Zhu's Forex Thoughts

The purpose of this thread is two-fold.

1. To share what I have learned from trading FX in the same spirit as those who have taught me about markets and life. If you are willing to listen, this is for you.

2. To gather feedback, especially constructive and critical feedback, on my ideas, concepts, thoughts, hypotheses, whatever I post here. I like disagreement and I think I need to hear more of it to get my trading growing in various directions.

As a side objective I am also hoping to improve my writing and become clearer with how I express ideas. So if you think I am unclear, please let me know and I will try to rephrase so that you can understand.

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The posts here will be of no particular order. I will pop in ideas on my mind or new insights I experience from trading. Eventually I might compile everything into a neat Table of Contents for easy reference.

FF might not be the best platform for this but I do hope for discussion and I do hope the wide audience means that more can use this as inspiration or simply food for thought on their own journeys in the world of FX trading.

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The ego dilemma and the nature of impermanence.

I must first admit that I am still a developing trader and still failing on many fronts. But I have experienced success to some degree and although I do attribute a significant proportion of it to luck, I think there definitely is some skill involved and it is a game that one can get better at over time. Of course we have to believe this don't we? But believing it at an intellectual level is not enough. One has to really experience it. For years I have felt stuck and helpless because no matter what I tried, nothing seemed to work. Still, at times over the years I would feel that I have "made it" or have finally cracked the code of the market only to have the market prove me wrong. The market has a way of teaching us things.

So I am really afraid to come here and type these things. Afraid because history has shown that it is easy for ego to get in the way. Whenever we put our reputation and ego on the line, we suddenly have more to lose and it becomes a lot harder to make changes or to admit that our positions or methodology is wrong. Being aware of this doesn't make it easier to avoid the ego trap. It is psychological. Our psychology does not follow logic.

The very nature of markets make things worse for the egoistic trader. Impermanence. That's the way of the world and that's how the markets are. Price is always moving; market structures are always developing and changing; systems are always evolving. Nothing stays the same for long. The humility to admit one is wrong and that one can never beat the market is what is required to stay on top of this game. We can never beat the market; we can only beat other traders playing the same game.

So why am I still here and doing this? Sounds incredibly cheesy but I followed my heart and intuition. I think there is a lot of good in all of us and that there is a lot we can share about our experiences and through cultivating a win-win situation and environment everyone can benefit. Sure, only a handful can win at this game at the financial/monetary dimension, but that just means I need to keep improving and getting better, and not by clinging on to what I know. On the personal growth and spiritual dimensions, I think trading has the potential to benefit more than just a handful of people. If you give your best and don't make it as one of the top of the field, I don't think the journey has been a waste. The lessons you gleam from this can be applied in so many other things. But do not use that as an excuse not to succeed. Try as hard as you can to succeed, while fully understanding that the journey and the change it brings you is what truly matters in the long run.

So let me end of this short post with a cautious reminder to myself and all: we are all learning and the only thing we can do is to try to be better today than yesterday. My views and ideas are only as valid as my experience and experience is something that I have that some of you reading do not. Hopefully you will find some of my experiences and lessons I have drawn from them valuable to your own journey.

Does EUR/USD trend?

Well I am being real specific here. I would like to believe that what I know is applicable across all assets and markets, but that would not be possible to know without testing. I only speak from experience. I think people over-value theory and under-value experience in this game. Too many traders talk a good game but can't actually make a dime when it comes to actual execution. Philosophy is only valuable here to the extent that it can be applied at the experiential level.

The short answer is Yes. Price has a tendency to persist in one direction. Upward movements bring more upward movements and vice versa. But what does it imply for our trading? It's a really huge edge. By noticing the trends and positioning ourselves in the direction of the trend is a huge first step to profitability.

Haha. Well it sounds really simple but in reality it is quite a bit more complex than that.

Why does it trend?

Generally, the why in market may not be that important, because many times we do not really know why. But it helps to come up with a theory if that theory can produce testable hypotheses. I like to adopt George Soro's idea of reflexivity and how as humans we have herding instincts. These are strong positive feedback loops that exist in nature.

