Hello,
I have 3 questions for anybody that would like to discuss what they've learned trading Forex. They are -
1. Can you trade profitably?
2. What would you say the most important lessons you've learned are?
3. How have these lesson affected you, i.e. what is your style of trading like now as a result of learning/coming to believe this?
Here are mine, you might not agree with what I've learned, but I have learned what is right for me -
1. Know what the market can give you, and don’t aim for anything more,
When I first started trading I had ambitions of making 3% a day compounded, and silly numbers like that – the result was I lost all the money in my account, put some more money in my account, and then lost all that too. This went on for several years... I then came to the conclusion that I would never consistently make 3% per day because the market was far too random to produce daily gains that big. After all the market wasn’t consistently moving 3 percent a day, but there I was anyway, trying to make it by attempting to pick exact tops and bottoms and using very high leverage on a short and almost random time frame. By aiming for the impossible I was automatically ensuring that almost every trade I made was a bad one, after all, how can a trading strategy be sound if it’s goal is greater than the edge that’s supposed to achieve that goal? I can’t tell you exactly how much the market will and won’t give you. All I can tell you is that you need to test your trading ideas to see what sort of edge they produce. Then ensure that any leverage you will use to magnify the effects of your edge fit in with a proper money management strategy, and consider the effects of drawdowns and factor in the spread and any other costs of trading. Once you have done this you’ll have a reasonable idea of what you can really expect to make. Once you have decided what you are aiming for it is easy to avoid making the rash trades one inevitably makes when they are aiming for the impossible. Personally, I think that if you can avoid having any serious losing years and average around 30% profit per year, and can consistently do this year on year, then you’re an excellent trader. Aims of doubling ones account every month and such like aren’t, in my opinion, reasonable goals. But it’s surprising how many newbie’s have goals like this.
2. Accept the Forex business for what it is,
The Forex market is often called a zero sum game – a zero some game is when someone’s gains are always the result of, and paid for by, someone else’s losses. A private poker game with no ‘house’ to take a rake would be one example of a zero sum game, someone wins only because someone else losses. Forex trading is actually a little worse than this. Forex trading is actually a negative sum game where one trader’s gain is another trader’s loss minus the spread and the costs of trading. Trading the Forex market isn’t investing and a traders profits aren’t income earned from investments. Forex trading is speculating, the profits of which should be seen as capital gains. Speculating has far more in common with gambling than investing. Gambling when you have a reason to believe that you have a statistical edge over ‘the house’ is essentially what Forex trading is – that is essentially what it amounts to, regardless of what you choose to call it. If you are not OK with that then don’t trade. Many people consider gambling immoral, I personally don’t but personally morality is for each individual to decide for his or herself. If you are not 100% sure you’re OK with making money this way you shouldn’t try to, you will only end up subconsciously sabotaging it for yourself. And lying to one’s self rarely works.
3. Use suitable stop losses,
Stop losses and leverage are actually very closely connected and have to be considered together as part of a money management strategy – but I’ll write about them separately in this article. There is a lot of information on the Internet that recommends keeping your stops tight. Usually this advice comes from novices on Internet blogs and forums, online seminars given by the various ‘bucket shop’ Forex brokers, and it’s often part of the trading methods prescribed in various ‘systems’ sold by unscrupulous trading system vendors that promise to tell you how to turn that mini account into $100,000 in six months by using very high leverage, all for a one off payment of $197 plus taxes... I would suggest that the advice these sources are giving you is bad advice and that many of these people don’t actually have your best interests at heart. Stop losses of 20 or 30 pips are way to small to be effective, if you need to use stop losses this low to avoid losing to much of your account on a single bad trade then your leverage is to high and you need to lower it and increase the size of the stop loss. It’s very difficult, if not almost impossible, to pick a market’s exact high or low over any meaningful time period, short time frames are mostly random and moves of 20 or 30 pips happen almost randomly in the Forex market. A stop loss this small will therefore usually degrade the performance of any trading system as good trades are turned into stopped out losers by random movements. This might sound contrary to the sound advice you may have read in some of the good books about trend following that are out there where they tell you that ‘a good trade rarely goes to far against you’ and therefore advise cutting your losses early and letting your winners run, but it’s not. Cutting your losses and letting your winners run is good advice when it comes to medium to long term trend following systems, but in these systems cutting off a losing trade might mean using a stop of around twice the daily average true range; or perhaps 1.5% of the market’s value from the previous day’s high or low – but certainly not 20 or 30 pips. A decent sized stop loss for trading the EUR/USD is more likely to be in the region of 200 – 300 pips than 20 - 30 pips. In short, a trade needs room to breath and the need for ultra tight stops comes from being over leveraged and aiming for the impossible (point 1).
