Fundamental teaching from a profitable trader

****note that I have rebranded myself as Tigris Equity, my new myfxbook is www.myfxbook.com/members/tigrisequity where there is a link to my website www.bestpammaccounts.com and other details*****

In summary
*I now offer managed accounts
*I also offer teaching per hour
*I am totally commercial!
*If you want to contact me, it will have to through my website or myfxbook as I will not be able to send PMs

This thread has essentially been moved from the trade journal area as I did get some interest in coaching, and intend to open a PAMM in the near future. The posts below will be lifted from my old thread so I will be repeating much of the same content.

****note that for those interested I am now in the managed accounts sector - details are on myfxbook or you can contact me*****

I have posted on numerous forums (babypips, trade2win, forexfactory, donnaforex) very much the same thing mainly because I want to emphasis how I had the wool pulled over my eyes on how to trade for so long in forex. I will be copy and pasting my previous posts to save myself time.

If you don't like what I have to write, please be civil. If you hate the fact I am copy and pasting, I apologise but I don't really want to spend a lifetime rewriting forum posts. All that I write is my own opinion, and is not the only gospel truth/holy grail/black box, so if it goes against your beliefs, I am not personally attacking you but just providing my viewpoint from my experience.

My main motivation for writing is that I have wasted a lot of time and a lot of stress (I emphasis the stress and worry part) trading the methods that I have found promoted online. Not only promoted by gurus but promoted by people who claim they were successful. Fortunately I had a sizable enough account to absorb my errors instead of blowing up, but I am pretty certain that if I did not learn and continued to follow the teaching found online I would have blown up by now. In a way I want to show others what I learned from my experience, and talk about the right way to trade. The bottom line is that the teaching found online is a marketing tool that will lose you money, but I will elaborate later.

Learning to trade not a easy task. You can't compress it into an hours seminar. You need to develop critical thinking and a swift mind to trade. But mainly I would implore you avoid the massive pitfall that is the retail forex industry if you don't want your money swallowed up by what is essentially a massive PR/marketing machine that thrived on the freedom of information and the lack of any regulation or authority to provide that information.

Enough with the originality already! Onto the cut and pasting which I will do as time allows (there are about 70 posts or so to transplant over, and I hope to add to it from time to time). There is a lot of talking to get through. But there is a lot to talk about, so if you have the time to spare, its worth the read.

I have been trading forex since 2011, after a couple of years of stocks and shares trading. This is my trade journal - my trade record is here:

http://www.myfxbook.com/members/goldenmember

I have written a whole thread pretty much dedicated to this on other forums, but it is quite an unpopular line of thought because system vendors, teaching gurus and brokers gain their customer base from convincing people that trading is simple and predictable (and what trader would like to hear that they have spent years wasting their time?).

Their greatest achievement has been to convince the retail crowd that behavior of millions of market participants can be predicted by joining up two lines (support and resistance, fibonacchi, trendlines etc etc). If you think about it, its kind of ludicrous to think that the net demand for Brazilian coffee, Indian sugar, Apple products, Toyota cars, Playstation 4s, Greek holidays, and Chinese electronic products can be summed by joining up two lines. However, between them, the forex industry, forums and teachers managed to convince people that a line that any four year old who could draw can predict the future behaviour of an incredibly complicated interaction.

If the truth was known and the retail crowd believed you needed to study macroeconomics, read up financial issues and understand them, understand technical analysis, model statistical probabilities and have a large equity base (all of which I believe you need to be successful), very few people would attempt trading forex, and brokers would not get customers so it is in their best interest to promote "trading is simple - here is our 1 hour training seminar to make you rich."

Its a brilliant marketing strategy because 95+% of adults have the intellectual capacity of joining two lines together. However a very small percentage of people have the intellectual capacity to statistically model and are able to educate themselves and understand macroeconomics (and the majority of those are in full employment and do not have the time or inclination to do so because they are usually well paid in their job). If brokers marketed responsibly towards people who had the understanding and capacity to trade their customer base would be many times smaller than they have at present (in fact most would not be in business). If you have any experience dealing with financial professionals, a lot of their job revolves around trying to part fools from their money.

It all comes down to what you want to believe - do you want to believe that you will get mega rich by joining up a line when the vast majority of others do the same and cannot? Or do you think that maybe there is more to trading than that? I believe you can make money trading if you spend time learning the right thing and having a realistic outlook.

I'm reading that journal now....interesting thread ...forexmadeeasy comes to mind

*In addition to cut and pasting I am also intending on adding in some youtube links where I discuss the post I have made (although its somewhat of a project to do). This should give some additional content, and also help explain what I am talking about. In PM correspondence there is a vast amount of 'repeating the same point' so this should make my point clearer although I'm covering much of the same ground - the below is cut and pasted content*

Perfect Trading is not necessary


I am a retail trader - I also work a standard job as well - I am not a full time trader because I quite appreciate working (as I invested quite a lot of time in training for my profession), but I do not regard myself as a "trading professional" or a "city trader" nor do I have any aspirations to do so. I came into trading for one purpose, and that was to make money from the money I earned, and I think that is an important for everyone to bear in mind as I rant. I don't have a vast set up of networked computers or Bloomberg terminal etc.


I see that many traders try to achieve 'perfect trading' or some sort of 'trading nirvana' by getting their trades exactly right. HOWEVER I don't think there is any advantage to be gained of being exactly right, or posting a chart saying that your entry was within 2 pips of the low, and exit 2 pips from the high. After all if someone earns $200 through a 200 pip trade where he picks the bottom and exits out of the top, its the same REAL WORLD RESULT as someone who managed to earn $200 through trading 40 pips of that move (in fact I would argue that the person who traded 40 pips of the move had a safer strategy).


