Governor Mervyn King said at a press conference in London today after publishing the report. Still, he said he expects a ``marked slowing'' in growth.
The central bank based the forecasts on expectations the benchmark interest rate will fall three quarters of a percentage point to 4.5 percent by year-end.
U.K. Inflation
Inflation expectations climbed to a five-month high today. The yield difference, or breakeven rate, between two-year U.K. nominal bonds and inflation-protected notes of the same maturity rose 8 basis points to 3.45 percentage points, the widest spread since September. The difference represents the inflation rate that's expected over the life of the securities.
Inflation accelerated to a seven-month high last month, the Office for National Statistics said yesterday. Still, the rate was lower than economists forecast as discounting by fashion stores blunted the impact of rising gasoline and food costs.
Claims for jobless benefits in Britain dropped 10,800 from December to 794,600, the lowest since June 1975, a government report showed today. The decline was more than double the 5,000 median forecast in a Bloomberg News survey of 28 economists. The jobless rate stayed at 2.5 percent.
Britain's currency pared gains against the dollar, and gilts dropped, after a U.S. government report showed retail sales in the world's largest economy unexpectedly rose in January.
The 0.3 percent increase followed a 0.4 percent decline the month before, the Commerce Department said in Washington. It was a sign consumer buying, which accounts for the biggest part of the economy, is holding up even as a housing slump deepens.
Gilts Decline
Two-year U.K. government note yields rose 2 basis points to 4.27 percent. The price on the 5.75 percent security due December 2009 lost 0.03, or 30 pence per 1,000-pound ($1,962) face amount, to 102.56. Ten-year gilt yields climbed 2 basis points to 4.62 percent. Yields move inversely to bond prices.
Government bonds will advance for the next six months in the world's biggest debt markets, including the U.K., as the U.S. economic slowdown spreads to Europe and Asia, a survey of Bloomberg users showed.
Bonds will rally in the U.S., Germany, U.K., Italy, France, Japan and Hong Kong, according to the monthly Bloomberg Professional Global Confidence Index, which canvassed more than 6,800 users from New York to Paris to Tokyo.
Policy makers lowered the U.K.'s main rate a half-percentage point to 5.25 percent since December and are weighing the need for a third cut to boost Europe's second-biggest economy. The Federal Reserve reduced its benchmark rate by 1.25 percentage points this year, the fastest pace since 1990.
Rate Expectations
Britain's central bank will lower the rate to 4.75 percent by midyear and to 4.5 percent by the first quarter of 2009, according to the weighted average of 20 forecasts in a Bloomberg survey of analysts.
The chances of a 25 basis-point cut at the March 7 policy meeting have halved this week, to 14 percent, according to a Credit Suisse Group index of probability based on overnight indexed swap rates.
The implied yield on the December sterling futures contract has risen 11 basis points this week to 4.65 percent, the highest level for two weeks, as traders reduced wagers on lower U.K. borrowing costs.
Feb. 13 (Bloomberg) -- The pound climbed to a two-week high against the euro after the Bank of England raised its inflation forecast, prompting traders to pare bets on interest-rate cuts.
Britain's currency also traded near the highest level in a week versus the dollar after the central bank forecast in its quarterly inflation report today that price growth will overshoot its 2 percent goal in two years even as ``downside'' risks to the economy remain. The pound also gained as a government report showed unemployment fell to a three-decade low in January.
``Sterling rallied because the market is going to focus on slightly higher rate expectations,'' said Adrian Schmidt, a London-based senior foreign-exchange strategist at Royal Bank of Scotland Group Plc, the fourth-largest currency trader. ``But they've also talked about downside risks for growth.''
The pound climbed to 74.15 pence per euro, the strongest since Jan. 30, and was at 74.28 pence by 4:39 p.m. in London, from 74.41 pence yesterday. It rose to $1.9655, the highest level since Feb. 6, before trading little changed at $1.9611.
It's ``odds on'' inflation will exceed 3 percent, Bank of England Governor Mervyn King said at a press conference in London today after publishing the report. Still, he said he expects a ``marked slowing'' in growth.
The central bank based the forecasts on expectations the benchmark interest rate will fall three quarters of a percentage point to 4.5 percent by year-end.
U.K. Inflation
Inflation expectations climbed to a five-month high today. The yield difference, or breakeven rate, between two-year U.K. nominal bonds and inflation-protected notes of the same maturity rose 8 basis points to 3.45 percentage points, the widest spread since September. The difference represents the inflation rate that's expected over the life of the securities.
