This is my last post for 2010. I wish everyone a happy and healthy New Year. May your best trade from 2010 be your worst trade in 2011. See you January 3
Happy New Year
Thursday, December 30, 2010
This is my last post for 2010. I wish everyone a happy and healthy New Year. May your best trade from 2010 be your worst trade in 2011. See you January 3
2010 Blog Trade Results +37,780 pips
For 2010, I earned 37,780 pips from trades I discussed in this blog. These were trades I blogged about as I was preparing to place them or shortly after I did place them. How different from so-called "gurus" who talk about their successful trades only in retrospect. These were also all trades based on generally accepted technical analysis methods. There were no secret, mystical methods—in fact, there are no secret, mystical methods. Most of the pips were from trades taken between January and October as I began winding down my trading in November and only took a few trades in December.
Until July, I was posting my results monthly but I stopped doing so for several reasons. First, I could never resolve how to calculate pips for the blog when I scaled out of positions in pieces. I was lumping all pips together as though they were separate trades but that didn’t sit well with me. In some trades, I establish more than one position but this is extra work when blogging about trades. I asked for advice from readers but never received a method I thought was better.
Another reason I stopped was because I believed it was putting the emphasis in the wrong place. If one has solid reasons for getting into a trade, that trade is a good trade regardless of whether it makes money or not. Most people do trade to make money, of course. The reality, though, is that a trading approach is one key to that. The other key is discipline. One isn't a bad trader if they use a solid approach and apply discipline (including getting out of a losing trade on terms that were defined in advance).
Regardless, many of the trades I blogged about were good trades, both technically and from the perspective of earning pips.
Until July, I was posting my results monthly but I stopped doing so for several reasons. First, I could never resolve how to calculate pips for the blog when I scaled out of positions in pieces. I was lumping all pips together as though they were separate trades but that didn’t sit well with me. In some trades, I establish more than one position but this is extra work when blogging about trades. I asked for advice from readers but never received a method I thought was better.
Another reason I stopped was because I believed it was putting the emphasis in the wrong place. If one has solid reasons for getting into a trade, that trade is a good trade regardless of whether it makes money or not. Most people do trade to make money, of course. The reality, though, is that a trading approach is one key to that. The other key is discipline. One isn't a bad trader if they use a solid approach and apply discipline (including getting out of a losing trade on terms that were defined in advance).
Regardless, many of the trades I blogged about were good trades, both technically and from the perspective of earning pips.
Business Plan—Performance
Any business plan worth its salt needs a section devoted to performance objectives and evaluation.
Objectives are what you hope to achieve with your trading. Objectives should be specific and measurable. Most traders don't bother to spell them out beyond a vague desire to "make money" or "beat the market." Some say they don't want to lose money. Each of those statements is vague. How much money? What will you do to be sure you don't blow up your account in trying to make money? How will you measure your results?
It's important to spell out objectives in the business plan. Perhaps it's to double one's money in a year. As ridiculous as that might sound, once someone knew that was their objective they'd have to figure out the best way to achieve that goal without risk of losing their capital. Doing so would require evaluating the trading methodology they used, understanding its probability for success, performing a thorough risk assessment (including all the things I wrote about in yesterday's blog), and being sure they followed the discipline to execute their plan successfully.
A reasonable objective for a new trader might be to evaluate the use of several different trading methods. They could take very tiny positions using different approaches and at the end of the year might have enough information to determine the approaches that are best for them. I personally consider paper trading a waste of time. Using real money, even if it is in small amounts, brings the trader's psychology into the picture. Another objective might be to practice a specific daily routine. This is one of my objectives—I have a list in my trading plan of what I should be doing each day. The list ranges from a self-assessment (for example, if I'm under great stress, that may impact my judgment and decision making) to updating my Point & Figure charts to calculating my daily P&L statement. I also have a checklist for weekly and monthly tasks. Another objective might be to earn a specific percentage this year. The point is that one should think through and decide what their specific objectives are.
It's also important to include how one will evaluate one's performance. This is easy with specific objectives. For example, each quarter I specify a profit target for each of the months in the upcoming quarter. I take into consideration such factors as whether I have a large amount of business travel (thus taking my focus off trading) or whether it's a slow market month (August and December are usually light months). At the end of each month, I know what my results are and I can compare them to plan. If there's a variance—positive or negative—I want to know why. I do the analysis to find out. I keep a checklist of the things I'm supposed to do each day and mark each task off. It's easy enough to scan them each week to keep track of whether I'm doing what I'm supposed to be doing. If not, why not?
I also include objectives in my plan for education and sometimes include specific books I plan to read. For example, in 2011 I know I'll be attending the MTA conference in May—it's in my plan to do so. Again—it's easy to measure my performance against such specific goals.
All of this takes work. Is it worth it? Yes, if you want to be a good trader. Good trading is the result of hard work. Hard work begins with planning that work.
© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.
