Update
As per my previous post, price action patterns proved to be right as we dropped from the 1.5580 level to a current low or 1.5510…
My NFP forecast was a minimum job loss of -28K to -50K, the data printed at -51K, last month’s was revised up and the unemployment rate ticked up to a 4-year high at 5.7%.
Watch for the 0930 EST money flows and the 1000 EST data… I’m still look at the bottom in the 1.5480-1.5460 level and I will likely be buying down there should we see those levels.
There’s a lot of time left today, be careful…
2 comments August 1, 2008
Trade Team Call UPDATE (7/29/08 Call)
By FX Insights
To subscribe to the signal with 100% success rate click here.
The FXI Team Call was officially closed at 3:02 a.m. EST as the EUR/USD reached the price of 1.5631.
Minimum Pips Gained From Each Buy Level Traded:
1.5610 to 1.5631 = 21 Pips
1.5590 to 1.5631 = 41 Pips
1.5570 to 1.5631 = 61 Pips
Total minimum pips gained: 123 Pips
Again this call is closed and paid out with full profits thus making all FXI calls ever issued 100% profitible and paid-out.
-FX Insights
Add comment August 1, 2008
Understanding Drawdown/Market Drops Part II
By FX Insights
Profit taking – profit taking is one of the biggest factors that account for drops in the market. When a large bank or institution closes a multi-million or multi-billion dollar entry, this will have an adverse affect on the market, and cause the market to de-value the price of the currency based on the liquidation of that position. A profit taker literally takes money out of the market – somebody had to loose in order for that trader to win.
Example: suppose you and I bet on a football game… you bet me $100 that the Packers would beat the Giants in the NFC playoff game… we both put our $100 dollars in a bowl… at the end of the game the winner would not only get his $100 back, but would get an additional $100… game’s over, Packers are victorious, and you win the bet, so not only do you get your $100 back, you get my $100 and all of the cash in the bowl is drained… your money came from my loosing bet, but all of the money was removed. That example is basically the same principle of how it works in our FX market when a position is closed for profits.
Loss taking – a bank/institution/trader who closes a loosing trade will also affect the market by causing a drop. The same principle of how it works with profit taking is also how it works with loss taking. The bigger the loss, the bigger the affect it can have on the market.
Currency reserve moves – as retail traders, we never actually exchange currency, but banks and central banks do, and when these banks shift literal currency reserves or do a literal currency exchange, this can cause big moves in the market. Seasonally speaking, there can be quite a bit of reserve shifting done in the springtime, especially with the Asian countries. Even a mere mention from a central banker or finance minister about possible reserve shifting can cause 200+ pip moves instantaneously.
Many traders don’t know this, but each central bank has their own FX trade team. The Fed has a 24/6 FX trade center at the New York Federal Reserve in New York City and that trade team is responsible for the Fed’s FX moves. And no, the Fed doesn’t use a retail broker… they are directly linked into the inter-banking system and do their trading that way. This type of set up gives central banks unbridled control to manipulate markets and to price fix, which is something as retail traders we are powerless against.
Stop hunting/stoploss triggering – stop hunting is something most retail brokers do during thin markets, many times between the end of the NY session and the beginning of the Tokyo session when it’s easiest for them to manipulate prices. Retail traders who place stoplosses are hunted by the broker and the broker can manipulate the price by causing a quick spike up or down to close out entries. The price will almost always return to the point of where the spike took off from.
Stoploss triggering is a slightly different concept… we saw stoploss triggering in action this week when the EUR/USD dropped from 4815 to 4593 in about a 50-minute timeframe… this is how it works… as the euro kept gaining in value against the dollar since Christmas, traders undoubtedly were putting stoplosses on those positions, and stops were building for weeks on end… and because so many traders use the same 5 or 10 technical indicators, those stoplosses were set on a buttload of so-called “key technical levels.”
So, as you know, a dude from the ECB got the ball rolling and started the market on euro profit-taking and loss-taking, which sped up the momentum of the euro drop, then the stops started getting triggered, which caused even more losses, then it continued to drop violently, causing more and more stops to get taken out, so on and so forth… it’s almost like a self-fulfilling prophecy for the herd-mentality tech traders who set stoplosses on technical levels like Fibo lines or whatever… they are just pure cannon fodder for those types of moves…
Fundamental – obviously a shift in the overall fundamentals can cause market drops/market corrections, but this is more of a bigger picture type thing… for example, if current forecasts hold true and stay on track, there will be a fundamental change within the Eurozone this year as growth appears to be slowing and signs are pointing to a considerable slowdown during the second half of 2008. This shift in overall market fundamentals should certainly be more USD supportive against the EUR.
The banks control this market and they trade on the bigger picture using fundamental analysis of the market. Now here is something very important about drawdown you must understand – with the banks wielding so much control in this market, trading on the bigger picture fundamentals, if they have an open position that goes several hundred pips in the negative, they will let those trades run… banks will not even blink an eye at a trade that might be 500 pips in drawdown if it’s a bigger picture, fundamentally based trade take on a swing basis (i.e. position trade).
