One of the best introductory books on forex I have seen. Unlike the window shopping type beginner books that just browse over all the basic topics, Ms. Horner, a professional trader, documented a complete trading method in the book. The details are there as long as you are willing to read the book slowly to absorb the materials. Anyone who want to jump ship from trading equities into the forex markets will find this book a great starting point. I highly recommend this book to anyone who wants to learn trading forex profitably.
Book Information
ForeX Trading for Maximum Profit: The Best Kept Secret Off Wall Street
Written by Raghee Horner
Published by John Wiley & Sons, Inc.
Some people think they can simply put hard work into trading and they will become proficient quickly. How hard could it be, many people asked, that it is just buying and selling something quickly to grab profit, right?
Well, I can use a similar argument claiming that it is just cutting someone up and glue it back, how hard can it be to become a surgeon?
Or that it is just driving a car, very fast, how hard can it be to become a professional racing car driver?
This under estimation of a skill, in fact, any skills, underlies the difficulties in seeing anything properly when you are not proficient in the skill you are trying to acquire. It is a common problem and it is also the root of many mistakes that people make when they decide to make trading their career.
This topic is very sensitive and I understand it can be very annoying to someone who is struggling to become profitable in trading. All I am trying to do here is to open a dialog on the subject so that you can see things from a different angle. Be patient with me – read the rest of the article first and curse me later.
You Cannot Become Profitable If You Repeat Your Trading Mistakes Again and Again
I did it. Many others did it too. But there is a point in time that you have to stop making the same trading mistakes. The fewer mistakes you make, the more likely you would be consistently profitable.
There are well known trading mistakes that we have all committed – averaging down on losing positions, jumping onto a trade just because we have not made a trade for some time, feeling lucky so suddenly increase position size, etc.
Making these mistakes is normal. The important thing is that we learn from the experience and stop making the same mistake again. If you somehow allow yourself to keep making the same mistake again and again for a long period of time, you may have a problem that is not necessarily originated from intellectual issues. It could be a psychological problem. You could be developing a habit into loving the mistakes you made, the emotional swings you experience, or the consequence you face right after.
It is important to deal with this issue as soon as you can. The first step, however, is that you have to recognize the problem and acknowledge its existence. Once you accept the fact that you have a problem, you will be able to open up to ideas and possibilities dealing with the problem.
Some people find that they can stop their bad trading habits by themselves. It takes certain characteristics for people to be able to do that. Remember that it is difficult among people beyond early adulthood (early 30s) to break any form of bad habits be that smoking or just swearing.
Some people find it easier to correct these mistakes with help from a mentor, or even a psychiatrist. The bad habits may not be removed completely though, but the impacts from the bad habits can be reduced and it will be very noticeable in the bottom line.
Another way that works, but not likely applicable to retail traders, is quite awkward. I have seen trading firms utilize special rules imposed on their traders to improve firm-wide bottom line and risk control. I know It works but the traders are called to stop trading like being called to the bench by a referee in a ball game. When the traders leave their firms, it is imaginable that they may not be able to enforce the same discipline by themselves.
Some individuals, however, may have deep psychological issues making it very difficult for them to choose trading as a career. The sense of insecurity with unstable income is one of them. If you do have such problem affecting your ability to trade, remember that there are always other things to do outside of trading. Good examples are part-time traders who consistently profit from short term swing trades on stocks who quit their day jobs to pursuit full time career in trading. Many who tried doing that would fail, not because they are not good at trading in the first place, it is the extra stress they experienced that killed their ability to perform.
The lesson here is that you do not have to make trading your only career. It can be a very profitable side project or part-time job. Keep this in mind.
The Thrill From Trading May Not Be Where Your Passions Lie
Trading can be exciting. Especially if you are trading with excessive risk. Many people hooked into trading because of this excitement quality. They have mistaken this as a sign of passions that they have for trading. It is not. What they are enjoying from the thrill ride is the addictive quality of gambling – the excitement and anxiety of going through uncertainties.
The truth is, trading, especially at professional level, is quite boring. It can be very satisfying to see a trade works out beautifully and exactly as planned. But there is not much excitement to be remembered if it is just a normal trade that works out. Encountering a losing streak can be frustrating, but a winning streak would not make you high because it is just working according to the plan. So if you believe rolling on your luck and getting high on betting your farm is what trading is all about, you are wrong and you should not be trading at all.
Some people have hatred against their existing jobs. Some get bored by their jobs. Trading give them an exciting escape with potential of good money too. Of course many people will think that it is the best career choice for them. It is especially true for those who have some beginners luck.
The problem is, however, the excitement will disappear if you are doing it right. You would become profitable. But your original problem of boredom or lack of excitement from your previous job will resurface again. Sadly, this time around you would not want to go back to your old job. And believe me, I have seen enough how people spice up their trading careers – increasing position size to the point that can make them sweat, seeking excitement from trying out markets they have never touched, etc. And we all know how that will likely end.
If you suffer from this issue, I do not have to convince you that you have this problem because you know clearly I am describing you. What you need to do, however, can be very difficult if you want to stop this downward spiral.
