Archive for the ‘Forex’ Category

5 Treasures of a Forex Mentor

May 5, 2010 by · 8 Comments
Filed under: Forex, General, Mega Success 

Most of us have heard of the term “Mentor.”

Our first impression of a “Mentor” is usually that of a successful individual who has “been there, done that.”

I’ve read many definitions of a mentor; but here’s the one that I like and identify with the most:

“A mentor is someone with more experience than you in your field of expertise, and who serves as a trusted confidante over an extended period of time.”

In that sense, a mentor is like a coach.

In this day and age, having a mentor in your chosen endeavour is imperative for you to reach your goal in the shortest possible time. Why would you want to enroll in the “school of hard knocks” when a guide is almost always available to help you along the way?

What then, are the tangible benefits of choosing a good mentor?

As endless as I think the benefits are, I’d like to narrow the list down to the top 5. In particular, because my chosen field of expertise is Forex, much of what I share comes from my personal experience in the field of Forex.

Treasure #1: Accountability

A mentor is there to ensure that you are “on target.” Many a time, we are actually clear of the task at hand, but nature sometimes takes it course and we tend to “slack off.”

A mentor serves to make you, the mentee, accountable for your tasks and goals. There must be commitment on both sides. Firstly, for the mentee to do the necessary work required and secondly, for the mentor to provide the necessary guidance so that the mentee doesn’t veer off-course.

Treasure #2: Affirmation

In the book “You Can Heal Your Life” by Louise Hay, the author recounts how scores of her clients have an ingrained belief of “I am not good enough.”

Most of them formed such beliefs in their early childhood because growing up was rough; no one took them seriously and their parents were always chiding them for doing things wrong.

One of the best gifts a mentor can give to the mentee is the gift of positive affirmation. By this I mean continuous and loving support. All of us need to know that “it is ok to screw up”, and that we can always count on someone to encourage us and support our learning process along the way.

Treasure #3: Assessment

A good mentor tracks the progress of the mentee. How would you know how far you’ve gone if there isn’t a yardstick to measure progress in the first place? Depending on the discipline or nature of the expertise, different mentors have a different way of assessing the growth of the mentee. It is with the constant cycle of action, review and evaluation that true change is initiated and cemented.

Yes, think HOMEWORK!

Treasure #4: Advice

Haven’t we all been at the place where we just felt like throwing in the towel?

“It’s too hard! and “I can’t do it!” become the standard mantra in these situations. This is where the experience and counsel of the mentor comes in.

While some mentors may be tempted to say “Yes! An elephant can learn faster than you!” (ok, I threw that one in to add a little spice), most mentors would know how to apply coaching techniques to provide the mentee with options, possible solutions and specific directions to carry on.

Mentors know that blocks and obstacles are part and parcel of winning the game.

Think Newton’s 3rd Law:For every action, there is an equal and opposite reaction.

With sound counsel and coaching, it would be no time before the mentee is up on his/her feet again and moving towards his/her desired goal.

Treasure #5: Assets

Regardless of the chosen field, a mentor is able to provide valuable assets to the mentee along the way.

Assets can be in the form of resources like a book, an audio tape or maybe even a specific contact. It is basically a solution to help the mentee press on. Without the advantage of having this quality in a mentor, the mentee can spend precious time “going around in circles” and not really finding the solution to the problem at hand.

Do you know who Nicol David is?

Nicol David is currently ranked the World Number 1 in women’s squash, the first Asian woman to achieve this prestigious accolade. She won the British Open title in 2005, 2006 and 2008, as well as the World Open title in 2005, 2006, 2008 and 2009.

Nicol has also obtained the WISPA (Women’s International Squash Players Association) Player of the Year on five consecutive occasions, from 2005 until 2009.

Outstanding achievements for sure.

Do you know who Liz Irving is?

Probably not.

She’s the coach who has managed to build Nicol into the Champion she is today. She’s the person whom Nicol turns to when she has difficulties with her strokes, her psyche, her attitude. Liz is always there to Affirm, Advise and Assess.

Is mentorship important? Without a doubt.

The same goes with Forex Trading. If you are serious about walking this path, get yourself a mentor. Not only will it save you precious time, it cuts short your learning curve, instills correct trading habits in your system and propels you to consistent profits faster.

Early on in my trading career, I was fortunate to be mentored by some of the best Forex Traders in the world, Kathy Lien and Ed Ponsi.

Among the two of them, they occupy the TOP 2 SPOTS in the best-selling Forex books OF ALL TIME.

Have their mentorship made a difference to my trading? Without a doubt.

And the rest, as they say, is history.

