A brief summary of what I learned in the past 17 years
Dear professional traders and fellow learners of the market,
I would like to take this opportunity to share with you what I've learned over the past 17 years of trading in a brief, easy to understand, point form.
I started trading in the floor around 18, back in 2001. Now I'm 34, and doing my own prop shop.
I'm not a commercial trainer. Most of my teaching is done at various Universities in Asia, primarily for students coming from central banks and commercial banks, specializing on the topic of using FX as means of treasury management, on an institutional/national level.
As a sideline hobby, I do trade on MT4, and develop indicators and EAs for personal/friends use, typically for free.
Let's begin with what I've learned about MT4:
1. MT4 is a Russian software designed with the B-booker in mind., ie. Market Making.
2. Only in the last 10 years where a few companies started making bridges can MT4 truly reflect quotes from larger qualified liquidity providers (LPs)
3. MT4 is a very slow piece of software. It typically display 10-20 ticks at most per second, is single-core non threaded, and most calculations of indicators on MT4 are incorrect and/or misleading due to the inherent weakness of the software. Comparatively, a pro platform can support hundreds to thousands of ticks per second. So please, don't try to do HFT on MT4. Cost and internal latency will eat you up.
4. MT4 only show Top-of-the-book (TOB) quotes. To fill a larger position, the bridge provider typically need to VWAP the entire market depth for you. This means that slippage is very real, and tick scalping doesn't work beyond 6 digits of capital. Of course, if you're using a market making broker, ie. B-book, they can fill you at the artificial price but usually they don't do that. They prefer to requote, offquote, or delay execution, to prevent predatory trading.
5. Predatory trading comes in many forms - They are known as Toxic flow. Things like latency arbitrage, tick scalping, LIFO hedging etc. Typically brokers don't like them, so does liquidity providers.
6. STP or ECN brokers simply means they are A-book for larger trades which they cannot fill in time. Since LPs do not like to take trades smaller than USD 10,000 notional value, a 0.01 lot trade would need to be aggregated into a bunch in the broker's books before sending them out to the real LP. By then, usually the priced has changed, thus, the broker would have to do a Two-way or Three-way give up trade, fill your orders internally first, and then deal with the risk.
7. Somebody has to fill the other end of your trade. Doesn't matter whether its a broker, or a liquidity provider, or an aggregated pool of liquidity provider, be it light pools, dark pools or neutral pools. This naturally means stop losses, being market order, can have slippage. This also means that there is limits to how much you can make in the FX market per trade. For example, if you hit 1-2 yards per clip, you're going to have a lot of issues and you first need to call the bank for a two-way quote. Someone has to lose for you to win. Nobody likes to lose forever. Go figure what's the implication.
8. The larger your trade size, the larger the spread. Thus, if you're scalping 3-4 pips and making 100% daily on a small or cent account, doesn't mean you can do that when you hit 6-7 digits.
9. MT4 cost to traders are expensive. First you need to pay the LPs, then the bridge provider, then the broker. In some cases, especially if the broker is whitelabel or greylabel, you have to pay for the markups. Comparatively, larger fund houses pay very little commission (eg. $2 round-turn per standard lot) and/or get paid to trade. This is called Payment-for-flow, where since they contribute to liquidity, the traders are paid a little bit per million instead of having to pay commission to the broker supply chain. Therefore, a tick scalping system that works for them, will never truly work for MT4 users, in the long run.
10. VPS does not make a system more profitable. This is because, even though you may be 1ms to the Equinix Server, it does not solve the issue of the inherent lag of MT4 software, nor the lack of specifically required prices you demand from the real market. This also explains why professional hedge funds and prop shops, if they are doing short term trading, typically use limit order derivatives like Fill-or-kill (FOK), All-or-none (AON) etc etc. Typically in the market there are >20 types of orders professionals use. MT4 only has Market, stops, limits.
Some things about the real world market:
1. There is no real legal tender traded in FX. It is based upon credit, which is settled by transfer of credit from one LP to another and then from the LP to the broker, settled by BIS (Bank of international settlement) on a daily basis around 5pm EST, where swaps will be incurred.