Knowing why it trend can inform us when trends are likely to be most powerful. Since its mechanism depends on traders participating in the market, especially traders with herding instincts, we would think that trends will be most powerful when the market is the most active. Therefore a hypothesis that trends most frequently occur around liquid hours, i.e. market opens in NY, NYSE and Europe for EUR/USD. This can be tested. I have not run the statistical analysis nor have I done the math, but my observation tells me that this is true. I would like to challenge someone here to do it and perhaps even show us/teach us how to use Python or R to do this. Would greatly appreciate knowing the truth of the matter here.

There is much more to say about trends. I will revisit this a lot more in future posts.

Setting Trading Goals

So far I have been doing this on a daily basis before and after each trading session and also at the start of each month. A good goal has to be process oriented. It should not be focused on making a specific amount of money. We cannot control how much we make on any single day. That depends on the market. Trying to cling and grasp onto something like profits will only cause us to trade on tilt and lose the balance of our minds. Instead, I think it is a lot more helpful to set a goal that tackles a particular part of our trading process. For example, at the end of each day I would review my session and think about what was the best thing and the worst thing I did during that session and HOW I can continue doing the best thing and stop doing the worst thing. Usually, these will become my goals for the next session. Or if I have a monthly goal, I will also focus on that. An example of a good goal could be that I want to make sure I come to my desk 30minutes before the start of my session to write out a detailed trading plan with all the components I have in mind.

Constant reflection. Constant practice. Setting good process oriented goals and working towards them mindfully. If there's one thing you takeaway, let it be this. Time will solve the rest of the problems.

Why I have decided to start using exact probabilities in my trading

I read the book Superforecasting: The Art and Science of Prediction recently. IMO, this is a must-read for anyone serious about investment and trading in general. One of the key insights, among many, that I took away from the book is that one should attempt to use precise probabilities when dealing with uncertainties.

For example, going forward, I will be constructing hypotheses like,

"There is a 83% chance that EUR/USD (at price 1.092 now) will touch the 1.0952 level within the next 3.5 hours."

The number 83% does not arise randomly. It will be based upon a systematic analysis involving some serious guesswork using both technical and fundamental analysis. Well based on this single instance, I will not know if I am right or not. But the key is to make an attempt at putting a number down and maintain consistency in the process. Over time, you can collect data and construct the Brier curve. This can inform you how accurate your guesses actually are. Even something that expresses no edge, i.e. 50% chance that price will move up within the next 3.5 hours can be really helpful too. You will know whether you are really right when you think you have no edge in the market. So as you collect all these data, you can use to tweak your process and get better at forecasting. One really cool thing about the Brier curve is that you can construct it over a time series. So if you make forecasts every 5 minutes, you will be rewarded if you manage to eventually adjust your forecast to the reality. Therefore if you do this for a long enough time frame say 6 months, the brier curves you plot will also show you whether at each point, your decision making process/method that you have undertaken actually adds to your edge or not. An example is, I decide to revise my forecast after the trend changes on the 15 minute from up to down. let's say I revise it from 83% to 48%. If the actual outcome was that price did not touch the level at the end of 3.5 hours, I can get a significantly better brier score and I can see from the curve that this particular decision is what saved me. If I make sufficient such decisions, I can also evaluate all of them (i.e. every time when the trend changes i revise the probability down by 0.25. Is this an under-reaction or over-reaction?) and make adjustments to my interpretation and decision making. This way you can observe in real time whether your edge is indeed functioning as you wish it to be.

Regardless of what anyone tells you, we are forecasting at the most basic level when we are trading. It's just that the forecasts that we do that allows us to make profits is not something simple like, will EUR/USD go up or down. Knowing that is USELESS to a trader. I can know the direction and still lose money. We want to forecast the magnitude and also tag along a condition of either time duration or whether it touches our SL/risk level. And we want to be adjusting the forecast dynamically as market conditions evolve. Yes. The more you attempt forecasts as precisely as possible and the more you evaluate these forecasts against reality, the better you can get at reading and predicting market movements over time. We all do these at some level unconsciously. The key here is to make the entire process rigorous, visible, and scientific. Applying the methodology of statistics is what turned medicine into what it is today, where less than 2 centuries ago without such data physicians were doing the wrong things everywhere!