Friends, you become a part of who you are around. If you decide to stay in the Forex arena, make sure you get a solid mentor who can guide you along the way.

I promise you, the treasures are more than you can imagine.

How to “Be the Casino” in Forex Trading

April 27, 2010 by · 6 Comments
Filed under: Forex, Press Release, State Of Mind 

(This is an article I wrote for Smart Investor in the April 2010 issue titled “House Edge – If you can’t Beat the House, Be the House”)

On 14th February 2010, Singapore made history by opening its doors to the country’s first casino in Resorts World Sentosa.

The casino welcomed its first punter – a middle aged Singaporean woman – at the auspicious time of 12:18 pm on the first day of the Chinese Lunar New Year.

When pronounced in the Cantonese dialect, 12:18 sounds like “prosperity”.

The first bettor was followed by an initial crowd of about 200 enthusiastic gamblers and within hours of the opening, hundreds more were queuing up outside.

At the end of the first three days, a total of 60,000 visitors had thronged the casino. According to industry estimates, the casino is on track to draw 10 million visitors by the end of this year.

What is the draw of a casino? Why do we love its appeal when we know at the end of the day, the casino ALWAYS WINS?

The answer, is that there is “something” about being at a casino. We stand at the entrance, glance at the red carpet, take in the shimmering slot machines and hear the roulette wheels spinning. It’s almost as if we’re the suave, debonair main cast in a carefully scripted Hollywood blockbuster (think Casino Royale).

Let’s consider an interesting question here – why DOES the casino always win?

To understand why a casino always wins, we have to understand a term called…

The House Edge

The “house edge” is the casino’s average profit from a player’s bet. For example, in Roulette, the house edge is about 5%. That means for every $100 bet, the casino keeps $5 as profit, and returns the other $95 to the players as winnings, on average.

If all the roulette players in a casino collectively wager $10 million on a Saturday evening, the casino expects to pay back around $9.5 million as winnings and keep around $500,000 as profit.

In Baccarat, the house edge is “only” 1.2%. This means that on average, the casino keeps $1.20 for itself and pays out $98.80 out of every $100 wagered. It seems like a good deal for the player – or does it?

On the average, Baccarat plays at a rate of 60 hands per hour, or 1 every minute.

Simply because of this, even a small house edge, like 1.2%, means that you can expect to lose half your money after 1 hour of play, 75% after 2 hours, 90% after 3 hours and 95% after 4 hours – a stunning result.

This is the casino’s secret: to keep you playing LONG ENOUGH; because the longer you play, the closer you get to losing everything. That’s another way of saying that the casino always wins in the long run.

Now we understand why all casinos try to give you an “Alice in Wonderland playing experience” complete with free flow of drinks and sandwiches. No prizes for guessing why it’s also impossible to find windows or clocks in the casino. Why would you want to keep track of time when you’re having a ball placing your bets?

Let’s draw a parallel to trading here. Is it possible to gain a “house edge” over the financial markets?

The answer, is an emphatic yes.

As a trader, I have found that 2 keys above all else, give me a “house edge” – Consistency and Discipline.

Consistency

The best traders typically are the most consistent ones.  Consistency here refers to a few scenarios:

1)    Limiting your risk

Great traders never risk more than 1-3% of their capital per trade. I just can’t over-emphasize the importance of this rule. As the trading colloquial goes “Amateur traders are concerned with how much they can make; professional traders are concerned with how much they will lose.”

Inconsistency creeps in when a trader takes on different levels of risk for different trades without understanding the consequences. This mostly occurs after a trader experiences a string of losses; and packs on the risk to “make up for past losses.”

2)    Trust the markets

Many traders take or pass on trades based on “feeling” or “intuition.” This can be very hazardous. When a trade doesn’t fit all your trading criteria, don’t take it. When it does, take it. I have come to find that the latter is in fact, the more difficult one to follow. Sometimes even when all the criteria fits for us to take a trade, we pass it up because we “had a bad feeling.”

Remember, to have the “house edge” working for you, you have to have the odds in your favour and allow it to play out in the long run. The best application of this principle is to NOT pass on a trade when it fits ALL your criteria.

This rule becomes all the more important to aspiring traders who decide to “abandon” a trading plan and conclude that trading is “risky” after a couple of negative results.

Do not trust your gut – trust the markets.

Discipline

Discipline is the hallmark of every great achiever, so why should it be any different when it comes to trading? Discipline in trading takes many forms, but we will explore the more important ones here:

1)    Place a stop immediately after entering a trade

As simple as this sounds, I’m willing to bet (no pun intended) that not many traders follow this one simple rule. Traders get lazy and convince themselves that placing a stop immediately is not as important as “catching the right price.”

