Are You a Reasonable Trader? | Forex Factory

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Are You a Reasonable Trader?

  • #1
  • First Post: Feb 19, 2008 6:11pm Feb 19, 2008 6:11pm
Recently I started a similar thread in the 1KT Room and now I realize the thread will better serve new traders, so I've decided to post my thoughts here along with some sources to help new traders as they develope. This will also enable everyone a chance to respond or contribute to the topic.

First I would like to say a few words about the thread title. I believe like many others, that everything has a reason. Many questions can be answered with a reason. For example: Why do you want to trade in the retail Forex market? Why do you want to buy EURUSD at the current price? Why did the USD just gain value over the past few weeks? The list goes on and on and new questions should be asked every day.

As a new trader one of the first questions we ask ourselves is, "What am I getting myself into?" Imagine the Forex is a giant game of monopoly. If you don't have a clear unbiased view to this question you should Go to Jail...Do Not Pass Go...and Do Not Collect $200. The alternative IMHO is far worse. Without a true sense of what you are up against you will in effect be landing on one high rent square after another and soon become frustrated, exhausted and broke.

It might sound like I'm trying to talk you out of trading. Quite the contrary. We are here because we want to learn and I believe that every trader should start with a good psychological foundation before getting too wrapped up in technical or fundemental analysis. In other words, you should know why you are here and what you can expect.

To begin with I would like to recommend that you read about the nature of the retail Forex market, unless of coarse you are able to start with 100K or more of money you can afford to lose. While there are many good threads here at FF on this subject, I would like to recommend an easy read from Wikipedia entitled "Forex Scam". It summarizes the true nature of the retail market very well and quotes some reputable sources as well.
http://en.wikipedia.org/wiki/Forex_scam

Please don't get over alarmed. Instead try to realize that very few new traders will read such articles before trading live accounts and that gives us an edge we can work with. They will fall into many of the traps set by brokers and hopefully we can recognize the traps in time before the lunch crowd falls prey.

So what's my reason for starting this thread? Simple. Writing these thoughts down will reinforce them in my mind and there's always the chance that someone will contribute something to the discussion that I am unaware of.
  • #2
  • Feb 19, 2008 6:41pm Feb 19, 2008 6:41pm
Thanks.

Forex Star.
  • #3
  • Feb 20, 2008 1:00pm Feb 20, 2008 1:00pm
As I stated in the first post, we are here for a reason and there are reasons why we decided to trade. When I began trading Forex in 2003 my reason was I needed a part time income that could be generated from home. That's reasonable enough. Unfortunately, as I started getting lucky, I became greedy, and without my awarness of it, my reasons for trading changed. Greed took over and I became a trading maniac, looking to profit from every 15 pip swing. My reason for trading became, "I want to become rich in one or two years time." Looking back, I can easily say that I had become a complete and bonified ASS. In short, my reason for trading became unreasonable. I was mentally, spiritually and physically out of balance and the worse I traded, the worse my affliction became. Finally, thank god, I ran out of money and I eventually found Forex Factory.

Finally, I found a group of traders who didn't sugar coat the trading experience, or so I thought at first. I began learning more about indicators, trading robots, economics and whatever I could find that I felt would make trading easy and profitable. Once again, I became disillusioned. I soon discovered the curse of the false signal. I soon realized that most, if not all indicator based systems produced false signals. My trading robots just bought and sold when they recieved a signal and I was still losing money, just not as fast. At least now, my emotions didn't cause me to self destruct, but the nature of the market did. And that was the beginning of my quest to understand market dynamics.

I'm not sure if anyone can trully understand market dynamics or the cause and effect of price action without a sustantial amount of insider information, but if we get into the practice of asking ourselves pertinant questions, we can begin to see opportuntities to exploit market inbalance. Just remember, To see market inbalance, one must first be in balance mentally, spiritually and physically.