Inflation accelerated to a seven-month high last month, the Office for National Statistics said yesterday. Still, the rate was lower than economists forecast as discounting by fashion stores blunted the impact of rising gasoline and food costs.
Claims for jobless benefits in Britain dropped 10,800 from December to 794,600, the lowest since June 1975, a government report showed today. The decline was more than double the 5,000 median forecast in a Bloomberg News survey of 28 economists. The jobless rate stayed at 2.5 percent.
Britain's currency pared gains against the dollar, and gilts dropped, after a U.S. government report showed retail sales in the world's largest economy unexpectedly rose in January.
The 0.3 percent increase followed a 0.4 percent decline the month before, the Commerce Department said in Washington. It was a sign consumer buying, which accounts for the biggest part of the economy, is holding up even as a housing slump deepens.
Gilts Decline
Two-year U.K. government note yields rose 2 basis points to 4.27 percent. The price on the 5.75 percent security due December 2009 lost 0.03, or 30 pence per 1,000-pound ($1,962) face amount, to 102.56. Ten-year gilt yields climbed 2 basis points to 4.62 percent. Yields move inversely to bond prices.
Government bonds will advance for the next six months in the world's biggest debt markets, including the U.K., as the U.S. economic slowdown spreads to Europe and Asia, a survey of Bloomberg users showed.
Bonds will rally in the U.S., Germany, U.K., Italy, France, Japan and Hong Kong, according to the monthly Bloomberg Professional Global Confidence Index, which canvassed more than 6,800 users from New York to Paris to Tokyo.
Policy makers lowered the U.K.'s main rate a half-percentage point to 5.25 percent since December and are weighing the need for a third cut to boost Europe's second-biggest economy. The Federal Reserve reduced its benchmark rate by 1.25 percentage points this year, the fastest pace since 1990.
Rate Expectations
Britain's central bank will lower the rate to 4.75 percent by midyear and to 4.5 percent by the first quarter of 2009, according to the weighted average of 20 forecasts in a Bloomberg survey of analysts.
The chances of a 25 basis-point cut at the March 7 policy meeting have halved this week, to 14 percent, according to a Credit Suisse Group index of probability based on overnight indexed swap rates.
The implied yield on the December sterling futures contract has risen 11 basis points this week to 4.65 percent, the highest level for two weeks, as traders reduced wagers on lower U.K. borrowing costs.
Keeping Some Fire Power In Reserve
Written by Robert W. Colby
Reserves are funds in our account that are held back from trading, and usually parked safely on the sidelines in risk-less money-market instruments. The effect of holding reserves is to reduce net leverage. A workable rule of thumb that has evolved over time out of the real-world trading arena is to limit net leverage to 30%.
To see how reserves, leverage and net leverage work together, employ the following formulas:
Reserves = 100% - (Net Leverage / Leverage)
Net Leverage = Leverage * (100% - Reserves)
Leverage = Net Leverage / (100% - Reserves)
where
Reserves are cash or cash equivalents held back on the sidelines.
We can solve these equations to find any of these numbers. For example, for a stock position where initial margin and leverage are both 50% and net leverage is held to 30%:
Reserves = 100% - ( 30% / 50% ) = 1 - 3/5 = 1.00 - 0.60 = 0.40 = 40%
For stocks, if we deposit initial margin of 70% into our account and confine our use of net leverage to 30%, as recommended, then
Reserves = 100% - (30%/30%) = 1 - 3/3 = 1.00 - 1.00 = 0%
If we entered a futures position using 75% leverage (and, of course, putting up 25% initial margin, which represents 100% minus the 75% leverage), and if the total value of this position amounted to only 40% of our available trading capital (therefore, we are holding back 60% of our trading capital in reserves on the sidelines), then the net leverage would be reduced proportionately to 30% (that is, 75% times 40%). Using the second formula,
Net Leverage = Leverage * (100% - Reserves)
Net Leverage = 75% * (100% - 60%) = .075 * 0.40 = 30%
Again using industry standard (and quite reasonable) rules of thumb, if we wish to keep net leverage at 30% while holding 60% of our capital in reserve, we can put up 25% margin for each contract, and therefore employ 75% leverage for each contract. Thus, using the third formula,
Leverage = Net Leverage / (100% - Reserves) = 30% / (100% - 60%) = 75%
It has long been known that money management is the most critical consideration in trading and investing. Money management includes the prudent use of leverage. Sound rules and disciplines allow success to accumulate while minimizing the risk of ruin.
