Author Archives: Spencer Beezley

Sometimes traders abandon a strategy after the first trade (usually because it was a losing trade).  Most traders don't stick with a strategy for too long before they go and try something new.  While bouncing from one strategy to the next, how can a trader ever expect to attain consistent, positive results?

A path to consistent results is as much in the strategy as it is in trusting ourselves in times of poor results.  So how can we as traders, with an auto-trading or manual trading strategy, achieve consistent results?  A combination of solid market analysis and strong psychological conditioning is the key.

I have been through the cycle of trying out different strategies when I was starting out my trading career, and I can honestly say that if I didn't go through rough times in which I lost money, I wouldn't be have learned important (and expensive) lessons along the way.  While some of the important rules in which the foundation of my trading model were built upon were established early on from different market related trading experiences, the hardest aspect in my everyday trading life is the psychological aspect, and trusting my trading model.

So how do I know when to stick by a strategy or when cut it off?  This is one of the hardest things about trading.  How do we know if the strategy is becoming a non-effective losing strategy or just going through a rough patch.  This is where it is important to keep records of exactly what is going on with the price action in the market to cause our strategy to go through drawdown.  What I turn to in times of sustained drawdown is historical results.

How did my strategy perform over other periods and what was the drawdown like in those periods?  If I can gain some insight based off of history I can simply tell if this is just a market cycle similar to one in the past that the strategy has recovered from, or is this a complete shift in the market in which my strategy may not be able to recover from?  If the latter could be true, was there some sort of catalyst that could have caused this market shift?

These are the tough questions I think we need to be able to answer while in a long period of drawdown.  It is not as simple as just cutting the strategy off completely because oftentimes the strategy will begin to recover and then we didn't give the strategy the chance to recover the drawdown and are left with losses.  To be a successful trader, we have to break the poor habits that we, as people, pick up because we are trying to outsmart the market.  Not being able to take risk and allowing the strategy to run its course is a recipe for choppy trading results. Our trading mind has to be conditioned to be comfortable with the outcome of each trade as long as the trade fits within our trading framework or strategy.

So you've opened and funded a trading account. You've studied charts and understand different trading theories. You've got a strategy and a set of rules to trade by. You've even got your money management plan mapped out. But have been to a psychiatrist yet? Ok, I'm partly kidding but really, have you thought about how you are going to handle the wild emotional swings of trading? I ask because trading can be a roller coaster: you'll feel the highest of highs and the lowest of lows, often  in the same week or even the same day! I've felt a range of emotions through trading. One thing I've felt is the need to try and make up for losses as quickly as possible. I don't want to feel down for long, so why don't I just double down right quick and make up those losses really quick. Good idea? I think not.

So what do you do when you experience drawdown?

About six months into my trading career, I would stick with a strategy until it started to lose. Then I’d go on to the next strategy or trade idea. Sometimes this worked. Oftentimes it did not. So I needed to learn how to test strategies through backtests and live trading with small accounts to start. This way I could better know the types of swings that I may experience in the future. Understanding the intricacies of your strategy and how it behaves in different market cycles is essential. Then implementing the proper money management to ensure that we can withstand those drawdowns at our individualized risk tolerance levels. So going forward I know that I could safely stick my strategies and see the drawdown through because I don’t let emotions control my actions.

The idea behind a trading model is to gain an edge on the market.  In technical based trading we, as traders, have to stop trying to predict what will happen next.  Once traders start to try and predict where the market is going in the short term, generally it will affect the way we approach executing new positions, or the way we handle exiting existing positions.  Traders that try and outsmart the market and don't stick to their strategy oftentimes will experience a "profit gap", where they never experience their profit potential.  When trading in a drawdown, the trader has experienced negative trades resulting in low confidence in their trading system, and they feel betrayed by the market.  Many times traders cannot recover drawdown because they have not accepted the risks inherent to trading.  Trading while down, emotional discomfort and fear are present, which can affect the way we handle risk.  Completely accepting the risk that we are assuming during trading, without the slightest bit of emotional discomfort is paramount to trading successfully long-term and recovering from drawdowns.

This is why picking a solid strategy that performs in different market cycles with a decent risk/reward ratio and using smart money management are keys to smart long term trading results.

As an investor the same principles can ring true. So trading through a drawdown can be tough, sometimes downright exhausting. But we have to stick with our core trading principles and trading plans so that we can come out on top and become profitable once again. A good trader should not be measured by profitable trades, but by how he/she handles the losing trades.

When I first learned about FX, I interviewed for a position with a software company selling overpriced charting software to unsuspecting "newbies".  The software was comparable to any free trading platform charting with a couple of added "custom" indicators.  Needless to say, my career as a software salesman was over before it started, but it's funny that without that experience, I most likely wouldn't have pursued trading FX.  A spark was ignited as I learned that the FX market I could trade 24/5 and was the largest financial market in the world trading trillions daily.  This was something I couldn't ignore, and I found myself scouring the internet for trading forums, broker reviews, and anything else fx related. I was all of the sudden an FX addict.   In the next month I settled on a trading strategy that I’d picked up from an e-book that I had purchased for $59. I then funded $700 into my first fx account. I started out with patience waiting for trade setups within my swing-trading strategy on the 1hr EURUSD chart and then quickly I abandoned the strategy to trade lower time frames (1M and 5M) and in the ensuing weeks lost about 75% of the account.  I was impatient, wanting to force trades just to participate in the market, and quick to deviate from any plan or trading approach that that I had set forth.  A bit discouraged, I decided the mistakes I made were glaringly obvious.  I was not confident and patient with my strategy and had no firm rules and no money management to speak of.  I learned it would be very difficult to succeed in trading without some discipline and a change in my mindset.

