Archive for the ‘State Of Mind’ Category

The 3 Laws of Successful Trading

June 29, 2010 by · 4 Comments
Filed under: Money Management, Press Release, State Of Mind, Strategies 

(This is an article I wrote for “Your Trading Edge” in the June 2010 issue)

Having had the privilege of speaking to audiences about FX trading worldwide, I have noticed a common question: “What is the best strategy to trade forex?”

Each time I hear the question, I can’t help but smile. After all, that was my biggest question when I first started trading forex. It’s almost always, “Give me the strategy first, and we’ll talk about trading later!”

In this article I hope to shed some light on successful trading, and how we can all get there. Let’s start with the definition of a successful trader. The benchmark of a successful trader is that he must be consistently profitable.

Notice the word ‘consistently’. I’m never impressed when I hear someone is “making 500 per cent in a month”. Don’t get me wrong – these are amazing results; but any trader worth his salt must know that his game plan is to stay consistently profitable. It seems inevitable that the few who make exorbitant returns in one month get washed out the very next month, because they probably took on (and continue to take on) excessive risk.

Remember, you might be able to make 500 per cent a month for a particular month, but if you lose only 100 per cent any month, you are out of the game forever.

The Three Laws

How does one become ‘consistently profitable’ in the forex market? I would like to share my three laws of successful trading. They are not mutually exclusive; rather, they must go hand-in-hand. They are:

  • Strategies
  • Money management
  • State of mind

Strategies

There are four basic strategies for profiting from the forex market: trending, ranging, breakout and news release strategies.

Trending strategy
A trending strategy is employed when the market is clearly in an uptrend or a downtrend. When the market is in an uptrend, go ‘long’. If the market is in a clear downtrend, go ‘short’. This is, by far, the most popular method of banking profits in the forex market. As the saying goes: ‘The trend is your friend until it bends.’

Ranging strategy
A range occurs when the market is trading in a channel – between a floor and a ceiling. The price seems to bounce repeatedly between these two areas, called support and resistance. For this strategy, traders tend to go short near levels of resistance because buying pressure succumbs to selling pressure, hence pushing the price down. Conversely, traders execute buy, or long, orders near areas of support because selling pressure succumbs to buying pressure, which pushes prices up.

Breakout strategy
A breakout strategy is employed when prices finally break out of a trading channel and head either up or down. Momentum is greatest on breakout points; hence traders tend to capitalise on these specific movements by going long once prices break upwards from a trading range, or short once prices break downwards from a trading range.

News release strategy
I know a number of traders who trade exclusively around the news. Two of the most popular news announcements are interest rate changes from the G7 countries and the Non-Farm Payrolls from the United States on the first Friday of every month.

Because there is no telling which way the market is going to react once the news is announced, I do not advocate trading around the news for new traders. Markets tend to be irrational, and this is not the behaviour you want to experience when you have just begun your journey.

Another downside to trading around ‘hot’ news is that brokers have a tendency to widen their pip spread during these times. Spreads can easily widen to 20 pips, regardless of whether you go short or long, during this volatile session. Be mindful of this the next time you feel like trading on a ‘juicy, piece of news.

Money Management

Much can be said around the topic of money management; but I’d like to focus on just one aspect: risk. In the world of retail forex trading many promising traders are still oblivious to one of the biggest pitfalls of trading: the tendency to take on too much risk.

Sometimes traders just do not understand how much risk is too much. The golden rule is never to risk more than one to five per cent of your capital on any trade. In fact, I know many professional traders who consider five per cent to be too much. Some of them never go beyond two per cent.

What does this mean, specifically? If you have a trading account of $US10,000, a two per cent risk means that you will not lose more than $US200 if your stop loss is hit.

If we assume your stop loss is hit, then for your next trade you would begin with $US9,800 capital. It is hard to imagine anyone blowing up his or her account with such tight rules; but the sad fact is that traders are unaware of how they should practice prudent money management.