Objectives are what you hope to achieve with your trading. Objectives should be specific and measurable. Most traders don't bother to spell them out beyond a vague desire to "make money" or "beat the market." Some say they don't want to lose money. Each of those statements is vague. How much money? What will you do to be sure you don't blow up your account in trying to make money? How will you measure your results?
It's important to spell out objectives in the business plan. Perhaps it's to double one's money in a year. As ridiculous as that might sound, once someone knew that was their objective they'd have to figure out the best way to achieve that goal without risk of losing their capital. Doing so would require evaluating the trading methodology they used, understanding its probability for success, performing a thorough risk assessment (including all the things I wrote about in yesterday's blog), and being sure they followed the discipline to execute their plan successfully.
A reasonable objective for a new trader might be to evaluate the use of several different trading methods. They could take very tiny positions using different approaches and at the end of the year might have enough information to determine the approaches that are best for them. I personally consider paper trading a waste of time. Using real money, even if it is in small amounts, brings the trader's psychology into the picture. Another objective might be to practice a specific daily routine. This is one of my objectives—I have a list in my trading plan of what I should be doing each day. The list ranges from a self-assessment (for example, if I'm under great stress, that may impact my judgment and decision making) to updating my Point & Figure charts to calculating my daily P&L statement. I also have a checklist for weekly and monthly tasks. Another objective might be to earn a specific percentage this year. The point is that one should think through and decide what their specific objectives are.
It's also important to include how one will evaluate one's performance. This is easy with specific objectives. For example, each quarter I specify a profit target for each of the months in the upcoming quarter. I take into consideration such factors as whether I have a large amount of business travel (thus taking my focus off trading) or whether it's a slow market month (August and December are usually light months). At the end of each month, I know what my results are and I can compare them to plan. If there's a variance—positive or negative—I want to know why. I do the analysis to find out. I keep a checklist of the things I'm supposed to do each day and mark each task off. It's easy enough to scan them each week to keep track of whether I'm doing what I'm supposed to be doing. If not, why not?
I also include objectives in my plan for education and sometimes include specific books I plan to read. For example, in 2011 I know I'll be attending the MTA conference in May—it's in my plan to do so. Again—it's easy to measure my performance against such specific goals.
All of this takes work. Is it worth it? Yes, if you want to be a good trader. Good trading is the result of hard work. Hard work begins with planning that work.
© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.
Risk—Bruce Kovner Quote
Wednesday, December 29, 2010
In line with the post I just made on risk, I think that Bruce Kovner's words in Jack Schwager's book Market Wizards (2006) are very useful:
I would say risk management is the most important thing to be well understood.
Undertrade, undertrade, undertrade is my second piece of advice. Whatever you
think your position ought to be, cut it at least in half (p. 82).
I would say risk management is the most important thing to be well understood.
Undertrade, undertrade, undertrade is my second piece of advice. Whatever you
think your position ought to be, cut it at least in half (p. 82).
Business Plan—Risk
If I could use only one trading rule it would be this: always calculate and assess the risk of a trade before getting into it. How much risk one is willing to take on should be part of the thought that goes into a business plan.
People define risk differently. Some use the amount of loss per trade; others use drawdown or such things as variability of returns or price volatility. I first define risk as the amount of money I will lose at the price I will get out of the trade. If that price is touched—whether because of news spikes or because I was wrong in my analysis or because of some unforeseen event—then I take the loss. That amount is my risk for any given trade. This is the first number I look at when deciding whether to place a trade and I look at it regardless of how confident I am that the trade is a good one. No matter how skillful my analysis (and I believe I am skillful), I do not have a crystal ball and cannot predict with 100% certainty what the market will do. Nobody can. So my first question to myself is can I stand to lose this amount of money.
Only after I know what I can lose do I look at the potential return. The potential return has to be at least two times and better three times the risk taken. If my risk is $1,000, I want to see a potential return of $2,000 to $3,000 and preferably more. If that return is not possible, I don't want to be in the trade. Notice that I use dollars since dollars will affect my mood most. This is true for most traders. If one uses tiny positions, a trade can move against you by hundreds of pips with no significant dollar impact.
How much you are willing to risk should be in your business plan. Sometimes traders know the amount but don't realize when they've taken on additional risk of the same type. For example, assume a long position in GBPUSD with a potential $1,000 risk of loss. If one goes long in another correlated pair—one that tends to move in the same direction as the Cable—then that is two trades. If they each carry a potential for a $1,000 loss, the risk of loss is $2,000.
What this implies is that in assessing how much risk one is comfortable with for each trade, one must also look at the overall account equity. It's common to hear that one shouldn't risk more than 1% of the account. However, even a couple of correlated trades can push it well above that. Part of my daily routine—another part of my business plan—is to review correlation. Another need is to determine the correct position size.