4. Use low leverage,
Leverage can be deadly. If a profitable trading system had an expected drawdown of 5% (a really low drawdown for any technical trading system) when used with no leverage, then using leverage of 20:1 with this system would mean that you could reasonably expect to lose your entire account at some point. There is talk of the regulators in America limiting Forex leverage from 100:1 to 10:1, but at the moment it’s not uncommon for companies to let retail Forex traders use leverage of 100:1 – in fact I’ve seen several non-US companies offering leverage far higher than this, 200:1 and even 400:1 in some cases. They say that 95% of Forex traders fail, I have no reason to dispute this number but I’d guess that among those traders employing leverage of 100:1 the failure rate is more like 99%. My personal view is that leverage of 2:1 is OK and 3:1 is OK, 5:1 is starting to get worrying and 10:1 is way to high. I can’t advise you on exactly how much leverage you should use because that depends on your trading system, the only advice I can give you is be very careful as using to much leverage will result in you losing you entire trading account.
5. See the spread as a percentage added to the profit/loss,
As I mentioned in point 2, Forex trading is a negative sum game. To win a negative sum game you not only need to employ an edge combined with a proper money management strategy, you need to ensure that your edge is big enough to leave you with a profit after the costs of trading. The biggest cost of trading is usually the spread. A spread of, say, 1 pip, may seem tiny, and with a decent trading system where the average win is around, say, 400 pips, perhaps it is; but it does depend on the expected size of the wins and losses. I have been told by novice traders that they regularly employ leverage of over 100:1 to enter trades that have a profit target of 4 pips. With a system like this the actual costs of trading are huge and the winners are usually the bucket shop brokers. Suppose a market’s spread was 1 pip (a tiny spread) and that someone traded this market with a profit target of 4 pips and a stop loss of also 4 pips. After the costs of trading the size of a winning trade would be 3 pips (4-1) and the size of a losing trade would be 5 pips (4+1). The resulting 2 pip difference between the winners and the losers may not sound a lot but it is huge; losers are now almost twice the size of winners – the costs of trading a system like this would likely be bigger than the system’s edge. To succeed with a system the edge would have to be greater than 67%. ((1/3)*5)-1 = 67%.
6. Technical trading indicators vs. Trading price action,
Newbie traders often spend months trying to find that perfect technical indicator that’s supposed to be able to tell them exactly when to buy and sell with near 100% accuracy. It doesn’t exist. To understand why it doesn’t exist you only need to understand what an indicator actually is. All technical indicators are just mere distortions of the market’s price; they measure the market’s direction and/or the rate of change – that’s it. Indicators such as moving averages and Donchian channels measure the direction of the trend telling you only what direction the market has and currently is moving in, whilst indicators like the average direction index measure the rate of the change to tell you how strong the trend is/was. Indicators that try to predict market turns such as the relative strength index and other oscillators that supposedly identify ‘over bought’ and ‘over sold’ conditions do so by measuring the rate of change and produce trend reversal warnings when they detect that a rapid rate of change is starting to slow. But as I said, all these indicators are just a distortion of the market’s price. There are some traders who believe that this distortion should be ignored totally and that a trader should only trade the trading price action off of the raw chart data. Whilst I have the utmost respect for the logic involved in this conclusion, I do believe that some price distortions can actually be useful as they can help a trader ignore the market’s noise by filtering out the more random insignificant moves that one’s eyes might be drawn to if they where to simply trade off the raw chart price data - but only to a point. The more complicated an indicator is the greater the distortion of the data and the less likely it is to actually be useful; in my experience only slight distortions to act as noise filters tend to be useful. Traders who pay for access to the latest super duper technical indicator on the various subscription only websites are therefore likely to be wasting their money; the best technical indicators are the old ones as these ones tend to be the simplest and least distorted readings of price. My favourite indicators are moving averages, the ADX, Donchian channels, the TRIX and the MACD. In addition to this I have found market sentiment indicators that pay no attention to market price data, such as the COT report and the various speculative sentiment indexes to be of great value – but these indicators cannot be classed as technical trading indicators, they measure open position data, not the price (technical) data.