Another benefit of doing these probabilistic forecasts in a binary manner is that it forces us to realise the reality that the market is truly uncertain. Even if we predict 90% of the market going in a certain way, we are still susceptible to the 10% that it doesn't. Moreover, as we learn how to update our forecasts dynamically in real time, we can use it to position size and put on larger sizes when a trade is most likely to be working.

Forecasting continued.

Another benefit of using forecasting in precise probabilities is that it can inform your exit and entry points.

The trouble we all face in trading is the following:

When we exit the trade, how do we know that price indeed will no longer hit our target or go our way?

There clearly is never any certainty. But surely, there must be an optimum reaction algorithm to this? I must react fast enough such that I protect myself from a large loss or even capture the other side of the move but I must not react so quickly that I put myself out of the market when my thesis was actually correct.

So I think there comes a point in all trades where the odds of it hitting our target and the odds of it moving to a deeper level against us are more or less about 50-50. That is when the trade should be abandoned because the edge no longer exists. That will be the optimum exit point on the loss side.

The optimum entry point would be where despite the adverse price movement, the probability of the trade hitting the target does not suffer tremendously. At this point it may be clear to some of you that this makes LEVELS really important. At these key levels, probabilities can change tremendously. There is a jump in the probability distribution. When levels break, the probability is diminished to a large extent. This often signals an exit. Therefore the best entry point would be just at the level or for FX, often just beyond the level because that's what market makers tend to do to clear stops. Knowing this you can get the best entries, but the first step is to learn how to spot correct levels and also to learn how to put a probability to trades.

By now it should be pretty clear that my view of the market is highly bayesian. It does not take many blue balls drawn from a bag to distinguish between a 30:70 and 50:50 distribution of blue:red balls. Do the calculations and you will be surprised. The thing is that, as traders using technical analysis, we need to remember that the technicals are extremely reactive to the market and it means that when the technical picture deteriorates, our edge almost disappears instantly and often an edge to the opposite direction appears. People fail to grasp this and stick to their trades for way too long. If you're losing money, your SL is probably horribly placed. Either that or you got in too early.

Optimum take profit

So I have mentioned exits on the loss side, but what about taking profits?

Following the probability line arguments, there can be intermediate levels in every trade that you identify that price has to clear before it can hit the target you determined. At these levels, you may make hypotheses such as:

"There is a 10% chance price will blast through this level to our target without first consolidating above it for more than 10 minutes or making a slight reversal of at least 40% of the upmove."

Again, this is a hypothesis that can be tested over time to see how good you are at determining these levels. Knowing these, it means it is usually right to take some profit off at these levels and to add back to the trade when either of the two remaining cases happen. Moreover, near to your profit levels, price is at above fair value. You therefore need to update your odds. If let's say when price is 5 pips away from your target, and 35 pips away from your entry, you estimate that the odds of hitting your target is 95%. And then suddenly price starts to show weakness and your analysis shows that price is breaking down. You need to make adjustments, however slight to your odds. Perhaps to 80%. This slight adjustment will tilt the risk-reward against you and prompt you to exit. You are risking 35 pips to make 5. This is no longer a good point to be long. Exit.

I have to admit that this is getting a tad theoretical. In practice I have not used the precise numbers but this is indeed what I do habitually. I am putting in the numbers because that is what I am going to do next year onwards. The thing about trading is you want to slowly add things one piece at a time. It is easy to try to do too many things at once and get overwhelmed. for me because I am already doing these things it is easy to just tag the numbers on. If you are not then it doesn't make sense to suddenly add all these into your process. Go at a pace that you can keep up. Good trading is about doing the thousand little things right and better than most but you have to add one piece at a time.

What is going on through my mind when I am actually trading?

Before entering a trade:

What is the bias? Am I trying to go long or short today? Or am I scalping?

Is the market forming any new levels on the micro-timeframes or any specific chart patterns that might be relevant to time my entry?

How far is price from the level that I want to enter at?

Now that price is at the level, am I seeing an entry edge that can allow me to enter? If not, be patient and wait for it to present itself. Just observe. Just observe.