When you leave the computer as a retail trader you re-enter the real world. Unless you work at a trading desk you don't have a trading firm to pat you on the back or give you a bonus for executing a perfect trade. If you go boasting to your friends, your wife about your perfect trade, they will not really care!


To your wife, your $200 from a perfect trade is just as good as $200 from a dirty trade, and buys just the same amount of make up, shoes and clothes. There is an excellent market wizards video where Jack Schwager mentions that no one ever got rich by getting perfect trades that I watched when I first started out. I didn't get it back then, but I understand what it means now.


When I first started to read about forex trading early 2011, there was a lot of talk about demo trading until you are perfect, and there was a considerable body of posters that said the opposite of what I just wrote: that you should learn how to read the market perfectly and not care about the money, then the money would come to you. In fact there was a very high profile forum member we shall call C on this forum who claimed that he could predict the price to the pip and used to flame people all the time for not being able to predict the market all the time (he had a tendency to grid trade, and disappeared whenever there was a large unpredictable move).


I used to believe him and others like him, and attempted to trade perfectly, but after a time I realised it was pointless (and also highly unlikely and those who claimed to do never had any proof). Getting every pip of todays move, or not 'leaving a pip on the table' (I hate that saying) does not make you rich, and it is practically impossible to do on a regular basis. Trading is not about perfection like sports or any other discipline because it is very chaotic and I do not think that it can be determined to the pip because of the vast majority of players in the market.


Once I recognised that the point of trading was to make money (duh, obvious right!), then I recognised what Jack Schwager was trying to say: the goal of work/trading is to make money, NO-ONE CARES about being perfect. And your goals in trading should reflect that - by all means trade demo/trade micro accounts until you have a working strategy, but you have to start making money in the end. I recall talking to a retail trader who was planning on trading their $100 000 pension. They were trading a $100 account for about 6 months, and one day he came to me and was incredibly happy that he made 12% one day. He said "If I scaled that up I would have made 12% on $100 000 ($12 000)." I congratulated him, but thought that - but you didn't make $12 000 - you made $12 in 6 months (a salary of 50 cents per month). Assuming that he was trading $100 000 when he was in fact trading with $100 was like saying that if only he shorted gold at $1900 - its a 'if only' or 'I shoulda, coulda' type of fantasy.


What I am saying is there is very little point trying to trade a demo account or a micro account of $100 for years trying to get perfect because it will never happen (I'm not saying demo is not useful - on the contrary I think it is useful for testing).


I think that people are focused mistakenly focused perfect trading because they assume that their trading and prediction will get better and better with time like in sports or another game. If you look at fund managers though, their trading does not get better year by year. Trading involves a lot more outside factors that will influence performance, so I would strongly advise against trying to be perfect, but instead focus on making money/preventing excessive loss.


Obvious right? But you would be surprised at how many people still spend years going for perfection - as I mentioned, I did for a time go for this method, but ultimately is not not necessary and is time sink and unachievable.

Equity Goals in trading (and other goals)


Trading for me is about making money. Others might have goals of trying to be the best, or carve a respectable name for themselves as a trader, or to impress their friends, but for me, it is about making money (and not losing it). Therefore I compare it to a job, except that it is more risky, and less consistent. The parallels are quite plain - you turn up at work at your computer, you spend time on your analysis, and then you place trades. The hours you spend at trading are very much like spending hours at work. Of course, the main difference with salaried work is that you cannot lose money - hence trading is a bit worse than work because of the unreliability if they paid the same dollar value.


When you are considering trading, you should compare it the value you are getting out of it to what you would get at work. The average American monthly salary was $3769 in 2011 for standard work - minimum wage would around $2000 per month. If you are a full time forex trader, then you should be making $3700 at least, plus a premium of around 30% for the variability and risk you are taking on (lets also include reduction in transport costs and hours as a perk). This means that if you are replacing your work with trading, then you should be making on average $5000 per month if you are going to dump your average job. If you are working a minimum wage job, then you should be earning at least $3000 per month if you are going to dump your minimum wage job for trading.


In fact, a lot of retail traders do not make near this amount per month, and yet still spend their working hours at the computer trading - a lot of them lose money. One typical reason I hear is that "this is just a learning phase" - however there are people in the learning phase for years and who never leave. Most courses and apprenticeships do not require 8 hours a day for years to learn - nor is this necessary for forex trading, yet people put themselves through it. However, you can always learn while you work. This is a point that I will come onto later.


I equate money earned from trading as the same as money earned from a job. It buys the same amount of food, electronics, beer, housing. However, retail traders seem to cheer that they earned $2000 in a month for forex far more than they they would cheer if they earned it from their job. The reality is that if you are not making money in forex, you are worse off, and losing time compared to someone who is earning a minimum wage job. Some people would argue that forex is a time sink in which you are losing money, especially if you have dumped your job to trade, or are refusing to look for work and instead are spending time trading.


This is especially relevant for people who are trading micro accounts or $100, $200, $500 accounts. These people are in fact losing valuable time, and potentially money by refusing to look for work.


The great thing about trading is the accessibility. You can trade at any time, and it will always be there. Unlike work, you can take 2 months off, and it will treat you just the same. As a boss, trading is incredibly forgiving if you want to take an unpaid vacation - it will always let you come back in the same position no matter what. Whats more trading can be built around any work you do. Do your work, and then trade when you have some free time - forex will not fire you for moonlighting, or working too few hours!


Many retail traders have the wrong priorities and quit their $3700 per month job for a terrible paying job (trading). Others are young students who refuse to look for work that would provide $2000-4000 per month in lieu of accepting $100-200 a month (if that) from trading.