Reserves are funds in our account that are held back from trading, and usually parked safely on the sidelines in risk-less money-market instruments. The effect of holding reserves is to reduce net leverage. A workable rule of thumb that has evolved over time out of the real-world trading arena is to limit net leverage to 30%.
To see how reserves, leverage and net leverage work together, employ the following formulas:
Reserves = 100% - (Net Leverage / Leverage)
Net Leverage = Leverage * (100% - Reserves)
Leverage = Net Leverage / (100% - Reserves)
where
Reserves are cash or cash equivalents held back on the sidelines.
We can solve these equations to find any of these numbers. For example, for a stock position where initial margin and leverage are both 50% and net leverage is held to 30%:
Reserves = 100% - ( 30% / 50% ) = 1 - 3/5 = 1.00 - 0.60 = 0.40 = 40%
For stocks, if we deposit initial margin of 70% into our account and confine our use of net leverage to 30%, as recommended, then
Reserves = 100% - (30%/30%) = 1 - 3/3 = 1.00 - 1.00 = 0%
If we entered a futures position using 75% leverage (and, of course, putting up 25% initial margin, which represents 100% minus the 75% leverage), and if the total value of this position amounted to only 40% of our available trading capital (therefore, we are holding back 60% of our trading capital in reserves on the sidelines), then the net leverage would be reduced proportionately to 30% (that is, 75% times 40%). Using the second formula,
Net Leverage = Leverage * (100% - Reserves)
Net Leverage = 75% * (100% - 60%) = .075 * 0.40 = 30%
Again using industry standard (and quite reasonable) rules of thumb, if we wish to keep net leverage at 30% while holding 60% of our capital in reserve, we can put up 25% margin for each contract, and therefore employ 75% leverage for each contract. Thus, using the third formula,
Leverage = Net Leverage / (100% - Reserves) = 30% / (100% - 60%) = 75%
It has long been known that money management is the most critical consideration in trading and investing. Money management includes the prudent use of leverage. Sound rules and disciplines allow success to accumulate while minimizing the risk of ruin.
How To Increase Forex Profits 100% in 10 Minutes
Forex Articles | Written by Jimmy Young |
This simple exercise will increase Forex profits 100% and works for 99% of all short-term FX traders - stop trading so much - widen out your stops - widen out your profit targets - and only trade in the direction of the trend indicated by 4 hour chart.
1) Stop trading so much
Sure there are no commissions but the spreads are HUGE and believe it or not (well you'll believe it after you do the simple exercise below) the spreads are reducing your profits 100%!
2) Widen out your stops
Initial stop loss should be a minimum of 23 points; I use between 23 and 35 point stop losses for short-term trading.
3) Widen out your profit targets
Unless you think a trade can make you 100 points or more don't do it.
4) Only trade in the direction of the 4 hour chart
The real money is made in the direction of the trend
Simple exercise
1) Download all your trades for the year into an excel spreadsheet (if you don't know how to do this ask your broker for help).
2) Determine the dollar value of the spread for each trade.
3) Sum up the total dollar value of all spreads for all trades and add this number it to your current account balance; this is your spread adjusted account balance.
4) Take your spread adjusted current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
5) Take your actual current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
6) Subtract your spread adjusted year to date percentage change from your actual year to date percentage change.
7) That number should be 100% or more
8) Take the necessary steps as outlined above (1 to 4) and improve your results 100%
This simple exercise will increase Forex profits 100% and works for 99% of all short-term FX traders - stop trading so much - widen out your stops - widen out your profit targets - and only trade in the direction of the trend indicated by 4 hour chart.
1) Stop trading so much
Sure there are no commissions but the spreads are HUGE and believe it or not (well you'll believe it after you do the simple exercise below) the spreads are reducing your profits 100%!
2) Widen out your stops
Initial stop loss should be a minimum of 23 points; I use between 23 and 35 point stop losses for short-term trading.
3) Widen out your profit targets
Unless you think a trade can make you 100 points or more don't do it.
4) Only trade in the direction of the 4 hour chart
The real money is made in the direction of the trend
Simple exercise
1) Download all your trades for the year into an excel spreadsheet (if you don't know how to do this ask your broker for help).
