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Trading Tips

Ten habits of successful currency traders

habits

Here’s another post motivated by something I filed away for future discussion some time long ago – like Ten rules for risk management from the other day. Sorry, I can’t recall from where these habits were taken. If you know, definitely pass it along so I can provide due credit.

Ten Habits of Successful Currency Traders

  1. Trading with a plan
  2. Anticipating event outcomes
  3. Staying flexible
  4. Being prepared for trading
  5. Keeping technically alert
  6. Going with the flow/trading the range
  7. Focusing on a few pairs
  8. Protecting profits
  9. Trading with stop losses
  10. Watching other markets

I think #1 is an absolute must. In fact, if well constructed your trading plan will encompass a number of the other things on the above list. It will address what you trade (#7), how you trade (#6), what you consume by way of information (#10), your exit strategy (#8, #9), and your overall preparation for trading (#4).

There isn’t a ton I feel like I need to add, but will say that #2 is worth giving a bit more consideration.

If done properly, anticipation can be a very good thing. It lets you prepare in advance for probable developments. That, in turn, allows you to have a good plan in place for reacting to what happens.

Where you need to be cautious is when anticipation leads you to do things before you should. Overly excited or anxious traders can fall into the trap of anticipating a certain kind of price movement that would generate a trade entry signal, for example, and trading ahead of the signal actually happening.

This tends not to work out very well, as while part of the time the signal will come to pass, other times it won’t. That means you’re not actually trading according to your system or method, which tends to be recipe for disaster. That circles things back to #1. 🙂

Categories
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).

Categories
Trading Tips

You got yourself into this mess; get yourself out

One of the guys at ForexLive posted this Tuesday:

Don’t ask us what we think of your trades.

They suck.

That’s why you’re asking us…

You got yourself into this mess; get yourself out…

It’s snarky, perhaps, but it makes an important point. If you’re asking someone else for advice on a position you’ve put on, you’re in trouble and should get out. You’ve move into hope mode rather than having a solid plan.

Categories
Trading Tips

Ten of the leading trader mistakes

Jim Wyckoff has a good article out which looks at the causes of trader failure.

  1. Failure to have a trading plan in place before a trade is executed.
  2. Inadequate trading assets or improper money management.
  3. Expectations that are too high, too soon.
  4. Failure to use protective stops.
  5. Lack of “patience” and “discipline.”
  6. Trading against the trend–or trying to pick tops and bottoms in markets.
  7. Letting losing positions ride too long.
  8. “Over-trading.”
  9. Failure to accept complete responsibility for your own actions.
  10. Not getting a bigger-picture perspective on a market.

I think this is a very good list. I dedicated a considerable amount of my book (and by extension my course) to developing a good trading plan, and many aspects of Jim’s list tie in with the things I talked about there. I have written previously on the subject of “protective stops“, so I won’t go into that again here. You can also see my recent post about traders letting losers run too long.

For me, #9 may be the biggest one of them all – at least for some people. Too many traders want to blame poor performance on someone else.

I will contend with Jim on the trading with/against the trend in #6 as there are systems that do quite well operating in a counter-trend (often called mean reversion) fashion. That, though, is different from trying to pick tops and bottoms, which usually ends in disaster.

Categories
Trading Tips

From the data: One reason traders struggle

Over the last couple of weeks I’ve been working with the forex trader data I’m going to be using in my PhD research. I included some of the figures I’d pulled out in one of my recent newsletters, but I thought I’d share some additional stuff here.

I’ve pull the following set of numbers on trades which include USD pairs (no crosses), of which my data contains over 2 million records.

Winners: 1,280,459
Average Profit: $60.03
Average Pip Profit: 28.20

Losers: 752,614
Average Loss: $105.14
Average Pip Profit: 63.88

Notice there are many more winners than losers. They represent 63% of all trades. These are retail traders, so it just goes to show that you don’t want to get too crazy about looking to trade against the collective.

Notice also that the average loss is about 75% higher than the average profit. That completely offsets the 63% win rate and results in a negative overall expectancy for the group.

It must be noted, however, that that average loss appears to be due to holding on to losers too long rather than risking too much money. Notice how the average loss in pip terms is more than double the average gain. Traders actually had lower pip values on their losing trades than on the winning ones (on average). They just held on too long.

Here is the problem is for most traders. They are quick to take profits and slow to take losses. This is referred to as the Disposition Effect in Behavioral Finance research.

Much more analysis of the data needs to be done, but these results are very interesting nevertheless.

Categories
The Basics

The Primary Trade Size Forumla

Position sizing is something that comes up ALL THE TIME in the discussions among new and developing traders. Everything starts with the size of the risk we’re looking to take and works up from there.

Here is the basic formula:

Position Size = Amount at risk /(Number of Points or Pips being risked x Value of  Each Point or Pip)

Amount at risk comes from looking at the fraction of your account that you want to be exposed to loss on the given trade. So if you have a $5000 account and want to risk 2% then that would be $100.

The number of points or pips being risked is basically how far away from your entry point your initial stop will be. If you’re getting long at 100 and your stop is at 95, then the point risk is 5.

The value of each point or pip will depend on the market you’re trading.

Thinking in stock market terms where the value of a point is $1.00 per share (adjust for your own currency), the formula would be as follows:

Shares = $ to be risked / (Points risked)

So if you want to risk $1000 and your point risk is 10 you would trade 100 shares: $1000/(10 x $1)

If you’re trading a fixed size contract market such as futures or forex (lots), then it would look like this:

Contracts (Lots) = $ to be risk / (points risked x point value)

In the case of e-mini S&P 500 futures, the point value is $50, so if we want to risk $1000 and have a 10 point stop, we would trade 2 contracts: $1000/(10 x $50)

If we are trading micro lots of EUR/USD where the pip value is $0.10 and we are risking $1000 with a 125 point stop, we’d trade 80 contracts: $1000/(125 x $0.10)

Notice that nowhere in here did I bring up the question of appropriate leverage. It only matters if you don’t have enough available to you to put on the trade you’re looking to do.

Categories
The Basics

What do you trade and why?

A question came up on Trade2Win recently on a new thread. It asked the question of the membership, what do you trade and why? In many ways this is a fundamental question that every trader needs to have a strong answer to in order to be on the right track. So to that end, let me address it for myself.

I have traded just about everything you could think of a retail trader trading. Basically, it’s about finding good opportunities. I’m primarily a technically driven trader who operates mainly in the swing to position time frames, so I don’t need to have the narrower focus of someone who trades in the shorter time frames.

That said, stocks and forex are my two main markets.

In the case of stocks, that’s what I came up following. Back in the 80s when I got started it was still the main market available to retail market participants. I didn’t have the funding to effectively play in the futures market (there were no mini contracts back then). Also, when I read [easyazon-link asin=”0132825244″]How to Make Money in Stocks[/easyazon-link] it really resonated with me in terms of approaching the market. The strategies I use to this day have a foundation in what I learned from that book.

I got active in forex in the early 2000s. This was as online trading was really starting to develop and I was covering the forex market professionally at the time (as I am today). I liked that I could trade at any time of day or night, which you couldn’t really do in other markets at that time. I also liked how technical the forex market was. It suited my trading orientation very nicely.

These days my #3 is stock indices. I go through periods where I will lock in and fairly actively trade the likes of the mini S&P 500 futures. It’s very much a market conditions and available focus sort of thing, though.

What about you? What market(s) do you trade and why?