Monthly Archives: April 2011

Diversification

Ach, the wonders of modern technology! It’s now simple to set up a bunch of indicators and then watch what’s going on… So if gold drops to below 1448 then I’m buying ūüôā

Realistic targets and why people quit…

On another (closed) forum I’m a member of we’re engaged in a fierce debate (ok, there seems to only be a few of us left… lol) about what happened to the other 40+ members of the original courses that we went on. Where did everyone go?

I believe that in undertaking any new venture it’s extremely important to have realistic expectations and to understand that learning a new skill requires time, effort and patience…

I’m sure a lot of people are prepared to fork out huge sums on training and courses because they fully expect to make it back almost immediately. Unfortunately, unless they’re extremely fortunate in their initial trading I think it will take¬†most¬†people a while to get themselves to a point where they’re making consistent profits week in week out. As far as trading for a living goes? Well, I’ll come back to that…

So there’s a bit of conflict here. Companies need to sell courses so are prepared to put a rose tinted glow on what they’re offering. Hence many fall at the first hurdle when cash doesn’t magically fall into their lap…

So what is realistic? Let’s start¬†really small

Target 1. Make ¬£50 per week. No, seriously just ¬£50. That’s ¬£200 per month or ¬£2400 per year.¬†
You’ve possibly just given yourself a 10% pay-rise (remember it’s tax free) or paid for a very decent holiday… well done!

Target 2. Get twice as good and make ¬£100 per week. That’s ¬£5200 per year.
First rule Take some of this money and buy you and your family something nice. Make sure they know this is a direct result of you looking at a bunch of wavy lines on a chart.

Now, again if you’re starting with a small account and you can pull this off you are already a superstar. Give yourself a pat on the back and keep going. Don’t get cocky and pay very close attention to risk management. I think you realistically need a trading account over ¬£5K to achieve this with minimal risk but that’s just my opinion.

Target 3. What are your daily living costs? Take the amount you actually spend in a month and divide it by 30 days. So for me this is £83 per day (holy crap!)

Work on increasing your account size to be able to use¬†leverage¬†to achieve this modest goal. Yes, a 42 point rise at ¬£2 per point will cover it. Don’t try to place a trade on everything under the sun!

Minimize risk to reduce stress¬†and don’t trade with your last ¬£200 in the bank because you will trade like a scared monkey brain. If this means you have to wait a bit then bloody wait!

If you can achieve target 3 then you are¬†FINANCIALLY INDEPENDENT¬†Yes, this is what all the guru’s talk about. Your activity¬†outside your job¬†is paying for your life. Now here’s the interesting part.

Target 4. What is target 4 for you? 

Do you want to trade full time? How much money in your account do you need to do this while generating a positive equity curve? What size ‘buffer’ do you need to trade comfortably and live without financial stress? Is this the point at which you are going to give up your job? Is this something you’d never consider? Do you need to?

I believe everyone is sold on the basis of what they believe ‘Target 4’ to look like for them. What people tend to forget is that the way to eat an elephant is one small bite at a time…

FX spread betting = ¬£¬£¬£ needed

So here’s an idea… While FX might be the most ‘trendingest’ market, due to the huge volumes, as previously pointed out you can’t possibly hope to make good decisions unless you’re not under stress. Not really having enough cash to cover a loss is pretty stressful so there must be a psychological minimum… I’m sure it’s possible to have a stab at working this out.

£0.50 is the minimum amount you can place per point on IG Index

100 points is a¬†fair¬†number when placing your stop so you don’t get stopped out prematurely

1%-3% max is what you want to risk per trade

On this basis you needs a trading account that is between ¬£1667 and ¬£5000 in size if you’re going to trade FX without ‘worry’ over incurring losses that your account can’t handle.

Since the average spread account size in the UK is ¬£980(?ish) then most people are essentially using money they can’t¬†actually¬†detach themselves from emotionally… no wonder losing is easy!


IG Index – David Jones FX Seminar

Hi people ūüôā Here are my notes from the seminar presented by David Jones (IG Index) on Thursday at the Renaissance Heathrow near the London (obviously) who also wrote ‘Spread Betting The Forex Markets’

Have patience – do NOT get in and out of trades like a maniac. Most people think people spread betting have to be glued to a screen all day but this is nonsense. Sitting there doing that will make you mental and stressed.

Any hedge fund is averaging 13% PA. If you’re returning 2% a month consistently then you are a superstar and people will beat a path to your door

One of their biggest/best clients made an exceptional ¬£1.2 million return but they had a ¬£3million account to start with so this is only a 30% return. Set realistic expectations and you’re far less likely to blow up your account and FX is one way of easily doing this (the blowing up bit). David spent 5-6 years loosing money through taking an overcomplicated approach. Even with a strategy that’s right only 50% of the time if you can cut your losses short and let your profits run then you will come out ahead. This is where psychology is everything to a trader.

