Practicalities and philosophy of trading from a profitable trader

goldmember1

Member
60 7
Introduction

I have been trading since 2009, initially with stocks and shares, and then I advanced onto CFDs in 2010 (fell out of favour of those because of advantages of spreadbetting). I thought that I would provide a guide for traders who were interested in trading successfully.

I hope to provide some actual advice from a profitable trader that will benefit other traders. I realise that many teachers here claim to be profitable and don't provide any proof, so I decided to have a public track record - it is only from 2011 when I started trading - My Myfxbook is located here for anyone who wants to track my results:

goldenmember's Profile | Myfxbook

I am a strong believer that many retail traders lose money because the education and information out there is produced by failed traders, internet marketers and people who have been trading too long and convinced themselves they are experts. I hope that what I write about will be helpful.
 

Cducati

Newbie
2 0
Anyone that's been at this for a while can and will appreciate how impressive those figures are , looking forward to any insight you may provide.
Cheers
 
M

member275544

0 0
Anyone that's been at this for a while can and will appreciate how impressive those figures are , looking forward to any insight you may provide.
Cheers

thanks Cducati, but I cant claim these figures I'm afraid
I'll try and provide some insight in time however
 

Cducati

Newbie
2 0
Was talking about goldmember1 figures , I don't pay much attention to anything automated, nothing personal .
 

goldmember1

Member
60 7
If you're satisfied that is in fact me, I'll go ahead and delete the message to tidy things up.

The False Path of Perfect Trading

I am a retail trader, not a professional. I also work a standard job as well - I am not a full time trader because I quite appreciate working (as I invested quite a lot of time in training for my profession), but I do not regard myself as a "trading professional" or a "city trader" nor do I have any aspirations to do so. I came into trading for one purpose, and that was to make money from the money I earned, and I think that is an important for everyone to bear in mind as I rant.

I see that many traders try to achieve 'perfect trading' or some sort of 'trading nirvana' by getting the trade exactly right, but I don't think there is any advantage to be gained of being exactly right, or posting a chart saying that your entry was within 2 pips of the low, and exit 2 pips from the high. After all if someone earns $200 through a 200 pip trade where he picks the bottom and exits out of the top, its the same REAL WORLD RESULT as someone who managed to earn $200 through trading 40 pips of that move (in fact I would argue that the person who traded 40 pips of the move had a safer strategy).

When you leave the computer as a retail trader you re-enter the real world. Unless you work at a trading desk you don't have a trading firm to pat you on the back or give you a bonus for executing a perfect trade. If you go boasting to your friends, your wife about your perfect trade, they will not really care!

To your wife, your $200 from a perfect trade is just as good as $200 from a dirty trade, and buys just the same amount of make up, shoes and clothes. There is an excellent market wizards video where Jack Schwager mentions that no one ever got rich by getting perfect trades that I watched when I first started out. I didn't get it back then, but I understand what it means now.

When I first started to read about forex trading early 2011, there was a lot of talk about demo trading until you are perfect, and there was a considerable body of posters that said the opposite of what I just wrote: that you should learn how to read the market perfectly and not care about the money, then the money would come to you. In fact there was a very high profile forum member we shall call C on forexfactory who claimed that he could predict the price to the pip and used to flame people all the time for not being able to predict the market all the time (he had a tendency to grid trade, and disappeared whenever there was a large trending move).

I used to believe him and others like him, and attempted to trade perfectly, but after a time I realised it was pointless. Getting every pip of todays move, or not 'leaving a pip on the table' (I hate that saying) does not make you rich, and it is practically impossible to do on a regular basis. Trading is not about perfection like sports or any other discipline because it is very chaotic.

Once I recognised that the point of trading was to make money (duh, right!), then I recognised what Jack Schwager was trying to say: the goal of work/trading is to make money, NO-ONE CARES about being perfect. And your goals in trading should reflect that - by all means trade demo/trade micro accounts until you have a working strategy, but you have to start making money in the end. I recall talking to a retail trader who was planning on trading their $100 000 pension. They were trading a $100 account for about 6 months, and one day he came to me and was incredibly happy that he made 12% one day. He said "If I scaled that up I would have made 12% on $100 000 ($12 000)." I congratulated him, but thought that - but you didn't make $12 000 - you made $12 in 6 months (a salary of 50 cents per month). Assuming that he was trading $100 000 when he was in fact trading with $100 was like saying that if only he shorted gold at $1900 - its a 'if only' fantasy.

What I am saying is there is very little point trying to trade a demo account or a micro account of $100 for years trying to get perfect because it will never happen (I'm not saying demo is not useful - on the contrary I think it is useful for testing).

