Author Bio

One of the questions that just about every trader asks, either in their own head or out loud in some fashion, is what books they should read. That’s why I included the question in New Trader FAQs (available in the Currensee Marketplace).

There are, of course, probably as many lists of “the best trading books” as there are traders. We all have different perspectives on things and read certain books at different points in our development. That leads to a variety of views on which ones are the best. All I can do is provide for you the ones that I think are the most useful based on my own experience.

That said, here’s my list (excerpted from New Trader FAQs).

The Essentials of Trading is, of course, my own book. I don’t include it from any sense of vanity, but because I honestly believe it’s a great resource for new traders. I wrote it specifically to help them develop a good, solid foundation for their trading. It’s not specific to any market or timeframe or strategy, but rather focuses on the general requirements for creating long-term success in the markets. Those are things like having a solid understanding of the markets and how they work, putting together a personalized trading plan, and being able to evaluate different systems and methods.

The Market Wizards books (especially Market Wizards and The New Market Wizards) should be in every trader’s library. They are collections of interviews done by author Jack Schwager (a trader and market analyst in his own right) with some of the most successful traders, investors, and money managers of recent times. There is loads of great stuff in these books. No. You won’t find the one system that will make you a multi-millionaire in the markets. What you will find, though, is a whole array of little nuggets of wisdom from the years and years of experience these folks represent. Any time you can learn from what someone else had been through it can shorten your own learning curve. That’s what these books let you do.

Trade Your Way to Financial Freedom was written by Van Tharp, who was featured in the first Market Wizards book. Tharp was one of the early proponents of modeling success in trading. This book incorporates a number of elements of that and trading psychology. What I’ve always found to be the more valuable stuff for a new trader, though, is the discussion of expectancy and trading system performance assessment. Oh, and there’s a lot of good talk about risk in the book too.

When it comes to trader development, Brett Steenbarger is one of the guiding lights. His focus is on self-coaching, and Enhancing Trader Performance (see also The Psychology of Trading) is a fantastic resource in that area. Trading is like any other performance activity and Steenbarger goes to great lengths to highlight that. He does so because there are important implications for how you approach your development as a market participant. Steenbarger is a therapist by training and a trader himself. He works as a trainer for prop trading shops, so he knows what he’s talking about.

Markets In Profile is a discussion by James Dalton of the Market Profile analysis and trading methodology. More than that, though, it is an intensive discussion of how the way the markets work at their core plays out through the way prices move. This book is a follow-up to the author’s previous book, Mind Over Markets, which is a bit more mechanical regarding the Market Profile technique

A very good read for anyone researching or developing trading systems is Way of the Turtle by Curtis Faith. The author was one of the original Turtles selected to learn trend trading by market legend Richard Dennis. Faith describes his own experience in the Dennis program, but also spends a lot of time talking about constructing and evaluating trading systems. It’s a very practical book in that area.

So that’s my list. I realize they aren’t Forex-specific, but the fact of the matter is that successful trading is based on principles which are not market-specific.

What’s on your list?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Currensee member Ray Y. initiated a discussion recently in the Currensee platform about diversification. He wants to know:

“Why do I not see more about diversification? Surely we should all be looking for a hedge against our manual trading drawdowns.”

Diversification in Forex is a tricky thing. The number of currencies we trade are relatively few. Yes, there are a fair number of different pairs to trade, but there are only maybe eight currencies which are commonly traded (depending on what you include among the majors). That doesn’t provide much opportunity for diversification. If you want to avoid any overlap between currencies you can only have 4 positions on at any given time before you start introducing multiple exposures to a single currency. Even there it gets a bit dicey since the EUR and CHF tend to trade so similarly most of the time, and other currencies can also be highly correlated at certain points.

