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Trading Tips

A rookie trader’s plan

rookie

A while back, Mark Wolfinger (a contributor to Trading FAQs) was asked by a rookie trader to comment on his trading objectives and plan. Basically, this newbie had set himself the nominal goal of making $2ooo/mo from the market trading options. At first appearance, an objective like that is nothing new, especially for those who have it in mind to reach the point where they can trade for a living. As the following question quickly made clear, however, this was a person with zero trading experience.

“Should trading be limited to strictly paper trading or is there an advantage to trading very small sizes with real money?”

I’ve already shared my views on demo vs. live trading before, so I won’t tackle that subject again here. Instead, I’ll piggyback on some of what Mark has to say in his post.

Firstly, he talks about the importance in considering what the $2000/mo objective is relative to one’s capital. As he notes, if your account is $20k then you’re talking a 10%/mo return, which is quite ambitious to say the least. And looking at things from the other side, if you’ve got $1mm then such a small objective is hardly worth the effort. You can make more with very simple investments.

The big thing in all this, though, is that if you’re a beginning trader you shouldn’t be thinking about anything above and beyond getting first to being a break-even trader. You’re going to make a whole bunch of mistakes that will cost you money. Consider that a given and you won’t be disappointed.

Once you’ve worked your way through that phase you can start focus on making any kind of consistent positive return – over whatever time frame is relevant to you. Having achieved that, you can then start scaling things up and begin to think about profit targets.

Personally, I’m not a profit target type of trader. But then I don’t trade for a living and have no desire to do so. For others, it’s a bigger consideration because they need the money to pay the bills.

Mark offers up some other good new trader advice, so definitely give his post a read.

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Reader Questions Answered

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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Reader Questions Answered Trading Tips

Taking Your Trading to the Next Level

A really interesting question came in overnight from a trader who is still relatively new to it all, but who has achieved a fair level of success.

Hi John,

I’m a long time listener, first time caller. I started reading your blog when I first learned how to trade. I’m now at a point where I’ve found a system that’s suitable for my personality and has a predictable success rate. Although I still make mistakes sometimes, I’ve been disciplined enough to be profitable for the past 3 months.

My question has to do with maintaining high level of performance. I’ve only been trading for about a year so there’s a lot that I don’t know. In my head I often compare traders as athletes, where skill is necessary to compete and win. In sports there’s always the “next level” (high school to college to pros, etc.). What is the “next level” in trading? In the past 3 months I’ve made 5-10% monthly return. Should I strive for 20%, 50%, 100%? Should I set my goal to increase my win percentage?

Also, back to the sports analogy, athletes spend their time practicing when they are not competing. It is crucial to keep their skills sharp. Right now I spend 2-3 hours per day trading the four-hour and daily charts. How should I spend my time outside of those 2-3 hours? What can I do to keep my trading skills sharp?

Thank you very much in advance.

Kind regards,

Andre

The first thing I want to point out here is that Andre says right off that he’s found a trading system suitable to his personality. This is key. It’s probably the one thing new traders don’t understand about being able to reach a level of sustainable performance in the markets. If you’re system doesn’t fit you then at some point the conflicts are going to create problems.

Now, as for the comparison of trading to athletics, it’s certainly often made. I’ve done so myself. There are some differences in this context, however. Much of what athletes do with their constant training is to maintain or improve their physical attributes. Clearly, that isn’t something traders really need to worry about. It’s not like clicking the mouse is physically demanding, after all. The other side of things in terms of working to develop new skills and/or refine existing ones is relevant, though.

Taking the physical element aside, athletes work a lot on getting better at what they do in a few different ways. The most obvious is training – practice repetition. I don’t think I’m going too far out on a limb to say that Andre probably doesn’t need to practice using his system. What he may need, though, is the other side of what athletes do for development. That includes things like reviewing their performance on video and getting input from coaches. Performance review is definitely something which can help traders.

An important part of any trader’s development is monitoring their performance on an on-going basis. At its most basic level that means making sure you’re doing what you’re supposed to be doing according to your trading plan. If not, then you know you need to work on that as a first priority.

Another aspect to reviewing one’s performance is to look at how one’s system is doing in terms of expectations. Is the system making the trades it’s supposed to be making and/or avoiding the ones it isn’t supposed to make? If not, then the question of why needs to be addressed.

