Ramblings of a Forex Junkie

I see tons of lurkers here and I am the only member. People, take a minute and join the site. The admin has gone to the trouble to build this great site where you can come and learn. Join and take part in the discussion.

Here is the tough chart for the day. The first entry would have been a loser. After the GU news came out the price ripped down. An entry at the open would have lost but the previous daily low held. The two losers were covered and an additional 2R could have been made on this trade. This is usually the way it goes with my method. On tough days I may need to make three entries to get the winner. Nice thing is the winner is usually close to the daily low or high and the win covers the losses and still makes the normal return.

I have to go right now more business with the house. New essay coming later. I want to talk about leverage.

Hey SP,

Well done on the couple of trades and thanks for the chart uploads. Yesterday's end of day chart was especially useful.

Just out of curiosity, why didn't you break up your trades into 2 half positions? Setting a larger or no TP for the second position? You have done it on a couple of previous trades. Would you only do it when you are able to manage it?

Generally, what is your thoughts on splitting positions. Do you think there is a benefit in the long run? My thinking is that some times you'll get a runner which will be great, but most of the time the second position will be stopped out at BE after hitting your 3R level, halving your profit on a trade.

I'm not talking about averaging in your position as you mentioned a couple of posts ago. I fully understand the benefit of doing that.

I read some research a few years ago that proved that its better expetancy to hold the entire trade to exit. I wish I could remember the author I would link it. I think the only traders who benefit from splitting exits are the ones who are long term trend followers who rely on large profit tails. Remember I rarely hold a trade through rollover so I think its better for me to take my exits in full. I am trying though to hold the trades longer so I don't have to work as hard. I could have made 10% today on EU but I also need to sleep. Its a tough thing for me. Most trades only go 2-3R. Its not typical for trades to run hard all day. I have lots of history to tell me I should be happy with these gains but I get greedy when the market moves nicely like this. In the long run I know it works for me to set the target and go to sleep. I don't relish the idea of staying up 21 hours a day to squeeze out every last drop of profit. Having a life is important.

Hey SP,

Got one here for you - How can a trader know that the market is going to move so much today ? I see my ADX & the trend shoes strength but hardly the market moves strongly as expected. Its like the liquidity is not there in the fx market. Anyways a trader can know this ?

Good discussion..keep it up

Cheers

Mubin

You will never really know for sure. The market can do anything at any time. I think that is a great thing to make sure you remember as you are trading.

There are a few good clues. If the previous day closed very near its high and the current day takes out that high and holds there is a decent chance you will get a runner. Also, if your entry turns out to be very near the low as it was toay you have a decent chance of targeting the ATR value. How do you know that your entry is good before the end of the day? Go back and look at the chart from today. Notice that after our entry, price then broke through yesterday's high. Once that breakout held then the chances were high that you could get a runner. Another method for trailing is known as stacking bricks. You will notice that often as price moves it will thrust then consolidate, thrust then consolidate, thrust then consolidate. This looks a little like a set of stairs. As long as price continues to break out of the consolidations in the same direction and or does not violate the lows of the previous consolidation the chances are good for a runner.

Again you never know for sure what will happen with forex or any other market. Anything can happen at any time. Always protect your capital.

Hope it helps.

Just to throw my two cents in here. The EU had been consolidating for a while and any break outside of that zone was widely expected to bring a strong move. Part of the reason, at least from my understanding, is due to the stacking of stop orders just outside the borders of this zone. The Yen is a similar case except the 90 psych level was the big number to overcome. This was a previous value mentioned by the Bank of Japan until they later started saying things like that 100 would be "acceptable". Long story short, traders jumped on board, 90 got run over, and now it's headed back upwards. For moves like today's there were some hints that this would happen, but like Seneca Pilot says, the market can do anything at any time, and you just have to be prepared to deal with them as they come.

Dear SP,

Thank you for this interesting and educational thread. Greetings to the subscribers and posters.
I want to reiterate some of the important things mentioned here by SP and others. Perhaps I may BRIEFLY elaborate on some items in order to help.

