Month: February 2014

It’s (NOT) All About the Money

“In 1923, seven men who had made it to the top of the financial success pyramid met together at the Edgewater Hotel in Chicago. Collectively, they controlled more wealth than the entire United States Treasury.

Who were they? Charles Schwab, president of the world’s largest steel company, Arthur Cutten, the greatest wheat speculator of his day, Richard Whitney, president of the New York
Stock Exchange, Albert Fall, a member of the President’s Cabinet, Jesse Livermore, the greatest trader on Wall Street, Leon Fraser, president of the International Bank of Settlement,
and Ivan Kruegger, the head of the world’s largest monopoly.
What happened to them? Schwab and Cutten both diedbroke; Whitney spent years of his life in Sing Sing penitentiary; Fall also spent years in prison, but was released so he could die at home; and the others Livermore, Fraser, and Kruegger, committed suicide. ”

– Donald McCullogh, “Waking from the American Dream”

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How to Avoid the Two Trading Account Killers

downwardspiral

How to Avoid the Two Trading Account Killers

I have two signs prominently posted above my forex trading computer.  They read, “Take the Profit!” and “Stop the Bleeding!”  They are there as a reminder, a critical reminder, to avoid the two sure ways to kill your forex trading account.

Greed and emotion are account killers – deadly account killers.  Let’s take a look at each of them and how they threaten your trading success.  I’d go as far as to say that if you can just avoid these two forex trading traps, you’re almost guaranteed to be a successful trader.

GREED

One of the first trading maxims I heard many years ago, when I started out as a commodity futures broker, was “Pigs get slaughtered”.  Well, it only took me about ten or fifteen years to finally really learn the truth of that maxim and steadfastly apply it to my trading.  Greed will kill you in trading – in forex trading, stock trading, commodity trading, or any other kind of trading.  Here’s greed in action:  You have a very nice profit…but you want more.  And you’re just dead solid sure that the market is going higher (or lower).  And so you hang onto your position even though your profit slowly starts to erode.  Now you’re only 10 pips ahead instead of the 20 you were.  But you just “know” the market is going to move back in your favor.  But it doesn’t.  Soon, your profit is all gone, maybe you’re even suffering a loss.  Somewhere around this time you probably have the thought, “I should have gotten out at 1.3580!”  That’s right – you should have.

Don’t be greedy.  TAKE THE PROFIT!  In currency trading, if you turn a profit – I don’t care if it’s just one dollar – every day you trade, you will eventually make all the money you want to, and more.  Stop trying to make a million dollars in one trade.  I cannot stress this point enough – take a profit!

THE DOWNWARD SPIRAL – THE SPINOUT

Now let’s get back to your story, and look at the other account killer – the most deadly one – the downward spiral fueled by emotion (usually anger).  The flip side of “take a profit” is “minimize your losses”.  You’re going to have losing trades – we all do, it’s part of the game – but if you can just keep those losses small, you’ll be fine, and your profits will more than cover them.  Now, back to your story…Your once profitable trade has turned into a small loss.  You’re kicking yourself for not taking the nice profit you had.  You’re mad because a profit you had has now turned into a loss (HINT:  You don’t actually “have” a profit until you TAKE it by closing the trade).  You’re angry with yourself, angry with the market, and (understandably) just generally upset because you’re losing money.  And here’s where you run off the rails and start killing your account:  You’re determined to get that profit back, you absolutely refuse to take a loss.  So what do you do?  You stay in a losing trade as it becomes an even bigger loss, hoping against all good reason for the market to turn around.  You move your stop again and again to avoid being stopped out.  If you get stopped out, you immediately re-enter the trade, with a stop even further away.  Or worse, you double up your position, thinking (or rather, NOT thinking, not very smartly anyway) that when the market “inevitably” moves back in your favor, you’ll make up the loss by having a position twice as large as your original one.  The market continues to go against you – your equity is dropping at a dangerous rate.  But all that does is make you more anxious, more frantic, more desperate…and more foolish.  The downward spiral continues until you’ve either completely blown out your account or taken a loss so big that it will take you weeks of good trading to recover from it.

Sound familiar?  We’ve all done it.  I know I have, and more than once.  The first time I built up my trading account to $1000 (having started with less than $100), I completely blew out the account in just two days – wiping out all the profits I had spent months making, and I did it by following just the disastrous path I described above.  If you’re an experienced trader, that’s not that hard to believe – you may even have done it yourself (although I hope not).  That’s the reason for the second sign above my trading computer – “STOP THE BLEEDING!”

Okay, so you violated the first rule and let a profitable trade turn into a losing trade.  Bad move, but not a disastrous move unless you compound it by going into that deadly downward trading spiral.  Just take the hit.  Fine, you had a losing trade – it happens.  But as long as it’s not a huge losing trade, you’ll get over it, probably as early as tomorrow.  I have – once, I let a 10% profit turn into a 5% loss, but fortunately I had the good sense to just take the loss, and I turned a 20% profit the very next day (ironically enough, in the exact same pair, at almost the exact same price points), which did a wonderful job of taking away the pain of that small loss.

Maybe you don’t have to post big signs on the wall like I do.  I do, because I’m self-aware enough to know that I’m a born gambler and therefore prone to falling into those two deadly trading traps.  But please, for the sake of your success as a forex trader, do whatever you have to, to firmly fix those two ideas in your mind – “take the profit” and “stop the bleeding”.  Because here’s a very simple secret to being a successful trader:  If you can simply avoid doing the wrong things, you’ll naturally do the right things.