I think that people are focused mistakenly focused perfect trading because they assume that their trading and prediction will get better and better with time like in sports or another game. If you look at fund managers though, their trading does not get better year by year. Trading involves a lot more outside factors that will influence performance, so I would strongly advise against trying to be perfect, but instead focus on making money/preventing excessive loss.

Obvious right? But you would be surprised at how many people still spend years going for perfection - as I mentioned, I did for a time go for this method, but ultimately is not not necessary and is time sink and unachievable.
 
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goldmember1

Member
60 7
Equity Goals in trading (and other goals)

Trading for me is about making money. Others might have goals of trying to be the best, or carve a respectable name for themselves as a trader, or to impress their friends, but for me, it is about making money (and not losing it). Therefore I compare it to a job, except that it is more risky, and less consistent. The parallels are quite plain - you turn up at work at your computer, you spend time on your analysis, and then you place trades. The hours you spend at trading are very much like spending hours at work. Of course, the main difference with salaried work is that you cannot lose money - hence trading is a bit worse than work because of the unreliability if they paid the same dollar value.

When you are considering trading, you should compare it the value you are getting out of it to what you would get at work. The average American monthly salary was $3769 in 2011 for standard work - minimum wage would around $2000 per month. If you are a full time forex trader, then you should be making $3700 at least, plus a premium of around 30% for the variability and risk you are taking on (lets also include reduction in transport costs and hours as a perk). This means that if you are replacing your work with trading, then you should be making on average $5000 per month if you are going to dump your average job. If you are working a minimum wage job, then you should be earning at least $3000 per month if you are going to dump your minimum wage job for trading.

In fact, a lot of retail traders do not make near this amount per month, and yet still spend their working hours at the computer trading - a lot of them lose money. One typical reason I hear is that "this is just a learning phase" - however there are people in the learning phase for years and who never leave. Most courses and apprenticeships do not require 8 hours a day for years to learn - nor is this necessary for forex trading, yet people put themselves through it. However, you can always learn while you work. This is a point that I will come onto later.

I equate money earned from forex as the same as money earned from a job. It buys the same amount of food, electronics, beer, housing. However, retail traders seem to cheer that they earned $2000 in a month for forex far more than they they would cheer if they earned it from their job. The reality is that if you are not making money in forex, you are worse off, and losing time compared to someone who is earning a minimum wage job. Some people would argue that forex is a time sink in which you are losing money, especially if you have dumped your job to trade, or are refusing to look for work and instead are spending time trading.

This is especially relevant for people who are trading micro accounts or $100, $200, $500 accounts. These people are in fact losing valuable time, and potentially money by refusing to look for work.

The great thing about trading is the accessibility. You can trade at any time, and it will always be there. Unlike work, you can take 2 months off, and it will treat you just the same. As a boss, trading is incredibly forgiving if you want to take an unpaid vacation - it will always let you come back in the same position no matter what. Whats more trading can be built around any work you do. Do your work, and then trade when you have some free time - forex will not fire you for moonlighting, or working too few hours!

Many retail traders have the wrong priorities and quit their $3700 per month job for a terrible paying job (trading). Others are young students who refuse to look for work that would provide $2000-4000 per month in lieu of accepting $100-200 a month (if that) from trading.

When you decide to trade you should set equity goals for yourself. Money management is not just about 1% risk, but managing your income in the most efficient way. Don't quit your $3000/month job for trading if you cannot make $3000 per month doing it. Don't refuse to apply for jobs because you want to spend months battling away with a $200 account. You can always reduce your time commitments at work when you start to make $3000-5000 per month trading. Better still, you can find a job that you love to do and work that part time. If you love looking after animals, fixing cars, doing gardening, hanging out at nightclubs as a bartender, then its better to spend some time working than spending it crouched in front of your computer - you might even appreciate the extra income.

So instead of trading your $100, $1000 account, look for ways that you can increase your equity to a reasonable size before you stop looking for work/stop working. I would say that $50 000 is really the minimum equity you need to start earning a comparable salary to the standard American wage. This varies from country to country - obviously if you are from Indonesia or the Phillipines you can look at lower equities, but do yourself a service and value your time by setting a minimal equity goal and achieve that whether it be from working a job or trading.
 
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NVP

Legendary member
37,768 2,101
Hey there

dont worry to much about your performance or credentials .......talk some sence and people will listen

so far you have said ........

1) dont aim for perfection in Trading
2) Treat trading like any business venture

good start......:cool:
N
 

goldmember1

Member
60 7
2) Treat trading like any business venture

Thanks for the support - I just want to clarify what I wrote. The point I was trying to make was that trading wasn't like a business venture that you do for love eg: someone may be happy to run a country pub for $1500 a month, or a coffee shop, or animal shelter, or custom furniture shop if thats what they love to do. Trading is much more about making money than love (there might be people who love trading so much they are willing to do it for $200 a month) and the point I was trying to get across that earnings/money should be the focus.
 