When you decide to trade you should set equity goals for yourself. Money management is not just about 1% risk, but managing your income in the most efficient way. Don't quit your $3000/month job for trading if you cannot make $3000 per month doing it. Don't refuse to apply for jobs because you want to spend months battling away with a $200 account. You can always reduce your time commitments at work when you start to make $3000-5000 per month trading. Better still, you can find a job that you love to do and work that part time. If you love looking after animals, fixing cars, doing gardening, hanging out at nightclubs as a bartender, then its better to spend some time working than spending it crouched in front of your computer - you might even appreciate the extra income.


So instead of trading your $100, $1000 account, look for ways that you can increase your equity to a reasonable size before you stop looking for work/stop working. I would say that $50 000 is really the minimum equity you need to start earning a comparable salary to the standard American wage. This varies from country to country - obviously if you are from Indonesia or the Phillipines you can look at lower equities, but do yourself a service and value your time by setting a minimal equity goal and achieve that whether it be from working a job or trading.

Trading is not a competition


The more pressured and stressed people are, the poorer decisions people tend to make. I acknowledge there are times where competition and stress are useful - in sporting events the adrenaline (epinephrine for Americans) kicks in and helps athletes to push themselves further. However, most traders are sitting around in their armchairs and do not benefit from the extra stress.


This might seem completely obvious to avoid, but competition pervades every part of retail trading because everyone has their opinion online. I make 4-6% per month, but I see a few other traders can make 100%-200% per month, and many more claim that they can. There is pressure all the time to increase the amount I trade, increase the risk to attempt to beat others. I feel that I know my way around trading enough, and it gets quite annoying that someone with no experience and no knowledge claims to outstrip me, and I am tempted all the time to try and compete.


Nassim Taleb in his book Fooled by Randomness writes at length about this theoretical relationship between two neighbours who are traders. One is a young, successful trader who is somewhat naive but foolhardy in the markets but has made a lot of money for themselves in a bull market and has the biggest house in the street. The other is a conservative trader who is producing returns at a slower, safer rate (obviously Taleb writing about himself) who lives in a modest house. The conservative trader is jealous of the richer neighbour because he feels that the rich neighbour has no idea how to trade and has just got lucky by repeatedly buying in the right market. The successful trader eventually blows up when the Russian bond markets collapse, while Taleb continues to make money and he feels vindicated that he has stuck to his strategy and has not been influenced by his less educated counterpart.


The same situation occurs in retail trading - in fact it is much worse because retail traders are fond of telling tall tales and they don't need a big house to prove that their success (in fact, they often don't have any proof at all). Retail traders post up their (unverified) trading performances to champion how good they are when they have a winning streak, and it can encourage jealousy. Others post up single screenshots of a trade or mention a trade that they did take, and I know I feel like kicking myself because I missed out.


In the end, all of these facts make you want to compete, and its an influence that you have to ignore if you want to be successful. If you succumb, it make you change your successful strategy for a unproven losing one. You could switch strategies and never settle on a successful one. You have to remember that traders only ever post up their winning trades - the same happens in stock trading forums, or any other forum. The losing trades never get mentioned, and the 100% winners on myfxbook delete their profiles or make them private when they drawdown.


I actually am thankful for the existence of myfxbook because it does give a more realistic outlook. If it wasn't for myfxbook I would be thinking that everyone made 100% per month and made 200 pips a trade with a 100% success rate. In fact it actually gives me the opportunity (like Taleb when he saw his neighbour get evicted from his house) to see the 100% per month accounts go private or blow up. I feel vindicated (as nasty as that sounds) that my trading method is valid and that I am not wasting my time.


If you succumb to the need to compete then you risk throwing away your money and being one of those traders who loses because of other people rather than your own mistakes. This is incredibly frustrating because it is so avoidable, but easy to fall into because after all human beings have evolved to where they are because they learn and listen to each other so its a natural trait.


Just remember the statistics of retail traders are very telling - the figure of 95% losing retail traders is very accurate. The traders who claim repeatedly that they are making winning trades are generally not successful traders. Their sin is much worse than just making up their trades, but they also encourage others to fall into bad habits. I am sure that retail traders would benefit from not having access to the internet and succumbing to competing with others. In fact, competition is worse on the internet than how Taleb described it because at least Taleb could see the other persons actual success. On the internet, anyone can say that they are anything, although that has been mitigated somewhat by myfxbook most people still refuse to use an independent results service like it and prefer to tell tall tales.


Competition does not just exist in terms of percentage gain or money gained. One of my biggest pet hates is when people on Wednesday or Thursday say "Just made 200 pips, done for the week." How many times do you hear that, especially from people who have nothing better to do on the Friday? It reminds me of being back at school when people would compete in an exam to stand up and walk out of the exam early. Never mind that it was an important exam, but if you stood up 40 minutes before the bell rang, you were cool and smart. Of course, the smart pupil would check his/her answers until the end of the exam to be sure of getting the best marks, and the people who stood up and left early received poor marks. Only the naive and somewhat stupid pupils would try and leave an important exam early to show that they were smart.


People saying "I made 200 pips, I'm done for the week" are again acting like those pupils leaving the exam. Again it has the effect of making people feel as if they haven't done enough, quickly enough, and that they need to compete to catch up for the week. The reality is that if a prime set up occurs on Friday, that trader who stood up, left the exam hall to sit in the common room and "was done for the week" has missed the opportunity to make money. This is unforgivable for someone who wants to make their living trading (unless they have to pick up their mum at the airport etc). You might feel a bit of a loser sitting at your trading desk when others are saying "they are done for the week" but if you stick to your plan, you will be the one getting good grades or making real money, not the ones who stand up and leave.


