Trading is not about how much you win, but rather how much you lose.
By Tom Long | October 4, 2007
We often mention in the FX Power Courses that one of the key differences between a new trader and a professional trader is that new traders think about how much they can win while professional traders think about how much they can lose. It’s no coincidence that professional traders make money while many new traders do not. Often you will see a professional spend as much time determining the placement of their initial protective stop as they do in finding their entry. As the market moves in their direction, they will not hesitate to move the stop in order to protect any gains. Successful trading is all about identifying and limiting your losses. In the world of trading there is only one guarantee and that is if you trade, you will have losing trades. How you manage those losses will have as much of an influence on your long term success as any other factor. The idea is to risk no more than you are willing to lose. If you don’t want to lose half of your account balance on one trade, then don’t risk that much. You have most of the control over this by where you place your protective stop. Keep your risk down to less than 5% of your account balance and you will be able to absorb many losers and still remain in the game. Winning will take care of itself, but you have to have the funds to take the trade in order to profit. You can do that by limiting your risk to an acceptable level any time you are in a trade.
Tags: dow, forex analysis, fx power course, ssi, trades
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A consistent approach leads to consistent returns.
By Tom Long | September 28, 2007
Too many new traders spend time developing an approach to trading based on historical data and then when they use it live for the first time and lose, they throw it away thinking that it doesn’t work. The fact may be that the approach is solid, but it is our expectations that are not realistic. We shouldn’t expect to win every trade. Some of the best traders in the world win on less than half of their trades. But they also know that after a series of trades, because of sound money management they can expect to be profitable. This is because they are consistent in their approach, so they expect some consistency in their results. When developing a new strategy, you have to judge it’s effectiveness through different market conditions. This means that you have to see how it works when the market is trending up, trending down, in a range bound situation and also when the market seems confused and directionless. This may mean running through 100 practice trades to get a good feel for the strengths and weaknesses of the approach. Just because that approach loses three trades in a row, it does not mean it doesn’t work. If you and I were flipping a coin where I won on heads and you won on tails, we know that we would each win on about half of the flips. But if tails came up three times in a row, that does not mean that there is something wrong with the coin, it is just chance. We would still know that after a series of 100 flips, we would each still have won and lost about half of the flips. Think of this as you are working on ways to trade the market. Don’t be too quick to judge that approach on a small number of trades. Think long-term when evaluating and then if the results are acceptable, be consistent in taking the trades and your trading results will also start to show some consistency.
Tags: dow, forex, forex trading, trading mistakes
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Finding a trade is a two-step process.
By Tom Long | September 25, 2007
I’ve seen some new traders have some incredible winning results in a short period of time. However, quite often they will lose those gains as just quickly. They don’t do anything different and will come to us for some sort of insight. The reason is usually the same in that they forget to first identify the mood of the market before finding their trade. What I mean by that is to first identify the direction of the trend on the daily chart and then to find your trade. If the daily trend is up, then only look for buys and if the daily trend is down, then only look for sells. If the daily chart shows a range bound market, then look to buy above support and sell below resistance. If you are not sure of the trend, then the play is to move onto another currency pair where the trend seems obvious. I see many traders buying the pullbacks on a currency pair that is in a strong uptrend and enjoy tremendous success. Then when the trend stalls out or changes, they continue to buy and may lose all of the gains. Being on the right side of a trending move can result in some great trades while trading against the trend can lead to many quick losses. A good way to see if this may be one of your problems is to run a report on your FX Trading Station to see all of the trades you have made. Then take a look at the daily chart and note where you entered into the trade. Now ask yourself how your results would have been if you had only traded in the markets where you could confidently identify the trend. You may find that adding this simple first step of identifying and trading with the daily trend increases your chance of success.
Tags: dow, forex, trend trading
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EUR/USD: The Beginnings of a Turn in Sentiment
By DailyFX Updates | September 24, 2007
Our Currency Analyst David Rodriguez picked this up. We are discussing this on the DailyFX Forum
This from IFR:
EUR/USD: Big Picture - Global Investor Sentiment Shifts
24/09/2007 20:22:00
New York, September 24. Two proprietary flow reports that came across our desks this morning reveal a slowly shifting sentiment by the global investment community in the wake of the Fed 50bp rate cut.
