Forex Trading Philosophy

I think he is having a lend here...

You have to be in the market to make money in the market.

many will call this video crap. maybe this is the reason why majority loses.
enjoy:

Very good one.

Here are 20 rules of trading by Mr. Donchian.
Read, pick, take and use for your own liking.

General Guides

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.
2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.
3. Limit losses and ride profits, irrespective of all other rules.
4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.
5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.
6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation.
7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%
8. In taking a position, price orders are allowable. In closing a position, use market orders."
9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.
10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.
11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.



Technical Guides
1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.
2. Reversal or resistance to a move is likely to be encountered:
- On reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range
- On approaching highs or lows
3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.
4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.
5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places.
6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side.
7. Watch for volume climax, especially after a long move.
8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps.
9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

2 more interesting videos:

Thank you TashKent
I print the document and post it near on my desk. These are good rules to remember

Happy Christmas / Happy New Year

Martin

you are welcome Martin.
Happy New Year!

I found this book review for Fooled by Randomness by Nassim Taleb, the author of Black Swan. The reviewer nicely sums up author's main points. Very useful comments.

 

1. Markets are largely probability-based. Trading depends a lot on randomness, in a much greater extent than more “normal” professions.
2. Success in trading can often be attributed to randomness, not skills. The most successful traders are usually just the most “lucky fools”.
3. The trading records and past investment performance are of little use as there is no connection between past and future results in random environments.
4. People don’t understand randomness and probability. Even scholars in the field often do ridiculous mistakes in considering chances. Those who do understand probabilities often forget to use their knowledge in their daily and professional life.
5. Emotional and psychological traits inherent to humans are the huge obstacles in performing well in something connected with randomness (like Forex market, for example).
6. Moderate informational deprivation is important for a trader to filter “signals” out of the ”noise” and keep oneself emotionally uplifted.
7. Traders forget about rare events. They act like something really big and unusual will never happen to their strategy. In real world, rare events are destroying accounts of even the most successful traders.
8. Modern economical science is far away from being a real “science”, while is ridden with all sorts of scientists, failing to see their own mistakes.
9. Overfitting of trading strategies (or overoptimization for expert advisors) and seeking the causality in correlation is a big and popular mistake of the financial traders.
10. Traders can’t (and don’t want to) get rid of emotions — randomness can control the outcome of their positions and thus their emotions, but they can still control their behavior. A dignity in one’s behavior even in face of losses is most effective response to the kicks of fortune.

Summary: Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.

Why Does the Average Forex Trader Do Wrong?
Many forex traders have significant experience trading in other markets, and their technical and fundamental analysis is often quite good. In fact, in almost all of the most popular currency pairs that FXCM clients trade, traders are correct more than 50% of the time:


http://media.dailyfx.com/illustratio...profitable.png

The above chart shows the results of a data set of over 12 million real trades conducted by FXCM clients worldwide in 2009 and 2010. It shows the 15 most popular currency pairs that clients trade. The blue bar shows the percentage of trades that ended with a profit for the client. Red shows the percentage of trades that ended in loss. For example, in EUR/USD, the most popular currency pair, FXCM clients in the sample were profitable on 59% of their trades, and lost on 41% of their trades.
So if traders tend to be right more than half the time, what are they doing wrong?


http://media.dailyfx.com/illustratio...trade_pips.png

The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite bring right more than half the time. They lose more money on their losing trades than they make on their winning trades.
Let’s use EUR/USD as an example. We know that EUR/USD trades were profitable 59% of the time, but trader losses on EUR/USD were an average of 127 pips while profits were only an average of 65 pips. While traders were correct more than half the time, they lost nearly twice as much on their losing trades as they won on winning trades losing money overall.
The track record for the volatile GBP/JPY pair was even worse. Traders were right an impressive 66% of the time in GBP/JPY – that’s twice as many successful trades as unsuccessful ones. However, traders overall lost money in GBP/JPY because they made an average of only 52 pips on winning trades, while losing more than twice that – an average 122 pips – on losing trades.


Cut Your Losses Early, Let Your Profits Run
Countless trading books advise traders to do this. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. Conversely, when a trade is going well, do not be afraid to let it continue working. You may be able to gain more profits.
This may sound simple – “do more of what is working and less of what is not” – but it runs contrary to human nature. We want to be right. We naturally want to hold on to losses, hoping that “things will turn around” and that our trade “will be right”. Meanwhile, we want to take our profitable trades off the table early, because we become afraid of losing the profits that we’ve already made. This is how you lose money trading. When trading, it is more important to be profitable than to be right. So take your losses early, and let your profits run.


How to Do It: Follow One Simple Rule
Avoiding the loss-making problem described above is pretty simple. When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “risk/reward ratio”. If you risk losing the same number of pips as you hope to gain, then your risk/reward ratio is 1-to-1 (sometimes written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 1:2 risk/reward ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.
What ratio should you use? It depends on the type of trade you are making. You should always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Generally, with high probability trading strategies, such as range trading strategies, you will want to use a lower ratio, perhaps between 1:1 and 1:2. For lower probability trades, such as trend trading strategies, a higher risk/reward ratio is recommended, such as 1:2, 1:3, or even 1:4. Remember, the higher the risk/reward ratio you choose, the less often you need to correctly predict market direction in order to make money trading.