A Disclaimer: I've been in the markets since the late 1990s. I've been a member of FF for many years but I do occasionally change my member name. It helps me stay one step ahead of the Law. Two particular posts I did in the past were removed by the FF moderator. I never use profanity, vulgarity or personal attacks. However, I concede that I may have been too trenchant for someone's sensibilities. I continue to speak plainly but I have toned it down. I will also resist my urge to editorialize. I never intend to offend anyone. It grieves me to see so many try and fail. I want folks to grasp what it's really about.

1. I say Amen, Amen and AMEN to SP's intentions for, and information in, this thread. Threads like this occasionally come up, but rarely.

2. SP has sometimes stated, and other times intimated, that it is essential for one to do one's own work. I have posted before that many (or most) buy the dream and then look for others to give to them the key to the vault. The evidence is all over these forums. A direct example is SP's post 249. Too many posts ask what indicator, what settings, what pair, what time of day, what price level, what possy size, where to put the stop loss, and on and on.

3. If any of the items just listed are important to you, then find out on your own. There is nothing wrong with learning what other successful traders do, but don't demand every jot and tittle be dropped in your lap. Get their concept and then go to work and make it your own. The benefits are tenfold.

4. Give up on the Holy Grail. If someone has it they will not share it or sell it to you. The stuff in these forums may be useful or total junk. Your continuing education and experience will eventually enable you to determine which is which for your purposes.

5. It is better to learn what is really important to succeed and then focus your precious time, energy and money on those issues.

6. SP already mentioned some golden concepts to learn i.e. Market Structure, Market Mechanics, Critical Times of Day (I call that CTOD),
The Characteristics of a Pair You Want to Trade, Prior Significant Price Levels. I hope you noticed that SP not only told you about those concepts but also WHY they are important. That speaks volumes about the work he has done on his own.

7. Everyone admonishes that one must have an edge. I believe that is true but they never tell you how to create one. SP's work is an outstanding example. He has done what I will now suggest to get you farther down that road. Learn about data-mining and statistical/probabilistic analysis. I use TradeStation so it has become reasonably easy for me to write code that allows me to capture data and then analyze it. That tells me if my idea has merit. It often leads to new ideas. In the old days I used Excel but first had to learn how to use Excel! Success is not for the lazy.

8. Imagine the power of knowing what makes a pair move in the near term and long term. Imagine the power of looking at a chart and understanding why it moved there and then moved elsewhere. That knowledge and skill will literally enable you to know when it's time to pay attention and be prepared to trade. Some folks go a step farther and have a high probability of correctly GUESSING the next direction. SP does it and he also said nothing is absolute or certain so he is also prepared for the worst. (Great minds think and speak alike SP. That is the sycophantic, self aggrandizement I am known for.)

9. I think threads like this are more helpful than the others I mentioned. Sadly, I see that they usually get bogged down in swapping trades and charts and wins and losses, ET. AL. A chart example is helpful but not the minutiae of a specific trade and then the next and next.
I think it is fine for a great thread to convey all of the good info that the Starter intended and then close it. Are 50,000 replies really helpful once an educational thread has fulfilled it's mission? Maybe FF has a way to preserve and recommend closed threads that many people have deemed helpful?

10. Traders trade. Everyone else sells their books, CDs, DVDs, seminars, webinars, t-shirts, cigarette lighters, signal services, and anything else they can think of. I once contacted several of the gurus that publish articles in TASC, Active Trader and other magazines. I pushed and finally they admitted that they don't really trade?!

Everything you need to know to find your way is out there. Most, if not all, is free. $200 worth of the right books will give you everything.
First, you'll need to do research and determine the most useful books. That info is also out there. Get it?

SP is going to soon talk about leverage. Pay attention!!! I could tell you stories about leverage.

Thanks for letting me in SP. I won't post any more. It's your thread and you're generous to but it out there.

Best regards and good luck to everyone.