Is price moving further and further away from my preferred entry point and moving in the direction of the bias? What is the next level it might attack? when this level breaks, do I want to shift my optimum entry point to a different one? How do I adjust the probabilities that price might move to my target?

Are there any news releases around the corner that I need to factor in?

After entering a trade:

When will I know that I am wrong and should exit?

if price is moving against me, should I add a second unit to the trade (what I call doubling down just before the exit point, can sometimes work real wonders because my entries tend to be really good in the first place.)

Make sure that i exit the trade when it hits my exit point and re-evaluate the probabilities.

Now that i am in the trade, are there any opportunities that signal I should add to it perhaps with a much larger size?

Now that price is moving towards my take profit, are there any levels i should be concerned about?

when price hits these intermediate levels, do I see any signal to exit half of my position and to re-enter on a retrace?

After taking some profit off, do I want to add back? Where should i do that? do I see the optimum entry point to do so?

Are there any news releases around the corner that I need to react to perhaps by taking off some risk?

After a losing trade:

What is the next level beyond here that can potentially provide an entry?

Is the market forming any new levels on the micro-timeframes or any specific chart patterns that might be relevant to time my entry?

Is this level really broken or it is just Market makers and institution sweeping stops for liquidity? What do I want to see to help me distinguish which case it is?

Have the odds shifted now that this previous level is broken? Was it a inflection point/super key level or simply a normal support/resistance level? Should I consider taking a trade in the opposite direction?

Am I on tilt? Am I riled up?

Is there a news release around the corner that i can use to hop back in with a good plan?

What is the secondary storyline/plan B?

Is my plan sufficiently ahead of my trading or has the market evolved so much that i need to replan my session?

Have i hit my intraday stop-loss level?

Have i hit my intraday give-back rule?

After a winning trade

Reassess the market. Are there any further levels that may be tackled? What are the odds that price will reach them?

How is price behaving at my take-profit level? Is there an opportunity to reverse my bias and take the opposite trade? This should be systematic and not on a whim. can be very dangerous when done on the wrong days and cause lots of money to be given back.

Just Observe

99% of the time the correct thing to do in the market is to just observe.

Feel the emotions coursing through you as the market makes its volatile movements that attempt to scare you our of the trade. Know that these are perfectly natural responses primed into you from evolution. But you do not have to react to them like how a caveman would.

When something really significant happens, just observe and make a swift decision. Never clinging onto the trade or averting the pain from taking a realised loss. In fact feel the pain and use it to focus your mind to continue taking right actions and moving towards your goal.

Always remember: As long as you have an edge, stay in the market. When your edge disappears, and yes these can disappear in an instant, get out as soon as possible. But at the same time you do not want to over-react to insignificant things; know the difference between what matters and what doesn't. the bigger the edge you have, the larger size you should put on. Just keep on doing this and the money will just start flowing in naturally.

The reason why most suck at trading

By default our brain operates in three settings:

1. Certain it will happen.
2. Certain it will not happen.
3. Maybe (50-50)

When traders search for technical indicators, they are craving for the certainty, and whenever reality reacts unfavourably, they fall into the 50-50 mode and start doubting everything. There is no basis to begin. No attempt at creating a real edge that can be put into practice.

The setting I aim to have is

0% ------------------------------------ 100%

A percentage value of what may happen to the single percent point. So far I may not have this written down, but to succeed in the market I think it is necessary to understand this at some experiential level.

Two caveats (for the probabilities that matter to traders):

1. There can be large jumps in probabilities.
2. These moments when jumps occur are rare.

** i hope to collect enough data to test these statistically in my own trading. Right now, treat everything that i say as hypotheses and not truths.

These imply that:

- One should generally do nothing. 99% of the time the right action is no action.
- When action is taken, it should be swift and significant. (i.e. when cutting a losing trade, or when adding significant size.)

How to compute probabilities

We first look at base odds.

We can compute the absolute value of open to high/low (pick the larger one) during our trading timings for the past 60 days and then see what proportion of them fall within the range we are targeting. For example, if the target is 40 pips away, then we want to see how many times price travelled 40 pips in one direction from the open in a single trading session. We assume that we don't know whether price will go up or down first so we divide that proportion by 2. I don't have the numbers with me now because I am not with my laptop but I suspect the percentage will be close to 40%, since we are talking about the most volatile timing i.e. NY open hours.

