No Losing Currency Trade in 2007

The holy grail of trading is between the ears

It's been a long time between blog entries.

A quick update on what I've been up to trading-wise since April:

• I went on a world-wide trip, which included visiting the stock exchanges in New York and Vienna. I learned that the 'speculative mind-set' so prevalent in Americans and Australians doesn't occur to the same degree in Austrians.
  
• I've been trading both the Australian and US stock markets. The biggest downside has been the value-loss of holdings denominated in US dollars this year. The lesson for me has been that I should hedge for currency fluctations before they occur. You live and learn.
  
• I've been trading currencies actively this year and have not had a single losing trade.

Having traded different instruments for so long, I can say that I've finally found a home in currencies.

I don't use technical indicators at all when trading currencies, except for the simplest of trend indicator for longer term positions.

I've been considering launching a proper web site to describe my views about trading forex. So many systems are sold out there that sell indicators, and here I am making money using free charting software without indicators and making progress through simple discipline.

There is no holy grail, only self-discipline and using your head.

Never Add To A Losing Position?

That old chestnut. "Never add to a losing position."

Well, in my experience, that been a true risk management philosophy that has worked for stocks, since no matter how good the fundamentals might be for an individual stock, wider market girations can have a negative effect on an individual stock, sometimes for an uncomfortably long period of time.

However I'm learning that this old maxim ain't necessarily so for currencies.

I might see a technical long entry point for a currency pair (EUR/USD), but for whatever reason, the position might start to go against me. That would be a great time to GO LONG AGAIN.

Why? Because currency trading relies on understanding the Fundamentals as well as the Technicals. Adding to an initially losing position can be a great way to generate greater profits. I'm merely taking advantage of the random movements of short term price action.

But of course, my risk management has to be in place: low leverage and small trading positions, otherwise if it really sustains a negative move against me to the point that the fundamentals have changed, then I still have plenty of money left to trade with.

Black Box Scam - MCI Technologies

I want to tell you about a scam I receive in the mail about once a year.

The scam company, based in Queensland Australia is called MCI Technologies.

Every year they send me the same brochure:

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The brochure starts with a feel-good photo of a family, immediately attempting to hook me through an emotional-tie with the one's I care about.

Immediately I ask myself, is this product or service based on on market wizardry or marketing wizardry.

I'm already feeling nervous.

I turn the page, more photos of fun and freedom with the family.

Next they ask me to sit back and dream a little dream. What do I most want out of life...

And gues what! They have the answer to my dreams (turn page), the stockmarket!

MCI Technologies can help me achieve my dreams...

MCI Technologies have 'the secret'...

And it's so easy to use...

The company lives in a swank sky-scraper on the Gold Coast. Look how huge and successful they are.

They're so friendly and are ready to help me by phone too...

The stock market is a sure thing...

Just call...

Shhhhhh! Don't tell anyone about their secret system (I would need to sign the agreement...)

And if I'm still not sure, I can look at all the people who've made lots of money with them (all those stock photos of smiling, laughing people)...

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Seriously, never buy a software program that claims to make money.

Even if their system proved adequate through back-testing, there's no way it can continue because market conditions change.

Learn to trade your own system, using your own mind based on reasons that you can justify for yourself.

Under-estimating what it takes to be successful in trading

Larry Williams: this man oozes trading

Brian McAboy has written a list of mistakes that traders make that bring ruin. #1 on his list is "Under-estimating what it takes to be successful in trading."

When I look at my own quest to become a numb trader, I didn't appreciate HOW LONG it would take. I've been at this game reasonably consistently for 2 years and I still don't believe I've found the level of trading that I'm happy with.

I look at the trades I've done in the past and most of them I will not repeat. If they went bad on me it was because of either poor technical or fundamental analysis, or my risk management was utterly crazy for my account size.

I got stopped out of my most recent trade (shorting Orange Juice) and now I'm sitting on the sidelines, completely rethinking my whole approach. I've become very cynical about the value of technical analysis. So much of the results seem random, whether you win or lose the trade, I still don't fully trust it. Perhaps to some that's like saying I don't believe in God, or I'm trying to work out what my understanding of God should be, but at least I'm prepared to admit that technical analysis seems to behave like a drunken random walk. I still remain to be convinced about its value.