So, as a retail trader, you’re in a market controlled by banks who don’t crap their pants when they go into drawdown. And with proper money and risk management, you shouldn’t be crapping your pants either when you go into drawdown because first of all you’re powerless to do anything about it, and if your trade was taken with a proper game plan, based on sound analysis of the market, the drawdown should give you an even better entry and more ROI when the market goes back the opposite direction.
Real life drawdown lesson: some of you may remember that back at the end of September (2007) we started telling you to short the cable (GBP/USD) as we felt the U.K.’s fundamentals would turn south, particularly their housing, and that the BOE would start cutting rates within a month or two… back in September we predicted the cable would fall to at least the 1.9800 level, but possibly go as low as 1.9400 in the months to come.
Well, I took my first cable short at 2.0604. Then the Fed cut rates again, which weakened the dollar even further. Guess what happened to my cable short? It went into over 500 pips of drawdown. Now to most traders, especially tech traders, that would seem like a terrible trade and a trade that would have to be cut for a loss… instead of cutting my trade that was over 500 pips in drawdown, I added another short at 2.1105, and that trade went into drawdown too! So, I’m sitting with two cable shorts, paying interest on them, and they are both in drawdown…
Instead of panicking, I simply held both shorts with the faith and trust that my overall, long term, big picture fundamental outlook would play out perfectly. Long story short, my 2.0604 was closed at 1.9668, making those 500 pips of drawdown laughable when you look at the net bottom line ROI gained on that trade. And the 2.1105 is still open…
Conclusion
Hopefully, this info gives you more insight into why the market does what it does… and why it’s so important to have a game plan for the trades you take – a game plan based on sound analysis of the market, not based on emotions…
I do want to be clear about one thing – I absolutely, positively take losses on trades. I do not close every single trade I ever take for a profit. There is nothing wrong with taking losses in this market, it’s going to happen. When I do take a loss, I have a sound reason for it.
During the end of November the euro was way up against the dollar, but based on the price action, I saw a change coming, and many of you will remember I took some losses on some euro longs and then went totally net short… and that is when we saw the euro go from 1.4968 down to the 1.4300’s… so, if I see a bigger market move on the horizon, and I’m going the opposite direction of where I think that move is headed, I’ll take my losses, and recoup my losses by going the opposite direction.
If you have any questions based on this post, please find me in the chat so we can discuss. Or you can post your questions in this thread.
-FX Insights
Add comment August 1, 2008
Understanding Drawdown/Market Drops Part I
By FX Insights
For me it’s usually easy to identify why the market did what it did on a daily basis, because we can watch the correlated variables and we can watch price action to get the answers and piece the clues together… but every so often, like we saw last week, the market will make a 300 pip correction, which leaves many traders scratching their heads…
The other confusing thing to traders is something like we saw last August – it was mid August when all the subprime and credit crunch stuff really hit the fan. Logic would have told you to go heavy buying the euro and go heavy selling the dollar as the news coming out at that time was abysmal for the U.S. economic situation. But over the span of one week saw the euro fall 500 pips against the dollar, defying logic.
Those of you who were with us last August will remember we kept buying the euro all the way down to the bottom of that mega move, which probably didn’t make any sense at the time, unless of course you were able to see the bigger fundamental picture and have a confident understanding of why we saw such a violent drawdown and market drop.
One of the toughest aspects for many traders to wrap their brains around in regards to our signal is what to do when it goes into drawdown… it doesn’t matter that 100% of our signal trades have paid-out with full profits because as soon as a signal trade goes into drawdown, the panic sets in, the questioning begins, traders get rattled and squirm, and then they start praying the market will move back up… you should see the panic-stricken emails I get!
As you know Cisco’s original EUR/USD signal issues “buys” or long positions only. It does not trigger shorts. The signal, fueled by historical and real-time fundamental and price-action data is 100% predictive in nature… it creates a picture of the market and when all the data comes together in perfect alignment, a signal is issued, saying, “in the future, the market will go up at least 20 pips from the price point the signal was triggered.”
1. So why do some signals go into drawdown?
Buying – because the signal is predictive, often times the signal will trigger when it sees that the “market” is starting to buy or will start buying the EUR/USD. Quite simply, many times buying the EUR/USD (taking long positions) will cause the market to initially go in the opposite direction. On the retail side, a retail broker will take the opposite side of trades being taken – so, if retail traders are loading up on euro longs, the brokers are loading up on euro shorts to push the market against those trades to either shake them out of the trade or to trigger stoplosses.
I know this doesn’t make sense, but again, buying many times causes the market to go the opposite direction. The market’s direction will begin to change when a bigger banks and market movers jump in with large entries, which causes the other banks to jump on the bandwagon as they think “maybe the big boys know something we don’t.” At this point you’ve got momentum building, the banks within the inter-banking system will start raising the prices they offer EUR/USD contracts to the brokers, who in turn raise the prices they charge to us on the retail side. As this momentum-based move continues, the banks raise the price on the “ask” and the process continues.