2) Determine the dollar value of the spread for each trade.
3) Sum up the total dollar value of all spreads for all trades and add this number it to your current account balance; this is your spread adjusted account balance.
4) Take your spread adjusted current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
5) Take your actual current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
6) Subtract your spread adjusted year to date percentage change from your actual year to date percentage change.
7) That number should be 100% or more
8) Take the necessary steps as outlined above (1 to 4) and improve your results 100%
Before You Make a Trade: 10 Critical Questions
Articles Library | General Trading Articles | Written by Jim Wyckoff |
Before You Make a Trade: 10 Critical Questions
A "Trading Checklist" of prioritized criteria not only will help you decide when to execute a trade, but will also help you identify potential winning trades.
What kind of stuff should a trader put on a Trading Checklist? That depends on the individual trader. Each trader should have his or her own set of criteria, or rules, that helps determine a market to trade and the direction to trade it--including when to get in and out. Below are my Top 10 rules on my trading checklist.
1. Are shorter-term and longer-term charts in agreement on price trend?
I've told readers for years that this is my No. 1 trading rule. If the weekly, monthly and daily (and sometimes intra-day) bar charts are not in agreement on price trend, I'll likely pass on a trade. I'm usually a trend trader, and the "trend must be my friend" before I make a trade.
2. Is this potential trade within my financial risk tolerance?
To be a successful trader, I not only have to have winning trades, but I must survive the more numerous losing trades I am likely to encounter. If I see a potentially profitable trading "set-up," but the market is too volatile, I'll likely pass on the trade because of the potential for a big drawdown or even a margin call from my broker. An example is the energy markets a couple years ago. They were highly volatile. Certainly, there were some big moves (and trading opportunities for some) in the energies--both up and down. However, when a 75-cent, or more, daily move in crude oil is a "routine" trading session, that market is too volatile for my risk tolerance--at least when trading straight futures.
3. What is the potential risk-reward ratio of the trade?
My risk-reward ratio in a futures trade should be at least three to one on maximum profit potential. In other words, if my risk of loss is $1,000, my maximum profit potential should be at least $3,000. Anything less is not worth making the trade. Now, any eventual profit that is made may not always attain that three-to-one risk-reward ratio, but the point here is there should be the "potential" for a profit three times greater than your capital at risk in the trade.
4. Has there been a price "breakout" from a trading range?
One of my favorite trading "set-ups" is when prices have been in a trading range--between key support and resistance levels--for an extended period of time (the longer, the better). This type of trading range is also called a congestion zone, or a basing area when at historically lower price levels. If the price breaks out of a range (above the key resistance or below the key support), I like to enter the market--long on an upside breakout or short on a downside breakout. A safer method would be to make sure there is follow-through strength or weakness the next trading session--in order to avoid a false breakout. The trade-off there is that I could be missing out on some of the price move by waiting an extra trading session.
5. Is there a potentially good entry point if the trade looks good?
Entry points in trades most times should be based on some type of support or resistance levels in a market. If I see a potential set-up for a long-side trade, I will wait for the market to push up through a resistance level and begin a fledgling uptrend. Then, if I do go long, I'll set my sell stop just below a support level that's not too far below the market. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful. Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections in a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend.
6. Is there a support or resistance level nearby, at which I can set a protective stop when I enter the trade?
This is my exit strategy, and is one of the most important factors in trading futures. On when to get out of a market, I have a simple, yet very effective method: Upon entering a trade, if I place a sell stop below the market if I'm long (buy stop if I'm short), I know right away approximately how much money I could lose in any given trade. I will never trade straight futures without employing stops. Neither should you. Thus, I will never be in a trade and have a losing position and not know where my exit point is going to be.
7. Do "fundamental" market factors raise any warning flags?
Those who have read my features know I base the majority of my trading decisions on technical indicators and chart analysis--and also on market psychology. However, I do not ignore fundamentals that could impact the markets I'm trading. Neither should you. There are U.S. government economic reports that sometimes have a significant impact on markets. Associations also release reports that impact futures markets. Even private analysts' estimates can move markets. I make it a priority to know, in advance, the release of any scheduled reports or forecasts that have the potential to move the market for which I'm thinking about trading. I don't like surprises when I am in the middle of a trade.
