reacting to the market. The fear ofmissing a big move is eliminated.The challenge becomes identifying when to put on multiple lots. When do you puton more than one lot. How do you differentiate between conditions that justify two lots
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from those that justify three lots? The multilot decision should not be an arbitrary one.While there is no rule set in stone on this issue, an effective approach that has workedvery well is the confidence indicator. The purpose of the confidence indicator is to beable to determine when to put on multiple lots. Each trader should develop his or herown confidence indicator. It is not difficult, but it becomes a powerful way to improvetrading.The process is straightforward. For each trade setup that the trader is using, thetrader should assign a number from 1 to 5 (5 being the highest rank). If the trader seesa setup that has many elements of confirmation, then it gets a 5. An example would be asetup that has Fibonacci levels at resistance or support, the price is probing the Bollingerband, there is alignment with the trend, and so on. The 15-minute and 5-minute setupsare similar and supportive of the trade. This deserves a 5. If the trade setup generatesa feeling of high confidence with good features, but not the best, it gets a 4. A 3-rankedsetup is one that the trader has a “hunch” about. Maybe it will work. It may be a guess. A2 ranking is one where there is divergence and the situation appears to be not tradable.It may be a narrow range, or the price may be in the middle of a range. A 1 is the lowestranking. A ranking of 1 represents conditions that experience shows are very dubious fora successful trade. A ranking of 1 results when the trade is countertrend and when theindicators are not agreeing with the trade, showing divergence.The idea is that, over time, by ranking each trade that is about to happen, the traderwill be able to have a strong correlation of the confidence index with profitable trades.As traders become more experienced, more of the profitable trades should consist ofhigher-ranking setups such as a 4 and a 5. In the beginning, during your first 50 trades,many of the trades are hunches. So the distribution of winners should, over time, be withhighly ranked trade setups. During the first 50 trades, many losing trades would consistof high-ranking setups, which is an indicator that the trader is misevaluating the tradingsetups. If a large number of the winning trades are ranked 3 as hunches, consider yourselfan intuitive trader and keep doing what you’re doing!Using your own confidence indicator ranking system provides a powerful tool forself-improvement. Traders who experience a series of losses and then go back and review the trades in terms of their rankings will more quickly perceive what the nature ofthe error was. Having an archive of your trades ranked by confidence levels becomesthe equivalent of having a snapshot of your thinking right before a trade. A key tool isto take an image of the chart when you put on the trade and place the ranking on it.Using the “print screen” function achieves this capture. A very good and popular software tool to do this is SnagIt (available at www.techsmith.com). Take a snapshot of yournext trade, and rank it right after you put on the trade. Then evaluate your own ranking. Did it deserve the number you gave it? Over time, your ranking criteria will alsoimprove.
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TIMING THE TRADE WITH TECHNICAL ANALYSIS
Here’s an example: Early on the morning of February 28, at the opening of theLondon session, a high-confidence setup was observed (see Figure 15.1). Evaluate thissetup. We see the price probing an upper band. We see the Williams %R indicator pointing down, and we see a reversal in the renko blocks. This was a nice 4 rating (in my mind)and it fit the criteria for a multilot trade worthy of two lots of USDJPY for a Sell@118.57.Placing a stop order for 118. 36 (not quite twice ATR) and one limit of 20 pips for the firstlot, the second lot would have a limit of 30 pips. Both objectives were met within a shortamount of time.
FIGURE 15.1 High Conﬁdence Setup for a Trade.
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SUMMARYUltimately, where and when to enter a trade is answered by the trader’s observationof whether the conditions providing a high probable winning result are being observed.Aggressive traders would put on a trade more often with less confident setups. Morepatient traders would wait for a 4- or 5-ranked setup. Traders new to forex need to buildwithin them an archive of winning setup experiences. Remember, before you learn tospeak, you listen for about one year. For speaking the language of profitable forex, it’snot time that counts, but the number of trades that accumulate an actionable knowledgebase.