For example, let's say I decide to go long the AUDUSD today, 12/29 at 1.0174. That would be very dumb given this illiquid market but this is only an example. I buy 100,000 units. Where do I place a stop? The low yesterday was 1.0073 so let's use 1.0069 as a stop. I do not necessarily recommend this approach to stop setting but stops are a different subject. My potential loss is $1,048 (105 pips) and I use margin of $2,034.84 for a trade value of $101,742. In order to have even a 1:2 risk/reward ratio, the pair would need to move up 210 pips to 1.0384. But there's another problem. How big is my overall account? If it's small, i.e. $10,000, I'm tying up 20% of it in one trade. Is that a good idea? Probably not, although a definitive answer would require knowing what type of trading methodology one was using and considering the probability of success of any given trade. When one begins to factor in such issues as that, one can see how risky this entire proposition is, even though it looks as though I'm near my risk tolerance of $1,000. Reflecting on all these factors provides real insight into why so many people lose all their money when they begin trading. Using a hypothetical account size of $10,000, one would want to reduce the above position from 100,000 units to possibly 50,000. I still think this is too high for small accounts but it's a better risk position (including potential loss) than the original. But even with this reduced amount, it would only take a string of 20 losses (not impossible) to wipe out the account. I repeat—this is an example only. Nobody should be trading these illiquid markets even if the AUDUSD is at a potential breakout point. It could also be at resistance.
So risk is multifaceted. It begins with the potential loss on any given trade. It extends to overall size of the account, leverage, and size of the trade. It also includes the probability of your trading methodology. All aspects should be in your business plan. The time to decide upon acceptable risk is in advance of deciding upon any particular trade.
© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.
People define risk differently. Some use the amount of loss per trade; others use drawdown or such things as variability of returns or price volatility. I first define risk as the amount of money I will lose at the price I will get out of the trade. If that price is touched—whether because of news spikes or because I was wrong in my analysis or because of some unforeseen event—then I take the loss. That amount is my risk for any given trade. This is the first number I look at when deciding whether to place a trade and I look at it regardless of how confident I am that the trade is a good one. No matter how skillful my analysis (and I believe I am skillful), I do not have a crystal ball and cannot predict with 100% certainty what the market will do. Nobody can. So my first question to myself is can I stand to lose this amount of money.
Only after I know what I can lose do I look at the potential return. The potential return has to be at least two times and better three times the risk taken. If my risk is $1,000, I want to see a potential return of $2,000 to $3,000 and preferably more. If that return is not possible, I don't want to be in the trade. Notice that I use dollars since dollars will affect my mood most. This is true for most traders. If one uses tiny positions, a trade can move against you by hundreds of pips with no significant dollar impact.
How much you are willing to risk should be in your business plan. Sometimes traders know the amount but don't realize when they've taken on additional risk of the same type. For example, assume a long position in GBPUSD with a potential $1,000 risk of loss. If one goes long in another correlated pair—one that tends to move in the same direction as the Cable—then that is two trades. If they each carry a potential for a $1,000 loss, the risk of loss is $2,000.
What this implies is that in assessing how much risk one is comfortable with for each trade, one must also look at the overall account equity. It's common to hear that one shouldn't risk more than 1% of the account. However, even a couple of correlated trades can push it well above that. Part of my daily routine—another part of my business plan—is to review correlation. Another need is to determine the correct position size.
For example, let's say I decide to go long the AUDUSD today, 12/29 at 1.0174. That would be very dumb given this illiquid market but this is only an example. I buy 100,000 units. Where do I place a stop? The low yesterday was 1.0073 so let's use 1.0069 as a stop. I do not necessarily recommend this approach to stop setting but stops are a different subject. My potential loss is $1,048 (105 pips) and I use margin of $2,034.84 for a trade value of $101,742. In order to have even a 1:2 risk/reward ratio, the pair would need to move up 210 pips to 1.0384. But there's another problem. How big is my overall account? If it's small, i.e. $10,000, I'm tying up 20% of it in one trade. Is that a good idea? Probably not, although a definitive answer would require knowing what type of trading methodology one was using and considering the probability of success of any given trade. When one begins to factor in such issues as that, one can see how risky this entire proposition is, even though it looks as though I'm near my risk tolerance of $1,000. Reflecting on all these factors provides real insight into why so many people lose all their money when they begin trading. Using a hypothetical account size of $10,000, one would want to reduce the above position from 100,000 units to possibly 50,000. I still think this is too high for small accounts but it's a better risk position (including potential loss) than the original. But even with this reduced amount, it would only take a string of 20 losses (not impossible) to wipe out the account. I repeat—this is an example only. Nobody should be trading these illiquid markets even if the AUDUSD is at a potential breakout point. It could also be at resistance.
So risk is multifaceted. It begins with the potential loss on any given trade. It extends to overall size of the account, leverage, and size of the trade. It also includes the probability of your trading methodology. All aspects should be in your business plan. The time to decide upon acceptable risk is in advance of deciding upon any particular trade.
© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.
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