2ii2c

PS. 100 years ago I flew a Piper Comanche 250 w/ retracts. When it got to where I couldn't remember what I had for breakfast I gave it up.
I envisioned forgetting to switch tanks before the return leg. Old pilots, Bold pilots, No Old Bold pilots.

Great reply, Thank you SP.

Thank you for your kind thoughts. Funny thing I used to hear at the airport (there are two types of pilots who fly retractable gear planes, those who have landed gear up and those who will)

You didn't come right out and say it but I will. Orders move the market. All the trader's research should center around finding where the orders are and ignoring the rest of the chart. I took me six years to figure that out, the thread is just an attempt to give back because much of what I learned to become consistently profitable was carefully dug out of the dirt that is this forum. The information is there but it takes a lot of work to separate the wheat from the chaff.

You are welcome to post here any time you wish. I have no problem with others posting helpful hints I just want to avoid bad trade calls and hijackers who want to push their own agenda.

Just stumbled on your thread for the first time Seneca. You do a fantastic job of quantifying and wordsmithing some extremely important lessons of forex trading. It's great to see someone who has a very similar style to my own. I've become consistently profitable in the past few months and have been sharing my experience here on forex factory.

http://www.forexfactory.com/showthread.php?t=402660

I'm glad to see someone else demonstrating a thorough understanding of the market with only a "naked" chart. I don't know how I tried to make it in this game previously any other way.

I want to speak specifically to point ten in your post. I get many of the emails that I am sure most of the readers here get. It seems some guru is always selling their services to the uninformed. Many if not all of these gurus cross market with each other. I get ten or more emails a week offering a free webinar hosted by guru number one but the webinar is given by another snake oil salesman. Its sad that people are taken by these guys. I won't mention names but there are some really slimy people out there selling junk systems. The best way to view these guys is through this filter. If they could trade they wouldn't be emailing you three times a week begging for 39/49/59 or more per month. They would be trading real money for themselves or be trading for banks or be managing hedge funds. There are not that many people in the world who can trade and it is safe to assume that they aren't going to help you for 39.00 a month. If a person is producing a webinar every few days, maintaining a website, writing books, emailing their thought for the day, and managing the infrastructure that is required to process credit card transactions and operate their business when could they possibly be trading.

It's probably easier to run a training service than trading. I imagine that they go to sleep at normal times and spend their days counting the money. I just don't know how someone could live with themselves pushing some of the junk I have seen.

Semper Fi (I was army SOF but worked with marines and liked it every time)

It takes guts to post live trades. Good luck with your quest. If I can help in any way just ask.

Hooah, Thanks.

Leverage:

Its a wonderful thing and a terrible thing. Leverage allows us to achieve things in life and in trading that would be impossible otherwise. Imagine trying to buy your first house but not having access to a loan. Imagine buying your first car without the use of leverage. You see we use leverage in our everyday life. In trading if we overuse leverage we blow out our account. In life if we overuse leverage we have our cars reposessed and our homes foreclosed. Life in our time of inflated prices and deflated currencies is virtually impossible without leverage.

I began in trading with ten thousand dollars way back in 2002. I was trading stocks with no leverage and even after I became profitable it was a struggle to make thirty or forty dollars on a good day. I switched to futures a couple of years later. Here leverage is necessary to even trade. The opening margin was about 1/3 of my account for one car and I think the margin was only about 10% of the contract value (its been a while so my memory may be off). My first futures account was at Trade Station. This was my first experience with a good charting platform and the indicators were very attractive to me. I thought if I could just find the right combination of indicators I would have it made. It took about eight months but I blew that account. It was my first leveraged trading and that coupled with my ignorance and ego was a disaster.

Eventually I became profitable at futures. I didn't really know what I was doing but I muddled through. Using new risk controls (necessary after blowing the first account) I got my losses under control and began to develop the beginnings of my method using pivots. Pivots were fairly reliable in futures because there is a definate open and close to the market and many of the pit traders used them and they controlled the market at the time. Then came Forex. This was a totally new level of leverage. If you are a US based trader you have access to 50:1 leverage. In theory a ten thousand dollar account will control five hundred thousand in currency. In other parts of the world it can go to 500:1. WHAT, are you crazy? Five million on ten grand? Five hundred a pip on ten grand? No wonder so many beginners fail.