2. Price moves primarily not due to amount of money that is traded or exchanged hand. Price moves primarily due to level of desperation. Either to buy when perceived FV > PV; and vice versa for sell.
3. Stop hunting is very real. However, it is not to hunt specific individuals. It is simply for liquidity providers to provider execution and fills to a bulk of block trades or a bulk of small orders congregated at a certain price, usually pending orders. Obviously stop orders is one type.
4. Of the very few banks that are still allowed by regulation to engage in buy-side prop trading, most do not use stop losses. There are two primary reasons. First, they do not want to expose their clients' position and/or level of desperation to the market depth unnecessarily. Second, they hedge their losses with inter and intra market instruments. Think covered-call or calender spreads. Of course, in spot FX it is more difficult to do so but they can always use cross asset hedging.
5. In contrary, a retail trader should not copy them. Not only does retail trader do not have access to deep pockets - They usually do not do proper hedging. If one thinks that, for example, buying 1 lot of EURUSD and shorting 1 lot of USDCHF, given that they are historically 92% inversely correlated, is considered hedging - one really need to rethink. And rethink a lot more.
6. Some people make 100% a year. Some people make 100% a month. Some people make 100% a day. All are good. But if you want to be the top league, here are a few stats for your reference. The top performing prop shop (I am referring to those less than 50m USD capitalization); typically makes on average 150 pips (not points) a day, have a DD around 20-30% max, has an average holding period of less than 1hr, has winning probability typically around 50%, has a risk to reward ratio that is favourable (thus allowing a low winning percentage). This is not to say that if you are making 20 pips a day you are not pro. Yes you are. However, if you want to be the best of the best, you need 200 pips a day. And yes, it is possible, just very rare for retail traders.
7. Market changes every few months. Now with the trade wars situation going on, it changes every few weeks. If you're a technical trader, be prepared to curve fit a lot every month. If you're a fundamental trader, pay attention to short term news. If one wants to make it big (>10m) in FX, one should respect all types of studies, including but not limited to: Technical, Fundamental, Global Macro, Pair Micro, Correlation, Volatility, Sentiments etc etc. The list is non exhaustive.
8. If I were to summarize what the market is: I would say: "The market is a location for everyone to express their own opinions of this world". What this means, using a oversimplified example: A optimistic trader tends to buy, a pessimistic trader tends to sell, some people cut loss out of fear, some people cut loss out of discipline etc etc. This is also to say, the market never moves in a straight line because of two reasons. Number 1, everyone is expressing different opinions, thus some buy some sell. Number 2, money is made from a counter-party that made mistakes so that you, being opposite of him/her, can win. Everyone takes turns to lose and then win. If not, market is a straight line. Then everyone would be rich, thus making everyone poor. When everyone is a millionaire, a piece of bread would cost 10k.
9. Statistically speaking probably around 75-80% of traders lose money. However, there is not enough statistics to show how much they lose; nor is there sufficient data to show how much the 20% win and how long they will last. Money basically exchanges hand on a second-to-second (or even shorter) basis in the market. If you net win, you are a winner. Most traders are not happy. Because when they lose, they are obviously not happy. When they win, they feel they didn't win enough, so they're not happy. Be water my friend (Quote Bruce Lee), and be happy my friend. Happy traders make more money.
10. To win big sums of money, you really need a few things. First, you probably need a proper credit line with a Prime Broker. (Prime of Primes are just marketing terms, they are just resellers of liquidity). Or at least, the broker you use must have enough collateral with a clearing firm or clearing bank. Second, try to get non-last look, anonymous, unfiltered data. Nobody likes to lose to you forever. The least you could do is to spread out your wins from different sources, give the LPs enough time to fleece off retail money (HFT not recommended for retail), and then pass it on to you. Third, try to be well capitalized (>5 digit capital) if you want to make it big. Obviously if you are just trying to make 3-4 digits a day you might not need that. You can, sometimes, make 3-4 digits a day using a 3-4 digit account. This is conditioned upon an excellent set of money management, risk management (They are not the same), psychology management, computer algorithm management (if you're administering a robot), trading skills (general term) etc etc.
