Zhu's Forex Thoughts

Don't fight the gambling urges; ride with them, manage them.

You do not stop a fast moving ball by standing in its way. You take the momentum out of it by moving with it in the direction it's going.

When the urge to take a trade comes up, respect it and take it on board. Make it go through a pre-defined checklist and rank the trade idea.

Is it a tier 1 or tier 2 or tier 5 trade?

Alright, now you know how much size you can risk.

Now put on 1/5 of the size.

And nothing more until it shows that it works.

Exit swiftly when it doesn't. Feel free to try again.

When your trades are ranked, and your risk is defined and you scale in and out appropriately based on market structure, there is nothing you cannot bet on.

Trading is supposed to be fun.

The more you activate your intuition while trading, the more you can improve your intuition.

If we keep trying to trade according to strict rules and disregard what we FEEL is likely to happen, our intuition will never improve.

The best way to grow your common sense is to make use of it more. The more you use it, the more times it fucks up, the more times you can learn and sharpen it. If we rely on theories and systems to make all the decisions for us, when high stress situations pop up, we will be HELPLESS. We will revert to our default state and use our common sense. But since we never bothered to work on our common sense, how can we expect the decisions to be good?

Do you ride a bicycle by thinking of physics equations and figuring out what angle to apply the force at and what degree to turn the bar handle to or do you just ride it?

Since trading presents high stress situations all the time, the goal then is to make trading second nature. And the only way to do so is to keep activating your natural personality and decision making mechanisms and reshaping them continuously to fit the market.

We call a spade a spade. When something quacks like a duck...

If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

If price finds support, starts making HL,HH, and breaks and holds above key structure, then it probably is in an uptrend.

If price finds resistance, makes LH/LL, and breaks and holds below key structure, then it probably is in a downtrend.

Newton's 1st Law: If something is in motion, it will continue in motion until a force acts upon it.

Market's 1st Law: Trends exist.

Trading is all about pattern recognition

Here's an exercise for the initiated.

Go to the 1 minute chart and look for an up move that turned into a larger up move on a higher timeframe, perhaps a 40-50 pip move. Then look for an up move that failed after say 10-20 pips.

Compare the two. What are the similarities and differences between them?

Razor

Occam's Razor: Among competing hypotheses, the one with the fewest assumptions should be selected.

Market's Razor: Assume you are wrong until you are proven right.

The Holy Grail
a.k.a. It's okay to trade based on feelings.

Feel like going long a mega downtrend to catch the bottom?

Check the higher time frame trends.
Check for levels.

Well. Nothing. Everything is against a long trade it seems.

This trade sucks.

Put it on anyway. Risk 1/5 of the your tier 1 trade size.

Stops below the low.

Oh it didn't work...

Nevermind. Try again? Sure.

And it fails again...

Document the results. Go make a trading journal and tag your trades. Tier 1, long, EUR/USD, feeling.

One time it may even work.

It starts working and the trend starts to change. You add more and tighten stops. And it works brilliantly and you are up to a full tier 1 position.

Winner!

The market doesn't care what you think or why you put on a trade. It does what it does. Your initial hunch or trade concept DOES NOT MATTER. If it turns, it turns.

At the end of the month, check your stats. How much did you make or lose from these "feeling" trades?

Your results will convince you to improve your methodology (or stick to it). If you are making money with them, look to amplify them. If they are losing you money, discard them.

The real holy grail:

1. Market-structure based position sizing and scaling-in and scaling out give you freedom to express your ideas, make mistakes and learn from them..
2. What you measure, you improve. Start documenting everything. Journal more and record down your stats.
3. Trading is primarily based upon TESTING; not theory. Forget the armchair philosophy that goes on around this forum.
4. Amplify your strengths and discard your weaknesses. Through enough repetitions, you will eventually become your best trader.

Think about what this means for trading, Part 2

Imagine two urns filled with millions of poker chips. In one of the urns, 70 percent of the chips are red and 30 percent are blue. In the other, the ratio is reversed, so we have 70 percent blue and 30 percent red chips. Suppose one of the urns is chosen randomly and a dozen chips are drawn from it: eight red chips and four blue chips. What are the chances that the chips came from the urn with mostly red chips? (Give your answer as a percentage.)