We already know that many people refuse to take a loss and let losers run. We already know that many beginners cut winners at any sign of adversity. If twenty pips equals ruin at your chosen leverage then You should be jumpy. Twenty pips can happen in less than a second in forex. When I started in forex The US brokers were just adopting the 50:1 leverage rules that came out of the financial crisis. I can remember post after post on this forum saying that trading was dead. How could anyone make money at 50:1? I still laugh at that thinking.

I trade currently at 10:1. I make money. I pay my bills. I grow my account. Every time I can, I reduce my leverage more. I can't wait for the day my account has reached the level that will allow me to trade without leverage. I hope, if all goes to plan I will be there in two years. The problem most traders face is that they are majorly undercapitalized. If you want to even think about trading for a living I would say the minimum, the absolute basement account size is fifty thousand. If you think you can take a twenty thousand dollar account, risk five percent per trade, and count on making ten percent a week, you're nuts. If your account is a hobby and you are just trying to make a little extra and have a little fun then go for it. The professional trader will be happy to make a steady conservative return and put a little away for a rainy day. The gambler will open huge maxed positions and go for home runs. Compounding is the secret to riches, not swinging for the fences.

Most people don't want to hear this. Most want the quick buck. Most lose account after account trying to hit the one in a million trade. Yes its possible to enter a trade with small drawdown that goes to the moon, odds are though that you won't survive the losers before you find that trade if your leverage is too high. Trading is a numbers game. You can't win if you can't bet and you can't bet if you don't have any money.

The truth:

If you are a beginner you should be trading with small leverage. If you are experienced and trying to get to the level of making a living you should trade with even smaller leverage. NEVER risk your account.

Hope it helps.

I most often find these discussions on leverage confusing, they tend to be overly complicated. I claim that this is really simple mathematics and in the end only comes down to proper money management.

Assume I am using a money management system, risking e.g. 2% per trade. Seeing a trade possible develop I determine a stoploss (measured in pips), now this stoploss (together with margin requirements) tells me how much money I need to hold in my account to be able to take the trade. So if this tells me I need $10,000 in the account, then leverage/margin might make the actual amount 25 times less (50:1 leverage and double margin). Now MM is not about risking a percentage or two of the money I hold in my brokers account, part of this money can held elsewhere, e.g in equity or a savings account. The high leverage just allows me deposit less money with the broker, which I would prefer, reducing my overall exposure. So I could risk a larger share of my account than the 2% stipulated by my MM-system.

This leads me to conclude that with proper money management, leverage is not really that important. But as always, money should be handled by clear and cool calculation.

Your thread has been most interesting so far, thank you!

Thanks SP for your feedback..

No reason you can't do what works for you. My only questions, what do you do when you hit a losing run where your margin is too low to enter a position at your chosen risk level? How do you account for volatility in adjusting stops to the current market? How quickly can you transfer funds when your account needs to be adjusted to new stop loss requirements, or to replace funds lost on a losing series of trades.

So, you want to trade for a living.

You have heard the advice. You have heard that you need proper capitalization. You have heard that you need a clear concise and consistent trading plan. You have heard that you need an edge that can be quantified and proven. You have spent hours reading and dreaming about traders like Paul Tudor Jones, Bruce Kovner, Michael Marcus, Richard Dennis, Mark Cook, etc, etc. You are sure that this is the life you want. You have read and been told that these are just a few; a tiny fraction of those who have tried. You have heard that the odds are against you... bla, bla, bla.

Well here's what you haven't heard. Here's the real information you need. Here is the truth.

You will learn all you need to know about money management and risk control long before you begin trading for a living. If you are a profitable trader (that is you have made a solid positive return for at least two years) you must have already integrated these into your trading. You will have taken your track record and done the calculations to assess the amount of capitalization you need to make a living. You will not have built a profitable trading method without understanding your edge.