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P A R T III
Putting ItTogether
t some point in time, you need to transition from observing the market and acquiring knowledge to applying that knowledge in putting on real trades. Some accelerate the process by quickly opening a forex account and beginning to trade. Manystart a demo or virtual account and then proceed to trade. Both approaches are deeplyflawed. Immediately starting a real-dollar account provides the realism of facing emotions in real trading, but the result is usually large and quick drawdowns. Those usingdemo accounts often experience beginner’s exuberance by putting on trades with largelots, only to see their real trading totally disconnected from the successes in simulation.The point is not that it is wrong to go and trade with a real account as soon as possible, nor that it is wrong to simulate trades. The common flaw is that of inadequatepreparation. One does not go into war without training, and one should not start tradingforex without appropriate training. The shift into live trading should follow several milestones of phases that enable a constant cycle of learning, pattern recognition, and riskmanagement. Even the best traders never stop learning.How to get ready to trade is the overall theme of this section. There are many waysto start and many ways to start wrong. Many traders start with too much money and toomuch leverage and quickly get caught in major drawdowns.There is a better way that persons with various degrees of available trading capitalcan use. This section provides guidance on the essential ways of getting started andachieving adequate preparation.
A
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C H A P T E R 16
The Right Way to UseSimulation Accounts
ne of the most useful tools to prepare for forex trading is the demo or simulatedaccount. All firms provide these accounts. They enable a person to practice trading without the risk of loss. The trades go through an identical platform thatwould be used in real trades, but they do not execute. Instead, the profit and loss arehypothetical but tracked in the account history. The demo accounts are viewed and usedby the forex firms as marketing tools for converting prospects into customer accounts.They are not designed to train people on trading. The result is that many people have observed the experience in going from simulated accounts, where they were making largeprofits, to real accounts with sudden and large losses.Their conclusion has been that simulated accounts are not a valid way to preparefor trading. That is a wrong conclusion. While the real test of one’s capability is in trading real dollars, testing one’s strategies and tactics through simulation can be very useful if done under a plan of action that follows rules. The idea that one can start trading forex effectively by simply opening an account and beginning to trade invites toomany pitfalls. Trading for the sake of trading is learning by trial and error. The risksof major drawdowns are too great. Getting started in forex trading begins before onetrades. It begins with building fundamental and technical knowledge, testing skills without risk, and then applying those skills in real accounts with varying amounts of risk andcapital.Let’s explore this further.
O
173
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PUTTING IT TOGETHER
WHY SIMULATION WORKSTraining and simulation, when applied correctly under a well-planned sequence of instruction, work very well. It is inconceivable for airline pilots to fly jets without extensivesimulation. Simulation allows for testing one’s strategies and tactics to discover weaknesses and does not have discovering strengths as a priority. War games are designedto discover the strategic vulnerabilities of the battle strategies, not to predict a particular battle. It is essential, in preparing for forex, to correctly use a simulated account totest-drive your skills. The question arises: What is the best way?We have already provided the hints of an answer. The best way to use a simulatedforex trading account is to use it to simulate strategies and tactics that are intended tobe used. Trading $100,000 in a simulated account when the real account will be $5,000is misapplying the concept of simulation. Putting on two lots instead of one to test yourskills in multiple-lot trading is an excellent way to use simulation to stretch your boundary of experience. The test-drive of forex skills in a simulated account should be seenas an opportunity to identify what you know and don’t know about your own level ofcompetence. Of course, the results are hypothetical, but if trades are put on as realistically as possible, then the results will have preparative value in moving ahead to realtrading.
WHEN SIMULATION DOESN’T WORKThe major weakness cited in relationship to simulated accounts is that they cannot reproduce the emotions associated with trading real money. The fear and pain of loss, theanxiety of anticipation, and the joy of winning are not produced by the simulated account. The simulated account may be a clone of real trading, without a soul. Yet, this isa narrow view and, in fact, misunderstands even the drawbacks of simulation. Not beingable to reproduce the emotions associated with the trading situation may be simulatingthe best psychological state of them all—no emotions. Having practiced trades seriously,without the emotional angst of each trade, the trader has in fact reproduced an advancedstate of trading.
HOW TO USE A SIMULATED ACCOUNTEven if the critique of simulated trading is correct, the benefits far outweigh the costs.Let’s proceed with how to use the simulated or virtual account.