So, if we look at this from the perspective of the inter-banking system, which are the source for EUR/USD contracts, it would go something like this:
Broker “A” buys a 20 million EUR/USD contract from Bank “A” at the price of 1.4620. Then Broker “A” displays the ask price on their platform at 1.4623 – this is the price you pay to take that trade, meanwhile, a split second later, all contracts offered at the price of 1.4620 from the inter banks were bought up, so the only thing the banks can do is raise the price of the contract, based on supply and demand… so this process continues at break-neck speed… contracts get bought up, price goes up, more contracts keep getting bought, price keeps going up…
If you’re having trouble picturing this in your mind, think about it like you’re at an auction… a piece of artwork hits the bidding stand and the bidding starts at a certain price. Now, what would make the price of that artwork go up? Offers – which is equivalent to the “ask” in our FX market. If no bidders made offers on that piece of artwork at the auction, obviously the price couldn’t move. But if several hundred bidders kept offering a higher price, the value of that artwork would rise accordingly, but eventually the bidding would stop when the perceived highest value at that point in time has been reached. In this case, as in FX, the “market” decides the price and decides what they’ll pay and what they won’t pay.
The market drives the price as the momentum builds and the market movers are actively trading. When the price gets so high that it’s no longer an attractive price or perceived to be a value buy, the offers cease, the market stabilizes, and then will either hang out in a range or make a correction back down to a certain level.
And what will help us determine what kind of correction or retracement to expect? The way I do it is by gauging the speed and degree of the spike or big move, the possible causes for the market volatile activity, the time of the move, the amount of pips it moved, and what the real-time fundamental situation is.
In conclusion, buying is one of the main reasons a signal or the market in general would go into drawdown, until the upward momentum builds to a point where the market can no longer drop but must start climbing up… of course, we also have to watch correlated variables such as gold, oil, bonds, equities, etc. in conjunction with the spot FX market to help us determine why the market might be going against the prevailing trend.
Add comment August 1, 2008
Trade Team Update – - 7/31/08 (Non Farm Payrolls)
By FX Insights
Today’s big event was the release of the GDP data. As we forecasted last night, the GDP data printed USD+, but printed below the market’s expectations. As you well know, the euro ran up and then fell down.
Why did this happen? Very simple… the initial reaction was against the dollar because the expectations were running so hot that a growth rate of 1.9% looked pretty bad… perception is reality in this game… so, the market took the euro up, it hit my key upside level of 1.5698 to the pip and proceeded to make a dramatic drop.
Some traders said the euro hit 1.5700 on the bid, which would also mean my target of 1.5700 was hit, but my broker FXCM only showed a high of 1.5698 on the bid, so I suppose I can’t say my target was officially hit because I use FXCM’s price feed to calculate my numbers and for my price action, but on my MIG account I did see a high of 1.5700. Whatever…
Why did we drop? Because, the reality is, a 1.9% print is a great number for the U.S. economy. It’s the highest level of growth the economy has seen all year. And that’s why we dropped. It also helped that gold and oil dropped from their highs as the euro was dropping.
Another factor that initially drove the euro up this morning was the absolutely absymal print on the Initial Claims data. I believe this was the worst print all year long and serves as a very good reminder that the U.S. job market is remains under intense pressure and is struggling to show any signs of life.
NFP:
I’m really not looking forward to tomorrow’s NFP. Usually I live for NFP’s but tomorrow’s event is concerning me. If I’m concerned that means you should not trade NFP!
What’s concerning me the most is the utter lack of liquidty that will be in the market tomorrow. Tomorrow’s NFP will be the most ill-liquid we’ve seen all year and this makes for serious complications when it comes to forecasting and then actually trading it in the real-time. You saw what the market did today… in less than an hour we made a 100+ pip roundtrip…
Trying to forecast is almost pointless for tomorrow. Reason being, no matter how the data prints, there’s no guarantee of a logical move that correlates with the data.
My personal forecast is that we see a print showing a net loss of 28K jobs or higher. Based on what research I have done, which isn’t nearly as much as I normally do, my numbers show a minimum net loss of 28K jobs with a potential net loss of over 50K jobs.
Now, this doesn’t mean I’m loading the boat with euro longs because we still have last month’s revision to contend withand the Unemployment Rate which carries almost as much weight as the NFP data. Current forecasts are showing a tick up in the Unemployment Rate.
I have no personal forecast on this piece of data because whenever I forecast a tick up, it ticks down, and then when I forecast a tick down, it ticks up, so I’m not even messing with that one this go round.