Variations of this bad habit include loosening a stop or “doubling-down,” which is to trigger ANOTHER trade when the trade is not going in your favour.

This can be an “addictive” habit especially if a trader flukes a win when doing this. The trader’s downfall eventually comes when a trade is doubled-down to an extent that it never recovers.

2)    Mis-timed entries and exits

As humans, we are basically motivated by “fear of loss” and “hope of gain.” We see this trait playing out in trading when traders try to “chase the price.” In trading, the basic rule is to let our profits run and cut our losses short. However, because of our nature, many of us tend to cut our profits short and let our losses run.

Remember that much of successful trading is counter-intuitive. We must exercise discipline at all times so that we never deviate from our original plan of entries and exits.

Ever wondered why casino owners like Steve Wynn, Stanley Ho and Sheldon Adelson are billionaires? That’s because they fully understand the secret of the “house edge” and never deviate from their “trading plan.”

As traders, we need to do the same. With consistency and discipline as our “house edge”, we can firmly stack the odds in our favour and emerge the ultimate winner in the long-term.

Be the casino – because the casino ALWAYS WINS.

What else do you think will help you “gain the house edge” and “be the casino”?

Give me your thoughts and comments below

(Download the PDF version of the article here)

9 Challenges that We Traders Face

April 22, 2010 by · Leave a Comment
Filed under: Forex, Forex Brokers 

Having been a Forex trader for years, I’ve found that it is of paramount importance to partner a reliable broker.

You see, after you get a good solid education on how to trade the Forex Market, your next step would be to open an account and start trading.

I’ve compiled a list of 9 challenges that we traders face when choosing a reliable broker to open an account. Here they are:

1)  “I feel that my broker is a market maker and is trading against me”

We’ve all been there before. You set a trade up, place your targets and stops, and get ready to rock and roll. Unfortunately, the trade doesn’t go your way. It starts to inch closer to your stop loss. As it flirts dangerously close to your stop, you heave a sigh of relief when it appears to be reversing.

However, to your horror, it suddenly hits your stop, takes you out of the trade, makes a killer reversal and continues to move in the direction of your profit target! Sounds familiar doesn’t it?

This friends, is a reality in the Forex brokerage business. Many brokers operate a DEALING DESK which simply means they also trade to speculate for profits. Unfortunately, this sometimes means taking trades against you, the retail trader.

2)  “Slippage is a common occurrence. I hardly get the price I want”

Do be careful when you are attracted to brokers that offer “1 pip spread or zero spread.” Either one of 2 things may occur:

-  You have to pay a high commission on each trade

-  There will be many requotes

Please do your own due diligence and read the fine print on the broker’s terms and conditions.

3)  “I worry about the safety of my funds”

This is definitely high on the agenda of most if not all, retail traders. Unlike the billion dollar institutions which have endless cash at their disposal, many of us are trading with hard earned money. It would be refreshing to come across a solid broker which offers segregated client accounts.

Anyone remembers the Refco debacle? They were at one point the largest broker in the world before filing for Chapter 11 bankkruptcy in October 2005. Many people who opened accounts with them over the years are still finding it a challenge to get their money back.

4)  “It’s too hard to fund my account”

While I agree that many structures need to be in place to check the customer and his/her background, there must be a limit. As a Forex trader and coach, I have had my fair share of grumbles from fellow students who complain that funding their account is just too difficult.

To keep things clean and simple, your broker-of-choice must follow these 3 steps:

-  Have strict Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols

-  Verify client background with copy of passport & proof of residence

-  Provide a variety of funding methods for the trader, e.g. bank transfer, local deposits or credit card

Speed is also of the essence. Some brokers take more than a week or two to approve accounts; which makes one confused on whether its a case of strict regulation or pure inefficiency.

5)  “The customer support has a bad level of service”

This point really riles up most traders. At the very least, your broker-of-choice MUST provide round-the-clock customer support through a live chat function. If for whatever reason, the live chat function is down, then back-up support like phone and email must be readily available.

The second step would be to provide prompt and professional help to the traders.

Look, it’s YOUR company (I’m talking to the tele-support people in the brokers now). If you don’t know the answers to our questions, who would? Quick and competent responses coupled with prompt follow up on the clients needs seem to be lacking in some of the brokers I know today.

6)  “I can only trade Forex and basic commodities”

It has been a joy for me to see some of students blossom and mature into astute investors. Some of them have lament the fact that most brokers only offer currencies and basic commodities like gold and silver for trading on their platform. Come to think of it, it sure would be nice if brokers offer a one-stop shop for traders and investors to trade Forex, Bullion, CFDs, stocks etc. Some do by the way; but they are few and far between.