I’ve seen a number of folks talk about diversifying or hedging by matching up one pair against another, such as EUR/USD and USD/CHF. The thought is that since the euro and Swissy trade so similarly, if you go long EUR/USD and long USD/CHF you’ve got a hedge. What many fail to realize, though, is that the USD positions in such a set-up will nearly or completely cancel each other out (depending on trade sizes). What is left is a long EUR, short CHF exposure – so short EUR/CHF. Obviously, if you want to be short EUR/CHF, then it’s better to just short that cross directly rather than legging into it and having two spreads instead of just one.

Just keep in mind that adding an AUD/JPY to an existing EUR/USD trade may be diversifying, but adding EUR/JPY to EUR/USD is altering your exposure in one fashion or another (either canceling or double the EUR position, depending).

Now, having said that, Ray’s question offers up the potential to discuss diversification of our trading methods or systems. The idea there is that one system’s good results over some time span may offset poor performance in another. This is certainly something worth exploring. For example, a trend trading system could be paired with one which is more range oriented. In theory at least, these two systems would perform best under different market conditions. So long as the losses in one don’t wipe out the gains in the other, it could work out very well.

The issue with running multiple systems, as with any situation where you might be running multiple positions, is one of risk management. Two systems always run the risk of having the same trade on simultaneously. If you don’t account for that potential you could end up with a double-sized long in EUR/USD, for example, and find yourself suffering a loss you did not anticipate if something dollar-positive happened.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

A couple weeks ago Tim Bourquin posted 5 Uncommon Rules of Wealthy Traders at TradingMarkets. The rules were commented upon by zentrader in his 5 Unique Rules of Trading  post, which is how I came to find them. I wouldn’t really call these rules so much as observations, but they are still worth addressing. So, without further ado, here are Tim’s “rules” with my thoughts about them, specifically as they related to Forex traders.

1. They plan every single trade. EVERY SINGLE ONE.
This is a very simple restatement of “plan your trade and trade your plan”. If you don’t have a specific strategy defined going into a trade, one based on your larger trading plan, you are gambling. We traders are not in the business of gambling. We are attempting to apply a methodology with a statistical edge over a large number of trades to allow that edge to create a positive return. That takes planning and consistency.

2. They stopped trying to pick tops and bottoms years ago.
Here we have a reflection of the fact that no one can know for sure what the market is going to do at any given point. Even if you are right about the market making a turn, shifting out of one trend and into another, chances are you won’t get the timing exactly right. You have to realize that and account for it in your risk management. By that I mean if you’re strategy relies on catch market turns you probably need to either play with wider stops or be prepared to take a few small losses before that turn actually comes.

3. They are patient with winners – and ridiculously impatient with losers.
This third observation is basically “cut your losses and let your winners run” stated in another way. I definitely won’t argue the cutting of losses quickly side of things. If the market doesn’t act like you anticipated, and you don’t get out of the trade, then you’re hoping it turns around. Hope is not something you want involved in your trading at all. Remember, you can always get back in.

As for the letting the winners run, that depends on your system. Some systems have specific profit targets and not abiding by them could be problematic, just as in systems which relying on letting the market run it would be counter-productive to have a pre-defined exit point. Regardless which way your systems works, make sure you don’t suddenly decide to change path in mid-trade. That goes back to #1 above.

4. They trade one market. ONE.
I’m not sure I can totally agree with trading only one market. If you are a short-term trader, then that certainly makes a lot of sense. And in the case of Forex trading, it might even be down to trading just one pair. Generally speaking, the greater the focus you need on the price action in real-time the fewer pairs you want to be trading.

As you get out the time span curve, though, adding in additional pairs and/or markets may make sense. For example, the Turtles traded numerous markets because that was the only way they could ensure a sufficient number of trades to make their system worthwhile. That’s really the key – the number of trading opportunities. You need them to be sufficiently large in quantity to allow the probabilities to work in your favor. For example, a swing Forex trader may want to track a several pairs (probably with different characteristics) in order to make sure they get a fair number of trade signals. How many depends on the demands of your system and the potential for having multiple positions on at one time. If you are a position trader, you may not only want to watch all the major pairs and crosses, but perhaps also equities and bonds.