So instead of trying to crystal ball tomorrow’s data and the market’s reaction, lets rather look at the potentials that exist either way…
A print that comes in at expected shouldn’t do any real harm to the dollar. Market sentiment is looking for any reason to support the dollar right now, so even if the data prints at the expected net loss, which in reality is terribly USD-, we very well may not see the dollar get creamed. An initial spike up is certainly possible, but it may not get too far…
A print that comes in below expected and a print showing weakness on the Unemployment Rate should easily send the euro up 80 or more pips. I am not forecasting a 200 pip type move on below expected NFP data. Europe’s not really doing any better and the market’s back in love with the dollar, so I don’t see us getting a one-way ticket to the moon.
A print that’s better than expected should likely hammer the euro. The crazy thing is, even if the data prints better than expected, a net loss of jobs is still a net loss of jobs and this is a terrible thing. But, the markets don’t look at it in that kind of logical way. A better than forecasted should send the euro down to test the 1.5500 level and depending upon what happens there, we could see further downside testing.
Those are the basic scenarios I’m looking at and preparing for. But, no matter what happens with tomorrow’s NFP, it’ll still make the ADP data look worthless.
I cannot urge strong enough caution against trading NFP tomorrow. The market’s forecasts and expecations are all over the place. The banks are forecasting totally different number than what the market economists are forecasting. That conflict alone, in addition to the utter lack of liquidty is setting the market up for some serious shenanigans tomorrow.
In case I didn’t make myself clear: DON’T BE AN IDIOT AND TRADE NFP — DO NOT TRADE NFP!
My personal opinion is that we move up on NFP but I don’t even trust this overall bias enough to load up on some euro longs down here. In the name of risk management, my trading rules will not allow me to take any trades prior to the event like I normally do. That might sound lame, but I’m not out to impress anybody tomorrow…
EUR/USD:
A lot is riding on tomorrow’s events. As I said, an upside surprise will only further serve to support the dollar and serve to cap the gains the euro has been attempting to make all week long.
The fundamentals have kept the euro down this week… early in the week price action patterns were ripe for a move to 1.5800 but strong USD fundamentals reversed this and wiped it off the table.
The euro’s final shot this week will come tomorrow… as I said, my personal forecast is a move up but it’s all riding on how the data prints, and more importantly, how the market responds to the data and what the liquidity situation is to support such a move.
No matter what, any rise we get I’m shorting it. I’d like to hold off on any new short until we get above 1.5700, but it may be a game time decision tomorrow on how I decide to react and respond.
I’m still strongly bearish on the euro and short any rise and will be happy to hold those shorts should they go into drawdown. Fundamental factors will determine how much higher the euro can possibly go.
It’s very important to note two events that are happening next week: both the Fed and ECB give their rate decisions. The Fed is first, the ECB is second. Just something to keep in mind as you think about the possibilities tomorrow’s NFP hold.
Im out of things to talk about at this point… too many thoughts in my mind and I need some time to sort them out… it will help to see the real-time price action once Frankfurt and London opens. I will post more updates and key levels later on this evening. Stay tuned…
Please be smart and sit on the sidelines tomorrow. There’s too much risk tomorrow. It’s not worth it.
-FX Insights
Add comment August 1, 2008
Margin/Risk Management/Keeping Profits
By FX Insights
What you’ll read here is simply me explaining my trading style and how I do things based on the training I’ve received under Cisco and how I’ve used his training to develop my own style.
I won’t claim my way is the best way or the right way, it’s not a matter of right or wrong, this is just how I do things and it works for me with much success…
Margin and Risk Management…
First and foremost, it is my job to be a risk manager/money manager, and secondly, I am a trader. If I fail at risk management, I fail as a trader, so risk management always takes precedence over being a trader.
On all of the accounts I manage, I have 200:1 leverage. Does this mean I can risk more because I have double the leverage of a standard account? Absolutely not, it means I can risk less and get the same reward.
Cisco has stated many times he typically will not have more than 12% of his margin tied up in the market at any one time. I also try to stick to this game plan, but I will be honest and tell you at times I trade more aggressively and will have as much as 15-20% of my margin in the market, however, I do not recommend you take on that level of risk!
EXAMPLE:
By sticking to the 12% rule, here’s how I would break down a trade using the buy signal… suppose a buy signal was generated and we determine 3 buying levels, and we also know from experience that the average drawdown is 27 pips from the last buy point…
First buy point: 1.3510
Margin I use on first entry: 1%
Second buy point: 1.3480
Margin I use on second entry: 2%
Third buy point: 1.3455
Margin I use on third entry: 3%
Additional buy points… suppose there was 20 pips of drawdown from the 1.3455 buy point, I would use the remaining 7% margin I’m willing to risk by buying at the bottom. I may make 1 more trade and use all 6% on that trade, or I may stack two entries and risk 3.5% margin, it all depends on market conditions at that time…
If I’m in a scalping situation, I will never use more than 3-4% of my margin at any one time. The scalp trades are quick hits on the market that will add up nicely over each weeks’ worth of trading, but I use very little margin to scalp in order to mitigate risk in case the market moves against me.
