Forex trading is a risky business. This chapter will explain the usage of Stop Loss
(SL) and Take Profit (TP) orders. These are used for hedging your risks and
rewards, realizing your profits and minimizing your losses.
eToro places an automatic Stop Loss order on all your trades to prevent you from
losing more than you’ve invested. If the rate of your open trade drops below
what’s covered by your investment, the trade is closed by the automatic Stop
Loss.
This means the maximum amount you can lose on a trade is almost always
limited to the initial investment of the trade.
Still, there is no reason why you should wait until you lose your entire investment
to close the trade. By setting a Stop Loss order you make sure that the value of
your trade doesn’t drop below a certain level. This way you control the maximum
amount that you are willing to lose on a trade, without having to monitor each
trade around the clock.
Take Profit orders are similar to stop loss orders, only referring to profits. Take
Profit orders make sure that once your trade reaches a certain level of profit it will
be closed.
For instance, imagine that you’ve opened a Long EUR/USD trade for at the rate of
1.5400. After a few hours the rate rises to 1.5500, but an hour later drops to
1.5300. Without a Take Profit order, you might miss the rise in the rate, and end
up with a loss on your hands.
If you had set a Take Profit order, the potential profit of the trade would have
been realized, without you having to monitor the trade around the clock.
Remember, Stop Loss and Take Profit orders are very simple tools that can
make the difference between a successful trading career and a big hole in
your pocket. Consider using these orders with every trade that you make.
Friday, September 18, 2009
Top forex swings in history
The foreign exchange industry exists whenever one currency is traded for another. It is by far the largest market in the world in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The market is unique due to several factors including trading volume, the extreme liquidity of the market, geographical dispersion, the 24 hour trade day, the large number and variety of traders in the market and the variety of factors that affect exchange rates.
Among these factors that affect exchange rates is the news. This is one of the greatest advantages that the forex market has over all of the other markets; there is no such thing as insider trading. All a trader needs to do in the forex market is to stay abreast of the news, develop an opinion and apply that opinion to the markets. Some of the best currency trades in the world have been placed by investors following the news and taking advantage of the information given to them.
During the summer of 1992 there was wide spread speculation that England was going to be rejected from the European Monetary Union, which would severely hurt the English pound. George Soros, founder and head of one of the largest hedge funds in the world, The Quantum Fund, took advantage of England's poor fortune, by placing a ten billion short position in the market. The Bank of England attempted to stabilize the pound's value by intervening and depleting all of their foreign currency reserves. Despite their efforts, on September 16, 1992, known around the world as Black Wednesday, the fight was over and the pound plummeted. England was forced to withdraw from the European Monetary Union and in one day, Soros earned $1 billion. He is now known as the man who broke the Bank of England.
Stanley Druckenmiller, former money manager for George Soros, now runs Duquesne Capital which he founded in 1981. In 1989, he developed one of his greatest ideas. While working at George Soros's Quantum Fund, Druckenmiller bought two billion German marks. He believed that due to the falling of the Berlin wall and the reunification of Germany, the deutschemark was set for a huge rally. That one idea made him a very rich man, with the deutschemark climbing enormously in value over the next few years. Druckenmiller's exact profits on this investment remain unknown, but the Quantum Fund posted returns of over 60%.
Andy Krieger, once a star at Banker's Trust before resigning to work for no other than Mr. George Soros, is best remembered in New Zealand. During the U.S. stock market crash of 1987, traders were buying up any currency that was appreciating against the dollar, the most popular being the New Zealand dollar or the "kiwi" as it is known in the currency market. Mr. Krieger, knowing that this rally could never last and believing that the kiwi was one of the most overvalued currencies in the market, shorted 200 million kiwi which is more than the entire money supply of New Zealand. The currency not surprisingly buckled under this pressure, allowing Kreiger to cover his positions and walk away with a huge profit. .
All of these trades have one common underlying factor. Each of these traders had an opinion that was based on pure economic, fundamental data. Due to markets being more efficient and traders being more regulated, it would be nearly impossible to replicate any of these trades, however it would be rather easy to replicate the foundation on which each and every one of these trades were based.
Among these factors that affect exchange rates is the news. This is one of the greatest advantages that the forex market has over all of the other markets; there is no such thing as insider trading. All a trader needs to do in the forex market is to stay abreast of the news, develop an opinion and apply that opinion to the markets. Some of the best currency trades in the world have been placed by investors following the news and taking advantage of the information given to them.
During the summer of 1992 there was wide spread speculation that England was going to be rejected from the European Monetary Union, which would severely hurt the English pound. George Soros, founder and head of one of the largest hedge funds in the world, The Quantum Fund, took advantage of England's poor fortune, by placing a ten billion short position in the market. The Bank of England attempted to stabilize the pound's value by intervening and depleting all of their foreign currency reserves. Despite their efforts, on September 16, 1992, known around the world as Black Wednesday, the fight was over and the pound plummeted. England was forced to withdraw from the European Monetary Union and in one day, Soros earned $1 billion. He is now known as the man who broke the Bank of England.
Stanley Druckenmiller, former money manager for George Soros, now runs Duquesne Capital which he founded in 1981. In 1989, he developed one of his greatest ideas. While working at George Soros's Quantum Fund, Druckenmiller bought two billion German marks. He believed that due to the falling of the Berlin wall and the reunification of Germany, the deutschemark was set for a huge rally. That one idea made him a very rich man, with the deutschemark climbing enormously in value over the next few years. Druckenmiller's exact profits on this investment remain unknown, but the Quantum Fund posted returns of over 60%.