5. Their benchmark for success is anything but money.
As for this final observation, I agree wholeheartedly. The money focus trap is a big one for new, low-capitalization traders especially (a large portion of the retail Forex community). It leads them to take on more risk than they should. After all, when you only have $1000 in your account your gains or losses are only going to be so big in nominal terms. It’s hard to get excited about a $100 gain, maybe. If you focus on other metrics, such as % return, however, things become much more meaningful. That $100 gain becomes a 10% gain, which tells you something much more important. Also, a $10,000 gain is much less impressive on a $1,000,000 account, for example, than on a $25,000 account. It’s about not getting caught up with nominal amounts but with the performance of your trading according to the metrics which make the most sense.

Well, that’s what I think of these five rules/observations. What are your thoughts? Anything not included here that you think should be in the top five?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Confidence is a HUGE factor in trading. On the one side, the lack of it can create all kinds of anxiety and fear, over-thinking things, and not being able to pull the trigger (analysis paralysis). On the other side, too much confidence can lead to being cavalier with risk and taking poor trades. In this post I’m going to focus on building confidence.

Start Slowly
There’s no need to rush into trading. It’s really easy to get caught up in all the excitement of the financial markets, but try to avoid that. They aren’t going anywhere, after all. Give yourself time to learn and develop your skill set. A great many new traders see the dollar (or pound or euro or yen) signs and become blinded to all the rest of it, eager to get going and grab hold of their share of the winnings. It isn’t that easy. Trading is like any other activity. It takes time to get up to speed and develop the required competency.

Build a Strong Foundation
If you dive headfirst into trading without taking the time to think things through, you’re definitely more likely to be part of the majority who fail rather than the minority who succeed. I made a big deal about foundation building in The Essentials of Trading, and I harp on that repeatedly in my blog posts and other exchanges with new traders. Work your way through the process of developing your trading plan. If you’ve taken the time to sort this stuff out, it will help to give you confidence in your trading as you move forward.

Practice, Practice, Practice
Athletes practice skills to gain mastery and to be able to execute them under pressure without thought. Traders should do the same thing. There are all kinds of different demo trading accounts available these days. There are a lot of little things you can pick up demo trading. Some of it is the basic stuff regarding order-entry, prices, P&L calculations, and other mechanics. On top of that, though, you can also practice using your trading system or methodology to gain confidence in your ability to trade it effectively.

Go to Live Trading Early
I am a huge proponent of dipping your trading toes into the live markets as quickly as possible. That said, I’m not talking about jumping into the deep end without knowing how to swim. Once you’ve mastered the mechanics of trading using a demo account, it’s a good time to start playing for real. At this stage, however, it’s not really that much about profits and losses. It’s about your trading psychology. As just about anyone who’s ever made the transition from paper trading to the real thing will tell you, it’s not the same. When you’re money is at risk it can really change the way you think, and by extension, the way you trade. That’s why you should…

Start Small
When you make the initial move to live trading, do so with the smallest amount of money you can reasonably get away with. You are going to make mistakes. The cost of those errors can be thought of as trading tuition. You need not make that tuition bill a big one, though. A very small account means very small losses. How small an account you can get away with will vary considerably depending on the market you’re trading and how you trade it. And be sure to give yourself enough wiggle room in there to make sure a few bad trades don’t knock you out of the game.

Practice Some More
Once you’ve had a good taste of live trading, go back to the demo trading once more to really solidify your final trading action plan. Through the live trading experience you should learn what things you can and cannot handle or do in trading. Take that back to the demo trading and incorporate the new information into the way you set up your trading plan. This is just like being an athlete who using their experience in games to fine tune things during practice to get ready for the next competition. You should do the same thing as a trader.

Ease Your Way into the Market
Working through the steps outlined so far should help you become less afraid to trade and more confident in yourself. Even still, you don’t want to go piling into the market. Take it slow. Allow your comfort and confidence in real-money trading to build gradually by starting small once more. You’re still going to make mistakes (though hopefully fewer by this point), so keep their cost down and their impact on your confidence to a minimum. You’ll also invariably take losses. That’s something you’re going to have to learn to live with. It will probably take a bit of time, but that too will be helped if the losses are small. As you feel more comfortable, gradually trade larger, working your way up to the level of risk and exposure which suits you best.