All of this relates to my first points. Do you want to trade to look cool, and be respected on the forum, or do you want to make money? If you want to make money then avoid competing. Trading is not like a traditional business because you are not competing with other coffee houses, furniture stores etc. Taleb did this by isolating himself in his attic away from any distractions. The internet and forums are powerful distractions that can foster harmful competition. Its vital to be able to ignore the call for bravado and unrealistic competition

priceless writtings

can't wait for your next post

I'm only "practicing" with a micro account and take this as a hobby, I have a small construction business and do not plan on trading for a living but would be happy to use this hobby as a "sideline"

what I'm learning in your posts helps me being more realistic in the way I see FX trading

thanks for these posts and please bring some more


PS: sorry for my bad english

Hi Goldenmember! I agree with so much of what you say- really looking forward to hear about how you go about the fundamental analysis. Please keep the posts coming!! Thanks!!

An interlude

I thought that I would add a few points as there have been some surprising moves in the market recently particularly with the US GDP and the NFP. Glancing through forex factory and other popular forums I get the impression that people are trying to predict every single move of the market and trade every single move. Of course, without 100% of the information this is impossible.

Relating our currency trading to real world trading (let's say buying solar panels for a business) all you can do is make an accurate assessment whether it is worth buying the product or not. If you are running a solar panel business for example, you might see a manufacturer sell their units for 10% off. If you think that you can turn this over for a profit then it is a good deal. If you are simply buying it because you know nothing about the solar panel business and it is 10% off then it is a bad idea. The next week, you might find that another factory sells for 20% off. Then some company might have a closing down sale at 50% off. You are still making a good deal if your business plan is sound and there is no need to buy all you can at 50% off if you do not have the customers. After all, no one could have predicted that particular solar panel factory's major investor was an adulterer, got taken for a divorce and had to sell off his stake for example. If you think that you could have predicted this using the 'solar panel chart' you are deluding yourself.

However, if you note that the government subsidies for solar energy have been cut, or you can no longer sell for a profit for whatever reason, then that 10% off is a bad deal and it might be time to cut your losses. If your staff costs start rising or your customers start turning to wind energy then 10% off might not cut it - you need to work out the figures. If the government subsidies are cut to make your business not viable despite low solar panel costs then you have to change your business plan.

The same situation occurs in currency. A price might go up or down because of month end/year end movements - especially in December (compare this to closing down sales). If you have a good reason to buy or sell, then that reason stays until there is a reason why it becomes a bad idea (and that can be stop losses, fundamental factors etc). It doesn't mean you should be holding forever, but you should be aware that there are unpredicatable factors at work and all you can do is to trade what you know.

Learning why is as important as learning how


"I don't care why, I just want to make money." This thinking is common to many people coming to trading, and its why a college professor has as much chance of success as a high school drop out. Following a rote system without knowing why because you don't care to learn about trading as a profession negates any intellectual advantage you may have and is why smart people are just as bad traders as dumb people. When you learn it is really important to ask why instead of just learning by rote.


Some examples of learning by rote are buying and selling at pivot points, or at the 61.8% fibonacchi. Does anyone ask why? Success and failure here are dictated by not being smart, but by just following a 'system' without knowing what it means - this is a sure recipe for failure. Another example is the risk/reward ratio. This term is used so often by forum posters, forex teachers and well renowned forex analysts. The standard rule is that you should aim for a 1:2 risk/reward ratio +. Meaning you should place a take profit at least twice the stop loss. This has been used to justify trades, but if you ask why and the mechanics behind it - it is a ludicrous guideline. Also, if you examine myfxbooks top performing 10 accounts and compare it with the worst 10 accounts there is not much difference between the "risk/reward", and mostly the "risk reward" is <1.


For example, if EURUSD is 1.3000. If I place a long order at 1.3000, a stop loss at 1.2995, and a take profit at 1.8000 - its GREAT risk reward according to traditional dogma. In fact its 1:1000 risk/reward - so I am only risking 5 pips to make 5000 pips! What a pay off! Of course, what risk/reward merchants forget to mention is that there is a probability factor assigned to every trade. 1.3000 to 1.8000 is highly improbable, and even if given enough time, the swap that you will pay will probably eat many of the profits. For some reason, people have forgotten to assign probability to risk reward. Whereas the traditionally taught dogma is risk/reward =


Risk (pips stood to lose): Reward (pips stood to gain)


The actual equation should read


Risk (pips stood to lose x chance of losing particular setup): Reward (pips x chance of winning setup) - (Swaps + Spread + Slippage)


Thus when some analyst is blindly talking about risk rewards of 1:2 when the are risking 20 pips for 40 pips they are talking absolute nonsense because risk/reward is meaningless without the probability of the set up. Risking 20 pips for 20 pips is traditionally known as a 1:1 risk/reward and thus shunned BUT if the set up has a 66.6% chance of success then you have your 1:2 risk reward when you risk 20 pips for 20 pips. Traders who blindly talk about risk/ratio without actually knowing what it means (and there are a lot of them) would benefit from knowing why they are trading what they are trading.


This is just one of the examples where blindly following traditionally dogma without asking questions and asking why, what, as well as how leaves you with a broken system of doing things. If you think and ask while you learn then your actual intelligence and talent will reap rewards.

The never ending retail trading cycle


I have seen a lot of people compare trading to an apprenticeship or university course, and the figure of 'it takes 3-4 years to become profitable' is the most common one I have heard. It also happens to fit nicely with the length of a degree, and in many ways justifies to traders that they can happily not make money for 3 years. Even if they lose money, they compare the cost of that to education. After all, the price of a college degree in the USA in 2010-2011 was $13 600 per year, or for a 3-4 year degree $40-50 000. Thus a retail trader can happily lose $50 000 over 3-4 years convincing himself that he is getting the equivalent of a college degree in trading. I don't have figures on how many are profitable after 3-4 years, but I expect because of the large failure rate of traders, that even after 3-4 years traders who are unprofitable remain unprofitable unless they start learning a way to trade profitably.