Attached is a sample of what I do on MT4. It is purely for motivational purpose. Its last years, and with a B-book broker. I do not recommend using them. You should try to use a ECN broker as much as possible, and keep cost relatively low (Nothing more than $7 per lot, round-turn). And lastly, I trade on MT4, as I stated, as a hobby to test concepts.
Hope you learned something and if I'm wrong on certain concepts, please feel free to correct me. I am a student of the market, just like most of us are. And just like in trading, we do not have to be correct all the time.
P.S. Please do not email or PM me asking me to sell you some magical technical systems. The system that I use is just renko with some moving average. It is mediocre at best, and not predictive (sorry to say), and thus, I cannot sell things that are freely available. I focus a lot of fundamental and global macro from free informative and news websites too, where FF is one of them,
Thank you and have a good trading day!
Well done and thanks for sharing.
Thank you for your kind comments. Na gode sosai!
Very detailed and motivational post, well written Mr. He
So the market is basically a nasty slaughterhouse. Who knew!
And you have handsomely triumphed through the shitshow.
Very informative information. Thank you but it doesn't help me.
Not that you have an obligation to help or anything but the info you provided doesn't help anything.
If someone can outline how this helps them in any way let me know.
I can't change the nature of MT4, I can't change my broker and it's devices to make trading possible. I already dropped VPS because they suck....and yes my list of things I can't do to improve things is also none exhaustive. In other words, I have to do with what I have got and my $100 to $84K will mean a lot more to me when I get there.
Anyways thanks for taking the time to write a wonderful well worded explanation. I believe that you are a teacher well in command of your thoughts and thanks for the cherry PDF on top. However, I am still unchanged and walking away with nothing. The whole article says this: Life is a bitch and then you die (except that I, myself didn't and I'm not telling you why because I'm staying alive by being mediocre).
I'm sorry that you felt this way. I have "died" at least 3 times in the past 17 years in the hands of the market and myself, unofficially from millions to bankrupt 3 times and over. The first time was when I was 21, but I blew it within a few months by doing martingale (So I do not recommend it). Second time was when I was 24, blew it on drugs, alcohol and hookers. Third time was in 2008 when I overconfident of the housing markets (I've learned to pay attention to fundamentals more since then). When I made those money, I used to think I was great. But over the years I've learned by observing masters and came to a conclusion that I am just better than average, thus the word mediocre. For someone that has been humiliated and destroyed by the market and my own foolishness, I'd think there is a long way to go for me to learn about markets and also myself.
If you're technically inclined (just a wild guess, probably not accurate), what I use is just a 4 pip mean renko with a moving average on top (You can try Jurik's Moving Average with 20 period). I have uploaded a video in youtube before. Might want to google for that for visual clarification.
Once again sorry you felt this way.
Ok, thank you. Fair enough.
I've been 'on the floor' too in the 80's when they had floors and I have won and lost quite a few times too (not as dramatically as you). Yes, times have changed. I do remember flipping through paperback books of monthly charts of bluechip stocks and applying technical analysis to them in order to decide which stocks had the potential to go up. I do remember begging brokers to print me current charts on their dot matrix printers because brokers who had computers were far and few.
Just to add a positive point to your bleak assessment of the state of trading we have now, yes we have come a long way. MT4 and it's operations and all that has been done to making trading possible based on indicators and other data such as fundamentals and even your 4 pip mean renko with a moving average on top method are a miracle to me in this day and age and the traders using these tools are pretty much on top of the world with amazing tools and resources to use to trade.
There are enough negative things going on in the markets and indeed the world right now and your collection of so much bad news on trading is a real downer. Your PDF and your seemingly simple but oh so successful mediocre method really contrasts with each other. I'm supposed to believe it is all doom and gloom but so easy to overcome?
Okay, whatever. Thanks anyway. Sorry to see that Martingale method didn't work for you. You found a way to make it work despite all adversaries. I will take that as the point of your article and it is a positive one. Thank you.