If you are like most people, you have probably just said a figure between 70 and 80 percent. Surprisingly, the correct answer is actually a whopping 97 percent. To arrive at this answer you would need to apply Bayes Theorem, a relatively simple formula which shows how the probability that a theory is true is affected by a new piece of evidence. However, very few people solve this problem correctly. They end up being too conservative.

I posted this earlier. Time to revisit it.

Coming into the market each day, we make assumptions.

We look at historical prices and we see a series of Lower highs and lower lows. We thus hypothesize that we are in a downtrend. We assume our urn is red, and we do so with a high degree of confidence because of what we have observed.

But now, the market starts moving and it starts stalling at a low and makes a Higher low and higher high. It's starting to churn out blue chips.

Key lesson number 1: Account for the past, but always overweigh the present in the market.

Key lesson number 2: It does not take that many blue chips to tilt the odds are overwhelmingly in favour of a blue urn. It takes fewer clues than you think to signal you that a trend has changed.

However, Key lesson number 3: given the past history, if just one clue DOES NOT line up, it's likely the trend has not changed.

These imply the following:

When clues start appearing, get aggressive in cutting shorts and switching to longs. The more clues that appear, the more you pile in.

However, if just ONE THING does not line up, you get the fuck out and wait to see what happens again.

It's counter-intuitive.

No one said trading was easy.

Think about what this means for trading, Part 3

What many beginners end up doing is the following:

They see a downtrend and they start to buy even when price has not shown any clues it wants to reverse.

So because they don't use stops they suffer a drawdown, and then some even average down.

The ones who average down will survive 95% of the time but the 5% of the time when trends don't stop going they will lose all their money.

Then when price comes back to break-even they exit, they are too emotional to consider the fact that price may have made a HH/HL already and may travel higher. Even if they don't get out, they are usually too fearful to add to the trade by this point after suffering the tremendous drawdown. And when they add to the trade, it often makes another move lower to form a LH. A move that will scare them out of the trade.

Then now price starts heading higher, and they think, NOW IS THE TIME to short. But usually they are way too early and price has not made any clues that it will go back down.

SO they suffer another drawdown.

Then when they finally hit out of the trade, price reverses, fails at a key juncture and the downtrend reasserts itself. Now they try to get long and it fails.

...

So yeah.

Instead, what traders should do is to WAIT.

Wait for price to start showing signs of bounce. Then get in with a small size with extremely tight stops.

When it starts to work, add more.

When it starts to fail, get out and try again later. Don't be afraid to put on a trade at a worse price later if price recovers. The small pips you lose on a partial position is NOTHING compared to the potential moves you can catch and the moves against you that can wipe you out if you choose to hold on to a losing trade.

***

Caveat: The above example is when you are fading a lower TF trend to get into the direction of a HTF trend. God bless you if you are fading a HTF trend because 95% of the time that's suicide.

How I tap into intuition & the Art of Play

For entries: The first 1/5 of my position can be based off nearly anything. I have a list of 10+ things I am looking for. If any one of the 10 triggers, I am in. Intuition is one of them.

The remaining 4/5 is VERY specific and based upon price structure.

For exits: when the trend is mixed or price is ranging, my intuition tends to work better to spot favourable exits and spot where I should reverse. When the trend is one-sided I generally ignore everything and just focus on specific price action signals to exit.

I think it's extremely important that we incorporate the freedom for creativity into our trading approaches. Research as shown that performance is enhanced when we are motivated by:

1. Play: the activity itself is enjoyable
2. Purpose: performing the activity helps achieve a value directly.
3. Potential: performing the activity helps to achieve a value indirectly

and our performance is reduced when we are motivated by:

1. Emotional pressure: fear, stress, shame, guilt, ego
2. Economic pressure: monetary reward or other external incentives.
3. Inertia: unwillingness to budge the status quo -- just do the same thing without thinking.

It is no wonder that most traders fail because traders tangle their ego into the market and put themselves under stressful circumstances and focus heavily on the monetary reward.

How can you make trading more enjoyable in itself? How can trading help you achieve personal growth and development? Why do you trade?

When you start to love...

The detailed Pre-market preparation;

The pre-session visualisation;

Putting on the right trades;

Taking the appropriate risk;

Waiting for the good entries;

Conceding small losses;

Stalking for the optimum exit;

Journalling about your session;

Documenting your Playbook trades;

Recording your statistics;

Setting monthly and daily goals

more than you love

making money, that's when the

little grains of sand start adding up.

Be brave and do the right thing.

Act responsibly.

We can all be a little braver, a little happier.