Alifari's Trading Journal

Living with lag - an oculus rift experiment

Most of the rookie traders trade like this. Out of sync, hammering every swing and getting cheeks done.

Illogical Stop Loss Placement:
"Trading is not a business of predicting, it is a business that involves hypothesizing and risk management"

It is common practice among novice retail traders to use needlessly wide stop loss due to fear of taking a loss and preserving their win/loss ratio. This fear is commonly caused by lack of knowledge and due to insufficient research and back testing. They don't understand that losses happen and they are part of this business and that there is no place for fear, if you want to be a successful trader.

Professional traders understand this aspect and doesn't use arbitrary stop loss such as 30, 50 or 100 pips. Instead they place their stop loss at a price level which, if reached determines that a setup is invalidated and the price is very likely to continue to move against their analysis. Usually these price levels are established support/resistance or supply/demand zones closer to entry price because these are the zones where banks, hedge funds and smart money place their stop loss. Once a trader starts thinking in terms of long term profit expectancy and not thinking about win rate he/she will realize the difference.

Let me explain, what I meant by long term profit expectancy, since very few novice retail traders understand the importance of long term profit expectancy (PE) = (probability of winning trade * average size of winner) - (probability of losing trade * average size of loss). For example out of 100 trades taken your win rate is 60% and average winner is 1.2R (in terms of risk to reward ratio) and your loss rate is 40% and average loser is 0.9R, so your long term profit expectancy is 0.36R per trade.

Patience & Discipline:
"It's not the mathematical skill that's critical to winning, it's the patience & discipline of being able to stick to the system"

In my opinion, the number one reason a novice retail trader fail to become consistently profitable is due to lack of discipline to follow a trade plan. It often happens, when the market is not behaving according to their expectation, they become impatient and take trades out of frustration and deviate from their trade plan.

Perhaps this lack of patience & discipline arises from the fact that they get carried away with volatile price movements and when they see other traders posting their winning trades on trading forums, it hurts their ego and they think that they missed the boat and jump in the water without a thought, which only leads to failure.

Moreover, some traders also become impatient and over trade because they don't have sufficient capital to start with, as such they get itchy and often take mediocre trade setups when there is no proper trading signal according to their trade plan in fear that they might miss a move.

The most important thing a trader has to learn is when not to trade. It is not only when the markets are overly quiet or nasty whipsaws, but when they are having mental whipsaws. In other words, when they are taking irrational and illogical trades contrary to their trade plan. When they are trading to be right and win every trade to satisfy their ego, instead of trading to be profitable. If their mind is not in subjection to their reason, mistakes will be made. Sometimes, I fail to understand why traders find it so hard to do what is in their own best interest.

Thinking in Probabilities:
"When you really believe that trading is simply a probability game, concepts like right and wrong or win or lose no longer have the same significance"

Forex trading forums are common place where retail forex traders post their price chart with technical analysis and justification for their trades. Out of these trades some trades end up in profit and some in losses. When these traders experience a losing trade then they somewhat doubt their analysis and often post charts with a query "Why my trade failed" as if they are expecting every trade to be profitable.

One of the major obstacle a novice retail trader face is they give too much importance to an individual trade and get upset or excited after couple of winners or losers and doubt their ability and change their trade plan too often. They fail to understand that trading is game of probabilities. Even the best traders have losing trades, but they know their edge and understand, if they follow their trade plan and if same scenario is repeated numerous time it will give them a positive outcome over a longer period.

So instead of asking someone else opinion, a trader need to ask himself/herself the ultimate question viz. If I take this trade 50 or 100 times will it give me a positive outcome in the long run. Once you start thinking in probabilities, it will change your perspective and eventually you will see positive progress in your trading.