Final Thoughts
The question is frequently asked how long it takes to get to consistent trading profitability. For some people it will happen relatively quickly while for others it will take longer. How long it will be for you will be impacted by things like the timeframe you trade and your personal base risk tolerance. Don’t try to compare yourself to others. Go at your own pace. If you have the commitment to doing things the right way, to developing as a trader, and to being prudent in your actions, you will eventually get to where you can trade confidently.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Last week Currensee Chief Market Analyst Shaun Downey wrote a blog post titled A Maze of Counterintuitive Forces: Volatile Sideways Ahead? There were a couple of things in there that I disagreed with, so I decided to take the opportunity to present my own view point. You can decide which one you prefer, or if you think both of us have no idea what we’re talking about. J

Mortgage Rates to High
Shaun made the comment that mortgage rates remain stubbornly high and that even though they have fallen, it apparently isn’t enough to induce an increase in mortgage applications. Seeing as the rates have recently been making all-time lows, I have a hard time agreeing that they are stubbornly high.

Speaking to the mortgage applications, consider two things. First, the tax credits pulled forward a lot of home buying activity, and the numbers have been reflecting a drop off since the credit expired. That was something inevitable and very little related to mortgage rates. Second, the potential home buying public is experiencing a quartet of symptoms helping to keep their activity down. They are:

1. Fear prices may yet go lower again (or at least not rise for a while),
2. Impaired personal/family balances sheets and credit ratings,
3. Being gun shy about borrowing for anything at this point, and
4. The belief that banks just aren’t lending. Again, none of this has anything to do with mortgage rates.

Fed Capping Long Rates

Assuming you agree that rates are too high, Shaun’s solution to the problem he sees is having the Fed cap long term rates, maybe at something like 1.5% for 30-year money. If, as Shaun has suggested, mortgage rates are too high then lowering long rates would help. Standard fixed rate mortgages are closely linked to the rate on the 10-year Treasury Note. If that can be pushed down, then mortgage rates would likely follow (falling 10yr rates is exactly how mortgages have been making record lows of late). There are several problems with this plan, though.

At the top of the list is the fact that the Fed cannot simply cap long rates. There is no long-term equivalent to the discount rate they can just set at 1.5%. Long rates are determined by the market.

If the Fed really wanted to drive 30-year rates down to 1.5% it would have to embark on a massive quantitative easing (QE) program of buying Treasuries. Keep in mind the $1.2 trillion the Fed spent buying mortgage securities, plus the hundreds of billions it put in to Treasuries last year. You could maybe say that knocked 80bps off 10yr rates at the most positive. After the Fed stopped buying, the 10yr rate went right back up and eventually made a new high before it rolled over into the current downtrend, which has nothing to do with the Fed buying.

If the Fed were to go back into the market to buy Treasuries and drive long rates down to 1.5% it would send alarm bells ringing across the financial universe. The dollar would get hammered (currency traders hate QE), which wouldn’t help any other global economy, perhaps aside from China (because of the close dollar peg for the yuan). That, in turn, would likely drag on global stock markets, especially for exporters to the US.

A sharp move lower in the long end of the yield curve will also flatten it. A strongly up-sloped yield curve tends to be an economic positive. A flat, or negatively sloped curve is generally the opposite.

And then there are the bond vigilantes. These are the folks who sound the alarms and sell fixed income securities when they perceive a risk of inflation. If the Fed starts a major new QE effort you know the vigilantes will be screaming and yelling about the inflationary implications of monetizing the debt. In order to neutralize the QE the Fed would have to perform massive short-term draining similar to what the ECB has been doing to sterilize its bond purchases. That would tend to put upward pressure on short rates, getting us back to the flattening yield curve.