Andy Krieger, once a star at Banker's Trust before resigning to work for no other than Mr. George Soros, is best remembered in New Zealand. During the U.S. stock market crash of 1987, traders were buying up any currency that was appreciating against the dollar, the most popular being the New Zealand dollar or the "kiwi" as it is known in the currency market. Mr. Krieger, knowing that this rally could never last and believing that the kiwi was one of the most overvalued currencies in the market, shorted 200 million kiwi which is more than the entire money supply of New Zealand. The currency not surprisingly buckled under this pressure, allowing Kreiger to cover his positions and walk away with a huge profit. .
All of these trades have one common underlying factor. Each of these traders had an opinion that was based on pure economic, fundamental data. Due to markets being more efficient and traders being more regulated, it would be nearly impossible to replicate any of these trades, however it would be rather easy to replicate the foundation on which each and every one of these trades were based.
OCO Order
To Begin - Click on the bid or ask price of the particular currency that you want to trade. A window will appear which is labeled “Open Order for (the abbreviation of the currency)”. Fill in the boxes for Operation, Account, and Units in the same way that you would for a market order.
Next, click on the bullet entry button labeled “OCO”. There will now be two entry fields where the single rate box was located, with one labeled “Stop” and the other labeled “Limit”.
Input the desired rates at which you want your Stop or Limit to be triggered. Both boxes must be filled in for the order to be accepted, however, only one of the rates will be used to trigger or execute an order. If the Limit order is executed first, the stop will be cancelled and vice versa.
The Second Step - To cancel the order at any time, select the “cancel” button located on the bottom middle of the window. To proceed, select “place order” and a window labeled “Confirmation” will appear. This does not mean your order was executed. This window asks you to confirm that all of the information entered regarding the trade is correct. If the information is correct and you want to proceed with the trade, select “yes”. Selecting “no” will take you back to the previous window.
After “yes” has been selected there are three possible outcomes:
1. A box will appear indicating that you do not have enough funds in your account for the transaction.
2. A box will appear indicating that the OCO order has been incorrectly entered. This may occur if the rates entered for the Stop and Limit levels have been reversed.
3. If you have sufficient margin and your order was entered correctly, it will be displayed in the “Open Orders” window. This may take a few seconds depending on the speed of your Internet connection.
The order will remain in the “Open Orders” window until cancelled or executed. If executed, the order will disappear from the “Open Orders” window and the necessary changes will be reflected in the “Open Trades” window.
Next, click on the bullet entry button labeled “OCO”. There will now be two entry fields where the single rate box was located, with one labeled “Stop” and the other labeled “Limit”.
Input the desired rates at which you want your Stop or Limit to be triggered. Both boxes must be filled in for the order to be accepted, however, only one of the rates will be used to trigger or execute an order. If the Limit order is executed first, the stop will be cancelled and vice versa.
The Second Step - To cancel the order at any time, select the “cancel” button located on the bottom middle of the window. To proceed, select “place order” and a window labeled “Confirmation” will appear. This does not mean your order was executed. This window asks you to confirm that all of the information entered regarding the trade is correct. If the information is correct and you want to proceed with the trade, select “yes”. Selecting “no” will take you back to the previous window.
After “yes” has been selected there are three possible outcomes:
1. A box will appear indicating that you do not have enough funds in your account for the transaction.
2. A box will appear indicating that the OCO order has been incorrectly entered. This may occur if the rates entered for the Stop and Limit levels have been reversed.
3. If you have sufficient margin and your order was entered correctly, it will be displayed in the “Open Orders” window. This may take a few seconds depending on the speed of your Internet connection.
The order will remain in the “Open Orders” window until cancelled or executed. If executed, the order will disappear from the “Open Orders” window and the necessary changes will be reflected in the “Open Trades” window.
CFD Trading
In the present day, there are quite a few options that can allow you to trade from commodities, stocks, CFD as well as bonds. A Contract for Difference (CFD) is growing in popularity as a preferred method to trade the stocks. It allows you to heighten up and endows with all the facilities where you can play safe in the market. However, a lot of traders have started realizing that CFD is the most attractive of all with the fact that you can trade all 24 hours of the day with six days per week. It also happens to be the highest liquid market in the world and is known as FOREX. Hence, with all the hype that surrounds CFD, there are a lot of things you need to know about CFD.* As far as the CFD trading is concerned, you would have to know how to trade them and where to trade them. It is mandatory to know which companies would trade the CFDs. This is by far the fastest trading tool in the world and for more information on the trading you can always refer to the Broker or have a look at the CFD FX report. There are quite a few applications that can help you learn better about CFD trading.* You also have to know about the latest CFD terminology such as the contracts of all kinds. It is extremely important to know all the terms before you actually start trading in the market.* The next step is to look for the broker. Getting hold of the right broker is as important as winning the trade itself. You can do your own research and practice on all those sites that help you create a free demo account. Such a way you wouldn’t be spending money as well. At the time of picking the right broker, you need to understand that you have to check for the kind of spread they present and they way in which they are regulated. You can also know about what kind of assistance they offer and what sort of charting packages are being offered by them. Stay in pace with the CFD FX Report that has the names of all the CFD brokers and they are highly appreciated in the report.* Lastly, find out whether you are going to trade yourself or allow the robot to do the procedure. The robots have their own pros and cons and it becomes necessary to assess your risk profile and then implement the robots.These are just a few things that you need to keep in mind before getting started on the CFD trade. It is important to know that the educated trader is usually a better trader. So get all the tools that can educate you such as the educational sites, free charts and demos.