8. What do computer-generated indicators show? (RSI, DMI, Stochastics, etc.)
Some traders use the Directional Movement Indicator (DMI) as a complete trading system. Also, some traders use the Relative Strength Index (RSI), Slow Stochastics or other computer-generated technical indicators solely for determining entry and exit points. I do neither and here’s why: I consider these computer-generated technical indicators to be secondary, yet still important, trading tools. I will use these "secondary tools" to help me confirm or reject ideas that are based on my "primary tools"--which are basic chart patterns, support and resistance levels, trend lines, and fundamental analysis.
9. Do volume and open interest provide any clues?
Most veteran futures traders agree that volume and open interest are also "secondary" technical indicators that help confirm other technical signals on the charts. In other words, traders won't base their trading decisions solely on volume or open interest figures, but will instead use them in conjunction with other technical signals, or to help confirm signals. As a general rule, volume should increase as a trend develops. In an uptrend, volume should be heavier on up-days and lighter on down-days within the trend. In a downtrend, volume should be heavier on down-days and lighter on up-days. Changes in open interest also can be used to help confirm other technical signals. Open interest can help the trader gauge how much new money is flowing into a market, or if money is flowing out of a market. This is helpful when looking at a trending market. Another general trading rule is that if volume and open interest are increasing, then the trend will probably continue in its present direction--either up or down. And if volume and open interest are declining, this can be interpreted as a warning signal that the current trend may be about to end.
10. What is the prevailing general opinion of the market? (Possible contrary thinking.)
When I was working on the trading floors of the major futures exchanges, traders would many times "fade" (or trade against) the featured articles on commodities in the major newspapers, such as the Wall Street Journal. They figured that if the general financial press had picked up on a market (such as a drought driving grain prices higher), then that uptrend must be about over. Contrary opinion in the trading business is defined as going (trading) against the popular or most widely held opinions in the marketplace. This notion of "going against the grain" of popular market opinion is difficult to undertake, especially when there is a steady drumbeat of fundamental information that seems to corroborate the popular opinion. If you've read books on trading markets, most will tell you to have a trading plan and stick with it throughout the trade. A main reason for this trading tenet is to keep you from being swayed or influenced by the opinions of others while you are in the middle of a trade. Popular opinion is many times not the right opinion when it comes to market direction.
Before You Make a Trade: 10 Critical Questions
A "Trading Checklist" of prioritized criteria not only will help you decide when to execute a trade, but will also help you identify potential winning trades.
What kind of stuff should a trader put on a Trading Checklist? That depends on the individual trader. Each trader should have his or her own set of criteria, or rules, that helps determine a market to trade and the direction to trade it--including when to get in and out. Below are my Top 10 rules on my trading checklist.
1. Are shorter-term and longer-term charts in agreement on price trend?
I've told readers for years that this is my No. 1 trading rule. If the weekly, monthly and daily (and sometimes intra-day) bar charts are not in agreement on price trend, I'll likely pass on a trade. I'm usually a trend trader, and the "trend must be my friend" before I make a trade.
2. Is this potential trade within my financial risk tolerance?
To be a successful trader, I not only have to have winning trades, but I must survive the more numerous losing trades I am likely to encounter. If I see a potentially profitable trading "set-up," but the market is too volatile, I'll likely pass on the trade because of the potential for a big drawdown or even a margin call from my broker. An example is the energy markets a couple years ago. They were highly volatile. Certainly, there were some big moves (and trading opportunities for some) in the energies--both up and down. However, when a 75-cent, or more, daily move in crude oil is a "routine" trading session, that market is too volatile for my risk tolerance--at least when trading straight futures.
3. What is the potential risk-reward ratio of the trade?
My risk-reward ratio in a futures trade should be at least three to one on maximum profit potential. In other words, if my risk of loss is $1,000, my maximum profit potential should be at least $3,000. Anything less is not worth making the trade. Now, any eventual profit that is made may not always attain that three-to-one risk-reward ratio, but the point here is there should be the "potential" for a profit three times greater than your capital at risk in the trade.
4. Has there been a price "breakout" from a trading range?
One of my favorite trading "set-ups" is when prices have been in a trading range--between key support and resistance levels--for an extended period of time (the longer, the better). This type of trading range is also called a congestion zone, or a basing area when at historically lower price levels. If the price breaks out of a range (above the key resistance or below the key support), I like to enter the market--long on an upside breakout or short on a downside breakout. A safer method would be to make sure there is follow-through strength or weakness the next trading session--in order to avoid a false breakout. The trade-off there is that I could be missing out on some of the price move by waiting an extra trading session.