7. Randomness on smaller time frames,
Whilst markets are not entirely random (nobody could trade profitable if they were) they do inhibit a great degree of randomness. As a general rule, the shorter the time frame the greater the randomness. I therefore do not attempt to trade on short time frames.
8. Technical edges: Support, Resistance, Momentum and the Trend,
There are three main ways (that I know of) that technical analysis can be used to gain a statistical edge, they are: support and resistance, market momentum and trading with the trend – most good technical trading systems involve using a combination of these three things. Support and resistance involves trading off of significant market levels where a large amount of support (buyers) or a large amount of resistance (sellers) is likely to be found. Momentum trading involves getting in on the side of a move that’s so large that the market is more likely than not to continue moving in the same direction for a considerable amount of time, due to the momentum behind the move. And the trend is the easiest and most essential of all edges to employ, it’s simply the general direction that the market is moving in – I think it is unwise to go against this.
How I trade as a result of having these beliefs,
Trading is actually remarkably simple, but it can be as complicated as you want to make it; personally I try to keep it as simple as possible. There are only two systems that I trade and which one I’m trading at any particular time depends on the strength of the markets trend. Both these trading systems are ‘end of day’ systems; I check the market once in the evenings and enter or exit using the day’s closing price. The basis of these trading systems is this -
System 1: When the market is strongly trending and regularly making new significant highs or lows (for example regularly closing above or below any closing price in the last 6 months) I will take a small position once the new high or low closing price is made. I will keep this position for a predetermined amount of time, usually between 8 and 20 days. If a new high or low is made during this time period I will add another ‘lot’ to my position. If the market continues to regularly make new highs or lows I will eventually build up a substantial position (this is where leverage comes in), the lots that make up this big position will gradual expire on there predetermined dates. This system uses the trend and momentum edges. Leverage is only used to add additional lots when the previous lots are already in profit, novice traders on the other hand often ‘double up’ their positions when they are wrong which often has disastrous consequences. This system uses a time-based exit and gets it’s edge from the strong trend and momentum causing new highs/lows, and from using leverage to add to a winning position when the trade is right (often known as pyramiding).
System 2: When the market isn’t trending so strongly and there is less unidirectional movement the system I use measures the general direction of the market by comparing the market price to the market price several months ago. If the general direction is up I will only take long trades. If the general direction is down I will only take short trades. Long trades will be entered on a dip and sold on a high. Short trades are entered on a high and sold on a dip. I define a dip as the price closing below today’s low + yesterdays low + the day before yesterdays low / 3. I define a peak as a closing price above today’s high + yesterdays high + the day before yesterdays high / 3. This system only ever trades with one lot and needs to be used with a carefully set stop loss. It is however more successful on indices than on most Forex currency pairs and tends to be correct over 60% of the time.
http://www.myforexdot.org.uk/TradingLessonsLearned.html
http://www.myforexdot.org.uk/FreeTechnicalTradingSystems.html
I have 3 questions for anybody that would like to discuss what they've learned trading Forex. They are -
1. Can you trade profitably?
2. What would you say the most important lessons you've learned are?
3. How have these lesson affected you, i.e. what is your style of trading like now as a result of learning/coming to believe this?