This thread is quickly turning into a small ebook and that was not my original intension. I can; however, see that a great deal of thought goes into my trading experience and this is by far the most dificult and least talked about part of trading for most people. Perhaps this is why 97.3257% of new traders lose money. Does that last statement sound reasonable? I hope not, simply because that was just a random number I pulled out of my arsinal.
  • #4
  • Edited Feb 21, 2008 4:15am Feb 20, 2008 2:01pm | Edited Feb 21, 2008 4:15am
Quoting Micro-MiniMe
As a new trader one of the first questions we ask ourselves is, "What am I getting myself into?" Imagine the Forex is a giant game of monopoly. If you don't have a clear unbiased view to this question you should Go to Jail...Do Not Pass Go...and Do Not Collect $200.
Hi M_MM!

I'd like to know how one could possibly have any remote inkling of what they're in for without having experienced it.

Also, how many do you think would open the door if they knew what all lurked within?

I'm sure I still would have gone forward; I'd already had quite a bit of trading experience, but I still had no idea what I was in for. And I'm not officially out of the woods yet, after 17 months full-time.

I've heard others (Skunny, I'm pretty sure it was) say that had they known, they wouldn't have tried it.
  • #5
  • Feb 20, 2008 2:07pm Feb 20, 2008 2:07pm
Interesting link.

The argument for "gambler's ruin" does not apply to forex.

It probably does apply to futures, since there is a minimum trade size.

The author must not have heard of money management. The article seems to be written from the viewpoint of an "outsider".
  • #6
  • Feb 20, 2008 2:27pm Feb 20, 2008 2:27pm
Quoting blueruby
Hi M_MM!

I'd like to know how one could possibly have any remote inkling of what they're in for without having experienced it.
I see your point here, BR. Experience is the only real teacher. Just the same, as I see myself about to screw up something, not just trades, I often hear the words that I read or heard long before, like seeds that have been sewn in the back of my mind.
Also, how many do you think would open the door if they knew what all lurked within?
Every retail broker is required to post clear warning of the dangers of retail Forex trading. They are not; however, required to describe what some of those risks are or why they exist. People still jump into live trading in droves. I find it helpful to myself at least to remind myself of what is ,or could be, really going on in 'The Bucket'.

I'm sure I still would have gone forward; I'd already had quite a big of trading experience, but I still had no idea what I was in for. And I'm not officially out of the woods yet, after 17 months full-time.

I've heard others (Skunny, I'm pretty sure it was) say that had they known, they wouldn't have tried it.
I would still have tried retail and as a mater of fact, I'm back to live trading after a year or so of practice and education, which I still do regularly.

If I had only read the Wikipedia article on Forex Scam, I would have approached things more carefully and methodically. That's my point in a nutshell. I still see new and experienced traders alike, taking trades on a whim or just because their indicator or news data release says to. My message is simple ask yourself if what you are doing not only stands to reason but is it based on a reasonable assumption. i.e. Is a signal to buy when price is just below a confluence of resistance levels reasonable. I think not, but the important part is that I think, period, before acting.

Thanks for the questions BR,
  • #7
  • Feb 20, 2008 2:37pm Feb 20, 2008 2:37pm
Quoting blueruby
Interesting link.

The argument for "gambler's ruin" does not apply to forex.
Why?
"Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of Gambler's Ruin. In a fair game (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt.
It probably does apply to futures, since there is a minimum trade size."

The author must not have heard of money management. The article seems to be written from the viewpoint of an "outsider".
Perhaps not. I'm not saying there is no way to win at this game and certainly money management is an intregal part of a sucessful long term strategy.
He may be an outsider, but there is a quote from an insider, from FXCM, who doubts that 95% of reatail traders make a profit for very long. This is certainly cause for a cautious approach, especially for new traders.
  • #8
  • Feb 20, 2008 3:26pm Feb 20, 2008 3:26pm
Quoting Micro-MiniMe
My message is simple ask yourself if what you are doing not only stands to reason but is it based on a reasonable assumption. i.e. Is a signal to buy when price is just below a confluence of resistance levels reasonable. I think not, but the important part is that I think, period, before acting.
Blue, isn't one of your trading maxims "you should require three reasons to enter a trade but only one to exit"? I'm pretty sure I read something similar in one of your threads. It's always kind of stuck in the back of my mind and it's helped me drastically cut down on my tendency to pull the trigger on "C" and "B" setups, i.e. trading merely for the sake of trading.
  • #9
  • Feb 20, 2008 4:55pm Feb 20, 2008 4:55pm
Quote
The author must not have heard of money management. The article seems to be written from the viewpoint of an "outsider".

