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Which range target should I use?

A reader asked me the following:

I am a Forex Trader at the beginning and my question is about range trading. I have attached a Screenshot of USD/CAD 4H chart and make some notes about targets and profitability. I want you know what do you think about target 1,2,3 pro and cons.

Here’s that screenshot.

Range Trading
Click for full-sized version

For me the selection of target in a case like this depends on the broader market pattern. If the general trend is positive, then going with a very conservative objective (Target 1) risks leaving considerable profits on the table. I would personally go with something higher, maybe all the way up to Target 3 in expectation that if the market is generally bullish it should reach the upper bounds of the range. If not, then you have a sign of potential weakness.

If, however, the market is in a generally negative condition then I would definitely use the closer target. In that case I would then watch to see how price moved in the range change to gauge whether it was continuing to show weakness (in which case I’d be less inclined to make long trades) or whether it started to show strength.

 

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Tips for someone with no experience

The other day I had a note come in from a young prospective trader:

Hi John,

I have just ordered your book [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link] and I look forward to it. I am an 18 year old from London who has always had an interest in trading but I’ve never pursued it.

Are there any tips that you could offer someone with absolutely no experience. For example, what to keep an eye out for in regards to FOREX stocks, books to read, papers to read etc.

I look forward to hearing back from you,

Kind Regards,

Ciaran

It’s always interesting to see younger people coming into the markets. When I wrote the book it was largely meant to be a companion text for a university trading course I was helping develop and teach. I needed something that covered general principles that I could use to work with a group of students who had a theoretical market understanding, but no real experience – basically, people like Ciaran.

In terms of advice for those just getting started, I would offer a couple of things.

Trade as small as you can get away with.
When you’re just starting out you have a lot to learn and are almost certainly going to lose money. Best to lose as little as you possibly can during this stage.

Once you have the basics down, do some real-money trading
There is a major difference between demo trading and having your actual money at risk. You need to understand the impact playing with real money will have on your trading psyche. This will inform your decisions on time frame, style, etc. For that reason, I suggest at least getting in a few live trades as early as practical to get a sense for it before going back to demo to work on systems, methodology, etc.

Be Patient
Experience makes a massive difference in trader performance, which is something that I plan on discussing in the new book I’m developing. Realize that it will take time for you to learn what you need to learn and to settle in to a good personal trading style – potentially years.

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Expectancy vs. MAR

I had this question come in recently:

Strategy A has better risk-adjusted returns (measured by Annual returns/Max Drawdown, aka the MAR ratio), but lower expectancy than strategy B. It manages to achieve this by having a larger number of trades, even though the backtest period is the same for both.

Which of the two performance measures should I rely on in choosing one strategy over the other?

When dealing with expectancy it is important to not just look at it in terms of per trade figures. You must also account for the frequency of trades. In other words, it will often be best to think in terms of expectancy on time basis rather than a trade one. For example, you could think of monthly expectancy to figure out what kind of returns you would expect to see in a meaningful time frame for your trading. This would be the better way to compare two systems or strategies.

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I am desperate, says a trader

I received the following note the other day with the subject “I am desperate”:

Dear John. Thank you very much for your services, – you are doing a great job! The reason that I am writing you right now is that I am desperate to loosing a half of my modest $2000 option trading account after my subscription of one of the options gurus, JC. I did trust them and I lost. Those people have so much money that they do not care how much one can loose in a trade. Anyway, I need at list to restore my account to the starting point and I am looking for some advice what should I do?

First of all, let me address the comment about the guru not caring about how much one can lose. I don’t know who this guru is or anything about their service. Assuming they are legit and worthwhile (and even if they aren’t), I would suggest that risk management is the responsibility of the trader doing the trading. While the guru may offer up suggestions about where to put stops or otherwise limit the losses on a given position, they cannot (and should not be expected to) tell you how big to trade, or indeed whether you should even be doing a given trade. They simply do not have the proper information. That is your responsibility as a trader to sort out for yourself.

In this particular instance, I can’t help but wonder if the trader in question was simply not financially capable of following the trades of this particular guru. It may be the case where the guru has several positions on at a given time, expecting the odds to work in their favor by maximizing the opportunities for them to do so. If a trader is not sufficiently capitalized to do the same, they risk not matching the guru’s performance because they are trying to cherry pick.