From here, we can bring in other factors. Let's say we think about news. Maybe there's some fundamental bias in favour of moving up. So we add 5%.

Then we see the technicals. Maybe the trend on multiple time frames are aligned. This allows us to add perhaps 30%. This brings the total to 75%.

Then we consider levels. If we see price has broken a clear inflection point and retested it already then maybe we want to add another 15% to bring total up to 90%.

These are very back-of-the-envelope calculations, and there's no clear indication whether they'll be right or wrong. But at least you start somewhere and over time if you stick to the same methodology, you can know whether your approach indeed has predictive power/edge or not. Best thing is, you can refine this over time so you get closer and closer to the true value. I can say with quite some certainty that it's not a 50-50 proposition.

Certainly, the more subtleties you can consider, the more precise you try to be, the more helpful it'll be to you when you evaluate your results.

Probabilities continued

In real time, you would want to factor in time decay and also changes in distance. The further price moves away from your target, the lower the probability of it hitting will be. You want to have a way to adjust your odds over time based on this. Stick to the base case of random walk/randomness unless you have a clear idea to adjust with. I don't think in most cases you should.

Example, 1 hour passes and price moves 10 pips further away from your target bringing it to 50 pips. Now you may want to drop your percentage from 90% to perhaps 75% or lower. And if some key level breaks on the 15 minute and also if the trend changes on the 15 min time frame that's significant, you want to factors all those in and maybe it'll drop to 45% at which point your edge is not very apparent anymore, so you want to reduce your size accordingly or even start looking at the opposite trade if there's a clear level waiting. etc.

Great posts!

"Price is always moving; market structures are always developing and changing; systems are always evolving. Nothing stays the same for long. The humility to admit one is wrong and that one can never beat the market is what is required to stay on top of this game. We can never beat the market; we can only beat other traders playing the same game."

That says it all.

Trading in the zone versus trading rationally

In mark Douglas's classic, he highlights that imposing rational thought can interfere with trading in the zone. I fully agree. Some of my best entries have come when I was trading in the zone and when I could see everything clearly. But so were some of my worst trades. Why? Because while we are in the zone we tend to see the market moment to moment and we know when great entry opportunities exist, but we overweight the present at the expense of broader market conditions. And while we are in the zone we can get so overconfident that we start thinking the trend is going to reverse and we throw our plans out of the window. Irrational behaviour takes over.

But to me these are not contradictory. Paradoxical yes but it's totally possible to trade in the zone and still get the benefits of rational market analysis. While I have spelt out a very detailed and seemingly complex process involves lots of numbers and thinking, in practice the execution has to be simplified greatly so as to reduce the cognitive load in realtime. Simple exit rules that follow fixed stop losses like 15 pips would be used in most circumstances. Adjustments to probabilities will also be done using fixed rules that are only adjusted after significant data is collected to inform their accuracy. Entry sizes are also based upon simple rules that discriminate between a few different types of opportunities and these are mostly determined before even starting to trade. In this manner, we keep our trading simple to allow us to enter the flow state and at the same time take advantage of the power of rational analysis. The key is to do most of the thinking beforehand in the planning phase so that in real time thinking is kept to simple yes and no questions involving little to no arithmetic.

If you have to think a lot while you are trading, then it means your planning has been inadequate.

Demand and Supply

The most practical definition of demand and supply I have heard is the following:

Demand is when emotional sellers meet technical support.

Supply is when emotional buyers meet technical resistance.

There are two parts to the definition. Let's take supply for example.

Emotional buyers & technical resistance must be present. If price goes into resistance but trades in a fashion that does not suggest buyers are getting emotional, then that area is not a supply area. It will keep going deeper and deeper until emotional buyers are found. If it goes deep enough it may mean the level has broken and resistance has turned support and now a retest of the newly formed support and emotional sellers will create demand.

If buyers at the resistance level are calm and buying based on good reasons such as broader technical picture or news events that were unexpected, then resistance is not supply. These buyers are strong holders. Weak holders are the traders who buy at resistance in a downtrend.