*nod* Most wikipedia articles are written by people that have a book-level knowledge of the subject only, ie: no direct experience about the subject matter.

I am glad I'm not the only one that had some negative thoughts about the article. The idea that "big players" can have prior knowledge of news releases was hilarious to say the least, as I doubt exact prior knowledge of a rate cut or an NFP release would give you any advantage at all over time. Someone with only a few months of experience would've caught that.

The whole "negative sum game" thing is also a bit funny, just because there are other bigger players out there trying to take our money doesn't mean we have to take an opposite position. Anyone who's ever played an MA bounce or used fibs and candles to enter a ret understands how unstated cooperation works.

Quote
Blue, isn't one of your trading maxims "you should require three reasons to enter a trade but only one to exit"? I'm pretty sure I read something similar in one of your threads. It's always kind of stuck in the back of my mind and it's helped me drastically cut down on my tendency to pull the trigger on "C" and "B" setups, i.e. trading merely for the sake of trading.

Certainly good advice. One of my own biggest challenges has been realizing that "no position" is a perfectly valid position to take. There's a certain zen -like quality to letting the market "just be" and waiting for trades to materialize.
  • #10
  • Feb 20, 2008 6:01pm Feb 20, 2008 6:01pm
Quoting Rabid
*nod* Most wikipedia articles are written by people that have a book-level knowledge of the subject only, ie: no direct experience about the subject matter.
The author quotes at least 5 'insiders' and reputable sources to make his points. I don't see that his experience in forex is important.

I am glad I'm not the only one that had some negative thoughts about the article. The idea that "big players" can have prior knowledge of news releases was hilarious to say the least, as I doubt exact prior knowledge of a rate cut or an NFP release would give you any advantage at all over time. Someone with only a few months of experience would've caught that.
OK. The retail Forex market is easy to make money in, not risky and squeeky clean. Good buy and good luck.

The whole "negative sum game" thing is also a bit funny, just because there are other bigger players out there trying to take our money doesn't mean we have to take an opposite position. Anyone who's ever played an MA bounce or used fibs and candles to enter a ret understands how unstated cooperation works.
It is nieve to think that retail Forex players have enough collective clout to move the market very much at all. It's no secret that the institutional players and spot Forex markets make up the major share of capital in the markets.

Certainly good advice. One of my own biggest challenges has been realizing that "no position" is a perfectly valid position to take. There's a certain zen -like quality to letting the market "just be" and waiting for trades to materialize.
I do agree with your last point however. I have taken no positions this week. I just don't see anything worth the risk right now but there will be something comming soon. That advice in itself is worth my reading your post.
  • #11
  • Feb 20, 2008 6:30pm Feb 20, 2008 6:30pm
Hi blueruby,

It's nice to see you are taking an intrest in this thread. I just wanted to take this opportunity to commend you on your fine work with the VHands Trading Simulator thread. I have had some experience with it, but frankly lack the time to do it justice. I certainly recommend that any serious traders use VHands or similar software to test your strategies and systems before trading live.
  • #12
  • Feb 20, 2008 6:37pm Feb 20, 2008 6:37pm
Quote
The author quotes at least 5 'insiders' and reputable sources to make his points. I don't see that his experience in forex is important.

Yes but for the point about "bribing governments for tips that would give them an advantage" he/she lists no sources. It's an unsubstantiated hypothesis based on the lack of insider trading laws. Obviously there's good cautionary information in the article, I would be negligent if I dismissed it all due to the author's pessimism. But I would be equally so if I took all of his/her statements at face value without factoring in it's tone.

Quote
OK. The retail Forex market is easy to make money in, not risky and squeeky clean. Good buy and good luck.
Quite the contrary. The market has a paddle large enough to spank anyone, big player or little player. The theory that big players have an advantage over little players, especially in relation to news trading (risky for all parties regardless of how big you are), is ridiculous on it's face.