Wishing you success and happiness, always!  And as always, these are just my thoughts and opinions.  I could be wrong.  But I’m not.  J

Jack Maverick

Jack Maverick is a writer and active currency trader.  You can contact him at https://plus.google.com/u/0/103534926809963693894/?rel=author   and find his latest novel, the psychological thriller “A Cross of Hearts”, on Amazon at http://www.amazon.com/Cross-Hearts-J-B-Maverick-ebook/dp/B006GHJ0ZC/ref=sr_1_5?s=books&ie=UTF8&qid=1392904532&sr=1-5&keywords=A+Cross+of+Hearts

The Secret to Using Technical Trading Indicators

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The Secret to Using Technical Indicators

     What in the world is a “stochastic”?  How do people even come up with words like “stochastic”?  Me, I can’t even spell “stochastic”.

     So, believe it or not, I am actually going to reveal to you – right here, today – the ultimate SECRET to using technical trading indicators.  But it’s not what you think.  So, pay attention.  J

     Which technical indicators work the best?  The simple truth is…all of them.  All right, just stay with me here and I’ll explain something quite a bit more useful than that basic fact.  It is, however, a fact.  Every single technical indicator ever created made money for the guy who created it – which is why he publicized it, and why we know about it, and why it’s available for download somewhere.  Welles Wilder became famous for developing the RSI (relative strength index), and used it very profitably (that’s why he’s considered a “market wizard”).  Me, I can’t make a dime using the RSI.  I have occasionally loaded his Parabolic SAR on my charts, but it’s never been more than a pretty little line of dots decorating the chart.  I’m not trying to bash Welles (cool name, huh?), nor his indicators.  I’m simply making the point that they haven’t been particularly helpful for ME.  Which brings me to my overall point:

     THE TECHNICAL INDICATORS THAT WORK BEST ARE THE ONES THAT YOU PERSONALLY CAN USE TO MAKE PROFITABLE TRADES.

     That’s the secret:  They all work for somebody, but you have to find the ones that YOU are comfortable using and that work profitably for you.  And now, just because I’m such a nice guy, I’m going to do my best to help you accomplish that task.  It’s really not that difficult – you can do this.

     Experiment.  You’ve probably already got some sort of basic technical trading strategy that you stumbled across one place or another.  Great.  Now, simply try adding one or two additional indicators, and see if they help (or hurt) your trading.  I wouldn’t try out more than one or two at a time – you don’t want to clutter up your charts with too many indicators, as all that will do is distract and confuse you.  If you have too many indicators loaded at the same time, they’re almost certain to give conflicting signals – your RSI says sell, your ADX says buy; your moving averages say buy, your Bollinger Bands say sell.  Myself, I have a whopping total of 6 indicators on my basic trading chart, and 4 of those are moving averages, so that means I only have three different types of indicators.

     When you’re trying out various indicators, give them a fair test – use them for at least 2 or 3 weeks, and do things like trying them out on different time frames.  Something that doesn’t seem very useful on a 15 minute chart may work like a charm on a 4 hour or daily chart.  Try out different versions of various indicators.  There are several variations of, for example, the MACD and the ADX.  I personally use the “Hull Style ADX”.  Is it head and shoulders above every other version of the ADX? – No, it’s just the one that works best for me.

     That’s how simple it really is – try things out and discover the ones that you’re comfortable using, the ones that work for you and your style of trading.  That’s the secret.  I know there are plenty of traders out there who do very well using indicators that I never use – I also know that I do pretty well using indicators that they don’t use.  There are a number of factors that determine the differences – what time frame one trades, one’s general trading purpose and goals (for example, long term investing vs. making a day to day living), and again, simply the different personalities we each have.  What’s of critical importance is your personal trading style and how various indicators either work with it, or don’t.

I urge you to test things out on an ongoing basis (I usually have at least one indicator loaded that I’m just looking at, considering, but that’s not currently an active tool in my trading arsenal – and I’ve been trading for several years).  You never know when you may find the one indicator that helps you boost your trading performance to a whole new level.  Make sure you’re aware of the general type of an indicator – it’s likely more helpful to have one trend type indicator and one momentum type indicator, rather than using two trend indicators.  Again, I caution against using too many indicators.  A pile of indicators creates a pile of confusion.  I’ve been successful trading 4 hour charts using nothing more than two moving averages and one momentum indicator.

In sum, the “secret” is that the indicators aren’t the key.  The key is your personal trading style and what works for you.  So just try out different indicators to find the perfect ones for helping you become a more successful trader.  Hey, that’s the whole secret to trading – finding the things that work for you and your style of trading.  You can do it!

As always, I wish you all the success in the world, and as always, these are just my thoughts and opinions (they could be wrong…but come on, when has that ever happened?).  J

Jack Maverick is a writer and active currency trader.   You can contact him at https://plus.google.com/u/0/103534926809963693894/?rel=author and find his novel, the psychological thriller “A Cross of Hearts”, on Amazon at http://www.amazon.com/Cross-Hearts-J-B-Maverick-ebook/dp/B006GHJ0ZC/ref=sr_1_5?s=books&ie=UTF8&qid=1392904532&sr=1-5&keywords=A+Cross+of+Hearts