Trading Question - From Todd

Hi received an e-mail from Todd about a position trade I took back in July. I figured it would be best served if I answered the question here.

Thanks for the question Todd, and I hope this answers your question.

Greetings!
I just "stumbled" onto your blog. I'm a relative newbie...Your post "Trading Update" from Friday July 28 06 has me intrigued. Could you perhaps elaborate on your position trading method, i.e., explain what's going on in the chart, especially the price patterns you're looking for and your entry/exit points/rules. Thank you. I think it's good portends great things that I came across your blog.

Have a great weekend.

Sincerely,
Todd

This is the chart Todd is referring to....



This was a play off of support. It was pretty simple and straight forward. Earlier in June 06 there was a pretty decent reversal which took place pretty close to the Murrey Math MM -2/8 line. I marked the line on the chart with the green horizontal line labeled 1.2471. As we move to the right you can see that in July 06 that price once again came down and tested the line. It ended the day with a small real bodied candle with long shadows or wicks. This alone tells me that once again the green support line and MM -2/8 is causing some hesitation in price going lower. It also tells me that there are a lot of buyers there willing to buy in that area. This area was also the 50% Fibonacci retracement line. I also know that the Murrey MM -2/8 line is an extreme and represents a buying condition. By the way we also have MACD divergence, which is not showing on the chart.

On the day that the red small real body appears I have a possible trade setup. Now when do I enter? The small real body is really not enough for me to enter the trade, and this is something I have struggled with in the past. I'm sure a lot of other traders have to. Cause if I wait until the following day, price is well above where I wanted to enter. Emotionally this is hard to accept. I've identified a good setup, and now price is running away without me. Not to mention the fact that the recommended stop loss would be below the support line and MM -2/8, so now i have 100 pips more of risk. So what do you do? Looking through my journal it appears I entered this trade in 3 different phases. I took 1/3 of the entry on the close of the small dark body day. Emotionally this works for me. I have minimal risk, and I'm not going to get left behind if the train leaves. The next 1/3 came when price dropped below support. When I saw price drop below support and that sellers could not push the price any lower I know my odds were getting better. So I waited until price pushed above the high of the previous candle and entered. The last 1/3 came at the close of the bullish engulfing candle. Keep in mind that my % risked never exceeded my money management rules. I just divided it up in 1/3's. So if my money management has a 3% risk rule I would be risking 1% with each 1/3. This procedure is still something I'm fine tuning today. It's a work in progress and it keeps evolving.

Now for setting the profit targets. I could tell by looking at the chart that price was making Lower-Highs. This is represented by the green sloping resistance line. So I knew I wouldn't be able to get greedy. I took profits on 2/3 at the MM 0/8 line and was stopped out on the remaining just below the 0/8 line.

I hope everyone keeps in mind that my style of trading works for me, and chances are it might not work for anyone else. It took me a long time to realize that i was not going to become a successful trader by a black box system or copying someone else trade signals. It was when I changed my motivation for visiting forums, blogs, and my discussions with other traders that changed my life. I no longer try to imitate them or copy their systems. Instead I try to pick up on their successful qualities that support who i am as a trader. It's all about finding out what works for me. I know emotionally there are only certain things I can handle while trading. So i have to pick the qualities from successful traders that support this. Just relate it to life for a second. I was taught by various folks. Including my parent, teachers, and grand-parents. The list goes on and on. Some of them successful and some of them not so successful. Well I didn't copy their personalities. I took experiences from each of them, and that made me into who I am. Don't you think the same thing would hold true with learning to trade?

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Trade Well....
Brent

Plain Old Truth - Rule #2 (Part 2)

I've been doing a lot of research on this particular rule, and it really seems the odds are stacked against us. You see most of the brokers we deal with are not "non-dealing desk" brokers, which basically means that they are market makers. This puts us in direct competition with them. At this point I am very skeptical that someone can win consistently dealing with these kind of brokers. I mean we are basically in competition with someone that can see every aspect of our orders, including stop losses and profit marks. If I can not find a reputable non-dealing desk broker, I'll most likely switch over and trade a regulated exchange.