Those of you who developed track records proving that you are indeed quite profitable when you are (mentally) in control, should seriously consider sparing significant amount of time doing something outside of trading. By shifting focus into something you are passionate about, the skills you have developed in trading will serve you well as an income generator. You will also less likely doing stupid things to screw up your trading as a business when you know that it is funding your passionate interest.
Time To Stop and Deal With Reality
For those not lucky enough to have a choice due to the problems mentioned above, your trading capital would have been depleted to the point that it is not likely you can continue to trade properly. It is time to stop trading if this happens to you.
Do not just jump back into trading with fresh capital from borrowed source, period. Deal with the problems first – the markets are always there.
You may be determined to correct your trading mistakes and have promised yourself with more discipline, but your mind may not be able to cooperate yet. What you think you are going to do is not necessarily what you will do when you are trading again. It is important to let your mind accepting and hardwiring the new rules and concepts you choose to follow first. That will take time. Taking a break from trading, or having a career change, even for a short while, can be beneficial.
Sir Ken Robinson’s Talk on The Element
Personally I find trading to be quite boring. I love discovering, understanding and (to certain extend) teaching how markets work. I am not a good trader as I am always distracted when I am trading, so I compensated the weaknesses with self imposed rules and restrictions to improve my trading performance. I also balance myself by limiting my trading with straight sizing rules and spend most of my time outside of trading. So far, this strategy serves me well.
Everyone is different, so the road to trading success is also different for everyone.
I will end this article with a video link to Sir Ken Robinson’s lecture at UCLA about the concept of being in the element. His lecture is a bit long. His message is simple but important – to be able to perform at your best, you have to be passionate with the career you choose.
End Notes
No one dares to write articles on this subject – persuading people to think over their choice of picking trading as a career. Obviously many in the financial industry cannot afford to do this because it can be a career ending move.
I feel obligated to do this because anyone who give trading a try should know, in the first place, that it may not be the ultimate career they are thinking of. It is possible to stop trading, or changing that to part-time, and choose to do something else as the primary career. The earlier the decision is made the easier it is due to the addictive aspect of trading.
The HTH vs HTT occurrence frequencies – It is one of the most overlooked and misunderstood basic pattern recurrence behaviour.
Many rookie traders and trading model designers often assume that certain common patterns (price, indicator, geometry lines) are useless because of their potential frequent recurrences. What they have overlooked, is that, first the assumed common patterns are not that common (like HTH) and second, the importance of any recurring pattern is not how common or rare it is, but the consistencies in the expected outcome following the occurrence of such pattern.
Here is a good teaser – How often does S&P make new year high after the last occurrence has led to 1% (or more) drop in price?
The 99% interpretation issue – You think your trading setup has a 80% win rate is pretty good, think again.
Most successful traders know their own performance pretty well. They are often better than computers in analyzing real-time scenarios. In their heads, they can picture the possible scenarios and reduce that to actions that improves their profitability.
Such mastery is not just a plain 80% win rate or other simple measurement can do to discover or qualify a method.
80% win rate is an overall measurement. It does not take into account the separate performance of a correctly identified setup and a falsely identified one. Often traders cannot even distinguish the two scenarios for trading setups they use all the time.
For example, a 1-2-3 sell setup can fail and results in a bull flag upside breakout pattern. 1-2-3 sell setup works best if the trader can identify the strong resistance area to key off the setup.
A good combination can be 90% of the time you identify the trading setup at a good resistance zone where 90% of those identified setups result in profits, and that in the 10% of falsely identified setups, you still edge out 50% winners. The reason why this is a good combination is that your expected performance will likely to have good consistency.
A bad combination could be 50% of the time you identify the trading setup correctly and 90% profitable on those correctly identified ones. And then in the other 50% of trading setups, 70% of the time you edge out a profit. In this case, even though the historical performance is around 80% win rate, you do not really know why your setups are producing profit. In fact, that 70% winners out of the falsely identified setups could be just random outcomes. Worst yet, traders often try to improve the win rate by adjusting the stop loss which simply curve fit the trading setup to perform better on historical data. Those extra winners in the particular 70% is likely a result of that.
The rare case independency issue – Traders often make the mistake in thinking that since a (huge) losing trade based on a particular setup is very rare, why not double down, triple down, or bet the farm on the next occurrence of the trading setup. People justifying such measures are likely in a losing streak. In such stressed situations, bad ideas often pop up and this is one of them.
Even if the huge losses are rare and likely independent, that does not change the potential of the very next trade being a loser. Betting the farm or sudden increase in bet size in general will significantly affect the expectancies with your trading method. If it is not something you have anticipated and well planned out, it is just plain stupid doing that knowing the consequence can wipe out your trading account.
Professionals in various fields often misuse statistics – In the video Peter Donnelly pointed out this very important issue that infested our society.
Doctors, lawyers, economists, security analysts, etc. are not statisticians. Yet these professionals frequently try to draw conclusions and inference from data they have compiled. Often these inference are incorrect and misleading. Unluckily there is no rule or regulation to, say, revoke their professional licenses for misuse of statistics. At the receiving end of these analysis and conclusions, it is difficult for the public to protect themselves from these misleading information.