Most people lose money… so do the opposite of most people because, for IG at least, 35% of their clients win and take money from the remaining 65%. Of the 200 people who applied for an invite to come to the FX seminar only about 80 turned up. That’s your ratio right there ūüėČ

David uses support and resistance but remember it’s buyers and sellers moving the market influenced by sentiment. The market doesn’t move on it’s own. Neither does it care about EMA’s, RSI’s, or trends. However, levels that were important previously in currency pairs should be important in the future. At all times we’re looking to stack the odds of probability in our favour.

Big mistake for traders – setting stops far too tight and continually getting taken out by market noise. Let’s say you have a 25 point stop on the Dow which is at 12300… So that’s you betting on an accuracy of 0.2%! This is just insanity and your account will suffer the ‘death of 1000 cuts’ equivalent. On GBP/USD 100 pts is background noise in the market. The price might go exactly nowhere in a day (open to close) but travel through a 100 point range while doing so.

The average spread account value in the UK is £980 and the average trade is £3/4 pounds per point in volume. Personally I found this a really interesting statistic

Currency contracts expire at 8pm on IG then all bets on all periods roll over. Explanation of the margin requirements for rollovers. Let’s say you bet ¬£1 per point on EUR/USD which is at 14,200 so your deposit is ¬£200 and rollover is about ¬£1.27 per day. Weekends do count for 3 days though!! For a few weeks of less then use a daily contract. For >2 weeks use a quarterly bet as the rollover is built into the spread.

Use currency pairs and support/resistance levels to find low risk/high reward trades.

Support/resistance lines are more important than trend lines. Longer time periods have more weight for judging a trend than shorter time periods. People have a huge tendency for going short, even when the market has been going long for months and even years. David put up examples of gold, oil and the FTSE to illustrate this. The trend is your friend apart from the bend at the end…

Position sizing is all a function of psychology – risk no more than 1-3% of your account per trade.

More than this will pile on the pressure and you will make shit decisions to add stress to what is already a stressful experience. If you have a ¬£10K account then your max exposure would therefore be ¬£300 at 3% so with a 20 point stop that’s ¬£15 per point. David’s longest losing streak was 8 trades in a row and longest winning streak 9 in a row. He has seen people with ¬£1K account risking ¬£3/400 per trade and he’s also done this himself. The aim of the game is to make money, not to be right. So if you have a ¬£1K account then 3% is ¬£30 max risk which at 60 points risk is ¬£0.50 per point on FX for example.

Worst (among many) stories was a guy who went short ¬£20 per point at the bottom of the FTSE correction in Oct(?) last year from 5500 to 6100… He had ¬£10K in his account and lost the lot because he was determined to be right and too attached to the outcome.

Section on RSI – this is the strength of the market measured against itself 10(period) days earlier. If it’s >70% then it’s moved too far too fast up and is due for a downward correction. If it’s <30% then it’s sold off too fast and is due a correction up. So immediately here you’re betting against the trend while people who don’t realise this will lose in continuing to short (possibly). Watch out for the RSI trying to put you into the market against the trend. Divergence is the key one to look at and it’s not that common. Say the stock is going down but the RSI is going up then this is ‘bullish divergence’. EUR/USD was doing this very recently.

IG Index will open 2000 accounts and 35% of people won’t place a trade. David talks to the same people over and over at shows who’ve never placed a trade and are still looking for the right approach years later. Also – key point I think is that rather than pay ¬£2K for a training session or a course use the money to trade and learn. Taking the driving analogy – you can learn all the theory but at some point you’ve got to get in the car and drive it… Also recommend watching his online market run through at 12:30 every Wednesday – extremely useful to just watch how this guy analyses charts.

That’s it. My key learning’s from the talk (2hrs?) and a great exampe which pulls it all together are in the next post…

My first ‘proper’ trade!

This post should show how the comments from David Jones and the examples he gave fed into a very successful trade. Extremely useful for me and what I’d describe as my first ‘proper’ trade…

Why proper? Well, firstly I managed to control a bunch of negative psychology and acknowledge that I was taking a risk which actually had a high probability of going in my favour then¬†placed the trade. Important step that! Also I was just keeping it¬†simple¬†with trend lines, support, resistance and watching the price action. A veritable ‘light-bulb’ moment. Then I managed to not quit out of the trade as initially it went against me. Keeping faith with the trend! So let’s break it down…

EUR/USD had been on a really solid up trend since mid/end Jan 2011 so we’re searching for an opportunity to go LONG. What’s a good opportunity to go long? Buy on weakness! In other words when the price falls it should at some point go back up!

So the black triangle section has a support/resistance line at 14,250 off a trend that began back in Jan from 12,850 above a previous s/r line at 12,610 ish. It’s a¬†daily¬†chart so as far as intra-day price movement it’s got more ‘weight’ than a 4 hour chart or any shorter time period.