The following two links will give you additional insight, please take their warnings to heart.

http://en.wikipedia.org/wiki/Forex_scams

I'd like to personally thank Phil for his efforts. It's really been an eye opener for me. Phil will be starting a public forum where forex traders can discuss their interaction with brokers, and hopefully the discussions will lead to answers. There's a lot of good information on his blog. Please study it carefully.

http://nondealingdesk.blogspot.com/2006/05/spiking-fact-of-forex-life-if-so-its.html

Plain Old Truth - Rule #2

Okay...Let's get started with Rule #2. Bottom line don't trust anyone. If they're trying to sell you something you need to exercise some common sense. Everyone is in the Forex venture to make money. Everyone from your broker, folks selling the systems, alert service, and us the traders. There's an old saying out there that goes like this....

"If you want to make money during a Gold Rush, sell the picks and the shovels."

Well the Forex is definitely a Gold Rush, and there are a lot of folks selling worthless picks and shovels. Let's break these down a little.

The Broker:
The Broker is out to make money like you and I. How do they make their money? Mainly by the spread difference between the bid/ask prices. Well lets think about that a minute. So if a broker wanted to create more revenue how would they do it? First they could encourage traders to trade more. Here are a few examples you've probably seen. Offer monthly trading contest for a cash prize. I don't know about you guys, but when I see how many pips those top guys make, I want to start trading my ass off. Give away free software that you can create EA's (Metatrader) with to trade 24/7. Or make API's available so you can program your own robot to trade 24/7. Bottom line the broker acts just like a casino. Time is on their side. They know the longer you trade the more likely they'll get your money.

The second thing they do is stop running. This is pretty easy for them considering there is no common price between brokers for a currency pair. There's no central exchange, they are all on their own. I've actually picked the act turning point with my stop loss dozens of times. It's funny when it happens I'll open a chat with my broker and tell the support person that once again I picked the exact turning point with my stop loss. I'll go on to say that I had the same position opened with my other broker (same stop loss) and it never got stopped out. I get some pretty interesting comments. Afterwards things calm down a little, and then later it starts back up again.

The last thing you need to know is to be careful when someone is recommended a broker. You see a lot of blogs/websites with broker recommendations on it. I'm not referring to the Google Ads you see, those are pretty harmless. I'm referring to how some brokers will actually give people/companies commissions for referring folks. Here's how it works. The person that recommended you can actually get a per-trade commission fee every time you make a trade. Sometimes that fee can be $1 per mini-lot. Yeah it makes you feel pretty good about the advice you've been getting from their blog/website doesn't it.

The Sellers
I like many others I have thrown a lot of money away on crap. Looking back if I just would have used some common sense I would have saved myself a lot of money and time. Don't get me wrong there are some good courses, books, and mentors out there. You just need to make sure you do your homework. Go to Fx-Review.com and see if anyone has information about them. This is one of the few times I would recommend it, but go to the forums and do a search for the person and whatever they are selling. If someone has had a bad experience it will be their. Basically if it sounds to go to be true it is. Ask for references, ask for broker statements, get specifics from them. I would never recommend buying something from another trader. I don't care how good they say they are. I've been their and it doesn't work. I look at it like this. If I had a system that made consistent profits, the last thing I would do is sell it. Think about it, if it works your making money. Why in the world would you want to mess with customer service, answering question, just the overall BS of making sales. The bottom line is...You wouldn't. Real trading takes concentration, and good traders don't mix the two. Good salesman will though. It's obviously crap so stay away from it. The other thing you need to keep in mind is that if this person/company developed something there's good chance it won't work for. Trading personalities are all different. One system doesn't work for everyone, and a good trader knows this. So if a "good" trader is trying to sell you it, they're taking advantage of you. You also need to be aware of something else. Take a look at the following chart. This indicator calls the tops and bottoms perfectly. Just go long when green crosses the zero line, and go short when red crosses the zero line. Pretty amazing isn't it??