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The Right Way to Use Simulation Accounts
175
1. Set the account size to the level anticipated for opening an account.2. Apply the sequence of trading challenges that are outlined in the previous chapter
and test them in the virtual account.3. Test yourself in the following challenges:a. Sequential wins. Try to get 9 sequential wins in a row of 10 pips or more.b. Stop loss test. Place an extra lot on each trade and place a stop loss of 50 pips on
the second lot. Compare whether you improve the percentage of being stoppedout.c. Profit-limit test. Place an extra lot on each trade, and place a profit limit on onewith your average pip goal, and on the other leave it open.4. Select a currency pair you have never traded and put on 20 trades on that pair in
simulation before you try it in real time.5. When trading a real account, place the identical trade in a simulated account and
vary the stops, limits, or lot sizes to compare performance.One of the greater challenges that the simulated account offers an opportunity totest is that of discipline. If one can’t follow a trading strategy and rules in a simulatedaccount, it may be a prelude to the lack of discipline in a real account.
PREPARING TO TRADEPreparing to trade is not a linear process; you’re always preparing to trade. But we arefocusing here on key steps to take that promote a winning mind-set. These steps areeffective because they are rituals of behavior that reinforce practices:1. Scan yourself. The most important scan to undertake is a self-scan. When you wake
up in the morning or right before you come to the screen after a break, observe yourown state of being.2. Take a walk and clear your thoughts.3. Read the Financial Times while you’re having a cup of coffee or your favorite morn-
ing beverage.4. Turn your cell phone off.5. Scan fundamentals and select the currency-pair’s predominant direction of your next
trade.6. Scan monthly, weekly, and daily charts for key areas of support and resistance.7. Check the trade-weighted index charts for each currency pair (www.iboxx.com).
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The result of following these steps is more than formulating an evaluation of marketconditions. The process generates greater confidence in taking on the trades that followand the trader mind-set is ready for the challenges ahead.Following are 10 key principles to guide the beginning experiences of forex trading:1. Trading in simulation is effective as a learning tool only if it is guided by a sound
methodology.2. Training to trade needs to approximate the actual level of capital intended to trade.3. The first 50 real trades are all test trades.4. The first 100 real trades should be at no more than 2-to-1 leverage.5. Losing trades are as valuable as winning trades: Don’t fear losses—learn from them.6. A trading plan won’t work if it’s somebody else’s.7. Success in trading is more than just profitability—it is repeatability.8. There is no best time to trade there are only best patterns to trade.9. Analyze the market by yourself before you read someone else’s analysis.10. Don’t waste time looking for better trading platforms; focus on better trading.
SUMMARYUltimately, it is a personal decision when one is ready to test one’s skills in real trading.The best approach is to look at simulation as a first step in testing one’s real trading—notas the end of training but as an evolutionary step in becoming a forex trader. Therefore,simulation and real trading need to occur in a context of principles that guide the trader.These principles reflect a commitment to achieving excellence in trading.
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C H A P T E R 17
Strategiesand Challengesfor DifferentAccount Sizes
he experience of trading can be greatly affected by the size of an account. Tradersstarting with relatively large amounts of money often have the belief that moremoney in the account leads great success. Often, the opposite is true. Having alarge account before you have acquired proven skills is an invitation to simply losingmore money. Yet, size does matter in trading forex because alternative account sizesgenerate different combinations of strategies and tactics. In a sense, each account sizecould be seen as presenting different challenges that should be mastered. Let’s exploresome of them.
T
LEVEL 1: THE $5000 FIRST-100-TRADE CHALLENGEIn beginning to trade forex, the account size should not be less than $5000. At $5000,one has the ability to put on trades and strategies that can be used in any size account.In a $5000 account, one should put on a standard lot amount ($100,000) only when theyrecognize a very high probability setup. A 20-pip loss in such a trade would represent a$200 decline, which is a 4 percent decline. In the early stages of trading experience, asequence of losses with big lots could wipe out the account.The best approach for a $5000 account size is to trade at $1 per pip and the most $2per pip. This means placing $10,000 trades and $20,000 trades. The objective at this stageis to achieve a measure of competence, not a measure of profitability.A $5000 account size should be viewed as a training account to get one into shape forthe marathon of forex trading. With that view in mind, there are warm-up exercises andstrategies to test out for your first 100 trades. Each strategy should apply to a sequence177
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PUTTING IT TOGETHER
of 10 trades to allow for a reasonable ability to quantify performance and learn from thatanalysis. Think of the trading as a series of challenges:1. Select one currency pair to start your trade.2. Set a goal to achieve an average pip win of 10 pips for your first 25 trades.3. For your next series of 25 trades, set an average pip win of 15 pips.4. For the third and fourth sequence of 25 trades each, select a different currency pair
with the same profit targets of 10 pips and then 15 pips.5. Set a risk per day of 4 percent of equity ($200) to allow for the expectation of being
frequently wrong during your first 100 trades.6. Don’t do any trades using less than 5-minute candles.
