Some Forex Philosophy

Works With Stocks Too!!

I remember one of the smartest human beings I’ve ever mentored, in my 15 years in the markets, explaining a trade he wanted to place. Let’s call him “Neal.” Neal told me that the Fed needed to raise rates immediately and he was piling up long USD. Well, the rate rise never came, but he made $1oK on his position anyway. The market was pricing in a larger rate rise in the future. He then prances around my trading room like a show horse, talking about how he was right for taking such a large long position. I walked over to him and proceeded to tell him that we were taking the money out of his account. “What?! Why?!” exclaimed Neal. “Because you were wrong. You said the Fed was going to raise rates immediately and they didn’t,” I told him, “so you have to give the money back.”

Obviously, we didn’t take the money from Neal but the point, I believe, is a strong one. In trading, focusing on being “right” will get you a cup of coffee and a few hours in front of the help wanted section of Craigslist. Right is ego and that has no business in a trader’s working day. If you want to be “Big shot trader,” do it at the bar at The Four Seasons Hotel on the weekend.

In successful trading, there is no “right,” only good trades and bad trades. As you grow as a trader, you want to eliminate as many bad trades as human nature will allow. It is possible to lose money on good trades and make money on bad trades but as time goes on, the more you eliminate the bad trades and put on the good ones, the more money you will make. What makes a “good trade”? It’s a combination of discipline, risk/reward, money management and internal honesty. Looking inward to see if you are in a trade because you want to prove (to others or to yourself) just how smart you are or because you did your analysis, calculated risk/reward and decided that this was the best trade the market offered you. Have you ever walked up to your screen with a position in mind only to find the charts or the fundamental news told you something different? Which trade did you put on? Were you able to face that your opinion was wrong and put on the good trade that the market was offering you?

Most successful traders that I know in the modern age have varying levels of personal ego, but very little trading ego. They are fine with a loss and know that the market will not save them from themselves. The days of the big swinging pit trader, pushing the market around, are over. There may be funds and institutions that can temporarily affect market direction, but the Forex market is too large and will always go exactly where it is supposed to be. Do your research and be disciplined in your trading plan and leave Neal, the prancing show pony exactly where he belongs…in the barn.

Bob Iaccino
TraderOutlook.com

Proper Position Sizing

Proper position sizing is something many traders never even think of, let alone learn to master.

To determine our positions size we must first set a stop level. This should be a logical place which will be out of range of normal market movements, and if hit will be at a level where we know we are wrong about the direction of the market. Remember, a trader should not risk more than 1-2% of capital on a trade. Less is better. Larger accounts are likely to risk much less than 1% of capital on many trades. They may do this by selecting a fixed dollar stop which is less than 1% of their account.

If our account is $5000, we can have a maximum loss of $100 if we risk 2% of our capital on the trade. Let’s say we choose a stop which is 50 pips below our entry buy price. From this information we can determine our proper position size; we can take a maximum of 2 mini lots. If our stop is hit, we will lose 50 pips X 2 mini lots, or $100 which was our maximum loss.

Taking 2 mini lots on this trade allows us to have an ideal stop (this will be different for each trade) and keep our risk in check. As our stop (or risk level) increases on the trade, our position size will decrease, and as our risk (on the trade) decreases our position size can increase. As our account grows our position sizes will also generally increase as we are able to risk more capital on each trade.

Whether we risk a percentage of our account on each trade, or choose a fixed dollar amount we are willing to risk on a trade (for larger accounts) the method above should be employed to determine the proper position size based on the stop level which is ideal for the trade. This means each trade may be for different quantities, depending on the dynamics of the trade set up.

To learn more about my writings and follow my blog posts you can view everything at darkpooltraders.com an active community of professional traders.

Best,

Ron Chernesky

Following Other Stock Market Traders

With all of the trading websites, services, blogs and chat rooms available these days on the Internet it can be a trick to decide who you want to trust or follow. Following someone refers to watching them trade and making the same trades they do in the hopes of becoming profitable.

Some traders post their trades on their blogs at the end of the day. This works if your swing or long term trading. There are stock people that start and run services where you can pay to have access to their trades. Lots of chat rooms exist where traders post their trades throughout the day as they make them. Internet sites such as Covester and Stocktwits are two such places. Many bloggers are now setting up chat rooms within their sites to attract visitors. Any number of ways to follow someone exist.

Opportunities present themselves in many different places throughout the online world to take the easy way out and shadow someone else's trades. The problem lies in finding traders that are good and consistently make money. There are literally thousands of people online trading these days. Finding the good ones is not always easy.

The braggarts are the most tempting, and usually the most dangerous. If you fall in with one of these you could lose big. Some of the really good guys are braggarts in their own right, it's just a matter of trial and error finding out who's real and who's not. Best to work on that in a paper account. Some post their winners and not their losers, so you can be drawn in by a false pretense of high percentage winners. There are those that make a trade and wait to see which way it goes before posting and let you know about the good ones loudly. Do your research and be careful.

Pay sites sometimes started out as free blogs or a good trader posting trades in chat rooms. These are the business people. Like the dealer on the street, they get you good and hooked on following them, then announce that they are going to start offering a premium membership. In my experience these are usually some of the best traders out there. They have to be to get and keep any business. At least in this case you know what your getting. Most of the time they try and keep their other thing going, but usually it is just to much. Some of these fail as the trader wasn't really good enough to pay for his service, and sometimes their followers are just offended. If your making money consistently you don't have a bad deal as long as your profits outweigh your costs.

The worst, and some of the ones you can make money following, are the copiers. The ones that take trades from other good traders and then post them as their own. You may never know the difference.

If it's from a site you don't know or use you could go on forever following this guy, the whole time thinking how good he is, and never knowing the truth.

Gurus come and Gurus go. Some have a nice spurt because of some factor or another and then fade into oblivion. There are those that are OK traders and just happened to have that one super year. Of course a lot are steadily consistent and make a good living. There is the flash in the pan, one hit wonders and even just great story tellers. Sometimes an exceptionally long trend is caught and can make someone look a lot better than they truly are. Point is Gurus have their streaks. I find it better to pay for a service I want to try by the month. That way I can find out if it's the real thing, or just another flash in the pan, and if I am convinced I can always take him or her up on the savings per year deal.

Whatever you decide to do, the best thing is to know what your doing. Accomplish this by educating yourself and learning how to do it on your own. Then follow someone for the convenience of it if you should so chose to do so.