Trading Tips

A rookie trader’s plan


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.

Trading Tips

Some more forex trading tips

risk management

Mike over at The Financial Blogger recently offered up his seven tips for staying safe while trading forex. They go something like this:

– Stick with what you understand, from both a positive and negative perspective.

– Know your risk tolerance and how you emotionally handle your exposure in the markets.

– Have a clear strategy and stick to your trading plan

– Never add to a losing position

– Keep things simple

– The trend is your friend

– Control your emotions and minimize their effect on your decision-making

I can see folks taking some umbrage at the trend one. There are many who consider themselves mean reversion traders. Certainly, those types of strategies can work. The aren’t so good in trending markets, though, just as trend systems get hurt in ranging markets. That’s why having a multi-phase approach can be very beneficial.

The controlling your emotions advice is something you often here. The trouble is, it’s harder to say than do. Further, emotion is an important part of our decision-making process, whether we realize it or not. In fact, I’ve seen research which suggests we actually make decisions emotionally much more quickly than we can consciously, and as a result what we end up doing in what we think is the decision-making process is just rationalizing the decision. Something to think about.

Beyond that, Mike’s got some fairly good, if not particularly new, advice or traders – forex or otherwise.

Trading Tips

A forex trading interview

I’m finally on YouTube!

Well, at least my voice and a somewhat dated picture of me have made it there. I did an interview about forex trading yesterday with Jason Decks which he recorded and has posted. Being immersed in my PhD work, I hadn’t done an interview like this in a while, but I think it went pretty well.

The interview was mainly aimed at new and developing traders, but it does cover some broader ground, including some discussion of forex trader performance and what I’ve found in my research.

Have a listen and let me know what you think.

Reader Questions Answered

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,


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.

Trading News

Forex broker profitability figures likely overstate trader performance

A couple weeks ago I began a discussion of retail forex trader profitability with my post Starting to detail forex profitability data, which generated some meaningful exchanges in places like (Trade2Win, FXStreet, and BabyPips). That post was really the tip of the iceberg, however. I am going to continue to post on the subject moving forward as my PhD research unveils new, interesting and useful information. To that end, I want to expand on my first post.

The quarterly profitability figures reported to the CFTC by the US forex brokers are meant to provide a degree of transparency to prospective (and current) traders. As I noted before, however, they are extremely limited and don’t really do a good job of telling the story of trader profitability. They may, in fact, provide a distorted view of reality to those who don’t understand them properly. I previously looked at the rate at which profitable quarters were seen coming back-to-back – the degree of consistency in performance. To put it briefly, there isn’t much.

The data I used in that analysis was based on active brokerage accounts, just as the CFTC-reported data is also based on active accounts (defined as those doing at least 1 trade in a given quarter). Here’s the thing, though. Some traders have multiple accounts. This is not the majority of traders by any stretch of the imagination, but to the extent that these multiple accounts are active they can potentially influence the broker profitability figures.

That being the case, I re-ran my analysis using trader performance rather than account performance measurement. In the chart below I’ve differentiated the results from my data between the initial view based on accounts and the new one based on individuals, which aggregates all the accounts held by one person into a single reading.

You will notice that in all cases there is a noticeable drop between the By Accounts and By Traders figures. This tends to suggest that the best performing traders run multiple (profitable) accounts, which is interesting in and of itself. I’ll likely follow up on that tidbit later.

More importantly, though, it suggests the broker-reported figures may overstate actual trader profitability rates by at least a small degree. In my data there are nearly 5900 traders who have done trades in almost 8500 accounts. This likely represents an overstatement of how many accounts traders run, however, as sub-accounts for at least one major broker are each treated as separate accounts in my data set and are not likely done so in the CFTC-reported figures (though confirmation of that would be worthwhile). As a result, a shift from account-based metrics to trader-based metrics may not show as much of a variance as seen in my own data. Still, the broker figures do potentially overstate things a bit.

Something else to think about is the impact of copy/mirror/social trading. My data has specifically excluded it where such activity could be identified (which is a lot). I’m studying individual trader performance, after all. Those trades automatically be copied from someone else don’t really further my research. If, however, traders are having profitable trader trades copied in their accounts (which hopefully is the case if they are engaging in social trading) then this also will tend to skew the CFTC-reported profitability figures positively, overstating the performance of traders who actually make their own decisions.

Trading News

Starting to detail forex profitability data

Each quarter US forex brokers are required to report customer account profitability figures, a requirement which went in to force in 2010 (with data back to 2009). As of this writing, the most recent update available is for Q3 of 2012, which you can find over at Forex Magnates. On average, these reports show that about 30% of active customer accounts are profitable in a given quarter. These numbers often get trotted out as countering the oft-repeated suggestion that 95% of traders fail, a topic which always gets a lot of conversation going when brought up.

While these profitability¬†figures provide some interesting information, they are severely limited. This is something which doesn’t seem to be understood by many forex traders. The broker numbers are only a snapshot view for a 3-month period. They include anyone who has done at least a single trade (the definition of “active”), and profitable can mean a gain of $0.01. As a result, they don’t give us a lot of useful information. Most importantly, they don’t give us any idea of what % of traders are successful in the long run, because we have no idea (from the data) what fraction of the 30% are consistently profitable from quarter to quarter.