If the Fed didn’t do that then you get a big spike in the monetary base, which will worry the inflation hawks. The money multiplier isn’t working real well right now, but the fear will be that eventually there will be a massive explosion in M2/M3 type of aggregates as the borrowing/lending contraction loosens up, which would lead to a spike in inflation (already the fear, actually). That could end up leading to big players shorting T-Bonds and T-Notes, which would make it harder for the Fed to drive rates down – kind of like how some big players in the forex market play against central bank intervention.

And to top all of this off, anything the Fed does will tend to create market distortions. It’s happened in the mortgage market now, to the extent that the Fed has had to rearrange its holdings to allow for more supply of certain securities in the market so they can trade and be held in portfolios. If the Fed holds most of the T-Bonds and T-Notes in existence, as it would likely have to do, it will put a squeeze on those who need to hold them in their portfolios (bond funds) and others who need them for other purposes.

That said…

This is just my view on things. Feel free to tell me I’m crazy. Differences in opinion are what make the markets so interesting.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

A conversation is going on among Currensee members in the discussion board on the subject of trading rates of return. There’s been a fair amount of back and forth about what is a good return, risk, consistency, and all that. The topic of “how much can I make trading” is one which comes up often (and I’ve addressed it in New Trader FAQs), and beyond that there is a common interest in relative performance. I’d like to throw two things out there as thinking points for the discussion.

Thinking like you would about a job
Trading is an active process – more so than investing, for the most part. It requires consistent effort to identify opportunities, research and test strategies, stay up on market developments, and manage positions. For some folks this means hours each day. In other words, it’s like a job (part-time or full-time). So what’s your take home pay? That’s why I challenge the comment of Currensee member Alex when he said “An acceptable return to me is anything that beats the average return for stocks and bonds but at the same time somewhat realistic so there is more consistency for ROI.” How much time was put in to making those investment returns vs. required for the trading returns which beat them?

Admittedly, if you’re a new or developing trader asking yourself how much return you’re seeing for the time you’re putting into trading is probably a bit depressing. As you get an idea of your trading plan and probable return levels, time commitments, etc., though, you can start forming a view of what your hourly wage is going to look like. Then you can ask yourself whether what you’ll be making – after taxes and all other expenses – is worth the time required to earn it.

Currensee member Liam made this point fairly well by saying:

I would consider an acceptable return would be one which provides me with an income somewhat greater than I would earn in salaried employment. However the nature of Forex trading is such that if one has a persistent, substantial edge, there is no fundamental reason why one cannot increase one’s income to a substantially higher level, and it is reasonable to aim to do so.

Of course capitalization is a factor here. The more money you can put to work in the market, the higher the presumed notional return you would anticipate making. If you’re early in your trading career the stake is probably going to be small (it should be!) as you hone your skills. Once you’ve developed a good trading strategy, though, how much can you grow that stake? Partly that will mean gains from the market, of course. Most likely, however, it will be a function of additional funds being deposited. Will you be able to increase your account size to a workable level to make the return on your trading high enough for it to be a good use of your time?

I don’t put this question out there to dissuade anyone from trading. We do all, however, have to think about the relative value of the time we put into different activities.

Comparing your performance to others
Shifting gears a bit, the mere asking of the question about what is a good rate of return implies a question of comparative performance. Unless you are a money manager competing for funds, you really don’t need to get hung up on how your returns compare to those of others. This is something that can really trip traders up. Trading is a very individual pursuit in most cases. We all trade slightly differently, which makes direct comparisons difficult at best. The only way you can properly look at the relative performance of two traders is on a risk-adjusted basis, and that’s not always the easiest thing to calculate.

Regardless of the metrics involved, I’ll tell you the same thing I told many volleyball players when I was a coach. Don’t worry about what someone else is doing. You have no influence on their actions or performance. All you can ever do is focus on your own effort and trying to get the most out of yourself that you can. You’ll get more satisfaction out of things that way, and you’ll definitely develop in a better way.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

After writing my last blog post, Michelle suggested the next one be on the seven deadly sins of Forex trading. I don’t know whether she was joking or not, but I decided to go with it anyway. The list below is the seven which came to mind as the ones most likely to do real damage to a trader.