Even if it’s not for trading, it sure would be nice to see the price of oil, gold, the dollar index etc on ONE platform to get a global perspective on world finance.

I’ve had one student come up to me and say “Man! If only my broker could let me trade Citigroup when it was below $1 last year! I could have made a killing!”

My response was, “Are you going to sit there and whine or find a broker which allows you to do so?”

He got the picture! Not that it makes a difference to this article, but the share price of Citigroup is just under $5 now :)

Bro, if you are reading this article, I am all ready for a dinner treat at El Bulli or The Fat Duck!

7)  “I can only get low leverage”

This is going to be a bigger problem if you select brokers that are based in the US. Many brokers there are now “constrained” by regulatory bodies like the NFA and CFTC to offer LOWER leverage to the retail traders. This is huge. If it happens, my bet is that there would be a MASSIVE EXODUS of traders getting out of brokers which are based in the US.

Is high leverage good? My answer, is Yes. But you’ve GOT TO understand how to use it wisely. If you go with a broker that offers a leverage of 10:1 as opposed to 100:1 or 200:1, then get ready to put down more margin for each trade.

Do yourself a favour today. Go read up on Leverage and how to employ it wisely for your benefit.

My favourite explanation for the term leverage is “doing more with less.”

Is leverage a double-edged sword? Yes. So how would you reduce it to a single-edge one?

Lean a little closer. Press your ear to the computer screen.

(Shouting) “ALWAYS PUT A STOP LOSS!!!!!!”

8)  “My broker doesn’t allow hedging”

Not that I advocate the method of hedging, but it would be good if your broker gives you the flexibility of doing so. Again, brokers in the US do not allow you to do so (don’t look at me. Check with the NFA). Some also have the FIFO rule, which means that you can only exit trades in the same sequence you entered. What??!!

Now, with all that restrictions, time to pack your bags!

9)  “I must have different accounts if I want to trade Micro, Mini and Standard accounts”

Oh puh-leeeeeeease. Dear brokers, why the hassle? The main job of a trader is to control risk. Why can’t we have just ONE account which allows us the flexibility to execute 1 lot, 0.1 lot or 0.001 lot? Isn’t that the exact same thing as having a standard account, a mini account and a micro account?

Wake up people!

So there you have it. The 9 challenges that most if not all, retail traders face. The bigger question is how would we overcome them? Simple. Choose a broker that counters ALL the problems listed above.

As I operate the largest Forex Academy in Asia, I do get my fair share of brokers knocking on my doors, asking me to refer students to them.

I am careful with such practices; as it is my job to source the best brokers out there who HELP traders succeed rather than make their trading journey a seemingly painful one.

The One Broker I’ve Found That Is Really On Our Side

Over the last couple of months, I’ve had the pleasure to be acquainted with a Forex broker called FXPrimus. Initially, I had the impression that they were just “one of them.” However, on closer inspection on their business model, I am pleasantly surprised to find out that they SOLVE ALL 9 of the challenges that I have just listed above. Pretty cool!

Some of their BEST features include:

1)  Straight Through Processing (STP) – they DO NOT trade against their clients

2)  Segregated client accounts at Tier 1 banks; which are independently Administered by Turnstone Corporate (Mauritius) Limited – An Industry First

3)  Annual audits performed by world-renowned firm, Ernst & Young

4)  MT4 platform, the most preferred trading platform worldwide

5)  Trade over 70 currency pairs AND instruments like bullion, oil and gas

6)  Syariah compliant accounts

7)  No requotes during normal market volatility

8)  High leverage (up to 500:1)

9)  Minimum funding as low as USD250

Give them a try. I am particularly pleased at the speed of execution. You can open a demo or live account by clicking the banner below.

Understanding A Forex Trade

April 12, 2010 by · 2 Comments
Filed under: Forex, Press Release 

This is an article I wrote for “Your Trading Edge” in the April 2010 issue:

Today, the world of Forex trades USD3.5 trillion in a single day. This makes it the largest financial market in the world. Additionally, the playing field has leveled considerably because what used to be the domain of central banks and large commercial banks or hedge funds, is now available to the retail investor.

This article will help us to understand a Forex trade, how it is executed and how money is made or lost.

Reading a currency pair

Firstly, Forex currencies are always traded in pairs. Examples are:

-       USD/JPY (US dollar against the Japanese Yen)

-       EUR/GBP (Euro dollar against the British Pound)

-       AUD/CHF (Aussie dollar against the Swiss Franc)

In any currency pair, the currency on the left is termed the “base currency” and the currency on the right is termed the “counter currency”.