Effective Forex Trading Techniques
A lot of Forex trading systems that are being used today by a majority of the beginners are focused towards the short term gains and they allow you to take minimal risk and promise elevated profits as well as claim to generate a steady income out of it. So here are some ways which are proven to work. We have listed the biggest challenges faced by a Forex trader in the present day:There are loads of individuals with a different skill set, different opinions, who belong to different knowledge backgrounds and who trade differently. Honestly, it is almost impossible to predict the moves in Forex trading system. With all the varied elements involved in Forex, it is simply impossible to know what’s going to happen in the next hour of the market. Well, as a fact, all the volatility that is involved in the short term frame is supposed to be random and you cannot get the odds on your advantage and on the other hand, you cannot win the long term as well.A majority of the Forex strategies or the systems that are being purchased today do not help you heighten the profits; it’s that element of luck that can bring profit to most of the people. Quite a few would show the results of the previous tests and predict that you can get a positive outcome from the trade if the tests were adjusted accordingly.It has been proved that a lot of these systems come with a great sales pitch that can attract people and also formulate good case studies. This is a gimmick to bring more people on the trading bandwagon. However, there are some authentic programs that can help you win, but it’s not all about switching on the computer and getting started with the bids. It requires a lot of skill and knowledge on the subject.All you need to do is get the odds in your favor and then once you are able to do this, you need to hold on to that strategy for long term. Follow the current trends in the market and once you apply a combination of your techniques along with the correct market perception, you would be able to gain huge profits out of the Forex Trading system.Lastly, it would be advisable to avoid the Forex scalping. It is mandatory to get the right Forex education and if you really want to enjoy the long term benefits of the trade, you need to upgrade your trading skills constantly. There are a lot of sources on the internet that provide free learning sessions on the subject.
Global Forex Trading and great investments
The global Forex market which is widely known as the foreign exchange or the currency trading market has become one of the most popular markets to deal with in the last few years. With the increase in the global economy, a lot of people have started trading in Forex. Prior to this, the economy was not spread over all the countries. It is now possible for people to convert large sum of money into different currencies. This market is the largest in the world and includes all kinds of investors including banks, other financial institutions and other individual investors. The daily volume of trade in the forex market exceeds four trillion dollars and hence it appears to be quite a lucrative market to venture in.There are quite a few things that would separate the forex trading from the conventional markets. The trading volume differs greatly and then follows the other factors such as the exchange rates and lower profits. Hence a lot of people are turning towards the global foreign exchange market to beat the competition and this market has a demonstrated track record of its increase since 2001.The other way in which the forex market differs from the traditional market is that here the inter-bank market is at the top of the pyramid. Unlike the stock options, the investors to not have a same access to all the prices. It differs greatly. As the level of access is decreased, the difference between the asking price and the bidding price also increases. Hence it is still possible for someone with lower access to earn large amounts of money.At the same time as there is no central market involved in forex, there are no specific regulations that control the exchange. Global trading system in forex includes quite a lot of countries and hence compiles an intertwined market. Therefore there is not much of the single trading system here considering the scores of different prices and rates. These differences in the exchange have a direct effect on the gross domestic product, the inflation rates as well as the trade and the budgets of the economic transactions.There are a lot of people who plunge into the forex trading market in order to invest large sum of money and with the intention of making more money from it. This financial market is still on a rise, despite the recessive economy all around the world. A lot of new invest
What is Forex Trading ?
Forex trading also known as currency trading refers to a series of transactions on foreign exchange markets used by investors for speculative or hedging purposes. A basic forex transaction consists in the simultaneous buying and selling of one currency against another. Currencies are thus traded in pairs (majors or crosses) for instance: the Euro against the US Dollar (EUR/USD) or the British Pound against the US Dollar (GBP/USD). For example, buying the pair EUR/USD at 1.3305 means that you need 1.3305 USD to buy one euro.Trading forex can also be described as speculating on the direction of one currency against another. You make profit when the market moves in your favor and you lose if the market moves against you. For example, you'll buy EUR/USD if you think that the Euro will strengthen against the US Dollar. Conversely, if you think the Euro will weaken compared to the US Dollar, then you will sell EUR/USD.Although it may seem easy at first glance, there is much more to forex than meets the eye. Predicting market moves is a complicated matter and that's why Finotec has its own online forex Education Center where you can learn Forex. With Finotec, you may also practice online trading by opening a Forex Demo Account. The simulation platform will allow you to trade with virtual money in real market conditions. Once you have acquired the skills to trade, use our wide range of tools and indicators to make wise and informed decisions for successful online forex trading.Forex: the largest financial market!The investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor could now sell the 1000 euros in order to receive 1208.30 dollars. Therefore, the investor would have USD 122.60 more than what he had started one year earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a "risk-free" investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.
What is Forex Trading ?