1. Thinking that Forex trading is a get rich quick scheme. They say 90% or more of new traders fail. I don’t know if that’s the actual number, but it certainly is a high figure and a big part of the reason for that is unreasonable expectations coming in. Forex trading is promoted to many as an easy way to make lots of money. While that can eventually be the case, it tends to take a lot of hard work and a fair amount of time to reach that point. Those who think they’ll be able to jump right in and have the profits rolling into their account from Day 1 get slapped in the face with reality pretty quickly, and for many it is the end of their trading – whether they’ve lost a lot of money or not. Successful trading is a long-term thing (see Taking the Trading Long-Term View), and many folks just are not prepared for that.
2. Not effectively using demo trading. I will be the first to tell you to get into real money trading as quickly as possible, but taking the time to do proper demo trading is important. There are two purposes to demo trading. The first is to familiarize yourself with the platform you’re using and, if you’re a real newbie, with the basics of prices, P&L, and all that. The second is to work through the trading system development process to know that you have a workable methodology you can employ to good effect. Of course demo trading is not the same as live trading, as just about any experienced trader will tell you. If, however, you cannot profit in the demo environment, you don’t have a lot of hope for profitable live trading.
3. Failing to pay attention to detail. Making stupid, simple mistakes will cost you money. Yes, sometimes you mess up an order entry and it works to your advantage. Most of the time, though, when you make a mistake it hurts. I’m talking about totally avoidable mistakes here, like forgetting to put in a stop, or putting in the wrong price for an order, or buying rather than selling. It’s basic attention to detail. There’s really no excuse.
4. Not thinking through your approach to the market. A lot of folks jump right into the market with two feet without taking any time to think through what they’re doing. This is something which hit home with me when my book, The Essentials of Trading, came out. I wrote it for folks just getting into the markets, but found I was hearing also from many who’d been in the market for a while and found they needed to go back and revisit the foundational elements of their trading because they’d been all over the place in their development. They’d bypassed that aspect of things when they got started. By that I mean they didn’t think enough about things like trading timeframe, markets, and personal elements which feed into that what, why, and how they trade.
5. Getting fixated on your win %. New and developing traders spend WAY too much time thinking about the frequency at which they have profitable trades. I’ve written on the subject numerous times before (such as here and here), so I won’t go off on a long rant. It’s a simple question of whether it’s more important to you to be right or to make money. For some folks the being right (or at least not being wrong) thing is important to them. They probably shouldn’t be traders because trading is about making money. You can have 90% winning trades and lose money just as you could have 10% winning trades and see your account balance growing nicely.
6. Thinking more about rewards than risks. We trade to achieve positive results, to grow our account balance. As such, it’s quite easy to fall into the trap of thinking more about all the pips we can make rather than all the pips we could lose on a given trade. A good trader thinks about both at least equally, and if you listen to some of the elites in the business they indicate a clear focus more on the potential negatives. If you’re thinking to yourself “I prefer to be optimistic” then you’re being naïve. Trading first and foremost is about making sure you don’t expose yourself to the chance of getting taken out of the game because of big losses. After all, you cannot make gains if you can no longer trade. Traders with an “optimistic” mindset have a tendency to take on too much risk.
7. Getting too excited. Whether you are having a good run of success or coming off a bad performance, if you’re chomping at the bit to get into that next trade you need to take a few deep breaths. This sort of excited state can lead to very bad decision-making. I’m talking things like taking trades which don’t meet your system’s criteria, trading too big, or trading more markets than is good for you. Some folks can get away with trading while agitated. Most, of us, though, don’t readily notice how our emotional state feeds into our trading choices. Brett Steenbarger has written some good stuff on the subject.

Now, I’m sure others will have their own thoughts on the seven deadly sins of Forex trading. What about you? What’s your list?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

Last week I sent an inquiry to readers of my New Trader FAQs book asking them for feedback and suggestions for additional questions that could be added to future editions of the text. One of the readers sent in a question I thought was a really good one. It was “What was it that turned you into a profitable trader?”