The unit of the base currency is ALWAYS one, and it is expressed as a figure of the counter currency.

Here’s a few examples:

1)    EUR/USD      =          1.4150 (1 EURO is equivalent to 1.4150 US dollars)

2)    GBP/USD      =          1.6135 (1 GBP is equivalent to 1.6135 US dollars)

3)    USD/CAD      =          1.5055 (1 US dollar is equivalent to 1.5055  Canadian dollars)

4)    USD/JPY       =          90.50 (1 US dollar is equivalent to 90.50 Japanese Yen)

Take note that whenever the Japanese Yen is quoted as a “counter currency”, the price is always quoted to 2 decimal places, as opposed to 4 decimal places for the rest.

Now, when you see a quote showing USD/JPY = 90.50, we can infer 3 things:

5)    US dollar is the base currency

6)    Japanese Yen is the counter currency

7)    1 USD is equivalent to 90.50 Japanese Yen at that point of time

Long and Short

A trader would execute a “Long” when he feels that prices will rise. This is a “buy” trade.

A trader would execute a “Short” when he feels that prices will fall. This is a “sell” trade.

How do we execute a trade?

Take a look at the USD/JPY chart below.

(Click to enlarge)

In the first instance, our trader executes a “long” at 91.55 (let’s omit the last digit since it is always zero) because he feels that the price will rise. This is his entry price.

He exits the trade at 93.02. This is known as his profit target.

In the second instance, our trader executes a “short” at 92.60 because he feels that the price will fall. 92.60 is known as his entry price.

He exits the trade with a profit at 90.78. This is his profit target.

Take note that when you execute a “long” trade, the profit target is numerically HIGHER than the entry price (93.02 > 91.55).

When you execute a “short” trade, the profit target is numerically LOWER than the entry price (90.78 < 92.60).

Understanding pips

Let’s start with the definition of a ‘pip’. A pip is basically the smallest movement on the chart. For instance, if the quote of GBP/USD moves from 1.6250 to 1.6251, we say the movement is one pip. If the quote of USD/JPY moves from 90.50 to 90.40, we say the movement is 10 pips.

Take note that whenever the Japanese yen appears as the counter currency, the second decimal is referred to as a pip. Most other non-JPY currencies like EUR/USD, GBP/USD, USD/CAD and AUD/USD are quoted to four decimal places, thus, the fourth digit is one pip.

Let’s look at a few examples to help us understand the value of a pip. Let’s assume that the current prices for a few major currency pairs are now:

1) EUR/USD          =             1.4245 (1 pip = 0.0001 EUR)

2) USD/JPY           =             90.55 (1pip = 0.01 USD)

3) USD/CAD          =             1.0538 (1 pip = 0.0001 USD)

In Forex, the value of 1 standard lot is 100,000 units of the base currency.

In our 1st example of EUR/USD, EURO is the base currency. The pip value is calculated as such:

=          {0.0001/1.4245} x 100,000

=          7.02 EUR

OR

=            7.02 x 1.4245

=          10 USD

In the 2nd example of USD/JPY, USD is the base currency. The pip value is calculated as such:

=             {0.01/90.55} x 100,000

=             11.04 USD

In the 3rd example of USD/CAD, USD is the base currency. The pip value is calculated as such:

=             {0.0001/1.0538} x 100,000

=             9.49 CAD

OR

=             9.49 x 1.0538

=             10 USD

In short, whenever the US dollar appears as the counter-currency, the pip value is always 10 USD.

Whenever the US dollar appears as the base currency, the value of 1 pip can be derived from the above calculations.  The good news is that most Forex brokers will calculate this for you in the platform they provide.

Calculating profit & loss

Let’s look at the same chart we discussed earlier on.

(Click to enlarge)

In the first trade, our trader made 147 pips by going “long”. This is calculated by subtracting 91.55 from 93.02. Recalling that 1 pip is roughly 10 USD, our trader made a cool USD1,470 in that one trade!

If our trader started with an account size of USD10,000, he would have made a return of 14.70% in one trade.

In the second trade, our trader made 182 pips by going “short.” This is calculated by subtracting 90.78 from 92.60. In this trade, our trader made a cool USD1,820!

Again, if our trader started with an account size of USD10,000, he would have made a return of 18.20% in one trade.

Concept of Stop Loss

We’re almost there. So far, we have only discussed Entry Price and Profit Target. A complete trade must have 3 positions, and the third is a position called a “Stop Loss.”

What exactly is a stop loss?