LEVEL 2: THE $10,000 FIRST-50-TRADE CHALLENGEWhether one starts with a $10,000 account or grows to that level, one gets the ability totest and train with more strategies than at $5000. The biggest difference is to trade withtwo currency pairs at a time. The $10,000 account should still trade with mini lot sizes,but we increase the lot level to a maximum of three lots. The strategy for effectivelyphasing into a $10,000 account requires that you first select the currency pair or pairsyou will trade. An important consideration is formulating a pip profit target that youwant to achieve each day. Determining your risk tolerance is a critical task. Let’s take astep-by-step look:1. Select two currency pairs to start your trading. One is a currency pair you like as your
favorite, and the other is a pair that your scan of the markets suggests is presentinggood conditions to trade.2. Set a goal to achieve an average pip gain of 10 pips for the first 25 trades on one pair
and 20 pips on the second pair.3. The maximum risk per day should drop down to 3 percent risk per day, or $300.4. When using multiple lots, use an all-in and all-out strategy.
The Trader Log of Ross, A Real BeginnerFollowing is a real-world example of getting started. Ross, a beginning trader in London,takes a controlled approach. After learning how to trade at Learn4x.com, Ross openeda real account with approximately $10,000. A careful examination of his actual trades(Table 17.1) shows a remarkable discipline. The initial trades were put on with smallsums to test his skills. Greater amounts per trade were slowly put on.
GBP/USDEUR/JPYEUR/ USDGBP/ USDGBP/USDEUR/USDGBP/USD
3/8/20073/8/20073/8/20073/8/2007
3/8/20073/8/2007
3/9/2007
1.9299
1.92961.3138
1.9341153.571.31551.9320
1.93171.3161
1.9273
1.92611.3110
1.9311153.221.31201.9286
1.92851.3196
1.92521.9320
1.9299
1.93061.3139
1.9346153.671.31601.9325
1.93191.3151
1.92941.9189
1.31321.93511.3107152.311.31261.9278
10,000
10,00013,000
10,00013,00015,00010,000
10,00013,000
10,00010,000
13,00010,00013,00013,00013,00010,000
EUR/USD
1.3152
1.3172
13,000
1.3148
GBP/USDEUR/USD
3/7/20073/8/2007
1.92861.9290
1.30981.92131.3067151.931.3091.9254
$1
$1$1
−1−24
$1
$1$1
$1$1$1$1
$1$1
$1$1
$1$1$1$1$1$1
0
101
51055
210
93
2101−280−12
Won
LostLost
B/E
WonWon
WonWonWonWon
WonWon
WonWon
WonWonWonLostB/ELost
5031.345026.335037.785032.10
5016.655023.96
(continues)
15:11
Exited: ECB rate announcment 12:45 pmBOE as exp. Keeps rate at 5.25% – ridingmkt reaction5042.95 Bad Entry – mkt went down before up5043.18 Bad Entry again – let it test resistanceretreat then enter5043.18 Let it bounce retreat then assess bull/bear strategy5042.28 Wait until the downmove exhausts itself5040.37 ERROR: Platform put order intomkt/ not my actions***5042.59 Stocks say stay in trade longer: keepchecking