There was a very good post I read in 2011 from forexfactory which stated the standard journey of a retail trader - I will summarise it below:


1) Phase 1: novice phase - trades are placed at random, because of survivorship bias, the winning traders become enamored with the easy money since they made $100/200/1000 in a short space of time and decide to carry on trading, expecting the next day that they will make $100/200/1000. The losing traders fade off and look elsewhere (<1 month).


2) Phase 2: The winning cohort from phase 1 learns that their random trading technique is not consistent, or they attempt to match their previous efforts success and cannot manage it. They realise that a more systematic approach is required (0-3 months).


3) Phase 3: The traders stumble across a simple system they found on the internet/paid for on a course and think that this is the missing piece to their trading and learn it (1 month).


4) Phase 4: The trader executes the system, yet finds it is not providing the results they are looking for (2-6 months)


5) Phase 5: The trader goes back to the course tutor/forum where he found the strategy and seeks to improve the system (1-3 months)


6) Phase 6: The trader executes the system, with new suggestions/improvements yet still cannot get the results they are looking for (1-3 months). Depending on the character of the trader, he returns to phase 5, or advances to phase 7.


7) Phase 7: The trader tires of the system, takes a break and looks for a new system as in phase 3 (1 month)


Many people are locked into this cycle (lasting from 4 months to a year for a single cycle) for years because the systems that they try out are not successful. Because of the market for trading systems, there is a lot of fluff - most of the information I have read has serious holes in the logic, and most importantly does not work. A trader can lock themselves into this cycle for years and never come out until he actually happens to find a system that works, which may be never. Given how many 'rubbish' systems there are out there, the chances of an individual trader finding the 'right system' is very low. Lets say there are 99 bad systems out there for every 1 good one. The chances for a trader to go through the cycle to find a winning system at random is slim, and we do not have infinite time to find one. What makes it harder is that "social proof and testimonials" for systems are frequently posted by the system creator themselves, naive traders, or traders that have invested too much time to let go.


The solution to break out of the cycle is to understand the system itself, understand why the market moves the way it does, why it is difficult to make money (and it is difficult), and why it is easy to lose. Again, this is more of the same from me about not blindly following a system or a teacher.

enjoying the thread

This post summarizes in the best manner what has happened to me in the last 18 months.

I've lost big money here, I try new strategies, I bought some courses, and I still can't find a consistent system. Put money on sites like zulutrade, plenty of people who love to say they have the best strategy.

I have a decent job and fortunately I can spend few hours a day reading and trying to learn more and more. However, the fact is I don't want to lose more money. I don't expect to reach 100% in one week. I just want an stable system that allows me to get an extra money. Sadly, I haven't find that way yet. Hope this thread may enlighten me to find the way.

Thanks a lot goldenmember for your writings

I'm just going to start cutting and pasting things over - but have been a bit lazy about it all because I have been busy with outside interests at present:

Spending your time wisely


New retail traders work assume that working hard at a trading system is spending 12 hours at live charts working for 3 months as part of the retail cycle which is the most time consuming activity. I have heard people say they want to watch charts until they have seen every market eventuality. In my opinion, this is a waste of time - for instance, someone might not have seen the GBPUSD gap 200 pips at the weekend, or see the RSI 15 minute hit 6 before, but you might have to spend 12 hours a day, for months to actually see it, and if it happens when you are asleep then you missed it. If you are attempting to learn by chart watching ask yourself: what have you learned this week that you did not know last week by watching the chart? If you can write 2 or 3 new points that you did not know the previous week I would be amazed.


There was a trader I spoke to who claimed that he had learned a lot in his first year of non profitable trading by watching charts - I asked him what he learned in ONE YEAR, and his learning consisted of 1) always use a stop loss, 2) don't be emotional, 3) let profits run. Three points that he could have learned in an hour, he took a year - (thats 5 days a week, 50 weeks of the year to learn 3 points).


Once you have a general idea about the charts the most efficient way to spend time learning trading is:


a) backtesting purely technical set ups using forex testing software (V hands is a free one) if you are a technical trader,

b) learning about economic triggers if you want to learn fundamental trading not watching the forex calendar tick away

c) learning how to program if you are an EA trader instead of watching how your EAs perform live.


In my opinion, there comes a time quite quickly that staring at a chart is wasted. If you trade technically on a discretionary basis, you should just be alerting your levels. If you trade fundamentally there should be fundamental news that you look out for and you can have your newsfeeds alert you. If you trade arbitrage or pure technical, then you should have EAs that you audit and update. Chart staring and 'getting a feel' for the markets in my opinion is one of the biggest wastes of time you can do. Trying to watch charts to develop a sixth sense for the markets I believe is like sleeping with a French dictionary under your pillow and hoping to learn French - you have to spend your time learning in the right way to learn anything.


If you can trade with minimizing your chart time then you are spending your time more efficiently. We have all I am sure spent an overnight session battling to get our round figure for the day/week/month. After doing that a few times early on in my trading, I realised that I was spending 4-5 hours earning $40-50 - a minimum wage for an overnight session. I could sign up to the lowest paid overnight job and earn more - you wouldn't accept a $10/hour job under these conditions so don't accept it in trading. Remember, even McDonalds workers are on strike for $15 per hour. And as a forex trader - if you are earning less than this, you are better off working at McDonalds - they have benefits, sick pay, and a consistent pay packet (and free food).

The importance of realistic benchmarks for the retail trader


There was a famous trader on another forum who claimed that he turned $10 000 into $1 million every year forex trading. He produced numerous videos and webinars and had hundreds of followers. Eventually he made a myfxbook after being pressured to do so and lost 70% of his account in 6 weeks and disappeared off the forum. There are hundreds of examples of trader teachers who don't provide any proof of their own trading - question it and then you end up questioning the legions of sockpuppets, wannabes, and pseudointellectuals that frequent every single retail forum.