This is not to say that skill development isn’t a part of trader development. Experience will certainly make you a smarter trader over time, but there are other things which can be done along the way. Learning new methods of analysis can be part of that equation. Doing trading system research is another possible path, depending on your needs and interests. It’s almost always worth at least exploring ways you can improve things like risk management and market analysis.

As for Andre’s question about what the “next level” is, I’m inclined to lean against focusing on the rate of return itself. More important for just about everyone is making incremental improvements to following their system, avoiding errors, and the other sorts of things mentioned above. That will often translate into higher returns, but returns aren’t necessarily the most important consideration. Sometimes better trading means lower drawdowns and/or a smoother equity line overall.

In fact, taking it to the next level can mean a number of things which don’t relate to performance at all. It could mean trading with a large account. It could mean expanding the number of securities and/or markets you trade. It could be shifting to more advanced trading strategies, like employing options. The bottom line is that the next level is what you decide.

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Reader Questions Answered

Professional Trading: How Long to Get There, Are Good Genes Required?

I got a set of questions from a member of my mailing list over the weekend. They bring up issues that are the source of some intense debates among traders at times.

How long does it take for someone to be a professional trader?

How is preparation to trade successfully compared to training of an Olympic medalist?

Is trading hard or easy?

Is talent required to succeed in trading like genetics in sports?

Let me take the hard/easy question first.

The actual act of trading is incredibly easy. Click a button and you can buy or sell instantly. Anyone can be taught to do that. Trading with consistent success is definitely not easily accomplished. Actually, I should say that successful trading can also be easy, but the path to get there is most definitely on the hard side for just about everyone. To relate it to sports as the questioner has done, high level athletes are often said to make the execution of some skill look easy, but we know it took many hours of dedicated training and practice to reach that point.

Now, in terms of how long it takes to become a professional trader, that depends on how much consistent work and effort is applied. I’ve heard that bank training programs intended to bring a new person up to the point where they can be depended upon to handle the firm’s (and/or its customers’) money without doing too much harm can run a year or longer. That’s usually a combination of classroom work and on-the-job training with an experienced guide. If you figure 40 hour work weeks for 50 weeks a year you’re talking about 2000 hours.

Even that might not be enough time, though. I’ve mentioned previously the idea that 10,000 hours are required to gain a high level of proficiency (see this Trader’s Narrative article). That’s five years of 40 hour weeks, which actually just about fits. I think you’d probably find that the good Wall Street traders have at least that much time on the desk in the majority of cases. There are ways to speed things up a bit, perhaps, but it’s still a lengthy and involved process. In that respect it is akin to the development of an Olympic athlete.

As for genetics or talent, I can’t say with any authority. Obviously, some minimal level of mathematical ability is required. Beyond that you start getting into the nature/nurture debate. I personally think both are required and to some degree more of one can offset less of the other.

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Reader Questions Answered

Learning Trading from Scratch and Starting Small

Here’s a pair of questions I received recently. They are from a brand new trader and really do well to reflect the types of questions and concerns people just coming into the market almost always have.

I just started off using the FXCM Micro demo account. Since the the account is demo, and it is loaded with $5000, i trade as if it is a game and gain some profit. so after a few days time, I register a LIVE account, but with very small capital like $150 only. Trading on LIVE account has different experience, i have more fear. And I hardly gain profit due to unable to maintain the margin of slightly bigger fluctuation.

So, the questions that come across my mind is:
1) Is that possible for a person with really small capital to gain profit (or generate profit to increase the capital) from the Forex trade?
2) Can a self-taught person learn Forex from scratch without attending courses (maybe because of financial status limitation) ?

My questions might seem naive but I do hope there is some one that could enlighten me with some advice. I am really looking forward to hearing from you again.

First of all, readers will have seen me say on a number of occassions that live trading is different from demo trading. This note confirms that. It’s why I have said repeatedly that I’m in favor of new traders getting their feet wet in real-money trading (with a very small deposit) as early as possible.

As for the questions:

Can someone with a very small amount of capital make money in forex?

Absolutely. A major advantage to forex trading is that the barriers to entry are low. It’s possible to trade small positions, and with the likes of Oanda you have no minimum account balance or trade size.

Having said that, if you start with a $100 account you cannot expect to make big dollars in profits. Even if you make huge percentage gains you still won’t have made much actual cash. That being the case, your best approach is to focus on the % return and not on the actual dollars. If you do that you will get a lot more satisfaction out of your successes.