This was just the start of my trading education and the tuition costs were the losses along the way.   While I struggled at first, I lost my OWN REAL MONEY.  And losing money isn’t fun, but the lessons learned are priceless.  The experience of losing your own real money is the only way to truly learn how to trade.  After I lost 75% on my first account, I transferred the remaining balance to a different broker and ended up doubling that account in about 6 months.  I didn't let my emotions get the best of me and started displaying some real patience as a trader.  I learned to cut losing trades short, and began to refine my trading strategy to make it adaptable with my lifestyle.  I still made mistakes, but I would keep a log of the mistakes I made for future reference.  My focus began to shift from the profits that I could make trading to how to take acceptable losses.  Once this distinction was made, I found that managing downside risk is what defines a good trader.

These experiences were all things I learned on a REAL money account.  Trading on a demo account might be a good idea to learn the trading platform and how to enter trades, etc.  But you don’t experience the emotions that are involved when trading REAL money.  The great thing about fx is there are brokers out there in which you can trade micro lots, meaning you can start with a very small deposit.  While fortunes are tough to amass with a $100 deposit, you can learn the process and discipline needed to be a good trader.  You can also discover the type of trading strategy that is suitable for your personality, lifestyle, and risk tolerance.

Once you have a good feel for things, you will be much confident to add more funds to your account to possibly trade full-time or supplement your income.

Over the last couple months, the Eurozone turmoil has dominated every market in the world.  This has made it difficult for traders to determine what move to make next.  The markets have shown mostly choppy cycles that have seemed to last weeks as everyone waits to see what will unfold next in EU.  That, coupled with the time of year, forces us as traders to make a determination of turning risk on and off (risk off means not trading).  In this sort of scenario, I'm a large propenent of dialing back risk or going completely risk off.  Conserving equity is a key component of trading and limiting market exposure for my investors is important if there is any uncertainty.

In my trading, I will most likely look to trade at a reduced risk through December 16 and then not trade again until the second or third week of January due to holiday periods.  So many traders and institutions take this time off, and the markets will be trading on lower volume which can make trading conditions even more difficult than 'normal'.  Sometimes this is difficult for traders and investors to "sit on the sidelines", but there is no reason to chase a market that is going to be on low volume and there will be plenty of trading opportunities in 2012 and the years to come.  As a professional trader, I'm in this for the long haul, so a big picture point of view is always the way I try and see things.

 

Trade Leader Outlook blog post written by Currensee Trade Leader, Spencer Beezley.

August is usually a difficult month to navigate for currency traders, and this August was no exception. There are a lot of issues in the world that have yet to be sorted out and traders are having trouble determining the lesser of "two evils" so to speak. On one side, you have the USA and the downgrade in credit rating and debt issues, and the lack of decision making by the FED on what to do next. And then Europe with the PIIGS and the Eurozone crisis and all the things that need to be sorted out there. This confusion was evident in the market by looking at the lack of direction the EURUSD took in August. Some volatility was evident, but the market experienced a sideways range that couldn't breakout of the 1.45 and 1.40 levels, which were tested but never significantly broken through. Now after the first full week of September, the Dollar rallied and broke that 1.40 level and is starting to gain traction against the Euro. We might see some retracement back to the upside but we need to keep an eye on all the numbers and the key technical levels to determine if this will develop into a longer term dollar rally or false movement. Watch for the fundamental developments of strong decision making in Europe and the ECB, or the Fed in the USA.

My plan for the market:

I am a firm believer in sticking with the strategies that I've had success with. However, sometimes traders get in trouble by not paying attention to certain factors in the market that could negatively affect their strategies. Since August was not a month of breakouts, we have to closely monitor price action and key technical levels of market support and resistance, as well as daily range. In August, I found that many of my targets were not reached, because of the ranging nature of the market, which is why I have exit strategies set up in case of a reversal and I certainly don't want a winning trade to be turned into a losing trade. Also, make note that I use a tight stop loss on my trades, so there may be some losses, but they are cut short in order to protect equity and to provide a solid risk/reward ratio.

One of the things that is important is to not over-trade. With my strategies, some weeks will be lighter on volume than other weeks just depending on what the charts look like. Some traders try to avenge losses immediately or during an open floating loss. This is a setup for failure as it is best to wait until the next valid trade opportunity and not to trade off emotion. In August, I noticed that the market wasn't ideal for one of my strategies, so as a result, I stopped trading that strategy until the market gets back to a place where I feel comfortable re-implementing that strategy.

Going forward through September, I am hopeful that the market will have a higher daily trading range and I believe that more valid breakouts and trends will form as traders begin to get a better feel for this current market we are faced with, and how the economies and currencies will be affected. I am also a true believer in technical analysis and stop trying to predict what is going to happen with an economy, rather let the fundamental developments play out which will all be translated into the technicals, chart patterns, and price levels of the currency in which we can base our trades and strategies from.

With chaos and confusion often comes opportunity. I am a firm believer in trading where there's a trade and holding off if the market isn't there. September's rally out of the gate is a positive trend that I'm ready to ride.

To download Spencer Beezley's Currensee Trade Leader profile please click here.