This brings me back to "Under-estimating what it takes to be successful in trading." I was taken in by the marketing glitz that promised riches if I religiously followed a technical indicator based trading system. Having tried, I believe it takes more than just following simple signals.

Some relevant and pertinant points were made by Larry Williams, which he posted to his subscribers over a few days early in 2007:

Despite what the psycho-babble crowd says your success in 2007 will not come from being more disciplined, less emotional or because you are very smart.

Those are great attributes, but I know very disciplined, unemotional guys that have lost it all trading and investing. Long Term Capital was run by Nobel Prize winners and blew up. They proved intelligence is not our salvation.

The only thing that will make you money is finding an edge in the game.
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When a trader assumes, or is told he or she must be a certain way, it means that they have an entirely new battle on their hands; trying to be something that they are not. I think we need to be what we are and build our trading style around that; some great traders are very emotional and some are ice cubes.

What works for me may not work for you... and vice versa.

Now, about getting an advantage in the game..

I do not find any long lasting advantage to be found in the myriad of chart techniques (point and figure, candlestick, Gann, etc). All charts do is reflect what was... we need to know what will be. To the extent that a chart can predict the trend, it will have value. Most of us get so wound up in the minutia ofcharts and lines that we miss the big picture, and the big trades.

As I see it there are three major sources to find an advantage; the first is the Fundamentals of the market, then comes what the Big Boys are doing (Commercials, Insiders, Smart Money, etc) and lastly, never to be forgotten... Trend. Today I'd like to tell you what I think the number one reason is for market failure.

Of course, as pointed out yesterday, you first need to have an advantage in the game. But, having that is not enough.
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Having an advantage does not mean you win on every trade, just as Las Vegas does not win on every spin of the wheel. But how do they build those palatial casinos when they also have losing streaks?

This is an easy one to answer. They closely control all potential losses. Their eyes in the sky cameras, as well as the Pit Bosses, always keep an eye out for cheaters. Each table also has a limit a player can bet, which means the casino has a limit to how much they can loose.

Traders that cannot accept losses are destined for failure. Losses are part and parcel of this game... get used to taking them, don't let them take you by allowing losses to get larger, stops to back away. There is only one way to control all this. Never let any trade get more than X dollars away from you. X will vary with the trade and the trader, but just like the casino you must limit your maximum loss.
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The most pervasive element in the market is trend; there are more advantages to be garnered from trend than any place else. Fundamentals and Smart Money are often early, sometimes wrong. Trend is never wrong, it just is.

There are two parts of trend we can chip away at for our advantage. The first is that trend persist and in fact is the law of gravity of the markets. Prices follow trend. Trend is all pervasive, it lasts much longer than we usually imagine. Align yourself with trend and you have your advantage.

But... there is also anti-trend or reversion to the mean (technicians call this overbought/oversold). Reversion to the mean is equally real and powerful.

My resolution to all this is that one needs two or three trend indicators. The first is for the time period you want to trade... let's say that's 40 days.

Against the 40 major trend, prices will always be revertingto THE CENTER POINT of the 40 days, so you need a 20 gauge to suggest when the major trend will enter a reversion to the center of the 40 day trend.

Lots of ways to do this. My RnR system many of you have learned is one attempt to take advantage... I do not have all the answers, but I hope I can get you to always ask yourself, "What is the trend of the time period I am trading?" This means you cannot attempt to sell highs and buy lows without bucking the law of gravity of the marketplace. In a 3 month up move each of the 66 days can be argued to be the top. Only one will be the real one. Those are bad odds; 1 in 66 of being right! No advantage there.

Stop trying to defy gravity... there is your advantage.
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Hold those Good Thoughts
Larry
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I don't do or follow everything that Larry says, but when he speaks about the markets I stop and listen and reflect on my experience and approach - looking for that edge.