As for making the account whole again, I would tell a trader in this situation to put that out of their mind. Either add more funds to the account or reset your mental state to the current account balance (which really should be done on a continuous basis anyway). DO NOT attempt to quickly make the money back. That’s a recipe for disaster. Take a systematic approach to build the account back up based on a clear trading plan, assuming you have one.

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Reader Questions Answered Trading Tips

Learning to ask the right questions about your trading

I had the following note come in over the weekend. Not only does it say nice things about my book 🙂 but is also addresses some very important points.

Hi John,

I bought your book because I’ve recently started trading index futures but my inner voice said something was not quite right. I started with a $10k account and got stopped a couple of times, so I was at $9780. At that point I realized that I was missing my entries because I was too busy running my own design business along with other domestic duties. Then I came across a paragraph in your book about the amount of dedicated, uninterrupted time it takes to day trade futures. Bingo-I was glad I stopped early and kept most of my capital. My mentor never mentioned any of this. Now I’m starting over and working on setting up a trading plan that can fit me — swing trading appears to be the goal at this time. I’ve been searching high and low trying to find information on how to really set up a good trading plan and your book is the first one I’ve seen that really addresses this important issue.

Sincerely,
Michele

Firstly, I’m glad Michele recognized early that she had a problem. It would have been better had she done so while demo trading so she didn’t have to lose the money she lost, of course. I definitely encourage getting real money trading experience early on in one’s development, but that doesn’t mean demo trading doesn’t have a proper place in sorting out one’s strategy and trading plan. Fortunately, Michele didn’t have to suffered an overly hard lesson.

Secondly, it doesn’t say much good about her mentor that they failed to take into account Michele’s schedule when helping her determine a good way to take on the markets. A mentor is supposed to factor these sorts of things in. Maybe we’re talking a specific stylistic mentor here, someone who focuses on one type of methodology (like day-trading S&P futures). Even still, though, they should recognize someone who is not suited for their trading approach (see Trading Coaching and Mentoring).

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Budding student trader query

The following was posting on a trading forum site.

Hello all, im looking to start trading, i am going to try trading full time in July and August and then part time when i return to university in September. I have £1000 set aside to begin do you think this is adequate? I am going to take an aggressive approach and risk £300 per trade but pick my trades very carefully.

Just by way of clarification, this person is looking at stock trading.

How would you respond to this post?

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How to tell if you’re over-trading

A trading forum poster recently asked the question “How do I know if I’m over-trading”. Over-trading is a trap many of us fall into, especially during our early developmental stages in the markets. At that point we haven’t gotten a hold on the emotional side of things quite yet (though sometimes we don’t even realize it), so feelings like greed, excitement, boredom, etc. drive us to over-trade at times.

I look at over-trading in two ways. One is trading too big. The other is trading too often.

Over-trading by trading too big
Risk management is obviously a major factor in one’s chances for trading success. Each of us needs to find the risk level which suits us and our style of trading. That may be 1%. That may be 10%. Some folks like to say you should trade just below the point where you’d have trouble sleeping at night.

A somewhat more empirical way of knowing whether you’re over-trading in terms of size is to look at the period-to-period volatility of your trading equity. And don’t just think in terms of losses. Large gains are just as indicative of trading too big as large drawdowns. If you’re account jumps 10% in a single day (assuming it isn’t because of an extraordinary market move), that’s a pretty good indication your trade(s) is/are over-sized. Sure, a 10% one-day gain sounds great, but the problem is it means you could probably just as easily take a loss that size.

Over-trading by trading too often
The issue of trading too frequently is one that can get a bit more complicated to diagnose. It’s not just a question of the number of trades you do. It’s a question of the quality of those trades. One trader could trade 100 times a week and not be over-trading while another trader could trade 5 times a week and be doing too much.

Lots of different things motivate over-trading in this fashion. I think they can mainly be resolved by asking the question “Am I looking for a trade or am I waiting for a trade?”

If you are looking for trades then you are subject to all the emotions that get you to enter positions when you probably shouldn’t. These include really dangerous mindsets such as thrill seeking and revenge trading. This puts you at risk of taking bad trades just for the sake of doing something.

What are your experiences with over-trading and how did you get yourself back on track?