Think about it. It's quite simple but this insight is one of the key ingredients that transformed my trading.

The two layers of technical analysis

From my experience I have found that there are two layers of technical analysis in the market. The first is what 99.9% of the threads here address. That is technical analysis at the broader/macro level. This is the sort of analysis that gives you a bias in the market; the kind of analysis that tells you price has a certain directional bias. For example, drawing trendlines, looking at market structure, indicators etc.

The second kind of technical analysis is at the microstructure level. This is almost never addressed perhaps because traders do not delve into the charts of 1 min and below sufficiently. FX is so much more liquid than stocks and for this reason EUR/USD touches a lot more prices than stocks. There is almost continuous pricing. But this constant back and forth trading by non speculators also creates many pockets of inefficiencies in the market that shrewd traders can potentially capitalise on. This type of technical analysis will help you identify scalping opportunities, superb entry points, points to scale out of a trade and points to add size. This type of analysis helps you limit the risk of your entries.

from my experience these two work hand-in-hand. I suspect the reason why intraday trading is so hard is because the costs of trading overwhelm the edge provided by most broad/macro technical analysis methods. This is part of the basis for: I can know where the market is going but still lose money. This is unlike swing trading where costs are much lower.

What does it really mean to pre-define risk?

I speak from the perspective of an intraday trader. I think it's important to predefine risks in at least the following ways.

1. Hidden market risks and black swans

This is particularly relevant for traders using high leverage in the market. I do. You NEED to factor in the black swan risk and possible liquidity issues when one occurs. No point trading for your whole life to get wiped out 100k$ by one black swan event and go into serious debt. How i deal with this is to avoid any currency pair that is fixed or managed by the central bank in any manner. Also by trading the EUR/USD only that is the most liquid of all. Also by putting in hard stops in the market instead of waiting for a margin call. These should mitigate the black swan risks almost completely, unless we are talking about asteroid hitting earth but then I don't think trading matters.

2. Your stop-loss

YOU NEED to have a stop-loss while trading intraday. It could be a mental stop in most situations but that'd leave you exposed to black swans if you use leverage. If you do not use leverage by all means use a mental stop. If you do then I suggest using a hard stop because no matter how fast your reaction time is, the hard stop will be faster.

If you don't trade with defined loss-limits for each trade then you have not internalised the risks inherent in trading. Your results wouldn't be scalable. I am in this game to make millions consistently each year as income so if that's what you are aiming for then it's important to get the habit right and start predefining your losses.

In general, the more you think you CANNOT set a stop, the more you should either exit the trade or set a stop.

3. Exit when the edge disappears.

Dynamically monitor the market. Use the probability method to gauge whether your edge is still present. When you realise it's lowered significantly, drop your trading size. If you think it's gone and you are in a negative or 0 expectancy trade, get the heck out! don't need to wait for the stop-loss to be hit.

4. Intraday stop-loss

Set a max amount you are willing to lose each day. Do not trade when this amount is hit. Quite simple.

If I think there's a 90% chance price is going to hit a 30 pip price target within 4 hours, shouldn't I just enter at market price? Why wait?

What about the 10% of the time that price doesn't and goes 100 pips against you? What about the price moving 40 pips against you before hitting your target?

All these are possible scenarios you have to consider.

As an intraday trader, knowing your directional bias -- no bias is also a bias -- is a good first step, but it's not enough. You need to be able to pick spots in the market to enter that allows you to predefine your risk. Trading is about prediction at two levels. These two levels map nicely to the two levels of technical analysis I mentioned earlier. You want to predict the general directional movement over a certain time period, and you also want to predict the micro turning points in the market within the larger directional move so that your risk can be predefined and minimised. These are two completely different skillsets to cultivate. The former requires a lot of rational analysis. The latter requires being in the moment and tuning into the emotions of market participants. They are in CONTRADICTION. Even at this stage I still get riled up at times and too focused on the present and forget about my analysis and plans. They require different parts of your brain so it is why trading is so damn hard.