According to a very large European bank that manages significant equity flows, their client base witnessed a flow of $1.76bn into US equities last week, whilst the EZ experienced an outflow of $2.35bn (equivalent). Flows into the US from the UK equaled $0.56bn, and from Switzerland $0.38bn; however there were modest outflows to Japan, $360mn, and Asia Pacific (ex-Japan) $370mn. Foreign clients continued to sell Swiss equities to the tune of USD 1.41bn.
According to EPFR on their weekly “global news release” they witnessed similar flows in the funds they monitor. They noted a global shift of some $10bn out of money market funds into equities; GEM (global equity market) Funds, picked up $1.78bn in flows, and are back in positive territory y-t-d. According to EPFR, both Latin America and EMEA Equity Funds posted modest outflows despite collective performance gains of 6.93% and 4.37% respectively; however all Emerging Market Equity Funds combined (tracked by EPFR Global) had net inflows of $2.5bn during the week; their fourth straight week of inflows.
European Equity Funds were hit with “sizable redemptions” for the eighth time in the past nine weeks as y-t-d outflows broke $13bn. According to EPFR, slower growth, earnings downgrades and fears over the fallout from the US sub- prime crisis are draining sentiment towards the region. There is particular concern over the impact of the weak dollar on both European and Japanese exporters according to EPBR. Given these global “real money” shifts, it seems understandable that traders are getting gun shy now that EUR/USD is losing momentum, another week of similar flows and EUR/USD could start looking heavy. Spot last traded at 1.4080.
Tags: dailyfx, dollar, dow, fed, rate cut
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Food For Thought
By Laetitia Vaval | September 21, 2007
I found an article by Tom Long on www.forextradingblog.com. He talks about using protective stops and his article identifies one of the major DON’Ts that I’ve been doing on the demo account and that I briefly touched upon in some of my previous posts. I copy-pasted what I believe to be the essence of the problem: “Too many new traders use what they call a “mental stop”. They have a price level in mind where they would consider getting out if the market moves against them, but do not enter it into the trading platform. Typically, when the market does move down to that price, instead of exiting, they “wait and see how the market will react”. If the loss becomes larger, they then decide that they will exit when the market moves back to their original mental stop level. As the market continues to move against them, intentions about getting out turn to hope about the market coming back before they get a margin call. Many times, it is that margin call that determines their exit, not their own analysis”.
As I will be trading live very soon, I can not make that mistake again. I have to 1) use protective stops and 2) respect them. Hopefully, the fact that I’ll be trading with “real money” will be a good enough reason to not take such a useless risk !
Tags: currency trading, dow, forex, forextrading, trading strategies, wall street warrior
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Canadian Retail Sales - part 2
By Laetitia Vaval | September 21, 2007
So the Canadian Retail Sales numbers came out, and I was completely wrong since they came out worse than expected (-0.8% vs. 0.0% expected). Of course, the USD shot up about 30pips and now I’m down about 25pips. That’ll teach me NOT to make my own assumptions about economic data!
Tags: dow, economic release, forex market, pips, retail sales, wall street warriors
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DailyFX Forex Radio - Canadian May Break Parity, Greenback to See Little Relief
By DailyFX Radio | September 20, 2007
· US Dollar sees little relief, downward momentum shows few signs of slowing
· Canadian Retail Sales could send the Loonie past parity
· Be sure to view the rest of the week’s event risk on the DailyFX Weekly Calendar
To discuss these or any other FX topics with the DailyFX analysts, check out the Forum
Click Link to Listen to our Evening DailyFX Radio PodCast:
http://media.dailyfx.com/podcasts/FXRadioPM092007.mp3
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Tags: dailyfx, dollar, dow, gbp
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CHF/JPY results
By Laetitia Vaval | September 20, 2007
So i just got in the office and checked on my trades from yesterday. Especially, the CHFJPY trade that I “forced” myself not to touch once I had entered it in the system. So my limit price of 98.25 was reached and i made a 24 pip profit ($207). This really shows the benefits of letting the trade work by itself instead of “irrationally” closing my position as soon as it starts ticking a few pips against me. My only regret in this case is to not have set my limit higher because CHFJPY traded all the way up to 98.50 before trading back down to the level where I had bought the pair. Something to consider for my next trade.