Quote
It is nieve to think that retail Forex players have enough collective clout to move the market very much at all. It's no secret that the institutional players and spot Forex markets make up the major share of capital in the markets.
Well, I've heard numbers to the contrary... things like "90% of the daily movement is caused by speculation." But that's unsubstaniable. The point I will make however is assuming that institutional players all act with uniformity is equally naive. We need not move the market against these players in order to make money, we need only identify the elements the majority of traders (retail, institutional, whatever) use to trade and cooperate with them.

To understand what I mean take a look at how certain pairs bounce off moving averages and how they behave when they cross them... there's a definite pattern. This is not random, it's because a lot of ppl have been trained in the "if it's trading above the moving average it will tend to trade above it, and if it's trading below it will tend to trade below" school of thought. So it becomes a natural S/R line. While not enough to trade on by itself, if used in conjunction with a "weight of the evidence" approach you can identify several other patterns and gain the benefit of trading with the bulk of other traders regardless of who they might be.
  • #13
  • Feb 20, 2008 7:23pm Feb 20, 2008 7:23pm
Quoting Rabid
Well, I've heard numbers to the contrary... things like "90% of the daily movement is caused by speculation." But that's unsubstaniable. The point I will make however is assuming that institutional players all act with uniformity is equally naive. We need not move the market against these players in order to make money, we need only identify the elements the majority of traders (retail, institutional, whatever) use to trade and cooperate with them.
Yes, we don't need to know who moves the market or why. We have no way of knowing in real time anyway. What we do know; however, is that our brokers are required to have more cash on account than the sum total of all their account holders. Also, some retail brokers have been known to trade against their account holders. Even if you identify a bounce off an MA and take a good position is it reasonable to think that your broker won't spike the price? Are you prepared in the event he does? These are the types of things that turned my early trading luck into a frustrating and emotionaly drainning experience. I was using simple methods to identify trends and price action, but I made some nieve errors in judgement. This is what this thread is about. Making reasonable assesments of the big picture involved in trades, not just the technical aspects that so many traders claim to follow to the promise land.
  • #14
  • Feb 20, 2008 7:47pm Feb 20, 2008 7:47pm
Quoting Rabid
The whole "negative sum game" thing is also a bit funny, just because there are other bigger players out there trying to take our money doesn't mean we have to take an opposite position. Anyone who's ever played an MA bounce or used fibs and candles to enter a ret understands how unstated cooperation works.
Nevertheless, there are always two sides to every transaction, and with commissions/spreads involved, it does equate to a negative-sum game.
  • #15
  • Feb 20, 2008 8:02pm Feb 20, 2008 8:02pm
Quoting Rabid
Well, I've heard numbers to the contrary... things like "90% of the daily movement is caused by speculation." But that's unsubstaniable.
The BIS tracks international currency flows (i.e. instances where currency was actually settled/transferred between counter-parties). In their latest triennial survey, $3.2T was the reported daily volume of all FX instruments. By subtracting from that number the amount of actual settled currency, they can deduce the level of volume that is purely speculative (the vast majority).

Quote
To understand what I mean take a look at how certain pairs bounce off moving averages and how they behave when they cross them... there's a definite pattern. This is not random, it's because a lot of ppl have been trained in the "if it's trading above the moving average it will tend to trade above it, and if it's trading below it will tend to trade below" school of thought. So it becomes a natural S/R line. While not enough to trade on by itself, if used in conjunction with a "weight of the evidence" approach you can identify several other patterns and gain the benefit of trading with the bulk of other traders regardless of who they might be.
Completely random, no. But in practice, extracting edge purely from price-vs-MA relationships over the long run is exceedingly difficult. Do you know any multi-millionaire CTAs or hedge funds that trade purely price/MA relationships? That type of trading is more so the mainstay of retail traders, and we know how those figures hold up over the long run..
  • #16
  • Feb 20, 2008 8:39pm Feb 20, 2008 8:39pm
Quoting Trader KGB
The BIS tracks international currency flows (i.e. instances where currency was actually settled/transferred between counter-parties). In their latest triennial survey, $3.2T was the reported daily volume of all FX instruments. By subtracting from that number the amount of actual settled currency, they can deduce the level of volume that is purely speculative (the vast majority).