A stop loss is defined as the maximum amount a trader can afford to lose if the trade doesn’t go his way. A stop loss is absolutely essential in every trade to help a trader limit his losses.

Let’s take a look at the graph again:

(Click to enlarge)

The red line in the middle of the chart helps us to see that the trade on the left-hand side is a “long” trade and the trade on the right-hand side is a “short” trade.

Notice that now, we have also put in the stop loss. To illustrate this example with a stop loss, we shall use the most basic risk/reward ratio of 1:1.

This means that for the “long trade”, our stop loss is placed at 90.08 (exactly 147 pips BELOW the entry price).

For the short trade, our stop loss is placed at 94.42 (exactly 182 pips ABOVE the entry price).

Putting it all together

A trade exits in one of 2 ways: either the profit target OR the stop loss is hit.

Wait a minute! Does that mean that had our trader lost the trade, he would have been staring at a loss of 14.7% and 18.2% respectively on a single trade?

Not exactly. In Forex, it is imperative to understand risk per trade.

Great traders do not risk more than 1% – 5% of their capital on each trade.

The formula for calculating risk per trade is as such:

Risk per trade =       { lot size x stop loss x pip value} / Capital

To put us in the domain of the great traders, we need to emulate their approach to Forex trading.

Their approach is to determine risk FIRST. As an example, let’s assume that our trader starts trading with a capital of USD10,000. He then decides that his risk per trade is 3%, and his stop loss is 100 pips. The calculation goes like this:

Risk per trade  =       { lot size x stop loss x pip value} / Capital

0.03                =   {lot size x 100  x 10} / 10,000

Lot size          =          0.3 lots

This tells us that our trader can ONLY execute this trade with 0.3 lots if his capital is USD10,000 and his stop loss is 100 pips.

If either value is different, simply plug in the figures in the formula again.

In summary, ALWAYS start with risk FIRST. Decide how much you are willing to risk on each trade first (this figures must be between 1% to 5% of your capital and nothing more) to determine your lot size.

Never “take a swing” and start with lot size FIRST.

Most amateur traders would have a “more the merrier” mentality and take huge positions in their lot size without understanding the consequences.

This is when Forex trading borders on gambling and should be avoided at all costs.

Download the PDF version of the article here:

http://www.fx1academy.com/doc/Understanding_A_Forex_Trade.pdf

What You Don’t Know Can Hurt You

March 1, 2010 by · 2 Comments
Filed under: Forex 

Do you know how to read what some advertisers in the trading business are really saying? Ed Ponsi provides a detailed outline to enlighten you to some of the pitfalls of the trading business.

Ed PonsiA man is defusing a bomb. He is intensely focused; his face is inches from the mechanism. He applies the tiny tools of his trade to the intricate workings of the device. Meanwhile, an eighteen-wheel tractor-trailer is racing toward the bomb and our hero. He does not look up, does not break his gaze from the work at hand. He has decided that he needs to focus one hundred percent of his attention on the explosive device to the exclusion of everything else.

No, this is not a nightmare, a Steven King novel or a Metallica video. The intricate and difficult work of defusing a bomb could be compared to the act of trading. It is an effort that requires extreme focus and intense concentration. But what does the barreling truck represent? Our hero may be devastated if he fails to heed a completely separate, yet equally dangerous threat. The very real – and sometimes unheeded – danger represented by the truck is the influence of charlatans and scam artists on both new and experienced traders.

The following article is not intended to scare you, but to enlighten you to some of the realities of the trading business. I want you to know about the pitfalls that are lurking out there, waiting for the unsuspecting and the uninitiated. If I can keep you on the right path and prevent you from being drawn into these traps, your chances of success will increase dramatically. To be forewarned is to be forearmed.

The Trading Contest

Every month or so, I receive emails from market makers proudly announcing the best performing accounts for the month. This roster is usually restricted to very small or so-called “mini” accounts. The email message will boast about returns of 400%, 500%, or even 600% in one month! When my students see this, they often ask, “Ed, why don’t you teach me to trade like the guy who made 600% in his mini account? What is his secret?”

Let me tell you his secret. The trader who makes a huge gain in his account does so because he has taken on a great deal of risk. This trader is probably not using stops and bets heavily on the outcome of every trade. Eventually, he will bet everything and lose. If you do not believe me, ask yourself this question: ‘If this trader could consistently turn a profit of 600% per month, why is he trading a mini account?’