In this post I want to address the consistency point using some data I have on-hand for use in my PhD research. It comprises the trades completed by nearly 8500 accounts between January 2009 and April 2012 – a total of over 2.7 million transactions.

To facilitate reasonable comparison, I’ve produced quarterly figures from the trade data which are comparable to the broker-reported figures – namely % of active accounts profitable. Here’s how the traders in my data set stack up:

The accounts in my data come from all over the world and a large number of different brokers. In acquiring the data set I was looking for something which would be fairly representative of general individual trader activity and performance. As you can see in the table above, though, the accounts in my data have consistently shown a higher profitability % each quarter than those reported by the US brokers. This isn’t enough data to call the difference statistically significant, but I think we can safely say that the traders in my account are somewhat better than average, at least using this % profitable metric.

I make mention of the above to frame what I’m about to present.

Since consistency of performance is not something we can get from the broker-reported figures, I decided to take a look at that. This is a very basic study, but it provides some insight, I think.

Basically, I looked at each trader account to see how often a winning quarter is followed by another winning quarter. My data covers 13 full quarters.

Here are some of the notable bits from the figures:

  • Out of the nearly 8500 accounts noted above, 4596 accounts (54%) had at least 1 profitable quarter somewhere along the way.
  • There were 7634 total profitable account-quarters – meaning if we add up the profitable quarters for each trader and sum that all together we get 7634. If we compare that with the 20,724 quarters in which accounts did at least 1 trade we get about a 37% quarterly profitability rate, which fits in pretty well with the figures from the table above.

Now, since the question is one of consistency, I broke things down based on traders winning in back-to-back quarters. Removing accounts which only traded in Quarter 13 (thus having no back-to-back quarters) gets me down to 7933 accounts.

  • A total of 4239 accounts (53%) had at least 1 winning quarter, and there were 6860 winning quarters out of 18,849 total quarters traded (36%), both about in line with the numbers above.
  • Only 4381 accounts actually traded in more than 1 quarter, and of that group 2930 had at least 1 profitable quarter, which is about 67%.
  • Of those with at least 1 profitable quarter, 1250 were able to have back-to-back winning quarters on at least one occasion, about 43%, producing 2211 total back-to-back winning quarters across all accounts.

In order to look further at the frequency at which back-to-back profitable quarters are seen we have to account for the fact that anyone with a first profitable quarter in a potential back-to-back as Q12 will not be counted because there is no Q14. By that I mean while the data will show a back-to-back for Q12 and Q13, it cannot show it for Q13 and Q14. As a result, while 1250 accounts had back-to-back winning quarters, thus at least 2 winning quarters overall, only 950 accounts can be evaluated in terms of going back-to-back multiple times.

  • Of the 950 accounts with at least 2 winning quarters we could test for repeat back-to-back, there were 434 (46%) who had better than a 50% rate of doing so.
  • There were 241 accounts (25%) with a 100% success rate in following one profitable quarter with another.
  • Among the 214 testable accounts with 4+ winning quarters, 171 (80%) were successful in going back-to-back more than half the time, with 67 being 100% successful (31%).

In other words, the consistency rate is low in general terms. On average, less than half of those who make a profit in one quarter do so again in the next quarter. That means we can expect less than 15% of accounts to be profitable in consecutive quarters, based on the broker-reported data. And seeing as the data I’m using here is from what looks to be a somewhat above average group of traders, we can probably shave a bit off even that 15%.

Furthermore, even among the 15% who are able to repeat, less than half are able to do it multiple times. That means not only is there no consistency among the profitable traders broadly, but there’s not a great deal among those who experience success – at least until you get further out into those who have a history of repeating.

This isn’t a complete analysis of the profitability figures, obviously, but it’s a start. In the future I’ll post some additional numbers to further the discussion. Comments, suggestions, and thoughts are both welcome and encouraged.

Trading Tips

Optimism in trading is good, to a point

Jess at Rogue Traderette recently posted on the subject of optimism as a key requirement of traders for long-term success. I tried leaving a comment, but it was either lost in the system or deleted, so I figured I would post my thoughts here.

First, I generally agree with Jess that a certain sense of optimism is required in trading. Perhaps resilience is a better choice of words, but the idea is the same. The market is going to throw a lot of negativity at you and you need to not let it do any lasting damage.

That said, I have two counter-points.

First, we humans have a tendency to attribute things that go positively for us to the validity of our own decision making, or skill, ability, etc. even though it might just be random dumb luck. Similarly, we like to place blame for when things don’t go our way on external factors (brokers, market manipulation, regulators, etc.). We have plenty of anecdotal evidence for this in trading forums and elsewhere, and these are documented biases in the psychology research literature.

Second, being optimistic can mean not doing a very good job in terms of risk management. By that I mean those inclined to think happy thoughts can very easily under-weight the negatives in their market analysis, trading plan development, etc. That leads to taking positions which are too large, putting on trades which should be avoided, and other things which can cause considerable harm. When deal with risk, it makes a lot of sense to think first about the prospect for loss.

New traders are very subject to these issues. After a few slaps of reality in the form of losses, though, most folks who stick around long enough get things sorted out.