So what's the problem? Why do so many fail?

First, trading for a living, for yourself, is remarkably solitary. I don't mean you are by yourself alot. I mean your family and friends will often not support your decision. Many of the people in your life will have grown up working for others their entire life. Many of the people in your life will have never worked in a career where the income is not steady and reliable. Many of the people in your life, those whose opinion you most respect will tell you you are nuts. They will tell you that what you plan will lead to disaster. You will be told that you are gambling, you need to grow up. Many of those around you will actually secretly wish that you fail so that they can feel better about the fact that they gave up on their dreams years ago. The realization that you have little support from the most important people in you life can be devastating.

You are alone alot. If you are a social animal who can't make it through a day without interacting with others you may find it incredibly hard to trade for yourself. If you are social it doesn't mean you can't trade. You may just need to focus on getting the necessary experience to trade for a prop firm or some other venue where you can have others to be around. I don't think it is a good practice to talk to others about trading. You don't want to have conflicting information enter your decision process. Another trader might take a position that is opposite to yours and this might creat doubt in your own trade. However you may want to have someone around you to whom you can just talk about the weather. You may simply be one of those people like my wife who must have someone to talk to at all times.

Your income will be unreliable. Professional traders don't make ten or twenty pips a day. Professional traders don't target such things. The job of a professional trader is to make good trades. No more, no less. Sometimes you can make good trades and lose money. Following your plan is not always easy or a guarrantee of endless profits.

Many people think that when they retire their golf game will improve. They think that if they can have several hours a day to work and practice they will get to that goal they have been working for. Maybe its to break 90, or 80, or shoot under par. The fact is most of the time the retiree's golf game actually declines. You see they don't have good fundamentals. Since they are working and practicing on flawed basics they end up worse. The same thing happens in trading. The trader who suddenly finds himself in the position of having access to the market all the time will often see their performance decline. Prior to leaving the full time job the trader often has discipline in entries enforced by their life. If you are working a full time job and living life its tough to overtrade. Its pretty easy though, when you are in front of the computer for the entire day. Also your edge may not be quite what you think it is. Your edge, when applied over a larger trade sample may not hold up as well as you planned.

Its tough enough to trade larger size per pip when you have a job. When the pips on the screen represent the house payment its downright scary. Don't kid yourself, you will feel that same sinking feeling in your stomach as when you first started trading real money all those years ago. All the same things you fought to overcome will resurface. You will go through the same trials of taking profits too early and having difficulty facing the fear of taking a loss. It should not be taken lightly that you will have the possibility of gaining, or losing in one day the type of money some people work a week or a month to earn.

You may see your fitness decline. In trading we seem to be sitting in front of a computer all the time. Even if you are a long term trader and don't babysit your positions, you will spend many hours testing and refining your methods. Traders often see that when they go full time they are afraid to be away from the computer. You find that one missed trade can represent a large portion of your profit potential for the week. You tend to eat quick unhealthy meals, especially if you trade short term. You often feel guilty taking time away from trading, missing profit opportunity, to do things like working out. It is important to make time for fitness but often not easy for the trader.

I think most of the people on a forum like this one have a dream to trade for a living. The lure of free time and easy money seems irresistable. At some point though most of us must come to the realization that we aren't cut out for it. Its widely agreed that only about five percent of traders are long term profitable. This is no different from any other profession. To be at the top of any business is reserved for only the very few who will do what is necessary to succeed. Most of us simply don't have the desire and dedication. To be a successful trader requires that you love trading. The money, the supposed free time, the freedom of working for yourself are not enough. You must search deep within yourself and truly be critical of your decisions. You must be sure that this is the path you want to follow. If there is any doubt, any at all you will not succeed. Do you think Bill Gates family and friends supported his decision to leave college? Do you think that Fred smith cared that his business professor said he would fail when he started Federal Express. You must be committed. Not I want it committed, but I will do WHATEVER is neccessary committed.

Be careful what you wish for it may come true.

Hope it helps.