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Words of Wisdom

  
  Education
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These generally brief phrases often include such pearls of wisdom as:

“Buy low, sell high.”

This maxim describes profitable trading in a nutshell and represents what every successful trader aspires to do. Of course, this is much easier said than done.

“Let your profits run, but cut your losses short. “

Allowing a winning position to continue making profits while taking losses quickly can make up a solid trading strategy in itself, and it is a key element of just about any good money management plan.

Many successful traders apply this as a trading rule in their trading plans in one form or another, perhaps by having a minimum risk reward ratio where the anticipated reward on a trade is always greater than the risk taken.

“Sit on your hands when you don’t have a clue.”

Knowing when you do not know where the market is going and discerning when to stay out of the market because of difficult trading conditions or because of your individual portfolio situation can save a trader considerable money and frustration.

Remember, good trading opportunities eventually arise for those who wait for them patiently.

“No one ever went broke taking a profit.”

This seems a wise and yet somewhat limiting expression perhaps. Famous trader Jesse Livermore used to say this and then finish with “but no one ever got rich taking three or four points out of bull market”. Taking profits will always add to your account, but by “letting profits run”, a substantially higher profit can often be had.

“It’s never too low to sell or too high to buy.”

Typically, markets will continue moving in the direction of the general trend. When a high or low is made, often a sufficient amount of momentum will propel the price to an ever higher high or lower low.

“Price discounts all.”

The mantra of technical analysts, the saying refers to the belief that news about any event related to the trading instrument – whether it is related to current events or supply and demand – will already be included in the price of a currency.

“All news is old news.”

A variation on “Price discounts all”, this saying refers to the idea that the market has already moved to factor information into the currency pair’s exchange rate regardless of what the news that came out was.

“Buy the rumor, sell the fact.”

Buying the rumor means going long before a bullish news item ever makes it to the news wires for fundamental analysts to mull over. Trading activity then ensues based on this rumor indicating that an item of importance will soon be released. The trader wise to the rumor can take advantage of the release of this news by selling out their position once it becomes public.

“Plan your trade and trade your plan.”

Trading does not favor the scatterbrained over the long term, so having a comprehensive and objective trading plan which can be easily followed and implemented makes up a key component of any successful trader’s methods.

“The trend is your friend.”

Keeping abreast of the major trend in the market and following it by positioning according to its overall direction will tend to give a trader an edge.

“Markets go up the stairs and down the elevator.”

This saying refers to the slow and plodding nature with which markets often go up, whereas when prices decline, they tend to do it in a much faster and abrupt way. While less of a factor in the forex market, this is especially true of stock markets.

Basically, all of the above sayings contain valuable advice and trading wisdom that can be useful for just about anyone involved or thinking about getting involved in trading forex or any other market.

Do You Trade The Market or Your Emotions?

  
  Education
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As traders try to improve performance, the one piece of knowledge that is often overlooked, is self-knowledge. Most traders would benefit by simply focusing on doing more of what works and less of what doesn’t, which sounds obvious, but the reality is that most do just the opposite. Learning to identify which behaviors work and which don’t is not as fun or interesting as learning a new trading strategy or set-up.; and awareness of one’s internal state is just as critical, but that is typically not dealt with.  As a result, most traders focus outward and ignore their inner process. And the way this often plays out for a trader is they trade their emotions and not the market.

‘The Psychology of Trading-Book Review

  
  Education
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Author Brett Steenbarger has done a great job with this book. He covers what I personally believe is the most important element in trading: psychology.

New traders will probably not last through their first year in the markets without blowing up their accounts by taking losses too personally. Many times draw downs cause traders to start gambling when they become desperate to recover their losses. Many times increasing position size when they should be decreasing it is an ego-driven desperation to get back their losses. Other similar bad mental behaviors creep into our trading careers as dysfunctions in our personal lives cloud our minds from being able to make the right decisions in following our systems and established trading principles.

What this book shows is how to take the proper perspective and observe our greed and fear, enabling us to see them for what they are instead of getting caught up in these powerful emotions that lead to terrible consequences in our accounts and lives.

This book is a very good book on both psychology and trading. It is packed with lessons from the authors patients and his own experiences. What the book shows is that we are the most important element in our trading. We must have the right mind set in trading, and while developing as a trader we need to keep a log of the emotions we feel on our losses and wins to better understand ourselves and why we make emotional charged decisions that we shouldn’t while trading. (more…)

TRADER’S AWARENESS ZONES

  
  Education
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If you know who the enemy is and you know yourself, you will never fear the next trade.  If you know yourself but not the enemy, you will win one lose one.  If you do not know the enemy or yourself, you will lose on each trade. Sun Tzu Trader

The very best traders develop market awareness zones as a form of checks and balances for unbridled behavior.   In other words, no sound trading strategy should be based solely on an indicator but on several carefully designed tactics that form a strategic whole, much like a successful football or basketball team relies on a game plan carried out by several players working together, not one player acting alone.  In military terms, all branches working together to defeat a common foe.

Commitment

  
  Education
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When you trade from commitment—and do what you said you would do—you generate an extraordinary amount of energy. You begin to see opportunities in the market that you couldn’t see earlier. You do not need to struggle. All you need to do is to show up and participate in the context of the new trading target. Trading in terms of an expanded target means having the courage to look for what is missing in your trading strategy. This becomes the source of the breakthrough you can produce.—-Trading to Win, Ari Kiev

The Right Approach to Losses

  
  Education
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First of all, understand that losses are a necessary part of any risk taking activity.  The goal should always be to blunt the impact of  losses as opposed to eliminating the losses altogether.  There is a distinct difference between minimizing the impact of losses versus minimizing the number of losses.  If the money you are risking stands between you and hunger, think twice before placing it on the line.  Risk capital must be true risk capital.