Here’s an example to drive home the absolute importance of money management. If you start with an account of $US10,000, you would have $US5,000 left if you blew off 50 per cent of your account. The real question is how much you would have to make in order to bring your account back to the break-even level of $US10,000.

The answer, of course, is 100 per cent. In fact, the statistics are not pretty (see figure 1).

We are often reminded: “Amateurs are concerned with how much they can make. Professionals are concerned with how much they will lose.”

State of Mind

State of mind concerns a trader’s thoughts and emotions. It is the component that will present itself as by far the biggest stumbling block to a trader’s success. Four human characteristics – fear, greed, hope and ignorance – will always be a part of every trade.

Imagine you have just completed your ‘apprenticeship’ trading the demo account and you are now ready to trade live. The first opportunity opens up. It’s time to make big bucks. However, when it’s time to execute the trade, you somehow freeze up. Your finger just can’t find the energy to click the mouse. This is fear. You then watch in horror as your trade (which you didn’t take) goes on to register a win!

At your next trade, you double your lot size. This is greed. You double your lot size because you want to win back the money you left at the table by not taking the first trade. As Murphy’s Law would have it, this trade is now heading towards your stop loss! You then do the unthinkable – you remove the stop loss. This is ignorance. You remove your stop loss because you are giving the trade some ‘breathing space’ to reverse and, you hope, register your first win. Sound all too familiar?

I hope (no pun intended) that you now see that all three laws – strategies, money management and state of mind – must come into play for you to achieve any degree of success in trading. In fact, if we assume that the three circles make up 100 per cent of a trader’s success, then they can be divided as follows:

  • Strategies: 15%
  • Money management: 30%
  • State of mind: 55%


Strategies (15%)
Even when your strategies work, it is a fact that they account for only 15 per cent of your success in trading.

Money management (30%)
Money management is twice as important as strategy because if you take on more risk than you are allowed, you put yourself in a position where your account can be badly damaged. Remember, it takes more effort to recover an account that has a significant drawdown.

State of mind (55%)
And state of mind is twice as important as strategy because everything rises and falls on the way you, the trader, execute your plan.

Strategies and money management can be taught. Strategies are what to do. Money management is how much to do. However, state of mind -– thoughts and emotions – is difficult to control. Humans are emotional creatures and money is an emotional topic.

In summary, the three laws – strategies, money management and state of mind – must work in harmony before you can be consistently profitable in the forex market.

(Download the PDF version of the article here)

http://www.fx1academy.com/doc/3_Laws_to_Succesful_Trading.pdf

7 Habits of Great Forex Traders

May 25, 2010 by · 8 Comments
Filed under: Press Release, State Of Mind 

This is an article I wrote for Smart Investor in the May 2010 issue:

By definition, a habit is an acquired pattern of behaviour.

There are many “kinds” of habits, both good and bad. Some of these include:

1)    Over-eating
2)    Neglecting yourself
3)    Being a workaholic
4)    Chewing your nails
5)    Negative thinking
6)    Being late
7)    Blaming others

To set the record straight, I would classify the above as “bad habits.” The antithesis of the above list would thus fall in the category of “good habits.”

As an example, negative thinking vs. positive thinking, or being late vs. being punctual.

Here’s an interesting question – how do we get into the momentum of developing habits, good or bad?

Take a look at the graph below:


From the graph, it is suffice to say that ACTIONS, repeated over a period of time, would develop into habits.

We can go further by saying that “positive actions” repeated over a period of time would develop into good habits, while “negative actions” repeated over a period of time would develop into bad habits.

Here’s a classic example.

In the book “The French Paradox,” the author explains how the French live longer because they drink a glass of red wine a day. We could classify this as a good habit.

Taken OUT of context, drinking a bottle of red wine in a day could be passed off as a good after-dinner celebration. Drinking a bottle of red wine a day everyday, for an extended period of time, would border on alcoholism – a bad habit. You get the picture.