Market moves according to Order Volume & Flows

Sometimes there's nothing to be gained by asking questions about individual losing trades. Markets move according to order volumes and flow. If a move peters out surprisingly quickly, or the market bounces when you didn't expect it to, all it means is that there was a high enough volume of limit orders at that level to absorb and repel the push. And conversely, if the market breaks through a S/R level, trendline, etc, it means that the volume of limit orders at the level was less than your analysis led you to believe. There are a number of simultaneous factors that drive prices — just to name a few: macroeconomics, money flows, levels of supply and demand, breakouts during times of high liquidity, central bank/heavyweight activity, self-fulfilling prophecy, the need to maintain triangular equilibrium, news announcements, extreme overboughtness/oversoldness, trapped trader behavior, key OHLC levels, session/time-of-day idiosyncrasies........ and no doubt many others. Now unless you can accurately weigh up the effect of each of these relative to each other, or otherwise have a way of knowing the size and level of all existing and imminent orders, then you effectively have no way of knowing why a trade outcome was better or worse than expected. Price movement appears random because it's driven by the collective behavior of anonymous participants whose agendas are completely unknown to the retail trader.

Holy Grail Trading

There's a "this is the holy grail" post every few months on these forums. I've been a member since 2006, and during that time none of them have lasted more than 6 months. People overestimate their own genius: they believe that they've discovered something revolutionary that all the millions who have gone before them, including the most experienced traders and knowledgeable market veterans, have somehow missed. They forget that, if a simple "holy grail" grid system existed, that the big banks and institutions could save themselves millions in salaries by dismissing all of their expert analysts, traders, economists and IT gurus, and simply run this holy grail.

Am I being negative? No, because I know that it's very possible to be a profitable forex trader. I know of at least two traders who run accounts totalling several million dollars. I have other buddies and acquaintances who are profitable, albeit to a more modest extent. All of these folk are successful because:

1. They have a genuine edge, one that is grounded in exploiting inefficiencies in price behavior.
2. They accept losses, and exit them quickly (whereas the amateur looks to somehow filter out losing trades, and/or recover from recent losses).
3. They prioritize risk management, by sizing their positions small and consistently, allowing both their method and their account to survive unfavorable market conditions, giving their edge the chance to ultimately prevail.
4. They focus on improving their market analysis and trade execution, not their P&L.
5. They understand and avoid the newbie traps.
6. They know that discipline comes from having confidence in a proven strategy, which comes only from experience, and a knowledge of how and why markets operate.

Yet none of these professionals would ever talk about their approach as being the "holy grail". That is a term used by newbies, and also vendors who want to suck newbies into buying their worthless products.

New Market Wizard - Randy McKay

Randy McKay -- There are few futures traders who have gone from a starting account of several thousand dollars to double-digit million-dollar gains. Those who have kept their winnings are even fewer. The start of McKay's trading career coincided with the birth of currency futures trading. Over his entire trading career, McKay has been profitable for his own account in eighteen out of twenty years. A conservative estimate would place his cumulative earnings in the tens of millions. (Source New Market Wizard)

When I get hurt in the market, I get the hell out. It doesn't matter at all where the market is trading. I just get out, because I believe that once you're hurt in the market, your decisions are going to be far less objective than they are when you're doing well. And if the market had rallied 1,800 points that day to close higher, I couldn't have cared less. If you stick around when the market is severely against you, sooner or later they're going to carry you out.

My first significant loss, I was short the Deutsche Mark when the market went limit-up. I could still have gotten out limit-up, but I didn't. The next day, the market went limit-up again. I ended up not only doubling my loss, but it also took me two months to recover to my account size before that trade. I basically learned that you must get out of your losses immediately. It's not merely a matter of how much you can afford to risk on a given trade, but you also have to consider how many potential future winners you might miss because of the effect of the larger loss on your mental attitude and trading size.

The most important advice is to never let a loser get out of hand. You want to be sure that you can be wrong twenty or thirty times in a row and still have money in your account. When I trade, I'll risk perhaps 5 to 10 percent of the money in my account. If I lose on that trade, no matter how strongly I feel, on my next trade I'll risk no more than about 4 percent of my account. If I lose again, I'll drop the trading size down to about 2 percent. I'll keep on reducing my trading size as long as I'm losing. I've gone from trading as many as three thousand contracts per trade to as few as ten when I was cold, and then back again.