I do not care how many times you gain 600%; you only have to lose 100% one time to lose everything. Consider this – If a trader could consistently gain 600% per month, every month, he would be able to turn $1000 into $46,656,000 in six months (remember, if the trader is consistent, the gains are compounded). Soon, he would be richer than Bill Gates! So, you can be sure that if he is trading a mini account, he has not gained 600% per month for the past six consecutive months. In fact, the reason he is trading a mini account in the first place is probably because he blew up his standard sized account by trading in the same fashion.

he Lesson: Never allow yourself to be overly impressed with the published results of a trading contest. The rules of the contest usually reward the person with the highest return, regardless of how the returns were achieved. A real trading contest would measure gains versus largest drawdown or a series of losses to determine a ratio of risk versus reward as well as overall return. In this manner, the contest will prove which trader really is the best.

The Bad Trading Instructor

There is no rule that says you have to be a good trader to become a trading instructor. I am upset and alarmed at what I perceive to be scam artists pouncing on people who merely want to learn how to trade. Recently, there has been an explosion of smarmy, so-called trading instructors who are giving all of us a bad name. This is happening because the market for instruction has exploded and drawn in opportunists who are excellent at selling a trading course, but have little to offer in the form of useful information. Since they are good marketers, it is easy for them to get noticed while better instructors are overlooked. Personally, I learned how to trade on Wall Street, not on Madison Avenue. How many of these charlatans have actually traded professionally?

Some of these scams center around trading a particular event, such as the U.S. Non-Farm Payroll report. I am sure that it looks very tempting to traders when the exchange rate can move one hundred pips in one second, but what if you are on the wrong side of this move?

I have seen many accounts damaged by this report. It is the single most dangerous event in all of Forex trading, but I am sure the people who are selling the product care little about the consequences to the traders who buy the course. They just want that check or credit card number, so they can sign you up for the course. If they knew anything about trading, they would tell you to do the opposite and avoid the U.S. Non-Farm Payroll report.

I know of another so-called trading instructor who keeps a running account of his trades online. He takes small gains, and justifies them by saying that he is getting ‘quick profits.’ Then, to my horror, I saw his positions. In some cases, he was holding on to trades that had moved hundreds of pips against him! How is it that this person ever came to be in the position of telling others how to trade?

The Lesson: You cannot become a good trader by learning from a bad trading instructor.

Playing The Percentages

I recently saw an online advertisement that cracked me up. The banner ad claimed to possess a ‘Lost Forex Trading Strategy’ that was correct nearly 90% of the time. Sounds good, doesn’t it? Most of us make the assumption that if you are correct 90% of the time, you will make money. The truth is that a trader can win 90% of his or her trades and still lose money. In fact, this happens more often than you may believe. Let me ask you this – if the strategy is so great, why was it ‘lost?’ Could it be that the strategy consists of many small wins followed by one big loss that wipes out all of the gains?

Often, you will hear of spectacular returns. You will hear salespeople bragging about 90% to 95% winning trades and so on. You will hear claims that it is possible to win many consecutive trades on a consistent basis.

And what could be wrong with winning? It feels good to win, right? Well, the salesperson trying to sell you a product or service that promises such a high percentage of winning trades (or in some cases promises a ridiculous number of consecutive winners) is counting on your desire to win to short-circuit your thought process.

It is easy to obtain 90% winning trades and still lose money. Conversely, there are many successful traders who place more losing trades than winning trades. The percentage of winning trades has nothing to do with the ultimate success of the trader. Most references to a percentage of winning trades are merely a sales tactic, which is intended to appeal to the trader’s desire to ‘win.’

Do you want to know how to create a high percentage of winning trades? Why not simply trade without stops (breaking every rule of risk management, which will surely lead to losses) and take profits quickly? That way, every trade can be held until it either turns profitable or creates a margin call.

If this sounds ridiculous, that is because it is. But the point must be made. It saddens me to tell you that this is exactly how many people try to trade. They will get lucky for a while, putting up some nice returns at first. Then, they will blow a hole in the account with one big loss. Their percentage of winners versus losers will still be impressive, but their account equity will be severely damaged.

People actually teach so-called trading techniques that promise many consecutive winning trades. I have heard promises of twenty consecutive winners, fifty consecutive winners and more. This would be compared to flipping a coin fifty times with the expectation that the coin will land with the ‘head’ facing upward every single time. Not only is this trader almost guaranteed to lose money in the long run, but to add insult to injury, he or she actually paid someone to learn techniques that are sure to result in losses.

The Lesson: If it sounds too good to be true, it probably is too good to be true. Avoid charlatans who use a percentage of winners as a sales pitch; it is a sure sign that they do not know anything about trading.