Forex trading also known as currency trading refers to a series of transactions on foreign exchange markets used by investors for speculative or hedging purposes. A basic forex transaction consists in the simultaneous buying and selling of one currency against another. Currencies are thus traded in pairs (majors or crosses) for instance: the Euro against the US Dollar (EUR/USD) or the British Pound against the US Dollar (GBP/USD). For example, buying the pair EUR/USD at 1.3305 means that you need 1.3305 USD to buy one euro.Trading forex can also be described as speculating on the direction of one currency against another. You make profit when the market moves in your favor and you lose if the market moves against you. For example, you'll buy EUR/USD if you think that the Euro will strengthen against the US Dollar. Conversely, if you think the Euro will weaken compared to the US Dollar, then you will sell EUR/USD.Although it may seem easy at first glance, there is much more to forex than meets the eye. Predicting market moves is a complicated matter and that's why Finotec has its own online forex Education Center where you can learn Forex. With Finotec, you may also practice online trading by opening a Forex Demo Account. The simulation platform will allow you to trade with virtual money in real market conditions. Once you have acquired the skills to trade, use our wide range of tools and indicators to make wise and informed decisions for successful online forex trading.Forex: the largest financial market!The investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor could now sell the 1000 euros in order to receive 1208.30 dollars. Therefore, the investor would have USD 122.60 more than what he had started one year earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a "risk-free" investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.
Why People Learn Forex Trading
"I realized several years back the FOREX is the best opportunity available to every day people like me to build a sound financial future. See you in the trade rooms.""2006 is the year of financial freedom for me - "I can feel it in my bones." I know it's coming and I know that forex trading is the key. Once I learn to master this skill my life never be the same - none of our lives will.""I'm 18 years old, and im interested in doingcurrency trading. I have no previous experience in FX training, trading, or any other type related to this, but i hope to catch on quickly. I've wanted to invest in real estate since I was 14, and have studied it on and off since then, but I think this is agreater financial and career establishing opportunity, and im trying to learn as much as I can.""I have no experience in the financial world I don't even balance the check book! BUT I do know that I can do this and so can you!! So far I have been successful...I promise its not hard.""I come into this enterprise with miniscule experience as a trader and just enough knowledge about fx to lose my shirt in 5 minutes or less. I’m here to learn a workable system for foreign exchange trading. I like the concept of being ableto make money from anywhere I can take my laptop.""I am new to forex trading. My expectation in this course is to build a base of understanding and knowledge of the forex exchange. My goal is to learn how to trade effectively to retire from my 9-5 within the next three years if not sooner. My challenge is to leave emotions out and follow the fundamental rules to become a successful trader.""I have been with FXT since February 2005 and have enjoyed the program very much. My wife and I have been busy learning how to be successful traders over the last few months. Our goals are to become financially successful so we can provide more for our church and spread the Lord's word acorss the world. May God bless us all abundantly through this wonderful program.""I am new to Forex Trading. I've played the HYIP game and I look forward to learning a skill that will provide me the opportunity to be successful based on how I apply what I have learned. Success is a choice and I plan on being successful.""I am a retired airline pilot who has done a little commodity trading in the past, however, have always been very intrigued by the FX market. Now that I have completed the beginner's and advanced training from FXT, I am doing a review with the new Interactive Training Modules. I'm pleased to report that I am already having success in live trading, and am VERY excited about the FX market and the FXT products and business!What a fantastic opportunity!""I am looking forward to learning and trading the forex market. Some years ago, I traded options with some success, but discovered the forex market could be more rewarding. So looking forward to learning.""I joined one month ago and have been in corporate chat rooms. I am up over 130 pips and really just learning! I spent over $7000 on other systems and training and couldn't make money. FXT is FANTASTIC!""I found out about forex while looking for a new career. I have bookkeeping experience but thats about it! I love the concept of this type of trading and look forward to learning the skills and "enjoying the game"."I'm very excited to learn about Forex. I want to build my skills so that I can generate enough from Forex to raise my kids and sustain a nice life style as well as have time to help others.""I started with FXT about 3 weeks ago and I am excited to have an opportunity to learn how to be a FX Trader the right way. At 58 I feel like I am going to college for the first time, but my mentor has made me feel quite comfortable here. I feel I have finally found a home with FXT and working in the FX currency market.""I am looking forward to opportunity and education that is offered by FxT. The interaction that the business provides through this learning center and the potential for positively changing your life is exciting.
Forex Trading Rollovers
Rollovers occur when a transaction continues for more than two days, and the Forex trading order is automatically rolled over to the next day.Because the Forex trading market is a spot market, where trandsaction are made instantaneously, trades must settle in two business days. But don’t worry… You don’t have to sell everything after two days! This is exactly why we have the option for Forex trading rollovers.In Forex system trading you have the option of a rollover, so that your transaction will remain relevant for two more days. Forex trading Rollover can happen every two days, so your investment stays indefinitely.Rollover Charges and Interest RatesEvery rollover has a certain transaction cost, which is set according to the Forex site and software you are using. This information needs to be looked over before you invest, so there won't be any surprises.Rollover charges are different according to the currency you invest in, and this should also come into account when deciding how to trade.Forex trading Rollovers occur when the NY trading market closes at 17:00 ET. Traders sometimes earn interests on rollovers. US interest rates, for example, are higher than Japan's, so if you are holding a long USD/JPY you will be able to accumulate interest for the rollover. On the other hand, holding the JPY will means paying interest on the rollover.When the rollover is made, the currency can also move up or down for a few pips, so also take that into account when you notice changes in the Forex currency the day after.