Margin Usage Based on Equity…
I do not decide how much margin to risk based on what my account balance is, rather I base it on my equity, because to me, equity is how much money you really have at any one point and time.
Common Misconception – Account Size/Account Balance…
The size of a trader’s account has absolutely, positively nothing to do with the amount of ROI that trader can return nor does it have anything to do with how much additional margin that trader can safely risk… it’s all PERCENTAGES!
If I have a $2,000 account or a $200,000 and use 40% of my margin on my trades, I am taking on the same amount of risk! Using 40%, 50%, 60%, etc. of margin on any size account is way too risky no matter how big or small the account is.
Plus, believe it or not, it’s actually harder to make money the bigger your account gets. It would be easier for me to make 100% ROI on a $3,000 account than it will be to make 100% ROI on a $300,000 account. Just from a pure psychological standpoint it’s harder… also, the bigger your account gets the more leverage the broker takes away from you.
A good many traders think, “yeah if I just had $100,000 of usable margin, I’d have it made, no problems ever…” This kind of thinking is absolutely wrong and not even close to what the reality of trading is.
Not Giving Back…
As Cisco always says, “we are marathon runners, not sprinters…” Yes, some traders have risked upwards of 50% of their account on trades and have had a big pay day in return. That will happen every now and then, but they are also the traders that get margin-called once or twice a month and never really get anywhere…
You hear us repeatedly say “we do not give back” this means we do not give our profits back to the market. Almost anybody can make money trading currencies, that is the easy part, the hard part is actually keeping your profits and maintaining a healthy level of ROI.
I look at the market as a guerrilla warfare style battle… you have this enemy that is always lurking at you from any direction and at any point will attack you with whatever means necessary to defeat you and take what is rightfully yours.
I take a defensive stance to trading. Just like in football (American style), a defense can stop the offense from scoring but they can also score. The offense can only score, but can’t stop the other team’s offense from scoring, and the offense can be scored on by a defense that takes advantage of an opportunity to do so… hopefully that will make sense…
To sum it up, you are a risk manager first and a trader second. Never over-margin yourself in this kill-or-be-killed market. Do not believe the misconception that the more money you have the easier it is to make money. Do not give back to the market… in order for you to “win” at this game, some other trader has to “lose”… because 95% of traders lose money in the market, there is plenty of money for us winners to take!
Add comment July 30, 2008
Confessions of a CRAP Trader
Have to confess some errors I’ve made trading, maybe someone else will benefit from what I have to say here, cause I sure didn’t.
Ever been upside down in a trade and unable to kill it or even hedge it ’cause you “knew” it just couldn’t keep on going up (or down) until you have so little usable margin, you can’t even hedge it?
Ever had so many trades going at once that you couldn’t keep track of them all?
Ever had so many indicators and lines on the chart you couldn’t see the candles?
Ever closed a loser that, had you just waited 5 more minutes, would have been in profit?
Ever had a mental stop you didn’t execute while the price whizzed by so fast you got whiplash?
Ever changed a take profit for “just a couple more pips” because you figured the momentum would take you there, and it then it retraced right where the original take profit was, leaving you upside down instead?
Ever get so pissed off that you are stomping around the room, hitting walls and kicking furniture?
Ever got so loud and mad at the damn market that the wife AND dog ran out of the house in opposite directions?
Ever get so negative in your account that you threw up?
Ever hold a bathroom call to the point of going in your pants because you just couldn’t leave the trade station?
Ever sold at the bottom and bought at the top over and over?
Ever had a 2000+ pip hedge?
Ever had to call your one-time client and good buddy to tell him you lost his entire account?
Ever had a two month losing streak where EVERY trade goes wrong?
Ever set an alert and gone to bed, only to wake up having the alert time out after 1000 signals, and the account M/C’ed because of it?
Ever failed to take off a hedge at the right price out of fear that the market would continue moving against you if you did, and then it didn’t?
Ever felt like “a deer in the headlights”?
Are there “buttons” on your platform that you don’t know what they do?
Ever borrowed money to trade with and lose it ALL in a month?
Ever had a workable system, tried and true, that you failed to follow and lost money?
Ever been so cocky that you were convinced you could never lose?
Ever hit the wrong button and instantly lose $10,000?
Ever thought you were trading E/U and it was U/Chf intead?
Well, I have done all the above, and some more I can’t even remember, and yes; there is a moral in here somewhere.
It may appear counter-intuitve, but whatever you do, don’t stop trading and learning; if any of the above ever has or will happen to you, now you know you are not the only one!
At this point in my trading career I have no idea what else could possibly happen, but if it ever does I’ll be sure to put it in here!
As you can see from the above, it has been a long, trying, expensive experience but the lessons I have learned are NOT easily forgotten.
You might be wondering how anybody could posibly be so stupid, fearful and greedy to have committed all these sins- well I’ll tell you:
It was easy!!!!
The best possible advice I can give here is to have a workable trading plan, and NEVER, NEVER EVER feel that you can violate your rules without dire consequences as the guaranteed result EVERY time!