One of the greatest innovations for me in trading was the discovery of myfxbook, fxstat and mt4i. This gave for the first time a look into how other people were trading and what was a lie and what was actually possible. Internet forums are full of blaggers. If you go to bodybuilding.com you find that everyone claims they bench 350lbs, yet go to a gym and find that perhaps 1 person lifts 3 plates. In trading people aspire to make these make believe figures offered by penny stock traders or forex gurus who have no proof behind them. This is akin to the average guy thinking that everyone can bench 350lbs easily and actually end up getting crushed when he loads up three plates.


When you trade its important to have benchmarks so you do not end up aspiring to unrealistic figures and doing yourself a injury. Myfxbook, mt4i, fxstat give actual results so you know what you should be doing so you do not risk getting crushed by excessive risk and expectations.


I have done a lot of research on what successful traders manage to achieve - no matter what timeframe they use, what strategy they use, the figures of 4-8% per month for the most elite traders is consistent**. This is disregarding accounts that have traded less than a year or have excessive drawdown. I therefore do not try and over leverage myself and go for 20% per month. If we take the bench press as an example again - if you knew that the biggest, strongest guys in the gym were lifting 300 lbs for repetitions and you had just started training, you would be a fool to overreach and go for 350lbs because someone on an internet forum had told you that was what he lifted.

***note BTW I am aware people who have a possible bank capital of $100 000, and then deposit $2000 into a trading account, risk 50% of that or $1000 per trade who make 200%($4000) per month and claim to make 200% consistently do not count. Obviously these people are trading $1000 risk on a real capital of $100 000 and are in fact making $4000 on $100 000 or 4% with a risk of 1%. Work the figures around how you want - in the end, 4-8% on total accessible capital figures is consistent. Traders that risk more risk excessive drawdown and their accounts disappear.**


In fact, the average guy would benefit from lifting 160 lbs for repetitions and working his way up. In the same way, I do not reach for the 350lbs or 20% because I know that no one achieves it, and that I am happy making gains lifting 5-6% per month since I know that is the realistic for what I want to achieve.


If you want 20% a month plus then you should study all the 20% month systems and see what drawdown they achieve. I do not think I am 'the special one' and will go where no man has gone before - I am a realist and if 20% a month for the best traders causes excessive drawdown, then I will probably have to take excessive drawdown to achieve it which is not what I want.

Identifying the good from the bad



The ability to be able to process good data and filter out the bad is an important quality in any job. This goes for trading – not only in learning how to trade, but during your trades as well. If you recall your studies of history back and school, I can still remember having to study the Romans and the Second World War. Obviously this differs from where you live, but learning history was about sourcing the right information and filtering out what was bad. As history students sitting exams or writing essays we had to write compelling and accurate prose on Roman History. We all had the same textbooks and sources, but some people were able to produce good essays, while others would produce bad ones. Good essays focused on what was learned from good, accurate source material. Bad, biased, poorly researched information from unreliable sources was disregarded while accurate, legitimate sources were written about. In the same way, you would also disregard biased, propaganda about the Second World War and focus on neutral, first hand sources for your information. When writing about how the war was regarded by Germany, a propaganda leaflet from the Reich official was far less important than a personal diary entry of a common German soldier.


This is very much similar to trading. Instead of writing good essays and getting good grades, we are focused on learning good information and making good trades. This means that we should focus on being able to identify good sources of trading information, and avoid bad sources of information. There are many ways to do this for different types of information. Just as in history, you should seek out first hand material as often as possible. Information can be deleted the further it goes down the line. For example, an internet marketer trying to sell a trading course might offer similar information that he gleaned from a trading book. However, it is infinitely preferable to go to the original information rather than the trading course unless the internet marketer provides sufficient additional value.


The same goes for trading advice. Not too long ago someone on a forum advised me that USDCAD was going to drop to 0.8 because the USD was going to be repriced in the next month because of a new currency from the Middle East. The month elapsed and of course USDCAD went up to 1.05. The information that this guy had received was second /third/fourth hand garbage. What makes traders good, and intelligent traders shine through is the ability to take useful information and process it. This is the same intelligence that gets you good grades at school. If you are unable to identify sources of good information and differentiate it from the bad then you will struggle. If you need help then set firm criteria for what you regard as being good information. It goes without saying you should not accept trading lessons and advice from someone who is unsuccessful at trading or has no track record. Doing so is just is just the same as trying to write a history book about what the Battle of Dunkirk was like by talking to someone who had never been there or reading diary extracts from someone who has played Call of Duty rather than actual diary extracts of the men involved. You should also have similar criteria for what news and blogs you read, and what fundamental events you act on

Fooled By Randomness


This is one of the most important concepts that I read in Talebs book. I think that Taleb takes it a bit far by saying that everything is just random, but certainly randomness has a lot to do with performance. For instance, flipping a coin is 50/50. However, 1 person can be expected to guess 5 correct answers/5 wrong answers at random out of 10 coin flips. A person who guesses 10 coin flips correct is awarded the title of master coin flipper, and is given a lucrative job at an investment bank. Given enough people, at least a few out of millions can be expected to be expert coin flippers despite pure luck just playing a part. With 10 game coin flipping, one in 1000 players (roughly) can be expected to be given this award. These expert coin flippers swan around with their 100% win rates and live the high life guessing coin flips for their investment bank, however they are no more talented at guessing coin flips than anyone else.


Myfxbook (before the metaquotes argument) had over 100 000 traders on its books (which is why I prefer it to trade explorer which has just a few hundred). If they were a site that catered to coin flipping instead of trading, they would have at least 100 expert coin flippers on their books purely out of chance. These people get all the kudos, but eventually they have losing runs, and the more they coin flip (as well as for their investment bank) the more the mythos wears off, and eventually they are sacked from their position as expert coin flipper (except the lucky ones who has guessed another 10 in a row who is awarded the title of master coin flipper and a $10 million bonus).