Habits, good or bad, apply to all disciplines in life. Let’s take a look at how habits apply to a discipline where my passion lies – Forex Trading.

Over the years, I have found that the following SEVEN habits, above all else, keep a trader grounded and more importantly, consistently profitable.

Let’s have a look at them:

Habit #1: Know your reasons for taking every trade

All too often, many traders take a swing at the markets because they “feel” it is a good price. The most common scenario where this occurs happens when a trader goes “long” after the price drops a considerable amount. The train of thought is “Woa! It has fallen quite a bit already! It’s bound to reverse!”

Let’s look at an example.

From 1st Dec 2009 to 31st March 2010, the EUR/USD plunged from a high of 1.51 to a low of 1.32. A stunning move of almost 1,900 pips in just 4 months.

What if you went “long” after EUR/USD dropped a “considerable amount” of 500 pips? Or 700 pips? Or even a mammoth 1,000 pips? Your account would have been ravaged.

Here’s the key: Have a reason for entering every trade. This means you MUST follow a trading plan. Never enter a trade based on “gut-feel.”

Habit #2: There’s always the next trade

In the course of my trading career, I have come across traders who always appear to be on tenterhooks. They get anxious and frustrated because they “missed a trade,” and rue the day they “should” have been at their laptop to execute the all important trade.

Look, the Forex Market trades about USD4 trillion a day, making it the largest financial market in the world. There’s ALWAYS the next trade. It’s no use beating yourself up for missing a trade. If it’s any consolation – who said the missed trade would surely register a win anyway?

Habit #3: Always put a stop loss

This habit is well turning out to be my mantra when I coach my students. I sometimes joke with the class by saying that if I ever hear of ANY student not putting a stop loss immediately after entering a trade, I would personally fly back from wherever I am and smack their heads!

Friends take my word – the biggest reason why traders blow up their account is the habit of taking on excessive risk. Don’t fall into that trap. Always put a stop loss. Make it a habit today.

Habit #4: Don’t take revenge over losses

You have just completed your “apprenticeship” in trading the demo account and you are now ready to trade LIVE. The first opportunity opens up. It’s time to make the BIG BUCKS.

You take a trade and it hits your stop loss. You take the second trade and it hits your stop loss too.

You get angry. This is not how it’s supposed to be.

At your 3rd trade, you now TRIPLE YOUR LOT SIZE because you want to “win back” the money which the Forex Market has so cruelly taken away from you.

Sounds all too familiar doesn’t it?

Don’t fall into the “revenge” trap. The Forex Market will make you pay heavily for it. The key here is to not take things personally. No one wins every trade. What you should do is to step away from the computer and re-analyse your trading plan.

If everything is going according to plan, then great! Accept the fact that losses are part of the game.

Habit #5: Maintain a trading journal

This is a tough one, and not many traders do it. Those who do, profess of its immeasurable effectiveness.

A trading journal, among other things, should document your decisions before you take a trade AND note down your thoughts and emotions after the result is achieved. Here’s a short list of what a trading journal should encompass:

1)    Date and time of trade
2)    Currency pair (e.g. EUR/USD, USD/JPY or GBP/CAD)
3)    Action/Strategy used (long or short)
4)    Risk (how many lots, stop loss)
5)    Profit potential (do you have one or multiple profit targets?)
6)    Result (profit/loss)
7)    State (what are your thoughts and emotions? Did you execute it correctly?)

A trading journal is like a road-map. It helps you stay on track. Here’s a question – how would you know if you’re heading in the right direction if you are not documenting your progress?

How would you know if certain “bad habits” have unintentionally crept up on you if you don’t have a framework to measure against? Start maintaining a trading journal today!

Habit #6: Maintain a clear mind

Would it be wise to analyse or enter a trade just after a heated verbal exchange with a friend or family member? What about just after you had a long 14 hour work day where your boss berated you for the things you failed to accomplish?