Monday, September 14, 2009
Discipline in Forex Trading and Investing
The one thing I can think of that most affects both trading and investing has to be self-discipline.
Being disciplined is fully 50% of the job of forex trading or of investing. I don't care how good your trading system is, without the discipline needed to follow the system you don't have much of a chance for success in meeting your goals.
It doesn't matter how great a planner or organizer you are, without discipline your plans will most likely fail to bear fruit. Discipline involves self-control, and self-control involves your ego. If you want to succeed, you must learn to trade without your ego getting in the way.
Don't be fooled. A person's self image must be separated from his trading or his investing. When personal self-worth gets tangled up with your business activities, it not only wrecks your best trading or investing intentions, but it also damages your self-esteem.
You hear and read about great traders and investors who have done amazing things. They tell about how great they are. They talk about "The Big" trades they made. They talk about "Big" numbers. It all derives from their oversized egos.
Don't be misled. Sooner or later, there are "Big Downfalls." It goes with the territory.
For a moment, let's look at the results of what a huge ego can do. Due to his oversized ego, Nick Leeson brought down the Barings Bank. Victor Niederhoffer ran his fund into deficit. John Merriweather was so sure his strategies would work that he ended up threatening the health of the entire banking system by betting more than fifty times his capital that he could forecast, without any chance of a loss, the direction of various bond markets.
As we study the examples of these three men, there seems to be a pattern of temporary real success followed by a collapse for themselves and for those caught up in blindly following them.
Here are the kinds of problems that arise from putting your ego into the mix.
- Not putting in stops: You don't want to be proven wrong.
- Hesitation before entry: You want reassurance before you act.
- Overtrading: You want to prove how really big you are.
- Not getting out when you should: You have married your trade and just don't want to get a divorce. Getting out would mean you were wrong.
- Adding to a losing trade: You are making a massive effort to prove you were originally right.
- Grabbing a profit too soon: You want affirmation that you did the right thing.
- Missing an opportunity because you can't pull the trigger on a trade: You are still living with past mistakes.
In my 47 years of trading, I have seen great traders and investors come and go. All too many of them lost everything they had ever made. The great W.D. Gann died a pauper. The legendary Jess Livermore was flat broke when he committed suicide.
I have known dozens of traders who lost money because their egos got in the way.
I agree 100% with the following statement by Marty Schwartz, the great S&P 500 daytrader.
"I've said it before, and I'm going to say it again, because it cannot be overemphasized - the most important change in my trading career occurred when I learned to DIVORCE MY EGO FROM THE TRADE. Trading is a psychological game. Most people think that they're playing against the market, but the market doesn't care. You're really playing against yourself. You have to stop trying to will things to happen in order to prove that you're right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you're right, but to hear the cash register ring."
To that I would add, "trade what you see, not what you think." You cannot afford to get your ego or your opinion involved in your trading activities. Because both trading and investing are uncertain businesses of probabilities filled with uncertain outcomes, a huge ego or a fragile ego can easily get smashed. Defending your ego saps you of energy, distorts your perception, and will eventually destroy your business.
If your self-esteem is connected to your currency trading and investing choices, if it goes up and down with the results of your activities, you and your business are in trouble. Your self-image needs to be strong, not at the mercy of the outcome of your trading or investment choices.
To succeed in the fx markets, you have to have confidence in what you are doing and confidence in yourself. But self-confidence must not become confused with self-image. Remember not to marry a market or a trade. If you see you are not right, be quick to get out. Run your trading or investing as a business. Practice self-discipline. You'll be glad you did.
Being disciplined is fully 50% of the job of forex trading or of investing. I don't care how good your trading system is, without the discipline needed to follow the system you don't have much of a chance for success in meeting your goals.
It doesn't matter how great a planner or organizer you are, without discipline your plans will most likely fail to bear fruit. Discipline involves self-control, and self-control involves your ego. If you want to succeed, you must learn to trade without your ego getting in the way.
Don't be fooled. A person's self image must be separated from his trading or his investing. When personal self-worth gets tangled up with your business activities, it not only wrecks your best trading or investing intentions, but it also damages your self-esteem.
You hear and read about great traders and investors who have done amazing things. They tell about how great they are. They talk about "The Big" trades they made. They talk about "Big" numbers. It all derives from their oversized egos.
Don't be misled. Sooner or later, there are "Big Downfalls." It goes with the territory.
For a moment, let's look at the results of what a huge ego can do. Due to his oversized ego, Nick Leeson brought down the Barings Bank. Victor Niederhoffer ran his fund into deficit. John Merriweather was so sure his strategies would work that he ended up threatening the health of the entire banking system by betting more than fifty times his capital that he could forecast, without any chance of a loss, the direction of various bond markets.
As we study the examples of these three men, there seems to be a pattern of temporary real success followed by a collapse for themselves and for those caught up in blindly following them.
Here are the kinds of problems that arise from putting your ego into the mix.
- Not putting in stops: You don't want to be proven wrong.
- Hesitation before entry: You want reassurance before you act.
- Overtrading: You want to prove how really big you are.
- Not getting out when you should: You have married your trade and just don't want to get a divorce. Getting out would mean you were wrong.
- Adding to a losing trade: You are making a massive effort to prove you were originally right.
- Grabbing a profit too soon: You want affirmation that you did the right thing.
- Missing an opportunity because you can't pull the trigger on a trade: You are still living with past mistakes.