Tags: currency trading, dow, forex, forex market, jpy, trades, wall street warriors
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Trading the Fed Rate Cut Announcement
By Laetitia Vaval | September 19, 2007
Yesterday was pretty exciting since the Fed was set to announce whether they were cutting interests rates and if yes, by how much (25bps or 50bps). Opinions were mainly divided between a 25bp or a 50 bp rate cut. Before, the announcement at 2:15, I prepped myself by planning out the trades I would place for each scenario.
A 25bps cut would have been bullish for the dollar whereas a 50bps would have been bearish. I decided to trade the currencies I was most familiar with — that is the EURUSD and the GBPUSD.
At 2:15pm EST, the Fed announced that they were in fact cutting rates by half a point. The reaction in the US Dollar was immediate as you can see on the 5-minute charts above (EURUSD and GBPUSD). In the case of a 50 bp cut, my plan was to get long the Euro and the Pound as soon as possible right after the announcement.
The morning of the announcement I got long the EURUSD at 1.38818. The pair did not move much until the announcement in the afternoon. Within 5 mins the EUR jumped to 1.3965 - more than an 80pips. However, soon after the pair reversed and traded down. I got out of my position at the top of the wick of the next 5-minute (red) candle at 1.3936. I made $542 on that trade. OF course, the reversal was only temporary and a few minutes later the Euro continued trading up and at 14:40 hit 1.3980, and a few hours later hit a high of 1.3987. Had i held onto my trade longer my profits could have been doubled.
My second trade involved the GBPUSD. I also got long the pound in light of the half point rate cut. I actually ended up buying 2 lots of the GBP. I bought lot #1 at 2.00419 and sold it for 2.00670 ( a 25.1 pip gain). I bought lot #2 at 2.00528 and sold it at 2.00650. Looking at the 5 minute chart from yesterday, it is easy to see that I only captured a fraction of the profits that could have been made on this explosive upmove. As you can tell from the 2nd chart above, the GBP kept trading up to hit a high of 2.0150 about 35 minutes later. Same problem here as in the EURUSD, and many of my previous trades as you can see in my past postings — I exit my trades way to early and then they keep trading my favor.
About 15 minutes after the announcement I placed a few smaller trades on the USDCAD (got long at 1.0178) and re-entered a long position in the EURUSD at 1.3960. I exited those trades a few pips higher and made some minor profits — about $100.
I really enjoy trading the news. It’s very fast paced and there is a potential to make a lot of money. However, unfortunately market moving news like the fed rate cut do not happen everyday and in the meantime, I have to make some trades in the “slower” in between phases. Today, I’m going to focus on trying to find a few range-trading currencies.
Will update on that this afternoon.
Tags: dollar, dow, eurusd, forex, forextrading, pips, rate cut, trades, wall street warrior
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There is no such thing as too high or too low.
By Tom Long | September 18, 2007
I often hear new traders state that they are buying a currency pair because the price is too low or selling a currency pair because the price is too high. The USD/CAD lows from July 2007 were a good example. Many bought because they determined that since the market was at a 30-year low, that it had to move up. If you look at a daily chart of this pair you can see where there was a nice bounce up off of those lows. However, the fundamental picture had not changed. The only change was the number of traders who were convinced that the market had sold off enough and was due to rally. It did rally, but right up to a nice place to sell before the market moved back down through those July lows, to even lower lows. This brings us right back to the title of this piece. There is no such thing as too high or too low when it comes to prices in the financial markets, unless of course the price is zero. There is a good reason that a market trades at 30-year lows and until that reason changes, traders should assume that lower lows are in store. This may be the trend of the year, so we want to take advantage of these moves by trading with the trend instead of assuming that we can predict the end of the move. So the next time you hear about a market reaching a multi-year high or low, don’t start looking for the end of the move, but rather look for a place to jump on board in the direction of the move and ride it out for as long as possible. There is no telling just how long that move will last.
Tags: cad, dow
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