Completely random, no. But in practice, extracting edge purely from price-vs-MA relationships over the long run is exceedingly difficult. Do you know any multi-millionaire CTAs or hedge funds that trade purely price/MA relationships? That type of trading is more so the mainstay of retail traders, and we know how those figures hold up over the long run..
Thanks Trader KGB,
That's the kind of info I hoped this thread would extract from the more knowledgable traders here. Am I correct in saying that the speculative traders group includes big money players from the CME for example and as such they are dealing directly with the Interbank market, unlike retail traders who's money rarely enters the real Interbank market, but instead stays in house with their broker?
  • #17
  • Feb 20, 2008 9:42pm Feb 20, 2008 9:42pm
Quoting Micro-MiniMe
Am I correct in saying that the speculative traders group includes big money players from the CME for example and as such they are dealing directly with the Interbank market, unlike retail traders who's money rarely enters the real Interbank market, but instead stays in house with their broker?
You are correct.
  • #18
  • Feb 20, 2008 11:00pm Feb 20, 2008 11:00pm
Laff... (warning: the following is horribly off-topic)

Quote
Nevertheless, there are always two sides to every transaction, and with commissions/spreads involved, it does equate to a negative-sum game.

Yes but that was used as reasoning to avoid the game entirely in the mentioned article. A leap in logic is required to make that connection, and that more people haven't noticed that is... well, both sad and funny at the same time.

Quote
The BIS tracks international currency flows (i.e. instances where currency was actually settled/transferred between counter-parties). In their latest triennial survey, $3.2T was the reported daily volume of all FX instruments. By subtracting from that number the amount of actual settled currency, they can deduce the level of volume that is purely speculative (the vast majority).

Very nice, care to share the findings?

Quote
Completely random, no. But in practice, extracting edge purely from price-vs-MA relationships over the long run is exceedingly difficult. Do you know any multi-millionaire CTAs or hedge funds that trade purely price/MA relationships? That type of trading is more so the mainstay of retail traders, and we know how those figures hold up over the long run..

Which is why it's not a good idea to trade on that alone, and obviously some pairs react differently than others on this too. I do know a few buy-and-hold equities managers that use an MA strategy, and while that doesn't translate into the FX market very well... the approach has been used here for better or worse.

Whether it's effective or not is not my concern, that other people do it en-masse is far more interesting for the sake of debate. The simple fact that people can cooperate to improve their returns against the larger whole demonstrates basic super-rationality and provides a solution to the zero (or negative) sum game paradox.

Linky:
http://en.wikipedia.org/wiki/Glossary_of_game_theory

Pay special attention to "dictator" and "dummy" ... Obviously most of us fall into the latter category, where our individual positions have no ability to effect the game. But by following those who can... or at least working together to aggregate our individual positions, we can mitigate that problem.
  • #19
  • Feb 21, 2008 12:53am Feb 21, 2008 12:53am
Quote
Yes but that was used as reasoning to avoid the game entirely in the mentioned article. A leap in logic is required to make that connection,
The inclusion of the negative-sum definition in the Wiki article does seem out of place with the subject ("forex scam"), as it is simply a fact and is not in itself a scam.

With that being said, I do think that many novices who approach negative-sum situations (futures, forex, poker, etc) could benefit from an understanding of the concept. That might be perhaps what the wiki author was intending.

Quote
Very nice, care to share the findings?
http://www.bis.org/publ/rpfx07.htm

That's just the survey, they don't break out settled vs non-settled in that report. That's done in a Greenwich Associates report they do annually. I can't seem to find it now, but if you google long enough, it'll come up.
  • #20
  • Feb 21, 2008 1:27am Feb 21, 2008 1:27am
Quote
With that being said, I do think that many novices who approach negative-sum situations (futures, forex, poker, etc) could benefit from an understanding of the concept. That might be perhaps what the wiki author was intending.

I absolutely agree, it might do a decent job of deflating the often irrational exuberance that comes from a forex pitchman.

Quote
That's just the survey, they don't break out settled vs non-settled in that report. That's done in a Greenwich Associates report they do annually. I can't seem to find it now, but if you google long enough, it'll come up.


Very nice, thanks.
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