This, of course, is going to vary from trader to trader, so you’re likely to get a different answer if you ask someone else, but let me share with you what I think was the real turning point in my trading. This wasn’t some flip-the-switch sort of thing where I was always losing and then I was always winning, but it definitely laid the foundation for becoming a much better trader. It was doing my own analysis and not listening to others.

When I first got into the markets I was very often influenced by the opinions of others. For example, I got a few ideas from the stock broker who taught one of the courses I took in my early college years. Others came from things I read or heard from different sources. At this point, better than 20 years later, it’s hard to recall the specifics but I know that while I was doing a lot of research on indicators and trading systems and whatnot, I wasn’t producing much of my own individual analysis to come up with ideas.

That started to change with one specific trade. It was a position in NIKKEI put warrants. Think of it as something like being long on a short ETF for the NIKKEI (though technically it wasn’t quite the same). This was 1990 when the index was trading up above 30,000. ETFs weren’t anywhere close to being what they are today, and I wasn’t in a position to trade the futures market, so these put warrants were the only real option for me at the time. I can’t recall the specifics, but I know chart analysis was involved. I got long the put warrants at somewhere in the 5s.

Now, if you know your NIKKEI history you might be thinking, “You got short when it was above 30,000!? You must have made a fortune!” While it was definitely, by far, the best trade I’d ever made to that point in terms of return, it was a bit of a failure in terms of getting out. I bailed much too early, selling the put warrants somewhere in the 9s. They would eventually go above 25. I still cringe thinking about it. L

But the mistake of getting out too early is part of my point in how doing my own analysis and trading made a big difference. If you rely on someone else to tell you what to do you miss the opportunity to learn from both your successes and your failures. If that was a trade where I had just bought when someone told me to do so and exited when they said so, I would have lost the opportunity to get positive feedback on my initial analysis and negative feedback on my early exit.

Now, this is not me saying you shouldn’t follow what other people do. Just do it the right way. If you want to develop as a trader (and not just let someone else effectively manage your money) then when you track another trader’s actions you should work to understand their analysis and justifications for what they’re doing. That way you can learn what works, what doesn’t, and how a strategy works in varying market conditions.

What about you? What’s been the turning point in your trading so far?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

There’s a poll on the Currensee Facebook page which asks the question, “As a trader, which of the following psychological factors do you find the hardest to overcome?” The possible options are:

The two most common responses I saw among the traders who left notes along with votes were Patience and Fear. Casting back in time (way, way back!), I think I can remember my own progression. Here’s how it went.

Greed
Let’s face it. Most of us get into the market because of the potential to make a lot of money. Generally speaking, this doesn’t end up being the thing which keeps people there, though. Most folks who stick it out over the long run tend to have additional reasons. They enjoy the intellectual challenge. Or maybe it’s the “game” perspective. For some it’s the competition. These additional reasons give a trader purpose when the realization hits that they probably aren’t going to make 1000% returns every year.

Of course there’s also the micro greed that can take place on a trade-by-trade basis. It’s a definite trap to think mostly about how much you can make. Folks who do it too much don’t last very long. I can certainly attest to what can happen when the risk side of things is ignored. Fortunately, I think I got passed that.

Fear
When I got my start in trading, back in the Jurassic Era, there wasn’t much in the way of demo trading. What we had then was literally paper trading – keeping track of buying and selling in a notebook. When I got to the point of needing to develop trading on live prices I had to do it with real money. I was all of 18 at the time and not exactly flush with cash. The money I traded was all that I could scrape together. On top of that, I didn’t have experience actually putting in orders, so you bet there was a fear factor.

Practice tends to reduce the fear aspect of things. As time went by, I got comfortable with both entering trades (over the phone!) and having money at risk in the markets. The fear factor faded, except on the occasional instance when I goofed something up and had a position I didn’t mean to have. That can get your heart rate going pretty quick!