One word : Instructive
17 Years? you had really been through a lot of things.
Are you happy with your life now?
Thank you for your kind words and concern.
I was a sad, sad person for a long time. This is worsened by the fact that I suffered from PTSD after I got discharged from the military service, not to mention what someone quoted as "Straddling between Heaven and Hell between the markets" (Quote: Mr. Qing Ze, a famous financial writer from China).
Only this year have I started to practice some Buddhist teachings and I found a little solace in my sad little world, and learned to express apologies to those whom I have hurt in the past and learned to openly express love (not so easy in Asia) to others around me. At least its a small step towards achieving more happiness.
Trading wise though, relatively, much happier. For some time now (In the past 5 years) I am finally able to see numbers as digits and not get pressured by it much, which dramatically improved trading performance, at least for me.
What about the orderflow ..do you use it
Very well informed article. Can you tell what a retail trader should use other than mt4 or mt5 and that is commonly available, that could do a better job. Thanks and
No I do not use it, as I considered the three following factors:
1. There are 70+ Tier 1, 2, 3 LPs in spot FX around the world. Spot FX is OTC. It is difficult to obtain 100% reliable sources of order flow, volume and market depth from all of them, even if you managed to aggregate them, which is too costly - since to maintain relationship with them typically you need some level of business flow directed to them.
2. One can, however, obtain sources from centralized location such as CME GLOBEX FX Futures (eg. 6E, 6J, 6B etc). However, they only reflect open interest of block trades, and beyond that, just like COT reports, doesn't tell you anything more than what people are holding. It does not tell you when they will close, when they will reverse, to which price they will hold until, etc. I've seen some HFT shops use that, but usually for only less than 1 pip profit as it is ultra short term.
3. Just because we see a huge influx of bids doesn't mean it not buying into a massive sell bourse. Also remember that what most people see is from price-taking platforms, also know as "Buy-side"; which is totally inverse from price-making environments, also known as "Sell-side".
P.S. I've attached a short clip of the software we made (and sold) to some exchanges. Obviously it is not for retail but it does illustrate the difficult of finding a reliable pattern of using order flow alone.
In my opinion, MT5 is a little better than MT4.
Most professional platforms require some form of decent capital deposits to obtain, and/or a monthly subscription.
Some of them includes:
5. Reuters XTRA
There are some better ones but they are not usually open to public, and usually used for dark pools, like CHI-X etc.
The whole point of this article is not to say that one cannot make money with MT4. It is definitely possible, just not ideal.
Attached is a sample of a forward test of a concept on Tickmill. I have intentionally blanked out certain information to protect the person's privacy. Time taken around 1-2 weeks.
No problem Sir, thanks for reading patiently and your inputs!
Can you tell us how you trade with your renko strategy?
It seems it works for you maybe it can work for us?
This is the steps I do on a daily basis:
1. Check for prevailing economic sentiments (GDP, CPI etc) and assume that market is up or down trend according to global macro
2. Every 15 minutes, monitor for micro news that can affect the Global Macro trend. If necessary, switch direction bias.
3. Assuming nothing changes, trade in the direction of the renko that is in sync with the Global Macro trend.
4. Employ a script or EA that automatically places stops and trailing stops (everyone seem to have their own preference but mine is standard 12 sl 12 tp, which I will manually adjust if there's any news coming up, since spreads can widen and also profit can be more or less)
5. The moment the renko starts to change direction against the Global Macro trend, just take profit or cut.
So in essence my style is using Global Macro and economics news as directional tool, and using technical analysis and charts as timing tools. Hope that helps.
very well and thank you for sharing your knowledge and experiments to others.
I just wanted to say thanks for your trading story, life experiences and the information is vital to retails traders. I was not aware of a lot of the information you have stated and some like the weaknesses of MT4 is actually a given because anything that is free must be a weakness. But we all try to go forward with a dream and hopefully into a reality. I trade using Renko charts and try to do 3 trades a day and take my profits based on a 10 times lot size which gives me a great return daily. I do not want to be a millionaire just a thousandaire.
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