Trading in the same way has a lot of chance associated with it. However, the more you coin flip, the more you can say that luck has less of an effect, and skill comes into it. Someone asked me whether I thought that a 300% account in a month was impressive - yes, but I stated that I had not seen it being sustainable. ie: A 300% gain in a month might be a master coin flipper, but unless there is performance over time, this might just be due to survivorship bias. I would also like to see several people achieve these gains over a time to consider the gains realistic, otherwise we might just be looking at a master coin flipper, or even a grand master coin flipper.


What I have seen and marked as realistic gains is what a significant cohort of traders can achieve over a long time period. I am less interested in an isolated incident where a single trader makes a significant percentage higher than anyone else - statistically this is known as an outlier. For anyone who is interested in statistics (and they do play an important role in risk management and equity management) I would suggest that they read up on permutations and combinations. I won't post on permutations and combinations further unless requested since it would be considered boring plus there are better mathematical sites where you can learn how to do these maths.

Statistics Part 1

I have written this post out of request, and it was one of my most enlightening moments in trading. It will consist of several parts since it is a lengthy topic. If you ask retail traders what statistics they use, the extent of statistics are percentages – pretty much the same level of mathematics as nine to ten year olds are taught at elementary school. They continue to use this level of mathematics into their trading and its not really suitable. I was fortunate enough to study maths up to high school advanced level, although I do not consider myself a patch on anyone who has done a college degree in maths. If you vaguely remember the maths, then you will know that when maths teacher said that maths was useful in every day life she was lying, but it is useful in trading.


Statistics are useful because they can tell you how likely results are due purely to chance. They can also tell you the expectation of drawdowns and losses per 1000 trades or per timeframe. You can then fit a strategy or audit your strategy to ensure that you do not succumb to a margin call. In fact, in 2011 there was a movie released called Margin Call. The premise of that was the risk manager and mathematical whizz kid worked out that the risk/drawdown that the company was taking was beyond the expectation that the maths showed – ie: they were living beyond borrowed time already! (they were not trading forex obviously as someone on another forum pointed out, but the risk principle of their trading behavior is what I want to illustrate). This meant that they had to get rid of their positions before they would blow up! It amazes me that a lot of retail traders have seen the movie, but have no real idea what they were talking about, except that the Spock from the New Star Trek was in it, and that it was ‘pretty cool.’


Using the correct statistics you can take your strategy, or your results and apply the worst possible scenario to it (most losses/biggest drawdown etc). You can find out how many trades it will take for you to encounter a certain drawdown. Given infinite time of course, all systems will fail. Given 1000 years, the most robust systems will fail. Statistics will tell you how many trades you can expect to trade before you drawdown 20%, 40%, 60%, 80% (margin call). For example, the statistics can show you that you require 20 000 trades before you can expect an 80% drawdown. In the movie margin call (2011), the statistics already showed that they were way beyond the number of trades required to get a margin call at their current risk (which is why they dumped positions). You can apply this to your own trading. In reference to the points I made before, people who trade 20% per month, a significantly higher risk of the margin call than a 5% per month trader. The risk is NOT just 4 x as high (this is elementary school maths if you think this) – the risk is much higher, and in another post I will discuss it. Again, if this post makes you yawn or fall asleep, do let me know and I will change topic

Part 2 of drawdown statistics – a brief look at permutations


There are many ways to work out drawdown statistics and I shall just list a few of them, as well as what NOT to do. The most common error that I have seen (I have to clarify that I do not mean everyone does this as some people assume I mean when I mention examples) is where people trade for a month to 3 months, assume that drawdown is the maximal drawdown and adjust expect to continue. One example of taking this to an extreme is where a trader I spoke to was trialing a system which had live tested for 2 months. He then increased his lot size based on those 2 months to maximise his gains assuming the biggest loss in those 2 months would be the biggest loss he would ever had. That did not turn out well as you would imagine.


Myfxbook has a statistic called ‘risk of ruin’ which is based on your win rate but it is flawed since it assumes that all your losers will come in a row. This is actually uncommon. lets go back to the coin flippers working for the investment bank as an example. They each are given $5 million accounts, and bet 20% or $1 million on each coin flip since that is the minimum bet. Guess wrong and they lose $1 million. Guess correctly, and they gain $1 million. To simplify things they always bet 20% so they are always 5 flips away from blowing up (management requires high standards). Given that each coin flipping event is independent and fair, the chances of losing is 50% or 0.5. Losing 5 flips in a row would cause the coin flippers personal account to be blown and he would be sent home in shame, never to work in banks again. The risk of ruin as soon as they sit at their desks as given by myfxbooks stat would be given as 0.5 x 0.5 x 0.5 x 0.5 x 0.5. This is 0.03125 or around 3% who lose 5 flips in a row and get sent home. This is the risk of ruin as given by myfxbook. You could extrapolate this to say to say that it would take 32 coin flips for a coin flipper to be sent home in disgrace. That’s not too likely you might think…


HOWEVER this is not the whole picture. As well as being sent home for guessing 5 coin flips in a row (LLLLL where L is a losing flip), the coin flipper can lose in many different sequences of events. For example he may get the following sequence LLWLLLL and be sent home after 7 coin flips. The probability of this occurring is 0.5 x 0.5 x 0.5 x 0.5 x 0.5 0.5 x 0.5 or about 0.8%. However, he can also lose by LLLWLLL (another 0.8%) or LLLLWLL (add another 0.8% chance of being sent home). All the different sequences of how the coin flips may end up need to be added up to see his chance of failure. Just with those 3 losing permutations above, the chances of ruin increase from 3% to 5.5%, and the expectancy of flips they will last fall from 32 to 18. Working out the different sequences and permutations where the coin flipper can blow his account actually tells you that the chance of blowing the account is significantly higher than you might think.