In my 47 years of trading, I have seen great traders and investors come and go. All too many of them lost everything they had ever made. The great W.D. Gann died a pauper. The legendary Jess Livermore was flat broke when he committed suicide.
I have known dozens of traders who lost money because their egos got in the way.
I agree 100% with the following statement by Marty Schwartz, the great S&P 500 daytrader.
"I've said it before, and I'm going to say it again, because it cannot be overemphasized - the most important change in my trading career occurred when I learned to DIVORCE MY EGO FROM THE TRADE. Trading is a psychological game. Most people think that they're playing against the market, but the market doesn't care. You're really playing against yourself. You have to stop trying to will things to happen in order to prove that you're right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you're right, but to hear the cash register ring."
To that I would add, "trade what you see, not what you think." You cannot afford to get your ego or your opinion involved in your trading activities. Because both trading and investing are uncertain businesses of probabilities filled with uncertain outcomes, a huge ego or a fragile ego can easily get smashed. Defending your ego saps you of energy, distorts your perception, and will eventually destroy your business.
If your self-esteem is connected to your currency trading and investing choices, if it goes up and down with the results of your activities, you and your business are in trouble. Your self-image needs to be strong, not at the mercy of the outcome of your trading or investment choices.
To succeed in the fx markets, you have to have confidence in what you are doing and confidence in yourself. But self-confidence must not become confused with self-image. Remember not to marry a market or a trade. If you see you are not right, be quick to get out. Run your trading or investing as a business. Practice self-discipline. You'll be glad you did.
Destructive Patterns in Trading
Before we get into the topic of destructive trading, allow me to explain how psychologists assess whether or not a person has a problem with alcohol consumption. Here are ten questions that a professional might ask in order to assess any kind of substance use disorder, including alcohol abuse:
1) Have you found that your drinking is bringing unwanted, negative consequences?
2) Have you recently felt guilty over the way you have been drinking?
3) Do you find you need to drink more just to get the good feeling?
4) Do you find that your personality changes when you drink excessively?
5) Do you find it difficult to take a break from drinking, even when part of you knows that this would be best for you?
6) Do you find yourself drinking to feel good about yourself?
7) Do you sometimes feel that you cannot control how much you drink?
8) Do you find yourself getting angry when someone close to you questions your drinking?
9) Do you find yourself vowing to limit your drinking, only to slip back into overdrinking?
10) Do you find it difficult to not drink given the opportunity, even when the occasion is not really appropriate?
Now for the topic of destructive trading: Please answer the above questions, but substitute the word “trading” for “drinking”, and substitute the word “trade” for “drink”.
Fear and greed are potent influences on trading, but the greatest trading problems, I find, are addictive in nature. Successful traders really want to trade; they have a passion for trading. Addictive traders need to trade; they have a passion for action and excitement.
An addictive trader will not manage his risk. That is because risk is part of the high.
An addictive trader will not stop trading, even when losing money. That is because action, not profit, is the goal.
An addictive trader will cycle between periods of guilt and responsibility and periods of excess and irresponsibility.
Good traders trade actively. Addictive traders overtrade.
If you see yourself in this profile, do the right thing, before your patterns ruin your career and harm those who depend on you. Get help. You can change. Your trading and your happiness lie in the balance.
1) Have you found that your drinking is bringing unwanted, negative consequences?
2) Have you recently felt guilty over the way you have been drinking?
3) Do you find you need to drink more just to get the good feeling?
4) Do you find that your personality changes when you drink excessively?
5) Do you find it difficult to take a break from drinking, even when part of you knows that this would be best for you?
6) Do you find yourself drinking to feel good about yourself?
7) Do you sometimes feel that you cannot control how much you drink?
8) Do you find yourself getting angry when someone close to you questions your drinking?
9) Do you find yourself vowing to limit your drinking, only to slip back into overdrinking?
10) Do you find it difficult to not drink given the opportunity, even when the occasion is not really appropriate?
Now for the topic of destructive trading: Please answer the above questions, but substitute the word “trading” for “drinking”, and substitute the word “trade” for “drink”.
Fear and greed are potent influences on trading, but the greatest trading problems, I find, are addictive in nature. Successful traders really want to trade; they have a passion for trading. Addictive traders need to trade; they have a passion for action and excitement.
An addictive trader will not manage his risk. That is because risk is part of the high.
An addictive trader will not stop trading, even when losing money. That is because action, not profit, is the goal.
An addictive trader will cycle between periods of guilt and responsibility and periods of excess and irresponsibility.
Good traders trade actively. Addictive traders overtrade.
If you see yourself in this profile, do the right thing, before your patterns ruin your career and harm those who depend on you. Get help. You can change. Your trading and your happiness lie in the balance.
Avoid Making Predictions in the Market
Most people make a big deal out of market prediction. They think they need to be right 70% or better in order to "pass" the exam that the market gives them. They also believe that they might get an "A" if they could be right 95% of the time. The need to predict the market steps from this desire to be right. People believe that they cannot be right unless they can predict what the market is doing.
Among our best clients, I have traders who continually make 50% or more each year with very few losing months. Surely, they must be able to predict the market very well to have that kind of track record. Well, I recently sent out a request for predictions and here is what I got back from some of the better traders.
Trader A; "I don't predict the market, and I think this is a dangerous exercise."
Trader B: "…these are just scenarios, the market is going to do what the market is going to do."