Exit news release 8.55 amUSD ISM – bearishUSD ISM – bearishJPY is still overbought**Sideways actionEUR factory order: should have stayedwith position news bearish
Comments
August 10, 2007
Sideways Action – US Oil Inventory Dataout 3.30 pmExit – Fed Gov Walsh Speech at 7 pm$ rising before expected ECB rate hike(ECB 3.75% expect)
5013.725015.72
5025.215029.215030.735016.715016.675010.33
Quantity Total Pip $ PIP Result P/L (£)
3/9/2007
GBP/USDGBP/USD
3/7/20073/7/2007
1.31301.92511.3106152.261.31161.929
Stoploss Exit
1.3158 13,0001.9317 10,000
EUR/USDGBP/USDEUR/USDEUR/JPYEUR/USDGBP/USD
3/5/20073/5/20073/5/20073/5/20073/6/20073/7/2007
Entry
JWPR051-Cofnas (JWBK051-Cofnas)
3/9/2007 EUR/USD 1.3148 1.31133/9/2007 GBP/USD 1.9315
Currency
A Log of the First 50 Trades
Date
TABLE 17.1
c17Char Count=
179
180EUR/USDGBP/USD
1.32971.9455
1.32611.9423
1.93801.94431.3293
1.33041.9457
1.38001.94761.3321
1.9375
20,00020,000
20,00020,00020,000
20,000
20,000
72
53−4
5
3
$2$2
$2$2$2
$2
$2
WonWon
WonWonLost
Won
Won
Won
Won
Lost
Lost
Lost
Won
US non farm payroll suggest moderateexpansion** no explanation5034.30 Stupid Stupid: WAIT FOR THE NOISE TOCALM AFTER A NEWS REPORT5040.51 Disaster: Bought at 118.15 collapsedeventually broke 118 level4870.08 Stupid: Opened position, spoke tobroker forgot to put stop in4892.82 USD Retail Sales more bearish thanexpected – very imp indicator4895.49 MOVED TO SAXO PRO 2 – HAVE TOPAY FEE IF UNDER $50K4988.86 Seems to be ﬁnding resistance despiteupbreak – keep checking4943.16 Norwegian raise rates by 0.25% to 4.00%as expected4941.834997.08 Worries about US Recession4997.08 US Data not as bad as expected:Remember expectations alreadypriced into market4940.44 Below Pivot Support/Resistance Points4979.74 Intra day downtrend in place so exitedposition
5047.11
15:11
1.93751.94731.3323
1.9330
1.3175
$2
$2
−76
−10
$2
−2
$2
$1
−29
6
$1
7
Comments
August 10, 2007
1.9370
1.3210
3/19/20073/19/2007
20,000
GBP/USDGBP/USDEUR/USD
1.9320
20,000
3/15/20073/16/20073/16/2007
1.9284
0.7834
20,000
GBP/USD
1.9314
0.7879
118.13
3/15/2007
GBP/USD
3/13/2007
0.7844
117.85
10,000
13,000
1.3213
AUD/USD
3/13/2007
118.15
1.9293
154.49
EUR/USD
USD/JPY
3/12/2007
1.9298
154.06
Quantity Total Pip $ PIP Result P/L (£)
3/15/2007
GBP/USD
3/9/2007
154.39
Stoploss Exit
1.9329 20,000
EUR/JPY
3/9/2007
Entry
JWPR051-Cofnas (JWBK051-Cofnas)
2/13/2007 GBP/USD 1.9321 1.9283
Currency
(Continued)
Date
TABLE 17.1
c17Char Count=
GBP/USDGBP/USDEUR/USDEUR/USDEUR/USDAUD/USDUSD/CADEUR/USDEUR/USDGBP/USDEUR/USD
GBP/USDEUR/USDUSD/CAD
3/19/2007
3/19/2007
3/20/2007
3/20/2007
3/20/2007
3/20/2007
3/21/2007
3/21/20073/21/20073/22/20073/22/2007
3/22/2007
3/22/2007
3/26/2007
1.1626
1.33731.1596
1.3343*
1.9657
1.1630
1.3383
1.9700
1.33131.33691.97001.3352
1.1630
0.8015
20,000
20,000
20,000
20,00020,00020,00020,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
4
7
10363
10
10
1
1
4
5
3
$2
$2
$2
$2$2$2$2
$2
$2
$2
$2
$2
$2
$2
Won
Won
Won
WonWonWonWon
Won
Won
Won
Won
W