Example. My analysis tells me to buy. Then I will look for areas of support on the 15min chart or 5 min or 1 min that i think price will likely visit before going up. Then I look for clear patterns at these areas to tell me to buy. Then I buy and set my stop-loss. If it hits my stop-loss, I check my bias to see if it has changed. If it has changed, I may enter a reverse trade on a slight retrace. If it hasn't changed, I will want to see if I can get a second trade in at a deeper level or if price recovers this level and consolidates above it or if price bounces sharply at a random spot and tests it in a double bottom fashion etc. etc. any clues that can point to a false break-down. That's when I enter and control my risk again.

My views on leverage and some personal experience

In a liquid market, leverage is a very powerful tool for intraday traders.

It's as if you are getting funded by a proprietary trading firm, except there's no profit sharing and you take on potential losses. But if you trade a positive expectancy method, you can just keep pulling income out from the market day-in-day-out.

I trade with a $1000sgd account. On most days when I do quite decent, I can pull out about on average $500sgd. On my best day without taking extra risks I made over 3k (black monday). But that's when my risk management was pretty bad. So luck played a huge role. I expect to make less now but it should still be decent money that can be scaled up over time.

Reason why I don't try compounding is because when risk increases, my ability to act correctly diminishes. Right now the largest lot I have tried is 10 lots using previous days profits. That was very uncomfortable and I lost a lot of money. I think 2 is my psychological limit currently. 1 lot is my sweet spot. Also another reason is that i can hit my loss limits when I trade badly. If I am compounding that means i have to stomach a 70% drawdown on a large account. I am not sure I can take that kind of psychological damage. It's much easier to just refund the account and start on a blank slate the next day. I withdraw all profits to my bank account in multiples of $1000 and reset the account to $1000 at the end of each day. Choose a broker that allows you to segregate account balances.

Still a lot for me to learn especially on the risk management side. how to balance having a bias with staying in the moment is my greatest challenge. Recently finished a meditation bootcamp/retreat. I think the benefits i received from it will greatly help my trading next year. I am very grateful that I've been able to consistently make around 3k each month for 4 months in a row so far (Aug-Nov; ever since I started this manner of trading) despite some very bad habits. Curious what 2016 will bring.

What defines the state of the market?

I think there are four parameters that define the kind of market we face. It is the changes in one of these four that cause systems to lose their edge over time. Failure to adjust to changes to the market is probably one of the greatest cause of failure for traders who have already experienced some period of consistent success. There is no simple solution to measuring all these variables, but I think all traders should attempt to at least, so that when conditions change, they can adjust their approach and not be sitting ducks.

1. Range v.s. Trend

Don't skip this. It's a bit more subtle than what most commonly think. Because there are so many ways to define what a trend is, what really matters is how YOU as a trader define it and whether your measure of trend holds up over time. When we identify that there is a trend, we can make statements that are testable. For example, price will hit a certain volatility based/structural target within a certain time frame. The probability of that happening can vary over time and that's what I mean by range v.s. trend. If markets favour trends, then it's likely that whatever trend indicator you use, price targets will tend to be hit and follow through will exist. Conversely, if market favours range trading, then price targets will stop getting hit and markets will start staying in a tight range most of the time.

How can traders respond when they notice these changes? We should always be risking more per trade on setups that work best. If we start noticing that trend setups are becoming less favourable, and that whenever we identify a range day the market really ranges well, then we can consider over-weighting range setups and underweighting trend setups. By no means is this a simple thing to do but doesn't mean it isn't necessary. Only by putting the most risk on the A+ setups the market offers can we really make huge profits from the market. Other way else we will just be grinding away for small gains. It's not about blind diversification; it's about seeing opportunity and betting big.

2. Volatility/ Amplitude of cycles

How large are the moves per unit time?
Are there deep retraces?
Are levels well respected or are there a lot of wicks?
How should we measure/observe these and how do we respond in the way we trade?

3. Frequency/ Whipsaw-iness of cycles

Do markets keep moving in a whipsaw fashion?
Is our trading method susceptible to losing money when this happens? If not, it's a robust method.