Please, please read; no pour over the data here that Cisco and the Team are so graciously sharing with us. It is priceless, and the ONLY method that actually works.
One last confession: I spent $7500 on my first Forex course, and learned NONE of what is taught here, I wish there had been an FXI way back then; but, then I wouldn’t have all these great yarns to tell you, would I?
A once upon a time Crap Trader
Add comment July 30, 2008
The Mental Battle…
By FX Insights
If you practice strict money management and don’t over-leverage your account, the market will not be able to take your money. If the market cannot “physically” take your money by you over-leveraging your account, it will try to “mentally” take it from you.
With the euro making a 1,000+ pip move against the dollar with almost no correction, I know for a fact these extreme market conditions are mentally beating up traders. When a strict money manager looses the mental game to the market they will begin making trades and decisions they wouldn’t usually make under “normal” market conditions.
There have been a few occasions during my trade career that I’ve allowed the market to beat me mentally and each time it’s been costly. So based on my own personal experiences of allowing the market to get the best of my mind, here are a few signs you may want to watch out for… if you notice some of these same patterns or characteristics in your trading, you may be letting the market get the best of you mentally…
1. Deviating from your risk/money management plan… for example, if your risk management plan calls for you to use no more than 6%-8% margin at any one time and you find yourself “doubling down” to make up for your negative entries, the market is mentally deceiving you. It’s very easy to fall into the trap of thinking, “I can just make one more 2% entry…” because that one more entry will turn into two more, than three more, than four, and then you find your margin is squeezed and you are at the mercy of the market.
2. Not cutting a loosing trade… while I do not advocate using stop losses, there is a point where I’ll cut a trade for a loss. The market will try to win the mental game by telling you to “just hang on a little longer, that position will come positive soon.” Knowing when to cut a loosing trade has been one of the hardest aspects of trading I’ve had to learn. Cisco is the master when it comes to cutting for a loss and then going the opposite direction to make double or triple of the loss he took. The more I’ve learned to read price action, establish tops/bottoms, and follow the market fundamentals, the more I’ve learned when it’s time to cut for a loss and take that freed up margin to go the opposite direction to cover my loss plus add profit.
3. Trading counter-range… this simply means taking a long position at the top of a range or taking a short position at the bottom of the range. When the market has you beaten down mentally, you can be easily tricked into taking a counter-range trade because it deceives you into thinking, “ok, this thing is not going to stop running and is going to move another 100 pips before stopping…” The market does not move in a straight-line. Even with the EUR/USD running on a multi-year uptrend, it still corrects down.
I remember one time in the spring I had a short position, it was on a Friday and the euro was doing its normal Friday thing of moving up all day. I panicked and cut my short for a loss on Friday afternoon thinking it was just going to keep moving up and up. By early Monday morning the euro had corrected down from the top of the range, and that loss would have come back positive and I could have closed it for profit. But because I didn’t understand the euro’s patterns and price action and I lost the mental battle, I took an unneeded loss.
So this Friday we closed the trade week 2 pips shy of the all-time high. What would the smart trade be? Taking a long at 1.4392 because you think it’s going to move another 150 pips when the market opens at an all-time high? Or, taking a short because we know Friday’s are typically the euro’s strongest day, and because we know it typically makes at least a 50 pip correction when the euro hits an all-time high? If I was mentally beaten to the market, I might have taken a long thinking “it’s never coming back and I better get in now.” What I did was close all of my longs except for my best entry knowing there is a high probability we’ll have to at least go back to the 1.4300-1.4320 level.
4. Not sticking to the basics… when I’ve mentally yielded to the market, I forget the basics and I deviate from my game plan. For me, forgetting the basics means overleveraging my accounts, not analyzing price action, not forecasting the market with the fundamentals, not communicating with my teammates, having a negative mental attitude towards my own abilities as a trader, and placing trades for the sake of being in the market just “hoping” those trades might make me some money.
One of the keys to winning in this market and to hanging on to your profits is: consistency. One of the things I think that makes Cisco a great trader is the fact that he’s consistent in all that he does. He’s disciplined to the point where he remains consistent to his game plan no matter what the market throws at him. I cannot tell you how to trade your account. No one can or should tell you how to trade your account. That is something you need to determine on your own. Once you’ve established a winning game plan for how to trade your account and trade this market, the best thing you can do is to stay consistent even when the market is waging mental warfare with you.
Winning the Mental Game…
How you win the mental war is something you’ll need to figure out on your own. Just as I cannot tell you how to trade your account and manage your money, I cannot tell you what you’ll need to do to win the mental game of trading. Only through time, experience, and suffering the pain of loss and the pain of trading this beast of a market will you be able to build your mental defenses and your mental “strike force” to combat the market.
When we started training with Cisco last fall he put us through some interesting “mind games” the first few months. It wasn’t to be mean or malicious but more of test to see if we mentally had what it takes to trade this market.