This is a very important point.¬†We’re interested in making money, not being right¬†so¬†lets loose the ego and look at this properly!! The trend is¬†up¬†on the daily price so look for long opportunities!! Duh!!

Anyway, let’s continue. There’s also a significantly key level coming up at 14250 (ish) so it’ll be very interesting to see what happens to EUR/USD when it gets near to this level… PLUS I can also see that in the current trend when the price gets back down to the trend line¬†every time in the last month¬†it bounces right back up. Maybe not a lot but enough to indicate a¬†high probability of it being a successful long trade.


So I’m sitting looking for retracements back to the trend line on a¬†15 minute chart¬†at work.

Why fifteen minutes? Well I’ll be honest about the reasons. I’ve been attempting to trade on 1-5 minutes because: –

  1. I thought that’s what ‘proper traders’ did – that’s how it looks in the movies ūüėČ
  2. I really hate(d) having a trade out in the market that didn’t immediately go my way. The underlying reason for this (I now realise) was totally around fear of loss. I was afraid of losing money and the pressure of making a bad mistake meant I was trying to scalp a few points instead of analysing what was going on and reacting accordingly. Fear was essentially screwing up all my trades.
  3. I’d completely failed to take into account market noise in the fluctuations of price across really short timescales. I wasn’t giving the market room to sort itself out and confirm what was going on. Like the ‘small stop’ strategy (read my earlier blog comments ref: David Jones) not waiting and using a longer timescale just means you’re giving no margin of error to your trade.
  4. Looking at 15 minute timescales means I absolutely have to sit on my hands and be patient
  5. Signals, like the size of candles relative to each other, have significance when they do actually arrive. You have time to play out different scenarios. You have time to analyse
So it’s only taken me 6 months to figure this out ūüėČ

Right. So I’m looking at EUR/USD on a 15 minute chart before the Friday NFP (Non-Farm Payroll) results and although I know the results are better with less people in the US unemployed I’ve gotno idea¬†what will actually happen to the pricing. The price falls off a cliff and I do something daft, like I have so many times before. I go short at ¬£1 per pip and lose money for two reasons.

  1. I’ve not really thought about the context of what I’m doing. The price holds then fluctuates up where I’m down a few quid and like all my previous excursions I’m thinking about what I’m going to lose.
  2. I remember I’m betting against the trend for the last¬†3 months¬†in shorting the market and I close the trade.

However, I don’t want to quit, logout and leave it. Then the ‘light-bulb’… I reduce my bet size to ‘just’ 50p per point and go long¬†because as the euro falls people will then perceive it to be cheaper and buy back into the trend. I’m now long with the overall sentiment of the market. I’m with the crowd and the tide rather than trying to fight against it! Huzzah!

Here’s my position about 20-25 minutes(?) after opening the trade. And hopefully you can see two things. After I opened my long bet the trade continued significantly south… and I was deep in the hole¬†but¬†I had remembered the second key FX point from David Jones’s talk and put my stop way out under 14,040¬†below previous areas of support.

In the snapshot I’ve just moved my stop up to 14,056 but it was under this to begin with.

If I’d have placed my stop at 14,080 out of fear of loss or out of some sense of impatience I’d have been stopped out as¬†the price continued to completely obliterate the trend line
  • Previous support/resistance levels are more powerful than the trend
  • Longer time-frames have more ‘authority’ than shorter ones

My stop was 60+ points away from my entry. Well under previous support/resistance and the trend line too. I’m giving the market loads of space to re-establish the trend but much more importantly I’m not trying to fight the whole market placing a short bet in a long market and I’m giving the whole thing time to breathe.

As you can imagine I was extremely pleased at this point but I was also sitting behind my desk at work so that’s¬†not¬†a helpful environment for calm decision making. Euphoria as all these pieces of thinking came together may have also contributed as I closed the trade 30 points up. I could have waited an hour or more and closed the trade 100 points up instead – LOL.

There is no point beating myself up though as this was an awesome learning experience. It’s also clear that my trading account size is way too small – especially for FX where there can be wild fluctuations. I think this really brings home the message ¬†that if you’re too emotionally attached to your potential losses (or gains) then it’s extremely difficult to make good decisions. This is additional psychological pressure that encourages the ‘fight or flight’ response and increases stress. Making good decisions under stress is very hard. Also from a money management perspective you’ll kill your account in no time at all.

So I take this as a significant personal milestone, general wake up call and win as the decision making (the second correct time around) was based on trend analysis, support/resistance levels and¬†managing my own psychology. No EMA’s, no formulas, no indicators apart from looking at the RSI which I’m quite liking.

Now all I need to do is work on an exit strategy. Sitting on my hands may be the first one ūüôā