Well custom indicators can "repaint" themselves. So what you see here is not what you would see in real-time. Looks pretty convincing though doesn't it?? Oh Yeah, SolarWinds is not the real name of the indicator. It's an indicator that someone else developed that went by a different name. The originator however was up front about the repainting issue. You'll see this a lot. Folks take an indicator, create a system/methodology with it, rename it, and sell it. Stay away from these folks. They're just out there to take your money.

I'll elaborate on the "sellers" section a little more when I get into Rule #4. Who knows I might even give you some specific examples I've been through.

Summary:
Just use some common sense. Initially don't trust anyone. The people that sell the picks and shovels are slick. They know you need certain things to make it in the Forex gold rush, and they are going to make whatever they're selling as attractive as possible.

The Plain Old Truth

Like most of you I have seen a lot of things take place in the Forex community that just isn't right. I've decided to sum some of my expriences up into rules. Hopfully someday someone will stumble across this site, and it will make them better prepared to tackle the Forex and the Forex community when they start their quest to become a full-time trader.

Anyway I've pretty much summed everything up into 8 Rules. I'm planning on posting all the rules here and then, as time goes on, I'm planning on elaborating on them in individual posts. In each post I'll share some insight and some of my experiences with each rule.

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Here they are....

1. Use common sense.
2. Don't trust anyone.
3. Learn how to trade. (No automatic trading systems).
4. Don't buy a system or "Methodology" from anyone. Create your own.
5. Stay out of the Forex forums.
6. Do not use Alert services.
7. Hire a mentor. (After proper screening).
8. Treat your trading like a business.

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Rule #1

I decided to go ahead and elaborate on this one here, because it's going to be relatively small. Basically all we need in the Forex world is a little common sense. I mean really just think about things. The old saying still holds fast.

If it sounds to good to be true it is.....

You'll basically use Rule #1 when you are faced with all of the other rules.

So again just go back to the basics and use some good old common sense. Out of all the stupid things I've done, including buying junk trading courses, lowsy trading systems, picking brokers, etc. If I just would have used some common sense I would have saved myself a lot of money and heartache. It's hard sometimes though, because you want to make it so bad that you convence yourself that it works. And that is what these "Slick Willy's" feed off of. Instead just step back an realizing that it's all crap.

Anyway "Use Common Sense" is Rule #1

How to Control Fear And Greed in Trading

Here's another article that I had in my collection and I thought I would pass on. I have a "Favorites" folder in IE that has trading articles I've came across while doing research. Occasionally I'll revisted them. It helps me keep on track with my goals and strategies.

I think I will utilize my blog by passing some of them on to everyone. Hopefully they will benifit you as much as they have me.

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There is an old saying that the market is driven by fear and greed. Anyone that has placed more than a couple of trades will surely have experienced these two emotions.

All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let's look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios:

1. The trader's three previous trades have been losers. The unsuccessful trader will consider this before placing his next trade and be fearful that this trade will also end up a loser. This might result in a delay in placing the trade whilst waiting for the price to confirm that they were right - thus missing a perfectly good entry. They might suddenly discover that some other factor, previously unconsidered, is a reason not to enter the trade at all. Basically they will be fearful of another loss.

The successful trader will have tested their strategy extensively and will be aware that a series of losing trades is very probable. They will also measure their success on whether they place the trade according to their system rather than whether it is purely a winner or a loser. They trust their system and place the trade when the set-up occurs. The fear is removed from the trade because they know that several losers in a row is to be expected.

2. Once a trade is entered it immediately moves against the trader. The unsuccessful trader will fear that they have made a mistake. They fear making another loss so they wait and hope that the market moves back in their favour. The fear of taking another loss now controls their trading decisions, they might move their stop further out so the market doesn't take them out for a loss. They might ignore the trade, hoping that it will get back to at least breakeven - the daytrade becomes a position trade of a few days and then it becomes a long term 'buy and hold' strategy.

The successful trader, of course, will know from extensive testing of his system that such trades happen and that the trade might come round or it might hit the stop. His stop is in place and it will remain in place - the system dictates where the stop is, not the trader's fears.