5. Is there a potentially good entry point if the trade looks good?
Entry points in trades most times should be based on some type of support or resistance levels in a market. If I see a potential set-up for a long-side trade, I will wait for the market to push up through a resistance level and begin a fledgling uptrend. Then, if I do go long, I'll set my sell stop just below a support level that's not too far below the market. And if the trend does not develop and the market turns back south, I'm stopped out for a loss that's not too painful. Another way to enter a market that is trending (preferably just beginning to trend) is to wait for a minor pullback in an uptrend or an upside correction in a downtrend. Markets don't go straight up or straight down, and there are minor corrections in a trend that offer good entry points. The key is to try to determine if it is indeed just a correction and not the end of the trend.
6. Is there a support or resistance level nearby, at which I can set a protective stop when I enter the trade?
This is my exit strategy, and is one of the most important factors in trading futures. On when to get out of a market, I have a simple, yet very effective method: Upon entering a trade, if I place a sell stop below the market if I'm long (buy stop if I'm short), I know right away approximately how much money I could lose in any given trade. I will never trade straight futures without employing stops. Neither should you. Thus, I will never be in a trade and have a losing position and not know where my exit point is going to be.
7. Do "fundamental" market factors raise any warning flags?
Those who have read my features know I base the majority of my trading decisions on technical indicators and chart analysis--and also on market psychology. However, I do not ignore fundamentals that could impact the markets I'm trading. Neither should you. There are U.S. government economic reports that sometimes have a significant impact on markets. Associations also release reports that impact futures markets. Even private analysts' estimates can move markets. I make it a priority to know, in advance, the release of any scheduled reports or forecasts that have the potential to move the market for which I'm thinking about trading. I don't like surprises when I am in the middle of a trade.
8. What do computer-generated indicators show? (RSI, DMI, Stochastics, etc.)
Some traders use the Directional Movement Indicator (DMI) as a complete trading system. Also, some traders use the Relative Strength Index (RSI), Slow Stochastics or other computer-generated technical indicators solely for determining entry and exit points. I do neither and here’s why: I consider these computer-generated technical indicators to be secondary, yet still important, trading tools. I will use these "secondary tools" to help me confirm or reject ideas that are based on my "primary tools"--which are basic chart patterns, support and resistance levels, trend lines, and fundamental analysis.
9. Do volume and open interest provide any clues?
Most veteran futures traders agree that volume and open interest are also "secondary" technical indicators that help confirm other technical signals on the charts. In other words, traders won't base their trading decisions solely on volume or open interest figures, but will instead use them in conjunction with other technical signals, or to help confirm signals. As a general rule, volume should increase as a trend develops. In an uptrend, volume should be heavier on up-days and lighter on down-days within the trend. In a downtrend, volume should be heavier on down-days and lighter on up-days. Changes in open interest also can be used to help confirm other technical signals. Open interest can help the trader gauge how much new money is flowing into a market, or if money is flowing out of a market. This is helpful when looking at a trending market. Another general trading rule is that if volume and open interest are increasing, then the trend will probably continue in its present direction--either up or down. And if volume and open interest are declining, this can be interpreted as a warning signal that the current trend may be about to end.
10. What is the prevailing general opinion of the market? (Possible contrary thinking.)
When I was working on the trading floors of the major futures exchanges, traders would many times "fade" (or trade against) the featured articles on commodities in the major newspapers, such as the Wall Street Journal. They figured that if the general financial press had picked up on a market (such as a drought driving grain prices higher), then that uptrend must be about over. Contrary opinion in the trading business is defined as going (trading) against the popular or most widely held opinions in the marketplace. This notion of "going against the grain" of popular market opinion is difficult to undertake, especially when there is a steady drumbeat of fundamental information that seems to corroborate the popular opinion. If you've read books on trading markets, most will tell you to have a trading plan and stick with it throughout the trade. A main reason for this trading tenet is to keep you from being swayed or influenced by the opinions of others while you are in the middle of a trade. Popular opinion is many times not the right opinion when it comes to market direction.
11 Fascinating Market Correlations You'll Want to Use
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
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
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
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!
"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.
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
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
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.
Danger : Accumulating Loss makes Margin Call
I would like to share and discuss here about the questioner which I took one month before, and this is the vote result.
Which one is most difficult ?