Ironically, I got these comments from them despite the fact that I was not interested in any of their specific opinions, just the consensus opinion.
So how do they make money if they have no opinions about what they market is going to do? Well, there are five critical ingredients involved:
Others have decided that fundamental analysis doesn't work. Instead, they have chosen to draw lines on the computer or in their chart book to analyze the market technically. These people believe that if you draw enough lines, and interpret enough patterns, you can predict the market. Again, it doesn't work. Instead, cutting losses short, really riding profits hard and managing your risk so that you continue to survive is what really makes you money. When you finally understand this at a gut level, you will know one of the key secrets to trading success. In the meantime, we will continue to make predictions in our column, so that you will begin to understand that they are entertaining, but nothing more!
Among our best clients, I have traders who continually make 50% or more each year with very few losing months. Surely, they must be able to predict the market very well to have that kind of track record. Well, I recently sent out a request for predictions and here is what I got back from some of the better traders.
Trader A; "I don't predict the market, and I think this is a dangerous exercise."
Trader B: "…these are just scenarios, the market is going to do what the market is going to do."
Ironically, I got these comments from them despite the fact that I was not interested in any of their specific opinions, just the consensus opinion.
So how do they make money if they have no opinions about what they market is going to do? Well, there are five critical ingredients involved:
- They follow the signals generated by the system.
- They get out when the market proves them wrong.
- They allow their profits to run as much as possible—meaning they have a high positive expectancy system.
- They have enough opportunity so that there is a great chance of realizing the positive expectancy any given month and little chance of having a losing month.
- They understand position sizing well enough so that they will continue to be in the game if they are wrong and make big money when they are right.
Others have decided that fundamental analysis doesn't work. Instead, they have chosen to draw lines on the computer or in their chart book to analyze the market technically. These people believe that if you draw enough lines, and interpret enough patterns, you can predict the market. Again, it doesn't work. Instead, cutting losses short, really riding profits hard and managing your risk so that you continue to survive is what really makes you money. When you finally understand this at a gut level, you will know one of the key secrets to trading success. In the meantime, we will continue to make predictions in our column, so that you will begin to understand that they are entertaining, but nothing more!
Five Guiding Principles of Trading Psychology
When I recently participated in an online chat presentation for John Forman, I assembled my ideas into ten basic principles that have guided my thinking about the psychology of traders and the psychology of markets. In the very near future, if my testing continues to be promising, I hope to present a market indicator for swing traders that rests firmly upon these principles. Stay tuned! In the interim, here are the five principles that pertain specifically to trading psychology. Next up will be five principles for trading the markets.
Principle #1: Trading is a performance activity - This is the core idea behind my most recent book. Like the playing of a concert instrument or the playing of a sport, trading entails the application of knowledge and skills to real time performances. Success at trading, as with other performances, depends upon a developmental process in which intensive, structured practice and experience over an extended time yield competence and expertise. Many trading problems are attributable to attempts to succeed at trading prior to undergoing this learning process. My research suggests that professional traders account for well over three-quarters of all share and futures contract volume. It is impossible to sustain success against these professionals without honing one's performance--and by making sure that you don't lose your capital in the learning process. Confidence in one's trading comes from the mastery conferred by one's learning and development, not from psychological exercises or insights.
Principle #2: Success in trading is a function of talents and skills - Trading, in this sense, is no different from chess, Olympic events, or acting. Inborn abilities (talents) and developed competencies (skills) determine one's level of success. From rock bands to ballet dancers and golfers, only a small percentage of participants in any performance activity are good enough to sustain a living from their performances. The key to success is finding a seamless fit between one's talents/skills and the specific opportunities available in a performance field. For traders, this means finding a superior fit between your abilities and the specific markets and strategies you will be trading. Many performance problems are the result of a suboptimal fit between what the trader is good at and how the trader is trading.
Principle #3: The core skill of trading is pattern recognition - Whether the trader is visually inspecting charts or analyzing signals statistically, pattern recognition lies at the heart of trading. The trader is trying to identify shifts in demand and supply in real time and is responding to patterns that are indicative of such shifts. Most of the different approaches to trading--technical and fundamental analysis, cycles, econometrics, quantitative historical analysis, Market Profile--are simply methods for conceptualizing patterns at different time frames. Traders will benefit most from those methods that fit well with their cognitive styles and strengths. A person adept at visual processing, with superior visual memory, might benefit from the use of charts in framing patterns. Someone who is highly analytical might benefit from statistical studies and mechanical signals.
Principle #4: Much pattern recognition is based on implicit learning - Implicit learning occurs when people are repeatedly exposed to complex patterns and eventually internalize those, even though they cannot verbalize the rules underlying those patterns. This is how children learn language and grammar, and it is how we learn to navigate our way through complex social interactions. Implicit learning manifests itself as a "feel" for a performance activity and facilitates a rapidity of pattern recognition that would not be possible through ordinary analysis. Even system developers, who rely upon explicit signals for trading, report that their frequent exposure to data gives them a feel for which variables will be promising and which will not during their testing. Research tells us that implicit learning only occurs after we have undergone thousands of learning trials. This is why trading competence--like competence at other performance activities such as piloting a fighter jet and chess--requires considerable practice and exposure to realistic scenarios. Without such immersive exposure, traders never truly internalize the patterns in their markets and time frames.