Stick to Your Plan: Use Stops and Limits
Once you have a trading plan that uses a proper risk/reward ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper risk/reward ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor).
http://media.dailyfx.com/illustratio...isk-reward.png

Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading.

SOURCE:

I don't disagree with your article, but I'd like to make the following points:

1. Simply making higher RR trades is not in itself guaranteed to make you a winner. If that were so, I could write an EA that makes 2:1, 3:1 (or whatever) RR trades, using random entries, and waltz effortlessly into the winner's circle. And so could everybody else, making forex the easiest game in the world to win. The reason it isn't, is that everything else being equal, increasing RR tends to decrease your win rate commensurately. That is why profit factor is the product of win rate and RR. A PF > 1 represents a positive expectancy system, one that wins more than it loses, over time.

Having said that, I agree with the point that most successful traders employ an average RR > 1, by (like your article says) exiting their losing trades more quickly than their winners. But they also use analysis and knowledge to maintain their high RR, without dropping the win rate to the point that the PF falls below 1. Therein lies their winning edge.

2. If I may be pedantic, what you are calling "money management", I would call "trade management". MM is more about the monetary risk you take, and the approach you use to size your positions, e.g. fixed frac, fixed ratio, optimal-f, martingale; it can not in itself (over a large enough number of trades) provide a mathematical edge. Whereas TM is about the way that you manage your exits, according to your analysis and knowledge, and can definitely provide an edge, as explained in the previous point. There is no getting around the fact that P/L is always the difference between the entry point and the exit point. Hence IMO it is important to make the distinction between TM and MM.

I understand what you are saying and i mildly disagree with what you have wrote in your first part. High RR and high winning rate is ideal. that is what we all seek.
Many will disagree with the next thing i am going to say. We are taught to be winners no matter what. society does not welcome losers. therefore we try to win all the time and get disappointed with losses even if very small.
In this market we need learn how to lose. every martial art first teaches defending. after we learn how to lose the rest will not be too difficult. for an ordinary mortal person like me, high winning rate does not mean much. because i am wrong at predicting the market most of the time. and try to take quick losses. but once i realize that i am on the right side, i want to squeeze as much juice as i can out of this trade. if i lose consecutive 5 trades with 30 pip sl, my 6th trade with 200pip profit would still make me profitable. once you are in profit there are many options to manage the trade: aggressively pyramiding, securing the half profit, trailing stop etc. other reason high winning rate concept is not so attractive is that the idea we must win all the time puts pressure on us and negatively effect the trade. in order to avoid loss, we try to take the profit quickly. we can not tolerate profit evaporating or even going to negative, we take whatever we have profited. we can win 10 consecutive trades with 10 pip profit making total 100 pip. someone else can lose 7-8 trades (some of them hit straight sl, some BE after profit or sl hit after some profit) and his surviving 2-3 winning trades might generate a lot more profit than that of the high rate winner.
To speak for myself i never use R:R. Most of the time i have idea where my SL will be, but that does not apply to TP. But the idea of higher R:R is makes sense.
I agree with the second part. Money Management and Trade Management are two ingredients of the whole. MM is the strategy, TM is the tactics of the war.

Professional trader always said "
"Cut your losses short and let your profits run"

I never knew the true meaning of these words, until last Christmas.

Now I realize that forex is not High Risk, High Profit. But High Profit, Controllable Risk.

May God bless all of us.


Fam

This is so wrong on so many levels I don't know where to begin.
But I can tell you that this type of drivel that is constantly perpetrated is the very reason why people lose at trading.

Alot of truths in it. Especially the one about reversals. I think it's very accurate. Prices don't stop and reverse for no rhyme or reason. Usually, previous tight consolidations sticks in the mind for people. Thus when price reaches these previous levels of consolidation, things will happen.

What is luck? What is the secret behind it?
I hope this documentary will clear things a little:

Very good

Dear Tashkent

Can you tell what is all about? Does it really helps analysing all these! Or we just start trading since all the time we have 50:50 chance!

good question. what i am trying to say is the very essence of trading. it is much more than analyzing the market or predicting. 50:50 chance of winning a trade is the very first step of this long journey. try to comprehend this concept, think about it and develop your thoughts. you will be surprised what you will come up with. but first start with erasing everything you know, heard or read of about trading from your mind. be open minded. it will come to you.

Hi Tashkent

I like the words: "In markets everything works. Yet nothing is guaranteed to work continuously."
and ....."The only difference between these predictions is that the analyst may have slightly higher winning probability."

Though I am thinking to start with a demo account now. Will you suggest any broker? Though I know that all the broker is not perfect for everyone.

Thanks