Floating your loss 17%
Floating your profit 29%
Cut your loss 35%
Closing your profit 17%
Floating your loss 17%
Floating your profit 29%
Cut your loss 35%
Closing your profit 17%
Quite surprising result, the fact is most traders are still afraid to cut their loss than floating the profit or closing the profit. Actually I also see some people can stand with hundreds minus result and can’t stand to close their profit.
Let’s learn about how our brain works with money fear taken from By Jason Zweig, Money Magazine senior writer/columnist (Your money and your brain) :
1. Which is riskier: a nuclear reactor or sunlight?
2 .Which animal is responsible for the greatest number of human deaths in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark
Now let's look at the answers. The worst nuclear accident in history occurred when the reactor at Chernobyl, Ukraine melted down in 1986. Early estimates were that tens of thousands of people might be killed by radiation poisoning. By 2006, however, fewer than 100 had died. Meanwhile, nearly 8,000 Americans are killed every year by skin cancer, commonly caused by overexposure to the sun.
In the typical year, deer are responsible for roughly 130 human fatalities - seven times more than alligators, bears, sharks and snakes combined. Deer, of course, don't attack. Instead, they step in front of cars, causing deadly collisions.
None of this means that nuclear radiation is good for you or that rattlesnakes are harmless. What it does mean is that we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost.
We're no different when it comes to money. Every investor's worst nightmare is a stock market collapse like the crash of 1929. According to a recent survey of 1,000 investors, there's a 51% chance that "in any given year, the U.S. stock market might drop by one-third."
In fact, the odds that U.S. stocks will lose a third of their value in a given year are around 2%. The real risk isn't that the market will melt down but that inflation will erode your savings. Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement.
Fear: The hot button of the brain
Deep in the center of your brain, level with the top of your ears, lies a small, almond-shaped knob of tissue called the amygdala (ah-mig-dah-lah). When you confront a potential risk, this part of your reflexive brain acts as an alarm system - shooting signals up to the reflective brain like warning flares. (There are two amygdalas, one on each side of your brain.)
The result is that a moment of panic can wreak havoc on your investing strategy. Because the amygdala is so attuned to big changes, a sudden drop in the market tends to be more upsetting than a longer, slower decline, even if it's greater in total.
So… we as a forex trading don’t realize with a slower decline of our margin because of our uncontrolled emotion and money management can caused margin call next day. But we seemed that afraid with one big surprise loss than the accumulation of the smaller one, and that’s our normal brain if in panic situation.
Let’s try to admit and wise to control our stop loss, cutting the loss as minimal you can do is safer and secure than waiting for small latent margin call situation. Trying to manage the margin to get profit after the loss is very important as a profitable trader.
Tame your brain and manage your brain to facing money is very challenge effort for traders (you can read the article before in the blog about 8 ways to tame your brain). But will protect you as a profitable profit not as a contributor fund to your broker again and again until you feel desperate. Keep try traders !
Bahaya Laten : Akumulasi Loss menyebabkan Margin Call
Let’s learn about how our brain works with money fear taken from By Jason Zweig, Money Magazine senior writer/columnist (Your money and your brain) :
1. Which is riskier: a nuclear reactor or sunlight?
2 .Which animal is responsible for the greatest number of human deaths in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark
Now let's look at the answers. The worst nuclear accident in history occurred when the reactor at Chernobyl, Ukraine melted down in 1986. Early estimates were that tens of thousands of people might be killed by radiation poisoning. By 2006, however, fewer than 100 had died. Meanwhile, nearly 8,000 Americans are killed every year by skin cancer, commonly caused by overexposure to the sun.
In the typical year, deer are responsible for roughly 130 human fatalities - seven times more than alligators, bears, sharks and snakes combined. Deer, of course, don't attack. Instead, they step in front of cars, causing deadly collisions.
None of this means that nuclear radiation is good for you or that rattlesnakes are harmless. What it does mean is that we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost.
We're no different when it comes to money. Every investor's worst nightmare is a stock market collapse like the crash of 1929. According to a recent survey of 1,000 investors, there's a 51% chance that "in any given year, the U.S. stock market might drop by one-third."
In fact, the odds that U.S. stocks will lose a third of their value in a given year are around 2%. The real risk isn't that the market will melt down but that inflation will erode your savings. Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement.