Principle #5: Emotional, cognitive, and physical factors disrupt access to patterns we have acquired implicitly - Once a performer has developed skills and moved along the path toward competence and expertise, psychology becomes important in sustaining consistency of performance. Many performance disruptions are caused when shifts in our cognitive, emotional, and/or physical states obscure the felt tendencies and intuitions that lie at the heart of implicit learning. This most commonly occurs as a result of performance anxiety--our fears about the outcome of our performance interfere with the access to the knowledge and skills needed to facilitate that performance. Such performance disruptions also commonly occur when traders trade positions that are too large for their accounts and/or do not maintain sound risk management with their positions. The large P/L swings cause shifts in emotional states that interfere with the (implicit) processing of market data. Cognitive, behavioral, and biofeedback methods can be very useful in teaching traders skills for maintaining the "Yoda state" of calm concentration needed to access implicit knowledge.
The most important question I can ask an aspiring trader is: Are you engaged in a structured training process? Education--simply reading articles in magazines, websites, blogs, and books--is important, but it is not training. Training is the systematic work on oneself to build skills and hone performance. It requires constant feedback about your performance--what is working and what isn't--and it requires a steady process of drilling skills until they become automatic. No amount of talking with a coach or counselor will substitute for the training process: not in trading, not in athletics, and not in the dramatic arts. Training yourself to proficiency is the path to a positive psychology.
Principle #1: Trading is a performance activity - This is the core idea behind my most recent book. Like the playing of a concert instrument or the playing of a sport, trading entails the application of knowledge and skills to real time performances. Success at trading, as with other performances, depends upon a developmental process in which intensive, structured practice and experience over an extended time yield competence and expertise. Many trading problems are attributable to attempts to succeed at trading prior to undergoing this learning process. My research suggests that professional traders account for well over three-quarters of all share and futures contract volume. It is impossible to sustain success against these professionals without honing one's performance--and by making sure that you don't lose your capital in the learning process. Confidence in one's trading comes from the mastery conferred by one's learning and development, not from psychological exercises or insights.
Principle #2: Success in trading is a function of talents and skills - Trading, in this sense, is no different from chess, Olympic events, or acting. Inborn abilities (talents) and developed competencies (skills) determine one's level of success. From rock bands to ballet dancers and golfers, only a small percentage of participants in any performance activity are good enough to sustain a living from their performances. The key to success is finding a seamless fit between one's talents/skills and the specific opportunities available in a performance field. For traders, this means finding a superior fit between your abilities and the specific markets and strategies you will be trading. Many performance problems are the result of a suboptimal fit between what the trader is good at and how the trader is trading.
Principle #3: The core skill of trading is pattern recognition - Whether the trader is visually inspecting charts or analyzing signals statistically, pattern recognition lies at the heart of trading. The trader is trying to identify shifts in demand and supply in real time and is responding to patterns that are indicative of such shifts. Most of the different approaches to trading--technical and fundamental analysis, cycles, econometrics, quantitative historical analysis, Market Profile--are simply methods for conceptualizing patterns at different time frames. Traders will benefit most from those methods that fit well with their cognitive styles and strengths. A person adept at visual processing, with superior visual memory, might benefit from the use of charts in framing patterns. Someone who is highly analytical might benefit from statistical studies and mechanical signals.
Principle #4: Much pattern recognition is based on implicit learning - Implicit learning occurs when people are repeatedly exposed to complex patterns and eventually internalize those, even though they cannot verbalize the rules underlying those patterns. This is how children learn language and grammar, and it is how we learn to navigate our way through complex social interactions. Implicit learning manifests itself as a "feel" for a performance activity and facilitates a rapidity of pattern recognition that would not be possible through ordinary analysis. Even system developers, who rely upon explicit signals for trading, report that their frequent exposure to data gives them a feel for which variables will be promising and which will not during their testing. Research tells us that implicit learning only occurs after we have undergone thousands of learning trials. This is why trading competence--like competence at other performance activities such as piloting a fighter jet and chess--requires considerable practice and exposure to realistic scenarios. Without such immersive exposure, traders never truly internalize the patterns in their markets and time frames.
Principle #5: Emotional, cognitive, and physical factors disrupt access to patterns we have acquired implicitly - Once a performer has developed skills and moved along the path toward competence and expertise, psychology becomes important in sustaining consistency of performance. Many performance disruptions are caused when shifts in our cognitive, emotional, and/or physical states obscure the felt tendencies and intuitions that lie at the heart of implicit learning. This most commonly occurs as a result of performance anxiety--our fears about the outcome of our performance interfere with the access to the knowledge and skills needed to facilitate that performance. Such performance disruptions also commonly occur when traders trade positions that are too large for their accounts and/or do not maintain sound risk management with their positions. The large P/L swings cause shifts in emotional states that interfere with the (implicit) processing of market data. Cognitive, behavioral, and biofeedback methods can be very useful in teaching traders skills for maintaining the "Yoda state" of calm concentration needed to access implicit knowledge.
The most important question I can ask an aspiring trader is: Are you engaged in a structured training process? Education--simply reading articles in magazines, websites, blogs, and books--is important, but it is not training. Training is the systematic work on oneself to build skills and hone performance. It requires constant feedback about your performance--what is working and what isn't--and it requires a steady process of drilling skills until they become automatic. No amount of talking with a coach or counselor will substitute for the training process: not in trading, not in athletics, and not in the dramatic arts. Training yourself to proficiency is the path to a positive psychology.
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