Also keep in mind the power of compounding. You can start small, but if you generate consistent gains, and make contributions to the account along the way, you can actually turn that into a decent amount over time.

The thing to be avoided, however, is trying to swing for the fences. Many small account traders think “It’s only a little amount of money. It doesn’t matter if I lose it.” Then they max out their positions and take a big loss. You’re not going to grow your account that way, and the losses can be extremely deflating.

Can a self-taught person learn Forex from scratch without attending courses?

Again, the answer is “Yes”.

I need to add in a big “but” here, though. Trading education resources like books, videos, courses and such accelerate the learning process. For example, you’re going to move much more quickly along the learning curve if you read an book explaining things like price quotes, calculating P&L, margin and leverage, and order types than if you just fumble your way along. Think about how long it takes to read a book vs. how long it takes to work through all the inevitable basic errors and misunderstandings that are bound to come up without that initial knowledge.

This early part of the learning curve is something where educational resources are most helpful. That’s why I wrote The Essentials of Trading. Once you get beyond the introductory education, experience becomes the most important driver of knowledge and expertise.

Now, having noted the value of basic education, I am not a fan of people paying huge amounts of money for it. I’ve heard of new traders spending thousands of dollars on seminars and such. That’s a massive waste is almost all cases. You should only ponder a higher expense course or program after you have a good foundation and a strong awareness of where you need to develop your know-how and skills.

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Guest Posts Trading Tips

One Trader’s Path – Guest Post

One of my list members answered the call to contribute some thoughts on trading and trader development to share with others through a guest post. He’s asked to remain anonymous. I think it provides a fantastic perspective on what it really takes to become a successful trader – hard work and experience.

It took me many years and thousands of hours of market watching to develop my proprietary trading methodology. The baggage from my old “learnings” was so heavy that I was unable to trade successfully until I got rid of it. Then I stopped trading for about two years to get rid of bad habits.

There is always a price to pay for education. For some it may be losing several accounts, for others it may be hiring a good mentor to teach them; for me it was the school of hard knocks and even living at the border of impoverished conditions in order to study the market, back-testing and forward-testing several trading strategies until I finally developed a proprietary trading methodology that gives accurate entry/exit signals with levels for stop loss and profit targets. It was back tested with 5 years of data, forward tested in a virtual account successfully for six month and I am currently forward testing it in a live account.

Success comes with knowledge. Knowledge comes with experience. Experience comes with time and hard work.

I believe that one needs one good trading methodology to enter a world that no one ever really sees until you are there yourself. I am determined to enter this world this year and I will be happy to take many with me, if they so choose. I am taking baby steps toward that world and it is a great feeling.

I definitely don’t know everything. In fact I know very little and I am finding out the longer I live the less I know. I do make mistakes like everyone else; but I learned to quickly correct them with no ego involvement. Hesitation has little reward in life and none in trading.

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Trading Tips

Good Trading Goals: Focus on what you can control

Alex at My Trader’s Journal got me thinking about objectives with his 2009 Goals blog post. In it he discusses the goals he is thinking about setting for his trading this year. He’s got one or two things he talks about fixing in his trading moving ahead, but a big part of his thinking seems to be on performance.

Performance based trading goals
I am not personally a big fan of traders making goals to achieve some given % return for the year (or any given timeframe). The simple reason for this is that whether you achieve your objective or not tends to be based on things out of your control. By that I mean for most traders the market is the biggest deciding factor in whether a given performance objective can be reached (or exceeded) than anything else. If the market just doesn’t provide the good opportunities you need, there really isn’t anything that can be done. In that case, missing the performance objective doesn’t come down to anything you could do or have done.

The exception to that general rule is traders who have short-term strategies which produce a high trade frequency. That high trade volume tends to produce a higher level of performance consistency and predictability.

Execution based trading goals
What I do like to see traders have is objectives based on execution of desired actions – things they can control. For most traders this often boils down to not doing something which has consistently proven detrimental to performance. Trading against the longer-term trend is an example of that. Not trading in the US afternoon might be another some forex traders would have. Or, to put them more positively, trading with the trend and trading in the more active times of the forex trading day.

The idea here is to develop consistency of trading effort and execution. If you consistently do the things you should and avoid the things you shouldn’t, then the performance will tend to follow.

It’s like I used to tell my players when I was coaching: You cannot control what other people do or what external events may impact you along the way. You can only control your own mindset and efforts, and how you react to things. Focus on that and good things will happen.