Certainly not. A clear mind must always be maintained when you step up to the computer. You do not want any emotional distress to cause you to see patterns on the screen that aren’t actually there!

Habit #7: Pay yourself consistently

Is this habit important? But of course.

What is the ultimate purpose of trading? To generate consistent and profitable returns. However, what good is that if you are not enjoying the fruits of the game?

There are many ways to pay yourself in this business. I’ll list a few:

1)     Have a goal to earn 100% of your capital. Then withdraw your initial capital, and continue to trade on the profits generated. This is now essentially a “risk-free” business venture.

2)    After your trading account has grown sizeably, withdraw 20% as profits and leave the rest to be compounded. Ensure that the withdrawn amount far exceeds the amount you might have to pay for wiring fees charged by brokers.

So there you have it. The 7 habits of great Forex traders. How do you instill them into your system? Simple. Maintain these actions for an extended period of time. These actions will then automatically become conditioned habits.

This is when you bloom into a mature trader and become a force to be reckoned with in the trading world.

I’d like to leave you with a wonderful quote:

Winning is not a sometime thing;
it’s an all time thing.
You don’t win once in a while,
You don’t do things right once in a while,
You do them right all the time.
Winning is a Habit.
Unfortunately, so is losing.
~ Vince Lombardi (greatest football coach in history)

Download the PDF version of the article here:
http://www.fx1academy.com/doc/7_Habits_Of_Great_Forex_Traders.pdf

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)

The Power Of Passion & Belief

January 18, 2010 by · Leave a Comment
Filed under: State Of Mind 

Before going into the 81st Academy Awards, the statistics between the 2 biggest rivals looked something like this:

The Curious Case of Benjamin Button: 13 Oscar Nominations


Slumdog Millionaire: 10 Oscar Nominations

At the end of the night, the score cards read:

The Curious Case of Benjamin Button: 3 Oscar WINS = 23% profit!

Slumdog Millionaire: 8 Oscar WINS = 80% profit!

The “underslumdog” had WON convincingly. What made the triumph all the more jaw-dropping was that Benjamin Button had a behemoth budget of USD167 million (compared to Slumdog’s USD15 million) AND it boasted MEGA star appeal in the form of Brad Pitt. There were NO stars in Slumdog at all.

So what happened?

Here’s an excerpt from Christian Colson’s (Slumdog film producer) acceptance speech during Oscar Night:
“Together we’ve been on an extraordinary, extraordinary journey. When we started out, we had no stars, we had no power or muscle. We didn’t have enough money really to do what we wanted to do. But what we had was a cast and crew who were unwavering in their commitment and whose talents are up on the screen for all of you to see. We had a shared love for the extraordinary city of Mumbai, where we made the movie. Most of all, we had passion and we had belief and our film showed that if you have those two things, truly anything is possible.”

What fine words. Anything IS POSSIBLE when you have passion and belief.

Here’s a couple more examples for you to chew on:
1) Andrea Bocelli

Bocelli lost his sight when he was 12. Went on to become one of Italy’s finest singer/songwriter/producer. To date, he has recorded 7 complete operas and has SOLD OVER 65 MILLION ALBUMS. Bocelli is now the biggest-selling tenor of all time, outstripping even Pavarotti.

2) Manny Pacquiao

30 year old Filipino boxer. Was living off the streets as a kid. Today, he is rated by Ring Magazine as the #1 pound-for-pound boxer in the world. He took home USD15 million in his last fight against Ricky Hatton.
These are the 2 qualities that can give you ASTRONOMICAL SUCCESS.

I’ll share with you another secret. Listen.

PEOPLE BUY INTO PASSION.

People are curious to “have what you have” when they see you living with passion.

What’s your level of passion and belief when you trade FOREX?

Do you truly see it as a tool for wealth creation and human evolution?


“For those who believe, no explanation is necessary. For those who don’t, none will suffice.” – Joseph Dunninger