Here are mine, you might not agree with what I've learned, but I have learned what is right for me -
1. Know what the market can give you, and don’t aim for anything more,
When I first started trading I had ambitions of making 3% a day compounded, and silly numbers like that – the result was I lost all the money in my account, put some more money in my account, and then lost all that too. This went on for several years... I then came to the conclusion that I would never consistently make 3% per day because the market was far too random to produce daily gains that big. After all the market wasn’t consistently moving 3 percent a day, but there I was anyway, trying to make it by attempting to pick exact tops and bottoms and using very high leverage on a short and almost random time frame. By aiming for the impossible I was automatically ensuring that almost every trade I made was a bad one, after all, how can a trading strategy be sound if it’s goal is greater than the edge that’s supposed to achieve that goal? I can’t tell you exactly how much the market will and won’t give you. All I can tell you is that you need to test your trading ideas to see what sort of edge they produce. Then ensure that any leverage you will use to magnify the effects of your edge fit in with a proper money management strategy, and consider the effects of drawdowns and factor in the spread and any other costs of trading. Once you have done this you’ll have a reasonable idea of what you can really expect to make. Once you have decided what you are aiming for it is easy to avoid making the rash trades one inevitably makes when they are aiming for the impossible. Personally, I think that if you can avoid having any serious losing years and average around 30% profit per year, and can consistently do this year on year, then you’re an excellent trader. Aims of doubling ones account every month and such like aren’t, in my opinion, reasonable goals. But it’s surprising how many newbie’s have goals like this.
2. Accept the Forex business for what it is,
The Forex market is often called a zero sum game – a zero some game is when someone’s gains are always the result of, and paid for by, someone else’s losses. A private poker game with no ‘house’ to take a rake would be one example of a zero sum game, someone wins only because someone else losses. Forex trading is actually a little worse than this. Forex trading is actually a negative sum game where one trader’s gain is another trader’s loss minus the spread and the costs of trading. Trading the Forex market isn’t investing and a traders profits aren’t income earned from investments. Forex trading is speculating, the profits of which should be seen as capital gains. Speculating has far more in common with gambling than investing. Gambling when you have a reason to believe that you have a statistical edge over ‘the house’ is essentially what Forex trading is – that is essentially what it amounts to, regardless of what you choose to call it. If you are not OK with that then don’t trade. Many people consider gambling immoral, I personally don’t but personally morality is for each individual to decide for his or herself. If you are not 100% sure you’re OK with making money this way you shouldn’t try to, you will only end up subconsciously sabotaging it for yourself. And lying to one’s self rarely works.
3. Use suitable stop losses,
Stop losses and leverage are actually very closely connected and have to be considered together as part of a money management strategy – but I’ll write about them separately in this article. There is a lot of information on the Internet that recommends keeping your stops tight. Usually this advice comes from novices on Internet blogs and forums, online seminars given by the various ‘bucket shop’ Forex brokers, and it’s often part of the trading methods prescribed in various ‘systems’ sold by unscrupulous trading system vendors that promise to tell you how to turn that mini account into $100,000 in six months by using very high leverage, all for a one off payment of $197 plus taxes... I would suggest that the advice these sources are giving you is bad advice and that many of these people don’t actually have your best interests at heart. Stop losses of 20 or 30 pips are way to small to be effective, if you need to use stop losses this low to avoid losing to much of your account on a single bad trade then your leverage is to high and you need to lower it and increase the size of the stop loss. It’s very difficult, if not almost impossible, to pick a market’s exact high or low over any meaningful time period, short time frames are mostly random and moves of 20 or 30 pips happen almost randomly in the Forex market. A stop loss this small will therefore usually degrade the performance of any trading system as good trades are turned into stopped out losers by random movements. This might sound contrary to the sound advice you may have read in some of the good books about trend following that are out there where they tell you that ‘a good trade rarely goes to far against you’ and therefore advise cutting your losses early and letting your winners run, but it’s not. Cutting your losses and letting your winners run is good advice when it comes to medium to long term trend following systems, but in these systems cutting off a losing trade might mean using a stop of around twice the daily average true range; or perhaps 1.5% of the market’s value from the previous day’s high or low – but certainly not 20 or 30 pips. A decent sized stop loss for trading the EUR/USD is more likely to be in the region of 200 – 300 pips than 20 - 30 pips. In short, a trade needs room to breath and the need for ultra tight stops comes from being over leveraged and aiming for the impossible (point 1).