Second, losses are better teachers than wins.  As noted above, wins often lead to complacency.  Losses usually compel you to figure out “why.”  If small and incidental to your overall strategy, they confirm that your plan is  working.  If relatively outsized and/or unexpected, losses make you examine the precedent trades and determine if your strategy should be adjusted.  This is how advancement happens.  Thomas Edison needed nearly 10,000 tries to find filament for an incandescent bulb that would last for more than a few hours.  Of the thousands of attempts that did not produce the bulb, Edison did not see them as failures, but rather as things that didn’t work which was useful knowledge in and of itself.  By knowing what didn’t work, Edison was able to find his way to what did.  Containing and then examining your losses will help you do the same with your trading strategy.

Third, recognize that losses that are kept small relative to your portfolio are a big part of the fuel that propels your account higher.  They say that you are taking prudent steps to grow your account… that you are “in the game.”  The alternative, especially if you accept that losses are a necessary part of trading, is no risk taking or the taking of outsize risk (refusing to cut losers).  Neither of these provide a path to account growth.  If you can find/develop a trading method that allows for (in fact, embraces), many small losses while still delivering profits overall, you will have gone a long way toward eliminating the trepidation that most new traders feel about entering the fray.  You will also be able to stop worrying about having the “right” picks.

20 Trading Thoughts

  
  Education
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1.    You have to have passion for learning to trade; passion is the energy that you need to take you to your goals.

2.    You have to have the perseverance to keep going after you want to give up.  90% of new traders quit when they were very frustrated while 100% of successful traders didn’t quit until they reached their goals

3.    New traders spend too much time looking for what to trade instead of focusing on who they are as traders.  You have to know who you are as trader first then you can start building your trading system.

4.    Traders have to be able to manage their stress by trading inside their current comfort zone. Traders have to grow themselves and trade size step by step.

5.    The vast majority of new traders fail simply because they did not do their homework before they started trading.

6.    A trader has to build a trading system that matches their own personality and risk tolerance levels.

7.    A trader that chooses to be master a specific type of trading method or trading vehicles has a much better chance of success than the traders that just dabble in many different things and never make much progress.

8.    A trader has to write a good trading plan while the market is closed to guide their trading while the market is open.

9.    A trading plan has to be followed with discipline to have a chance at success.

10.    A trader has to manage their behavior by acting consistently with their own rules. (more…)

The best pieces of trading advice

  
  Education
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Here is some great trading advice I have gathered around the web. These were either answers from real traders to the question “What is the best trading advice you ever received?” Or it was advice given be successful traders when asked “What one piece of advice would you give to traders?”  There are some gems in here.

Don’t treat trades like their actual cash, separate the thought of money lost and focus on the next gain.

Always use stop losses.

Don’t trade with funds you can’t afford to lose.

Don’t be obsessed by indicators .

Always, always,  put in a trailing stop and take your profit.

Decide what kind of trader you wish to be. Do you want to be a day-trader, a short term trader, or a longer term trader?

The Holy Grail of investing/trading is risk management. If you don’t have an exit strategy or proper position sizing, you are gambling. I recommend all traders spend 90% of their time perfecting risk management, and success will come with time. -Damien Hoffman

Cut losses, cut losses, cut losses. If I followed my own advice, my email would be unlisted or a Hawaii address. -Howard Lindzon (more…)

Forecasting the Market

  
  Education
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Amateurs attempt to make a forecast while professionals manage information to make decisions based on probabilities. Dr. Alexander Elder compares this to a Doctor that received a patient with a knife stabbed in his chest. The family will ask, “will he survive?” and “when can he go home?” But the Doctor is not forecasting, he must prevent the patient from dying, remove the knife, saturate the organs and carefully watch for an infection. He monitors the health trend of the patient and takes measures to prevent any complications. He is managing, not forecasting. To profit in trading you do not need to forecast the future, you need to derive from the market whether the bulls or bears are in control. You need to practice money management techniques for long term survival.

You trade against the sharpest mind in the ocean-like markets. Mental discipline is an undivided part of trading. Please remember the following points:

Understand you are in the market for the long term, that you want to be a trader in even 20 years from now

Develop your trading strategy, either technical or fundamental analysis. If “x” happens then “y “is therefore likely to take place. You may need different tools for trading a bull or a bear market

Develop a money management plan, with the first goal being long term survival. Secondary goal is steady money growth and third goal would be high profits. Successful traders do not concentrate on the profit itself but maintaining successful trades regardless of the earned amount.

Winners feel, think and act different than losers. Look inside yourself, eliminate the illusions and change the way you have been thinking and acting. Changing is hard but could pave the way to becoming a successful trader.

Is Money The Rationale Or The Motivation For Trading?

  
  Education
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Here’s an interesting thought experiment: Suppose you find a trading system that made money consistently in all market conditions. It was backtested objectively during independent time periods and handily beat your own trading performance. It also took less risk to obtain these results, with minimal drawdowns. The system’s price is quite reasonable. The catch? The system trades four times a year.Would you obtain the system? Would you trade it? Would you buy it and then try to tweak it in various ways? Would you be able to follow its rules faithfully, or would you convince yourself in the middle of trades to take sure gains or limit losses?Such a system would not meet the needs of many traders: needs for action, needs to figure out the market on your own, needs to feel like *you* were beating the market. Money is the rationale for trading, but it is not the only motivation. Traders also trade to make themselves feel good, to validate themselves, to avoid a 9-5 job, and so much more.
This is truly the source of most problems with “trading discipline”: what we need to do to make money conflicts with the other needs that we impose upon trading. 
If we bring a host of unmet emotional needs to the perfect trading method, we will inevitably sabotage that method. A rich and fulfilling life outside of trading might just be the best trading strategy of all.
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