Learning this maths is quite time consuming – I recall it was an entire module of my maths exam a long time ago (approx 8 weeks of 4 hours lessons a week), so its not something you can just pick up by reading a blog post, but I hope you get the general idea. A website link is included here for anyone who wants to read more: Combinations and Permutations (link broken but its on the mathsisfun website). But if you really wanted to learn then getting a cheap maths book and working through the examples is the easiest way. You will also benefit from a scientific calculator – although you can find online scientific calculators easily enough.

Part 3: Probability and drawdown


Let us imagine for now that you have gone back to your math textbooks and you now know how to work out the chances of failure of a system (note there are weaknesses to this using just permutations that I will come onto in another post). The next topic is about applying probability and risk to drawdown. Again, we are looking at the coin flipper in particular and of course, we do not think that he has a very high survival rate. What if he cut down his risk? Instead of risking 20% on each coin flip, he had a bigger equity size and decided just to risk 10%. He goes and talks to his manager and they agree. We can then work out the risk compared to his coin flipper neighbour who has also been given a raise (investment bankers (or read hedge fund if you prefer) are fair to their employees). They both pitch their trading plan to the big boss: one plan has 10% risk, with the other coin flipper is still risking 20%.


Lets simplify and say that we discount the different combinations and say that only 5 in a row losers will blow an account. The 20% coin flipper has 1/32 per flip chance of blowing up, whereas the 10% coin flipper has 1/1024 chance of blowing up. All things considered, the lifespan of the 20% flipper is 32 flips, whereas the lifespan of the 10% flipper is 1024 flips (ignoring combinations which would reduce both flippers lifespans).


The 20% flipper starts with $10 million and ends up with a potential of $3 418 000 000 at his 32nd flip where he is past his time to blow up.


The 10% flipper starts with $10 million and ends up with a potential of $24,328,178,969,536,839,355,491,975 ,986,536,468,22 0,739,584, 000, 000 after 1024 flips. Of course at 32 flips, the 10% flipper only has a potential of $211 million and feels a fool compared to the 20% flipper, but in the end has the potential for a far superior plan.


Applying this to trading directly - I realise few people trade 20% risk, but there are plenty of people who trade 2% risk as opposed to 1% risk. The calculations would be very similar in how much would be made overall, and the lifespan of the trading account. I was messaged by someone recently who asked if I provided trading signals (I do not) and I mentioned that signals were a bad idea because money management was a large part of trading, and that signal followers would multiply up their risk without understanding the consequences - the underlying assumption is that if you double risk you just double the drawdown but the consequences are far more far reaching as I have posted.


Talking very roughly (you would have to do the maths to be more exact, although even then it is an approximation) you are far better off reducing the risk from 2% to 1% because that will increase the 'life expectancy' of your trading system which in the end will get you the results. Of course a lot depends on your investment goals - do you want to get rich in 6 months, or incredibly rich in 3 years - reducing the risk allows you to make the latter more likely.

Getting significant statistical results


An analysis is also useful for working out whether systems are entirely due to chance or have an edge on the current market but there are limitations, especially if you have small dataset. One of the most applicable uses for statistics is to find whether a trading system is successful solely by chance, or whether there is an edge. If you log your trade results you will have a record of your wins and your losses. Traditional statistics would have you input all your results and see of they beat the 'null hypothesis' of the trades being exclusively down to chance. Our examples of the coin flippers would given enough time have a 50/50 ratio of wins vs losses and would not be able to achieve their plans of 200+ million in a few flips. A probability assessment would state that the statistics support the outlook that the results are exclusively down to chance. Many traders will have good statistics and good win rates for periods of time because their systems are by chance have fit the market. They are dip buyers in a rallying market, sell the rally types in a bear market, or are grid traders on a ranging market (I have to make the point that there are many different types of rallying market, different types of bear market, and different ranging market in case someone brings up that point but I will talk about that later).


The statistics for when they are in the right market are good, but the snapshot that is taken is not indicative of the greater market - there needs to be a significant sample. Trading for 20% gain per month for 3 months tempts people into drawing out excel charts of 20% gain compounded for years (eventually hitting millions from a small account) but ultimately I have never seen this happen despite seeing many accounts have promising starts. I have seen many systems be successful over a period of months only to flatten and disappear - you can see this on zulutrade, myfxbook, fxstat and everywhere else. I only tend to look at systems that have been trading over a year to see whether their system is down to chance or actually has some edge behind it, otherwise the statistics may only be down to chance. Also it is possible to 'juke' the stats somewhat by only closing winners, and letting the losers run - after all - they are not counted in the loss rate until they are closed. Again, where do you draw the line? 6 months, 1 year, 2 years, 5 years? 100 trades, 200 trades, 1000 trades? There is no fixed answer - it just depends what how significant you want your statistics to be. The strictest is to do a statistical test which has the highest power and has the strictest probability or p value. By doing numerous tests you will be able to find the limit of where your trades are valid. This is quite similar to how confidence intervals are managed in the monte carlo simulation. If anyone wants to do anymore reading on how to do these tests here is a good overview: http://www.stats.gla.ac.uk/steps/glo...s_testing.html


When you see statistics with a great monthly gain, or a win rate for a month or two, you have to be aware that the population that the statistics is drawn from is not great. The probability of results being down to chance is a lot higher the fewer results there are. Getting good statistics and plenty of results is important for finding out whether systems work. I would caution over being wowed by statistics with a short lifespan, they may seem impressive but do not come up well against a robust test.