When you're trading well, you have a better mental attitude. When you're trading poorly, you start wishing and hoping. Instead of getting into trades you think will work, you end up getting into trades you hope will work.

Analyzing Past Trades

I think in order to survive in trading business, we have to regularly review our past trades and analyze, as to how we could improve our game and become consistently profitable and achieve our weekly, monthly, yearly goals.

I usually review my trade plan and analyze my trades on weekly, monthly, quarterly, yearly basis to identify my weaknesses and strengths and whether I learnt from my past mistakes or am I repeating same mistakes again and again.

"We all make them, the difference is what we do after we make the mistake, how we see the mistake - a learning experience or a failure." Catherine Pulsifer"

Quote on Trading with Fear

When you are fearful, no other possibilities exist. You can't perceive other possibilities or act on them properly, even if you did manage to perceive them, because fear is immobilizing. Physically, it causes us to freeze or run. Mentally, it cause us to narrow our focus of attention to the object of our fear. This means that thoughts about other possibilities, as well as other available information from the market, get blocked. You won't thin about all the rational things you have learned about the market until you are no longer afraid and the event is over. Then you will think to yourself, "I knew that. Why didn't I think of it then?" or, "Why couldn't I act on it then?"

Hi alifali, some chart you use supply/demand indicator to find zone, what is the indicator name?

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Hi orionfx,

I draw my supply & demand zones manually. However, I use this indicator, all it does is extend the zone towards the extreme right of the chart and change color of zone once price touch the zone, so that I know that it's no more a fresh zone.

I hope this helps.

thanks mate.

First trade of the week - EURUSD M15/M30 Demand Zone

Trade Result +3R (Trade reasons on chart)

EURAUD M15 DEMAND ZONE

Trade Result +2.0R

The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless.

Chart example - Gold M15 - couple of trading opportunities based on first time back to supply / demand zones.

Chart example - LCrude M15 Demand Zone

Trade reasons on chart

Hi Alifari,
Than you for sharing. Very good stuff.
Alec

Chart example - LCrude M15 Demand + FTB Level + Swap Zone (3 confluence)

Trade reasons on chart

Being Ultra Picky or Overcautious - Does it Help ?

I often read on numerous trading forums & blogs that their strategy has a high win rate because they take very few trades and that they are ultra picky. But when a novice trader try to apply that same strategy in live market environment and forward test it, they fail to achieve similar results and in fact they hardly make any money. Why is that ?

In my opinion, trading say 4-5 setups per month is going to lead to increased pressure on each trade and thus increases the chances of making an illogical decision and of course limits potential gains. Most retail picky traders also have low average %R so when they do take losses:

a) They take longer to recover from both in terms of number of trades and time period (as they only take a few trades per month) and

b) The pressure on the next trade becomes even greater.

Whereas if you can trade say 30 to 40 trades per month then your equity curve should naturally look good because recovering from losses doesn't take long in terms of time or number of trades.

I firmly believe, that if you want to make it in this business, then you have to come out of this mentality of being ultra picky and fear of losses, otherwise you just end up going round in circles not getting anywhere.

Trading Very Lower Time Frames - Noise or More Opportunities ?

I often read on numerous forums & blogs where retail traders are reluctant to trade very lower time frames (VLTF) such as 30 second, 1 minute, 3 minutes, 5 minutes charts etc. They often complain about unreliable price action and lot of noise on VLTF charts.

However, in my opinion only people who can't read price action thinks VLTF charts are noise. To the uneducated its noise, to the educated its valuable price action.

Moreover, many traders associate VLTF with scalps, but it is not the case. If you have price reading skills than there is decent risk to reward per trade on VLTF too, in fact better than what we get on HTF.