4. Type of reaction at market transitions/inflection points.

This doesn't fall neatly on a scale, but essentially it refers to the recurring patterns we can expect at key inflection points of the market. i.e. when the market is turning, on the various time frames, what kind of patterns tend to occur? I think this also changes over time and some patterns lose their edge and others come into fashion. Sometimes it even is a flavour of the week thing, especially on the lower timeframes. You can notice some patterns that occur on Monday that occurs again on Wednesday and Thursday and lead to the same reactions. But then they stop appearing the next week. These are typically due to order flow irregularities.

How prepared are you to handle changes in these 4 dimensions of the market? Would you still be able to make money???

When does System 1 Thinking/Intuition really flourish?

The short answer: when all information relevant to the problem are immediately available/in front of our eyes.

Read Thinking Fast and Slow by Daniel Kahneman.

In the context of trading, this means that intuition and quick thinking can really flourish in picking market turns on the really small time frames if we gather enough screentime. There are definitely repeating patterns and we can learn to see them. They may however change over time but that just means we need to adjust and abandon old methods for new ones.

However, Kahneman also informs us that System 1 thinking is bad at solving complicated problems or when the information available is not sufficient for solving the problem or is unreliable. Clearly the microbehaviour of price on small timeframes would not matter much to predict the general directional moves. But the problem with system 1 is, it cannot be turned off. So even if we consciously know that price is going up based on our analysis, we still have to fight with system 1's impulses to sell when we stay present to the moment.

This is the intraday trader's dilemma. We have to engage system 2 systematically when required and stay in system 1 most of the other times. It's difficult because once you join in the market, it's easy to get swept up by the emotions of the herd. I'm not sure experience helps either with solving this; in fact, it might hinder because the more experienced one gets, the stronger system 1's signals are and the more likely you'll get influenced by them to do the wrong thing. I think what's required is a even greater degree of mindfulness to step out of the situation and engage system 2 when necessary and step back in after. Sounds difficult but certainly a good goal to work towards.

My mentors

I don't have any real-life mentor to teach me, but there are some people, books, resources and courses that I consider to be my mentors and they have had a huge impact on my trading. I am going to share some of them here.

- Mike Bellafiore, SMB Capital

www.smbtraining.com

The two books he wrote The Playbook and One Good Trade are what I attribute what little success I have today to. I greatly recommend checking them out if you haven't. And put the knowledge into practice. Mike runs the prop firm SMB capital and it has an education arm SMB University. Recommend checking out his blog and daily trading videos that are free. I am currently enrolled in two of their paid courses. They are more for stock traders but there is ton of value for FX traders as well. But don't need to start paying money yet; I only invested in them after I started making profits from my trading based on what i learned from the books and free resources.

- Dr. Steenbarger, Traderfeed

http://traderfeed.blogspot.com/

One of the best blogs on trader psychology out there. I devoured every single one of his posts. Lots of actionable insight. Definitely recommend checking it out. He also wrote a few books such as Daily trading Coach and recently, Trading Psychology 2.0.

- Aaron Fifield, Chat with Traders

http://chatwithtraders.com/

This dude is only in his early 20s but he has launched an incredible endeavour. Check out his free weekly podcast Chat with Traders where he interviews tons of professional traders in all sectors. SO MUCH VALUE. I love this.

- Chris Capre, 2ndskiesforex

http://2ndskiesforex.com/

I bought a few of his courses. I don't really think they were for me but some seem to really like his content. But his name is here because when I almost really quit trading for good I sent him an email and he gave me some really great advice and that kept me in the game for a while more and that's when I started turning my trading around.

- Owen Cook, RealSocialDynamics

https://www.youtube.com/user/RSDTyler

This guy isn't a trader. He is a dating/game coach. But he might as well be talking about trading. So many lessons about life that can be applied and you start to notice how similar these two seemingly disparate fields are. I learned a lot a lot from him.

Thanks Tashkent.

Any specific ideas you want to add to the posts please do Disagreement is much welcomed.

"In fact, in science, the best evidence that a hypothesis is true is often an experiment designed to prove the hypothesis is false, but which fails to do so. Scientists must be able to answer the question "What would convince me that I am wrong?" If they can't, it's a sign they have grown too attached to their beliefs." - Philip Tetlock and Dan Gardner in Superforecasting: The Art and Science of Prediction