Fear: The hot button of the brain
Deep in the center of your brain, level with the top of your ears, lies a small, almond-shaped knob of tissue called the amygdala (ah-mig-dah-lah). When you confront a potential risk, this part of your reflexive brain acts as an alarm system - shooting signals up to the reflective brain like warning flares. (There are two amygdalas, one on each side of your brain.)
The result is that a moment of panic can wreak havoc on your investing strategy. Because the amygdala is so attuned to big changes, a sudden drop in the market tends to be more upsetting than a longer, slower decline, even if it's greater in total.
So… we as a forex trading don’t realize with a slower decline of our margin because of our uncontrolled emotion and money management can caused margin call next day. But we seemed that afraid with one big surprise loss than the accumulation of the smaller one, and that’s our normal brain if in panic situation.
Let’s try to admit and wise to control our stop loss, cutting the loss as minimal you can do is safer and secure than waiting for small latent margin call situation. Trying to manage the margin to get profit after the loss is very important as a profitable trader.
Tame your brain and manage your brain to facing money is very challenge effort for traders (you can read the article before in the blog about 8 ways to tame your brain). But will protect you as a profitable profit not as a contributor fund to your broker again and again until you feel desperate. Keep try traders !
=================================================
Bahaya Laten : Akumulasi Loss menyebabkan Margin Call
Cukup mencengangkan hasil questioner yang saya ajukan satu bulan yang lalu, di mana pada kenyataannya masih banyak trader yang takut untuk mengambil keputusan menutup posisi loss daripada membiarkan profit berjalan. Saya juga sering membaca banyak trader yang lebih bertahan dengan ratusan minus dibandingkan bertahan dengan puluhan point profit.
Dari artikel mengenai bagaimana cara otak kita bekerja terhadap uang dapat disimpulkan bahwa manusia lebih tidak menyadari bahaya kecil yang berkesinambungan dibandingkan dengan satu kejadian yang langsung membahayakan diri mereka. Dalam forex pun demikian, banyak yang tidak menyadari penurunan margin semakin hari karena tidak adanya kontrol emosi dan management resiko akan menyebabkan margin call pada akhirnya. Tetapi sepertinya kita lebih takut kepada kejadian Margin Call yang besar-besaran dari satu posisi dibandingkan akumulasi dari beberapa kekalahan yang ada. Otak kita senantiasa bekerja dalam kepanikan jika terjadi hal tersebut.
Mari kita mengakui dan bijaksana untuk mengatur stop loss kita, menutup kerugian seminimal mungkin lebih aman daripada harus menunggu bahaya latent yang tersembunyi setelahnya. Memelihara margin sangat penting untuk kembali mencari keuntungan.
Menjinakkan otak Anda dan mengatur otak Anda dalam menghadapi uang adalah tantangan bagi trader tersendiri (Anda dapat membaca artikel sebelumnya dib log ini mengenai 8 cara menjinakkan otak Anda). Namun hal ini akan melindungi Anda terus sebagai trader yang profit, bukan sebagai penyumbang rutin bagi broker Anda sampai Anda merasa putus asa.
Dari artikel mengenai bagaimana cara otak kita bekerja terhadap uang dapat disimpulkan bahwa manusia lebih tidak menyadari bahaya kecil yang berkesinambungan dibandingkan dengan satu kejadian yang langsung membahayakan diri mereka. Dalam forex pun demikian, banyak yang tidak menyadari penurunan margin semakin hari karena tidak adanya kontrol emosi dan management resiko akan menyebabkan margin call pada akhirnya. Tetapi sepertinya kita lebih takut kepada kejadian Margin Call yang besar-besaran dari satu posisi dibandingkan akumulasi dari beberapa kekalahan yang ada. Otak kita senantiasa bekerja dalam kepanikan jika terjadi hal tersebut.
Mari kita mengakui dan bijaksana untuk mengatur stop loss kita, menutup kerugian seminimal mungkin lebih aman daripada harus menunggu bahaya latent yang tersembunyi setelahnya. Memelihara margin sangat penting untuk kembali mencari keuntungan.
Menjinakkan otak Anda dan mengatur otak Anda dalam menghadapi uang adalah tantangan bagi trader tersendiri (Anda dapat membaca artikel sebelumnya dib log ini mengenai 8 cara menjinakkan otak Anda). Namun hal ini akan melindungi Anda terus sebagai trader yang profit, bukan sebagai penyumbang rutin bagi broker Anda sampai Anda merasa putus asa.
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