Suffering through drawdown is a great way to see the true measure and true character of a trader. I know a few traders who’ve totally lost it to drawdown and to the volatility of this market. It’s a shame to see those who could have been great traders loose the mental battle to the market.
Right now, I think our FXI community is stronger than it’s ever been. We’ve had a lot of traders come and go over the past few months. Some have moved on with success while others have gone by the wayside. But it’s very encouraging to me because the core group of active traders we have now are clearly hungry to learn the market and to put in the time and energy it takes to be great at trading this market.
This market isn’t for everyone. No matter what level of trader you are, it takes mental strength and disciplined consistency to win.
-FX Insights
Add comment July 30, 2008
Trade Team Update – - 7/29/08
By FX Insights
Today’s move was pretty simple… an upside surprise on U.S. Consumer Confidence, which is a key fundamental release led to eur long profit-taking, which also led to euro short contracts being taken, which led to USD strength, which took down oil and gold, and the USD strength pushed the USD Index up, and the overall slide down triggered stops along the way which further fueled the fire. In addition, equities helped keep the USD supported and vice versa. Pretty simple equation on all that…
As you should all know, I’ve been bearish on the euro and remain as such. I do have longs from 1.5558 on up, but will certainly be adding shorts on any break of 1.5600 on up.
Risk will remain on the euro with tomorrow’s ADP data coming under focus by the markets. The data is expected to be USD positive even though the forecast is showing an abysmal net loss to jobs.
Price action is empty with the complete lack of liquidity… Asia is not making any moves and as I said in the chat we’d not see a break of 1.5600 during the Asian session this evening and that’s how things have played out.
We could see an attempted move up between 0100 EST and 0300 EST. Don’t forget that we have Euro Consumer Confidence which is widely expected to print to the downside which will only serve to put the euro under pressure.
Commodities are very weak to the downside which is offering zero help to the euro.
As far as price levels go, I’m not in any position right now to calculate key levels but bearing in mind we have NFP coming on Friday and the banks can do further positioning between now and then.
A sustained break of the 1.5550 level should easily open the doors to test the 1.5500 – 1.5480 level. Prices will likely struggle at the 1.5620 level on up. A sustained break of 1.5660 will be required in order for any testing of the 1.5700-1.5720 level.
Risk remains to the downside as the underlying fundamentals of the market and the market sentiment is against the euro and working for the dollar.
Be smart here and do not over leverage.
Add comment July 30, 2008
Becoming a fulltime trader PART II
By FX Insights
I don’t care what anybody says, ROI (return on investment) is king in the FX market. It’s not about how many pips you can make in a day or in a month, it’s all about ROI, and how you trade your account to achieve that ROI…
In the world of investing, if you can beat the S&P/500, which is making about 15% ROI annually, you are pretty much a trading god. The key is how you arrive at your ROI, which goes back to risk management and not over leveraging your account.
Every once in awhile a retail broker will have a trading contest to see who can gain the most ROI in a month. Those contests are a joke and are a terrible way to teach risk management, because it causes traders to over leverage…
When it comes to ROI, I suggest setting a monthly goal for yourself… if you want to do 20% ROI per trade month, you need a game plan to safely get you there… you can even break this down to daily ROI goals. For me, I try do 1% ROI per day… some days I do more, some I don’t meet the goal, but I’m not going to go crazy on my accounts to hit that goal…
If you are going to trade fulltime to support your lifestyle you absolutely must know how much ROI you’re going to need to make on a weekly or monthly basis and then you have to trade your account in such a way to not only meet your ROI goal, but so you can safely withdraw funds from your account without putting any open trades in jeopardy of a margin call – not very easy to do!
You could have a balance of $50,000 but have 10 open entries that have sucked your usable margin down to $5,000, and a situation like that keeps you held hostage to the market… you’d not be able to remove funds because your usable margin will not allow… this is a critical factor when it comes to trading fulltime and trying to live off of your trades!
Not trading with your wallet:
There’s two ways to trade this market – either with your wallet or with risk capital. Trading with your wallet causes you to be emotional, take make dumb, emotional decisions, to over leverage your account, to over trade your account, and to take unnecessary risks. Trading with your wallet basically means trading with money you really can’t afford to lose – trading with rent money, trading with mortgage money, trading with food money, trading with your kid’s college money, etc.
Trading with your wallet is going to put so much stress on you that you’ll end up trading like an idiot and you’ll make idiotic decisions… it prevents you from seeing the market clearly and from making smart trade decisions.
In a way, trading fulltime for a living is like trading with your wallet, however, your account should be funded with risk capital… using risk capital keeps you in a much better psychological state of mind and it keeps your emotions from getting the best of you…
How much money should a fulltime trader have in their account? My opinion is a minimum of $50,000 to $75,000 to get started. It really depends on what kind of returns you need your account to give you to support your lifestyle. But I think any less than that will keep you held hostage to the market…
And please don’t get tripped up on account size… percentages are always the same… a 1% used margin entry is the same on a 5K account and a 50K account… percentages never change! 1% is 1%, no matter what…
If you have to take out a second mortgage on your home, or you have to get a title loan, or if you have to borrow cash from a credit card to fund a fulltime trading account, I can pretty much guarantee you’ll crap it out within 6 months and then you’ll be really screwed.