4. Use low leverage,
Leverage can be deadly. If a profitable trading system had an expected drawdown of 5% (a really low drawdown for any technical trading system) when used with no leverage, then using leverage of 20:1 with this system would mean that you could reasonably expect to lose your entire account at some point. There is talk of the regulators in America limiting Forex leverage from 100:1 to 10:1, but at the moment it’s not uncommon for companies to let retail Forex traders use leverage of 100:1 – in fact I’ve seen several non-US companies offering leverage far higher than this, 200:1 and even 400:1 in some cases. They say that 95% of Forex traders fail, I have no reason to dispute this number but I’d guess that among those traders employing leverage of 100:1 the failure rate is more like 99%. My personal view is that leverage of 2:1 is OK and 3:1 is OK, 5:1 is starting to get worrying and 10:1 is way to high. I can’t advise you on exactly how much leverage you should use because that depends on your trading system, the only advice I can give you is be very careful as using to much leverage will result in you losing you entire trading account.
5. See the spread as a percentage added to the profit/loss,
As I mentioned in point 2, Forex trading is a negative sum game. To win a negative sum game you not only need to employ an edge combined with a proper money management strategy, you need to ensure that your edge is big enough to leave you with a profit after the costs of trading. The biggest cost of trading is usually the spread. A spread of, say, 1 pip, may seem tiny, and with a decent trading system where the average win is around, say, 400 pips, perhaps it is; but it does depend on the expected size of the wins and losses. I have been told by novice traders that they regularly employ leverage of over 100:1 to enter trades that have a profit target of 4 pips. With a system like this the actual costs of trading are huge and the winners are usually the bucket shop brokers. Suppose a market’s spread was 1 pip (a tiny spread) and that someone traded this market with a profit target of 4 pips and a stop loss of also 4 pips. After the costs of trading the size of a winning trade would be 3 pips (4-1) and the size of a losing trade would be 5 pips (4+1). The resulting 2 pip difference between the winners and the losers may not sound a lot but it is huge; losers are now almost twice the size of winners – the costs of trading a system like this would likely be bigger than the system’s edge. To succeed with a system the edge would have to be greater than 67%. ((1/3)*5)-1 = 67%.
6. Technical trading indicators vs. Trading price action,
Newbie traders often spend months trying to find that perfect technical indicator that’s supposed to be able to tell them exactly when to buy and sell with near 100% accuracy. It doesn’t exist. To understand why it doesn’t exist you only need to understand what an indicator actually is. All technical indicators are just mere distortions of the market’s price; they measure the market’s direction and/or the rate of change – that’s it. Indicators such as moving averages and Donchian channels measure the direction of the trend telling you only what direction the market has and currently is moving in, whilst indicators like the average direction index measure the rate of the change to tell you how strong the trend is/was. Indicators that try to predict market turns such as the relative strength index and other oscillators that supposedly identify ‘over bought’ and ‘over sold’ conditions do so by measuring the rate of change and produce trend reversal warnings when they detect that a rapid rate of change is starting to slow. But as I said, all these indicators are just a distortion of the market’s price. There are some traders who believe that this distortion should be ignored totally and that a trader should only trade the trading price action off of the raw chart data. Whilst I have the utmost respect for the logic involved in this conclusion, I do believe that some price distortions can actually be useful as they can help a trader ignore the market’s noise by filtering out the more random insignificant moves that one’s eyes might be drawn to if they where to simply trade off the raw chart price data - but only to a point. The more complicated an indicator is the greater the distortion of the data and the less likely it is to actually be useful; in my experience only slight distortions to act as noise filters tend to be useful. Traders who pay for access to the latest super duper technical indicator on the various subscription only websites are therefore likely to be wasting their money; the best technical indicators are the old ones as these ones tend to be the simplest and least distorted readings of price. My favourite indicators are moving averages, the ADX, Donchian channels, the TRIX and the MACD. In addition to this I have found market sentiment indicators that pay no attention to market price data, such as the COT report and the various speculative sentiment indexes to be of great value – but these indicators cannot be classed as technical trading indicators, they measure open position data, not the price (technical) data.