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freestyler39

Newbie
6 4
Very interesting point about focusing on money making instead of treating trading like a hobby. The conventional wisdom says money (profits) comes as a byproduct of good trading. Therefore focus on good execution and not counting every dollar earned/lost. What you are saying is that if one is not making much (if any) money from trading, and you've been at it for awhile, then you're not putting your time into effective use. Treat trading as a business, where the bottom line is to make money. Like any "real" business, you need to have enough capital to start with, and you need to show real profits or else it's not a viable enterprise.

Very good points so far. Please keep going.
 

goldmember1

Member
60 7
Thanks for the support! Hope its useful. Trading is also a bit different from businesses in that businesses usually compete directly for customers and you need to compete with other businesses in the area by cutting prices, making offers etc, whereas for retail traders this competition does not exist in the same way. In fact, trying to compete in retail trading is actually self destructive so you can't "treat trading like a business".

Trading is not a competition

The more pressured and stressed people are, the poorer decisions people tend to make. I acknowledge there are times where competition and stress are useful - in sporting events the adrenaline (epinephrine for Americans) kicks in and helps athletes to push themselves further. However, most traders are sitting around in their armchairs and do not benefit from the extra stress.

This might seem completely obvious to avoid - (just don't enter competitions!), but competition pervades every part of retail trading because everyone has their opinion online. I make 4-6% per month, but I see a few other traders can make 100%-200% per month, and many more claim that they can. There is pressure all the time to increase the amount I trade, increase the risk to attempt to beat others. I feel that I know my way around trading enough, and it gets quite annoying that someone with no experience and no knowledge claims to outstrip me, and I am tempted all the time to try and compete.

Nassim Taleb in his book Fooled by Randomness writes at length about this theoretical relationship between two neighbours who are traders. One is a young, successful trader who is somewhat naive but foolhardy in the markets but has made a lot of money for themselves in a bull market and has the biggest house in the street. The other is a conservative trader who is producing returns at a slower, safer rate (obviously Taleb writing about himself) who lives in a modest house. The conservative trader is jealous of the richer neighbour because he feels that the rich neighbour has no idea how to trade and has just got lucky by repeatedly buying in the right market. The successful trader eventually blows up when the Russian bond markets collapse, while Taleb continues to make money and he feels vindicated that he has stuck to his strategy and has not been influenced by his less educated counterpart.

The same situation occurs in retail trading - in fact it is much worse because retail traders are fond of telling tall tales and they don't need a big house to prove that their success (in fact, they often don't have any proof at all). Retail traders post up their (unverified) trading performances to champion how good they are when they have a winning streak, and it can encourage jealousy. Others post up single screenshots of a trade or mention a trade that they did take, and I know I feel like kicking myself because I missed out.

In the end, all of these facts make you want to compete, and its an influence that you have to ignore if you want to be successful. If you succumb, it make you change your successful strategy for a unproven losing one. You could switch strategies and never settle on a successful one. You have to remember that traders only ever post up their winning trades - the same happens in stock trading forums, or any other forum. The losing trades never get mentioned, and the 100% winners on myfxbook delete their profiles or make them private when they drawdown.

I actually am thankful for the existence of myfxbook because it does give a more realistic outlook. If it wasn't for myfxbook I would be thinking that everyone made 100% per month and made 200 pips a trade with a 100% success rate. In fact it actually gives me the opportunity (like Taleb when he saw his neighbour get evicted from his house) to see the 100% per month accounts go private or blow up. I feel vindicated (as nasty as that sounds) that my trading method is valid and that I am not wasting my time.

If you succumb to the need to compete then you risk throwing away your money and being one of those traders who loses because of other people rather than your own mistakes. This is incredibly frustrating because it is so avoidable, but easy to fall into because after all human beings have evolved to where they are because they learn and listen to each other so its a natural trait.

Just remember the statistics of retail traders are very telling - the figure of 95% losing retail traders is very accurate. The traders who claim repeatedly that they are making winning trades are generally not successful traders. Their sin is much worse than just making up their trades, but they also encourage others to fall into bad habits. I am sure that retail traders would benefit from not having access to the internet and succumbing to competing with others. In fact, competition is worse on the internet than how Taleb described it because at least Taleb could see the other persons actual success. On the internet, anyone can say that they are anything, although that has been mitigated somewhat by myfxbook most people still refuse to use an independent results service like it and prefer to tell tall tales.