Continuing this point… I suggest you have set aside at least 6 to 9 months of living expenses before you go fulltime. In the event you can’t pull living expenses from your trading account, at least you have your bills covered for 6to 9 months while you get your account in shape to make withdraws. Don’t leave anything to chance!
Pick a broker:
Bottom-line – most retail brokers suck… they stop hunt, they manipulate prices, they play games, they take the opposite side of your trade, they don’t educate traders, etc. So you have two choices, go with a typical retail broker like FXCM, IBFX, Oanda, DBFX or go with an ECN like Hotspot or MB Trading or whatever…
There are advantages and disadvantages to a retail shop or an ECN, but you have to decide what works best for your needs and for your trading style. If you use stops and keep your trades exposed to stop hunting, you might do better with an ECN… if a feature like a user-friendly platform is more important, you might do better with a retail broker as opposed to an ECN.
Once you decide what type of brokerage you want to run your trades through, then you need to pick your broker. Trust me, some are worse than others… FXCM has the most user-friendly platform on God’s green earth, but of course they play typical retail broker games… an ECN like Hotspot is not known for stop hunting and they have lower pip spreads, but the platform is atrocious…
Talk to the brokerage, talk to their customer support, to their tech support and get a feel for how friendly and helpful they are… talk to other traders who use their services to see what kind of issues they might experience. Our community is a great place to do this…
Do you want to go with a U.S. broker or a Swiss broker? There are advantages and disadvantages to both… again, you have to weigh the pros and the cons, but I recommend you really take the time to figure out who will work best for your fulltime trading needs.
Suffering pain:
No trader wants to lose money, no trader wants to get margin called, but I honestly think every trader needs to feel the pain and wrath of this market… we trade in a beast of a market and no trader will ever respect this market until it beats them unmercifully… it’s pretty easy to suffer at the hands of this market, so if you’ve already been down that road, don’t make those same mistakes when you go live to fulltime trading…
Trading the spot FX market is like guerilla warfare… at any second you could be attacked… the whole market is against you… in order for another trader to win, you must be the one that looses, that’s how it works in this game… the market will use any and every opportunity to take your money, it shows no mercy, no remorse, and it’s unforgiving…
When I hear about these companies like 4xmadeeasy, it makes my blood boil because there’s nothing easy about Forex and there’s nothing you can do to make it easy… how dare those people even call it that? It blows my mind that they manage to sucker so many people, but it happens… I don’t know how they sleep at night knowing they’ve duped so many people, but I guess they don’t have souls…
Trading FX fulltime is one of the hardest ways to make money and requires the most time, energy, and focus… if you’re not willing to put in the work and the efforts it takes to trade fulltime, don’t do it… stick with your day job and do this as a hobby…
Resources:
Yes I might be biased, but I truly believe the FXI community provides everything a trader would ever need to be successful in this market… I think the principles we teach are solid and proven and tested to work… our community is helpful and kind and giving and serious about seeing traders succeed…
We are 100% committed to only providing accurate and helpful information and not filling your head with crap that doesn’t work and that would lead you down the wrong path…
Point being – fill your trading arsenal with good resources that will help you be the best trader you can be… trading FX fulltime can be so lonely, which is one reason we started FXI in the first place… take advantages of the good resources out there to help traders…
I always get asked what books a trader should read – I don’t have much to recommend… I’ve never read a book on Forex except for Forex Revolution and I never finished the whole thing, to be honest… I’ve never read a book on how to trade, I’ve never read a book on economics, and I’ve never read a book on using indicators… I can’t help you there… there are probably some good resources, though, so ask around…
If I did have to offer a recommendation, I’d probably say to read Jesse Livermore’s stuff… he’s an old school price action trader who made millions in the equities markets in the early 1900’s, but lost his millions because he broke his risk management rules… Livermore’s principles are timeless, however…
Consistency:
One thing Cisco has always drilled into our heads is staying 100% consistent in all that we do… consistency is one of the keys to being a successful fulltime trader…
Once you develop your risk management rules, your trading style, your rules for trading, etc., you must stay consistent and stay consistent with your game plan…
I could go on and on about consistency, but this point is pretty cut and dry and I’m sure you understand…
Conclusion:
Those are my thoughts on trading fulltime… that’s who I see it… I’m sure there’s more that could said, but I think this covers the basics… there’s a lot here so read it a few times if you must… after reading this feel free to find me in the chat if you want to discuss any of these points further…
I hope this helps, and like I said, we’re here to support you 100% in your pursuits of being a successful FX trader…
–END OF PART II–
Add comment July 29, 2008