3. Once a trade is entered it immediately moves strongly in the traders favour. The unsuccessful trader will suddenly see a villa in the sun or a new sports car flashing before his eyes. This trade is going to the moon so he removes his price target and decides to let it go. Greed has now completely taken over his trading decisions and the previous plan (if any) is ignored. Of course, markets rarely move in one direction for long and when the market turns the greed turns to fear as the dream slips away and the trader tries to hold on until the price gets back to where it was. The daytrade becomes a position trade...

The successful trader has set a target, either a certain price or a timed exit and will stick to it. If the trade only takes 5 minutes then that's just great, there's plenty that won't.

Fear and greed are human emotions - we can't do anything about that. But, when it comes to trading we need a way to control those emotions. Here's a few tips:

1. Know your system. If you have confidence in your system this helps to override those feelings of fear and greed. Confidence can only come from designing and extensively testing your own ideas. You can never be fully confident when you rely on someone else's tips or signals.

2. Automate your system. Computers do not suffer from fear and greed, they won't hold onto a loser praying for a miracle or screaming at the screen that the market is wrong - they'll just cut it if that is what the system says to do.

3. Money management. Quite simply, no matter how good your system you must only risk a sensible amount - and always money you can afford to lose.

"The Secrets of the Super-Traders"

I came across this article the other day, and I felt it had some decent points and it was worthy of publishing it on the blog. It is primarily worded for stock trading, but I think you all will get the point.

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The Secrets of a Super-Trader

The first and perhaps most important "secret" is to realize that your methodology or approach (no matter how good) is only part of being a highly successful trader. This applies to any trading style including, day trading, swing trading or position trading.

The simple fact is that a bad trader can screw up a fantastic trading system. Conversely a talented trader can take a mediocre strategy and make money with it.
Why? Please read on and I will explain.

Many traders/investors that I have talked with think that to be a "Super-Trader" that they must possess some type of highly advanced trading techniques or software along with nerves of steel and a highly developed intuitive feel for the markets. In addition they think that these elite group, have some "inside information" that they don't.

You will be relieved to know that the above is not necessary. There are actually only a few things that separate traders who consistently make money and those who don't.
And here they are?

* Skilled traders find a strategy or market pattern that offers a high probability for success. They make money by exploiting this edge over and over again.

* Skilled traders never deviate from their methodology or "wing it".

* Skilled traders never enter a trade without a entry and exit strategy. They know exactly when and where to cut their losses as well as taking profits.

* Skilled traders never ever let a winning trade turn into a losing one. The easiest way to ensure that this doesn't happen is to place a protective stop at or a few ticks in the money once your position is up several points.

* Skilled traders never hope, pray or wish that their stock would go up. They understand that when they are wrong they are wrong and the best thing to do is cut their losses short.

* Skilled traders never trade with their emotions. They don't allow themselves to get caught up in the latest and greatest investment hype.

* Skilled traders always have one goal in mind: To preserve their capital at all costs. They do this by never taking on too large of a position. A good rule of thumb to adhere to is never use more than 5% of your funds on any one trade. This way in the worst-case scenario the stock could drop to zero and your account would not be severely affected.

* Skilled traders never get too greedy. There is an old saying that "Pigs gets fed and hogs get slaughtered". These traders don't try to make one big trade that will turn them into instant millionaires. They don't try to hit home runs, instead they understand that it is better to keep hitting singles and making smaller consistent profits.

* Skilled traders enter and exit trades swiftly and decisively.

* Skilled traders listen to no one else's opinion concerning the market or particular trade they are in.

* Skilled traders are often contrarians. They will be buying when others are too scared to and sell when the crowd starts buying.

That's it, the secrets to making big money in the markets. Perhaps that is a bit of a let down as you were hoping for something a bit more esoteric and complicated.

Let me assure you that if you follow the above principles that you will take your trading skills and profits to a level that you never thought possible!

This article is courtesy of Dr. Jeffrey Wilde, a trading veteran with 15 years of experience in all major markets. He is a trading coach to over 1400 traders in 38 countries.