Competition does not just exist in terms of percentage gain or money gained. One of my biggest pet hates is when people on Wednesday or Thursday say "Just made 200 pips, done for the week." How many times do you hear that, especially from people who have nothing better to do on the Friday? It reminds me of being back at school when people would compete in an exam to stand up and walk out of the exam early. Never mind that it was an important exam, but if you stood up 40 minutes before the bell rang, you were cool and smart. Of course, the smart pupil would check his/her answers until the end of the exam to be sure of getting the best marks, and the people who stood up and left early received poor marks. Only the naive and somewhat stupid pupils would try and leave an important exam early to show that they were smart.

People saying "I made 200 pips, I'm done for the week" are again acting like those pupils leaving the exam. Again it has the effect of making people feel as if they haven't done enough, quickly enough, and that they need to compete to catch up for the week. The reality is that if a prime set up occurs on Friday, that trader who stood up, left the exam hall to sit in the common room and "was done for the week" has missed the opportunity to make money. This is unforgivable for someone who wants to make their living trading (unless they have to pick up their mum at the airport etc). You might feel a bit of a loser sitting at your trading desk when others are saying "they are done for the week" but if you stick to your plan, you will be the one getting good grades or making real money, not the ones who stand up and leave.

All of this relates to my first points. Do you want to trade to look cool, and be respected on the forum, or do you want to make money? If you want to make money then avoid competing. Trading is not like a traditional business because you are not competing with other coffee houses, furniture stores etc. Taleb did this by isolating himself in his attic away from any distractions. The internet and forums are powerful distractions that can foster harmful competition. Its vital to be able to ignore the call for bravado and unrealistic competition.
 
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goldmember1

Member
60 7
Learning why is as important as learning how

"I don't care why, I just want to make money." This thinking is common to many people coming to trading, and its why a college professor has as much chance of success as a high school drop out. Following a rote system without knowing why because you don't care to learn about trading as a profession negates any intellectual advantage you may have and is why smart people are just as bad traders as dumb people. When you learn it is really important to ask why instead of just learning by rote.

Some examples of learning by rote are buying and selling at pivot points, or at the 61.8% fibonacchi. Does anyone ask why? Success and failure here are dictated by not being smart, but by just following a 'system' without knowing what it means - this is a sure recipe for failure. Another example is the risk/reward ratio. This term is used so often by forum posters, forex teachers and well renowned forex analysts. The standard rule is that you should aim for a 1:2 risk/reward ratio +. Meaning you should place a take profit at least twice the stop loss. This has been used to justify trades, but if you ask why and the mechanics behind it - it is a ludicrous guideline. Also, if you examine myfxbooks top performing 10 accounts and compare it with the worst 10 accounts there is not much difference between the "risk/reward", and mostly the "risk reward" is <1.

For example, if EURUSD is 1.3000. If I place a long order at 1.3000, a stop loss at 1.2995, and a take profit at 1.8000 - its GREAT risk reward according to traditional dogma. In fact its 1:1000 risk/reward - so I am only risking 5 pips to make 5000 pips! What a pay off! Of course, what risk/reward merchants forget to mention is that there is a probability factor assigned to every trade. 1.3000 to 1.8000 is highly improbable, and even if given enough time, the swap that you will pay will probably eat many of the profits. For some reason, people have forgotten to assign probability to risk reward. Whereas the traditionally taught dogma is risk/reward =

Risk (pips stood to lose): Reward (pips stood to gain)

The actual equation should read

Risk (pips stood to lose x chance of losing particular setup): Reward (pips x chance of winning setup) - (Swaps + Spread + Slippage)

Thus when some analyst is blindly talking about risk rewards of 1:2 when the are risking 20 pips for 40 pips they are talking absolute nonsense because risk/reward is meaningless without the probability of the set up. Risking 20 pips for 20 pips is traditionally known as a 1:1 risk/reward and thus shunned BUT if the set up has a 66.6% chance of success then you have your 1:2 risk reward when you risk 20 pips for 20 pips. Traders who blindly talk about risk/ratio without actually knowing what it means (and there are a lot of them) would benefit from knowing why they are trading what they are trading.

This is just one of the examples where blindly following traditionally dogma without asking questions and asking why, what, as well as how leaves you with a broken system of doing things. If you think and ask while you learn then your actual intelligence and talent will reap rewards.
 

Martinghoul

Senior member
2,690 276
You're incorrect, goldmember... Risk:reward isn't traditionally used in the context of expectation, the way you suggest it should be used.

Given the probabilities in question are purely subjective, in the context of discussing trades (what you refer to as "analyst blindly talking risk/reward"), you should be using the simplistic version of risk:reward. It's like when people talk about horses, innit? Nobody is going to talk about market odds adjusted for that specific person's probability of their horse winning. It would be impossible to communicate if people were to do that. Odds are given as pure odds and then you make a personal decision whether these odds, in your opinion, are mispriced.

Obviously, when you make that personal decision, you should be doing what you suggest, i.e. calculating the expected value of the trade.
 
 
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