7. Randomness on smaller time frames,
Whilst markets are not entirely random (nobody could trade profitable if they were) they do inhibit a great degree of randomness. As a general rule, the shorter the time frame the greater the randomness. I therefore do not attempt to trade on short time frames.
8. Technical edges: Support, Resistance, Momentum and the Trend,
There are three main ways (that I know of) that technical analysis can be used to gain a statistical edge, they are: support and resistance, market momentum and trading with the trend – most good technical trading systems involve using a combination of these three things. Support and resistance involves trading off of significant market levels where a large amount of support (buyers) or a large amount of resistance (sellers) is likely to be found. Momentum trading involves getting in on the side of a move that’s so large that the market is more likely than not to continue moving in the same direction for a considerable amount of time, due to the momentum behind the move. And the trend is the easiest and most essential of all edges to employ, it’s simply the general direction that the market is moving in – I think it is unwise to go against this.
How I trade as a result of having these beliefs,
Trading is actually remarkably simple, but it can be as complicated as you want to make it; personally I try to keep it as simple as possible. There are only two systems that I trade and which one I’m trading at any particular time depends on the strength of the markets trend. Both these trading systems are ‘end of day’ systems; I check the market once in the evenings and enter or exit using the day’s closing price. The basis of these trading systems is this -
System 1: When the market is strongly trending and regularly making new significant highs or lows (for example regularly closing above or below any closing price in the last 6 months) I will take a small position once the new high or low closing price is made. I will keep this position for a predetermined amount of time, usually between 8 and 20 days. If a new high or low is made during this time period I will add another ‘lot’ to my position. If the market continues to regularly make new highs or lows I will eventually build up a substantial position (this is where leverage comes in), the lots that make up this big position will gradual expire on there predetermined dates. This system uses the trend and momentum edges. Leverage is only used to add additional lots when the previous lots are already in profit, novice traders on the other hand often ‘double up’ their positions when they are wrong which often has disastrous consequences. This system uses a time-based exit and gets it’s edge from the strong trend and momentum causing new highs/lows, and from using leverage to add to a winning position when the trade is right (often known as pyramiding).
System 2: When the market isn’t trending so strongly and there is less unidirectional movement the system I use measures the general direction of the market by comparing the market price to the market price several months ago. If the general direction is up I will only take long trades. If the general direction is down I will only take short trades. Long trades will be entered on a dip and sold on a high. Short trades are entered on a high and sold on a dip. I define a dip as the price closing below today’s low + yesterdays low + the day before yesterdays low / 3. I define a peak as a closing price above today’s high + yesterdays high + the day before yesterdays high / 3. This system only ever trades with one lot and needs to be used with a carefully set stop loss. It is however more successful on indices than on most Forex currency pairs and tends to be correct over 60% of the time.
http://www.myforexdot.org.uk/TradingLessonsLearned.html
http://www.myforexdot.org.uk/FreeTechnicalTradingSystems.html
About getting a mentor... well just like you, may be in the future. If one's trading preferences are not alike the mentor, then the mentorship will not be suitable. In FF I find many traders are having their own trading methods. 