Patience
Once you get over the hurdle of being afraid to pull the trigger, the pendulum can definitely swing in the other direction to being overly eager to do so. I have definitely gone through periods where I just let things run away with me. This sort of thing often happened after a good string of results. Can you blame me? If you’re on a good run you want to keep it going. That tends to make you forget your trading rules, though, which is never a good thing.

Actually, some folks get caught up in revenge trading which can also be a lack of patience situation. This comes about when you take a hit in the market – often one bigger than you probably should have – and you’re eager to make that money back. There’s a scene in the Trader video where Paul Tudor Jones takes a hit in the markets and talks about making the losses back with interest. The difference between him and the rest of us, though, is that he clearly didn’t get impatient, though he certainly did make the money back, and then some.

Lack of Confidence
Once I got over the three previous issues (mostly, at least), confidence became the thing which did the mental damage. I am not primarily a rigid system trader. That means my own discretion weighs heavily in my trading decisions. As such, when trades don’t go well, it can be a confidence shaking situation.

System traders have a simpler path to evaluating their trading and do discretionary traders because there is no human element (or at least there shouldn’t be).  It’s just a question of whether the system is working properly. With a discretionary trader, though, the methods employed have to be evaluated as well as the trader’s application of them. For those inclined to be hard on themselves (as I can be), a period of underperformance can create a crisis of confidence. If you’re prone to shaky confidence, you might be better off being a system trader rather than a discretionary one.

Charting Your Own Forex Path
The progression above was my own path through the comment mental pitfalls of traders. There was certainly overlap, and some things supposedly put behind me reappeared at different points to trip me up. Your own path may be quite different. It’s good to know what’s underlying your mental hurdles, though. It makes them that much easier to overcome.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

Author Bio

There’s been discussion around trading for a living going on in the Currensee forum area. It’s not the first, of course, and it certainly won’t be the last. A recent informal pool on BabyPips indicated that more than half the folks there have it in mind to replace their jobs with trading (it also indicates that something like 75% plan on making at least 50% per year on average, so take it however you like). I’ve written on this subject before in my own blog in the post Trading for a Living vs. Trading for Wealth Building, and others as well.

The question “Should I quit my job and trade full-time?” is one that was answered by several experienced traders and market pros in the recently published New Trader FAQs book. A common thought from those answers is that trading for a living requires two things:

1. Having enough capital to produce returns large enough to pay our expenses, plus pay for your outgoings for some period of time without having to rely on income generated from your trading;
2. Having the proven ability to make money consistently from the markets.

To the first point, think on this: consider the scenario where you need to make $5000 per month to cover all your expenses and provide for some savings. If you can consistently make 10% per month (no mean feat!), then using 5% gives you a very good safety cushion in case of an off month or whatever. In order to make your monthly expenses on a 5% rate of return you would need $100,000 in base capital. And that doesn’t account for the cushion suggested in case of a string of tough months.

As for the second point, one of the FAQ contributors has this to say:

To become a full time trader is at least a 3 year apprenticeship, and you must be prepared for some serious tests of character along the way. You will place trades and have some wins, some losses and some break evens, finding the difference between these three outcomes is what makes or breaks a wannabe trader. Some traders will discover the difference and then go on to prepare a solid foundation of rules and requirements to ultimately become a consistent winner. Others will desperately try to devise a plan and will fail, while the final and most common outcome will be to simply give up after losing too much money and being unable to determine why.

If this sounds like I’m suggesting you shelf your dreams of trading for a living, I wouldn’t go quite so far. I would, however, caution you to really think through things before making that kind of move. It’s not just about the money. It’s not just about getting out of having to work for The Man. There are other issues like quality of life to be considered. I have told people on many occasions how I’ve long known that trading full-time for a living is not for me. I trade to grow my assets and do so on a part-time basis because there are so many other things in my life I enjoy doing, and my salary suits my needs and comes with a minimum of stress (usually).

Just some food for thought. Feel free to discuss!

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.