The IB Relationship

People often ask me which trading platform I use. It is an enough innocent question, but one which I am reluctant to answer because there are certain relationships in this business that are designed to benefit brokers and the people who send new trading accounts to them. In fact, this relationship benefits everyone except you, the trader.

As a reasonably well-known trader, trading instructor and author, I am often approached by Forex market makers who would like me to drive some business their way. In return for referring customers to open accounts, the broker offers to give “rebates.” In other words, a piece of each trade – usually part of each round turn commission – that is generated by you, the trader.

Here is the problem. What if that broker is not the best broker choice for you, the trader? The market maker benefits by gaining your account and the referring agent benefits via rebates. Everyone benefits except the person who has chosen his broker based not on what is best for him, but based on what is best for everyone else!

It gets worse – because the referring agent makes money every time you place a trade, he may try to convince his traders to ‘churn’ their own accounts! This could be done under the guise of ‘trading lessons.’ I have heard of a referring agent who offered trading lessons for free; the only thing the trader had to do was open an account at broker XYZ. Then following the referring agent’s ‘advice,’ the clients would unknowingly churn their accounts. This created rebate income for the referring agent, gained customers for the market maker – everyone benefited except the traders, who almost certainly lost money because they overtraded their accounts.

One broker representative used to call me every week to try to convince me to send my trading acquaintances his way. Here is an approximate recreation of part of our last conversation:

Broker Guy: “Mr. Ponsi, you could make an awful lot of money if you refer your clients to us!”

Ed: “Sure, but what about the clients? Isn’t it an inherent conflict of interest to refer someone to a brokerage just to collect rebates?”

Broker Guy: “Yeah, but you could make an awful lot of money!”

The Lesson: Be careful. If someone tries to steer you toward a particular brokerage firm, find out why. That individual could have an existing relationship with the broker that allows him to collect rebates. If that is the case, any advice given by that individual would be suspect.

Beware the Back Tester

There is nothing wrong with backtesting a strategy, per se. In fact, backtesting can be a valuable tool in strategy development when used properly. However, some unscrupulous operators have appropriated this strategy development tool and turned it into a weapon for use against an unsuspecting trading public.

Backtesting is the process of optimizing a trading strategy using historical data. Traders backtest strategies to determine how well they have worked in the past with the assumption that what has worked in the past will continue to work in the future.

Since markets are not static and are constantly evolving and changing, backtesting is not a panacea. The past does not equal the future. As markets change, good traders adapt and the best traders are the ones who adapt quickly.

Because we know what has occurred in the past, it is easy to create strategies that would have been highly successful in the past. Since we cannot turn back the clock and trade in the past, these strategies are limited in their usefulness. This has not stopped some individuals from marketing these over-optimized, backtested strategies as current and viable money making opportunities.

One individual allegedly solicited funds from unsuspecting investors by misrepresenting backtested returns as actual returns. This person is currently the subject of a CFTC complaint for allegedly having “engaged in the fraudulent solicitation of customers by misrepresenting his past performance.”

Other unscrupulous individuals attempt to sell backtested strategies to the unsuspecting, using impressive sounding hypothetical returns as a sales tool.

Whenever someone tries to impress you with the alleged returns of a strategy, be sure to ask that person if the results are actual or hypothetical. Too many people assume that hypothetical returns are actual returns, but this simply is not the case.

Hypothetical returns are not created from actual trading and are usually the result of backtesting. Now that we know how easily one can create impressive results from mere backtesting, it becomes apparent that we should never be overly impressed with hypothetical results.

One day, far in the future, perhaps mankind will finally perfect the time machine. If that should occur, over-optimized backtested strategies and hypothetical returns will become valuable indeed. Until then, since we cannot trade the past, the usefulness of these tools is severely limited.

The Lesson: While backtesting can be an effective tool, it is not a guarantee of success. Avoid scam artists who cite hypothetical returns in an attempt to sell a trading strategy or signal software.

I hope that you have found this article to be informative and helpful. It is much easier to drive down the highway to success if you know where the potholes are located.

[Mario's note: Ed Ponsi's mentorship helped me avoid many pitfalls of Forex Trading and breakthrough to 100+ pip wins per trade. And this March 2010, the legendary trader is coming to Singapore to personally coach 50 serious individuals into world-class forex traders through his Advanced Mentoring Program. Click here to find out more at the preview free-of-charge.

Ed Ponsi is the President of EdPonsi.com and FXEducator.com. He is a dynamic public speaker who has appears regularly on CNBC, CNN and Fox Business Network. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders and individuals of all levels of skill and experience.His book, Forex Patterns and Probabilities, is the #2 Best-Selling Forex Book of All Time.]

« Older Entries