Mastering Forex Trading

Window Mobile Metatrader

2008-01-07T06:50:00.000-08:00

This is a software metatrader for Window Mobile Pocket PC, the new version:
Download

INTERMEZZO "Paid to Click" program

2008-01-05T21:58:00.000-08:00

I have been search all of topic about making money online, and there is something interesting me about PAID TO CLICK. If you click advertising on “Paid to Click Program” everyday (spare your time about one hour). I guarantee you will get around $100-$300 per month consistently.

Relatively register in PAID TO CLICK Program is easy. I will give you link a good program below and just follow the instruction to register.

How about a payment? a Payment in this program usually use internet payment service, i suggest you must have Paypal and e-gold. After you get the money in your account balance on the Paid to Click Program, you can withdrawals to your account Paypal and/or e-gold (From Paypal and/or e-gold you can transfer to your bank account of your country).

The program PAID to CLICK, i suggest is;

If you have a problem with this program let me help you to guide with send to message in comment this articles. I hope this articles will help you to generate other income every month.

cheers

Personality and Trend-Following

2007-11-05T03:02:00.000-08:00

I would describe my approach to trading as research-based trend following. By that I mean that I attempt to ride strength or weakness in the market after it has been manifested. I do not, however, automatically assume that any trend is my friend. Instead, I use historical research to distinguish between trending movements that are likely to continue and those with a high probability of reversal. This is a highly disciplined approach to trading in that it requires significant research and preparation time, as well as an ability to stick with market movements and one’s game plan.

In my book HOW I CAN TRIPLE MY MONEY IN FOREX MARKET, I referred to personality traits that tend to distinguish successful traders from less successful ones. Several of these traits are also likely to influence the degree of success traders are likely to have in adopting a trend-following approach to trading. Below are several self-assessment questions that might be useful in determining whether you’ll face particularly great challenges in riding market trends. Please write down “yes” or “no” answers to each of the twelve questions before reading further:

When something goes against you in the market, do you often find yourself venting your frustration?
Do you enjoy (or as a child did you enjoy) roller coasters or other thrill rides?
Do you often find yourself procrastinating over work?
Do you consider yourself moody—sometimes rather up, sometimes rather down?
Would you generally prefer going out and partying with friends rather than staying at home with a good book or movie?
Do you often find yourself apologizing to others because you forgot to do something you were supposed to do?
Are you generally high-strung, tense, or stressed?
If given the choice at a buffet, would you prefer to try exotic foods you’ve never heard of rather than familiar dishes?
When you have a task that needs to be done around the house, do you tend to take a quick and dirty approach, rather than a meticulous, painstaking approach?
After a losing trade, do you often feel guilty or get down on yourself?
Have you experimented with or regularly used two or more recreational drugs (other than alcohol) in your life?
Are you often late for appointments or for social plans you’ve made?

If you indicated “yes” to most or all of questions 1, 4, 7, and 10, you most likely score high on a trait called “neuroticism”. Neuroticism is the tendency toward negative emotional experience, and it shows up as anger, anxiety, or depression.

If you responded “yes” to most or all of questions 2, 5, 8 and 11, you probably score high on a trait called “openness to experience”. Openness reflects a tendency toward sensation seeking and risk-taking.

If you answered “yes” to most or all of questions 3, 6, 9, and 12, you potentially score low on a trait called “conscientiousness”. Conscientiousness measures the degree to which an individual is oriented toward duty, responsibility, and dependability.

Other things being equal, the ideal personality pattern for trend following is one of high conscientiousness, low neuroticism, and low openness. A good trend-follower will stick with rules and systems (conscientious), won’t impulsively enter or exit trades on the whim of emotion (neuroticism), and will trade for profits, not stimulation (low openness). In my experience, some of the best systems traders are among the least flashy people. They are meticulous and conscientious about their research and execution, and they don’t let their emotions or needs pull them from their discipline.

Conversely, individuals who are high risk-takers and who crave novelty, stimulation, and action often take impulsive and imprudent risks. Very frequently, the neurotic emotions kick in after a series of losing high-risk trades. Such individuals are trading for excitement and self-validation, not just profits. Even if they are given a tested, profitable trading system, they will not be able to follow it faithfully.

System traders often focus their research and energy on defining the optimal parameters for a system’s profitability. Equally important is finding a trading strategy that meshes with one’s personality. Traders who are relatively risk-averse may trade shorter time frames and/or smaller positions than those who are risk-tolerant. Traders with a higher need for novelty and stimulation may benefit from trading a greater number of stocks and/or markets rather than focusing on a relative few. Are some personalities simply unsuited for trading? I would say yes, just as some personalities are not cut out to be fighter pilots or surgeons. It is difficult to imagine a trader enjoying ongoing success without the capacity for disciplined risk-taking.

It is not at all unusual to find that a trader is losing with a trend following approach because he or she is acting out unmet personality needs in the market. One of the best trading strategies one can employ is to find adequate outlets for attention/affection, achievement, self-esteem, emotional well being, and excitement outside of trading. Sometimes traders I talk with try to impress me by explaining that trading is their entire life. They do not realize that their very “passion” and “obsession” with the markets are likely to sabotage them, imposing undue pressures and interference. If you have a trading system and you faithfully execute that system, trading should be reasonably boring and routine. Better to enjoy roller coasters outside of market hours than ride them with your equity curve!

Last Exit for the Lost

2007-11-05T02:53:00.000-08:00

I’m encountering frequent tales of the demise of once-successful “daytraders” of the futures markets, which perhaps had me thinking of The Fields of the Nephilim when I titled this piece.

Here is what I believe:

As an increasing number of players swarm to a recognized trading “edge”, this creates new patterns of over-reaction and under-reaction in the markets and fresh sources of “edge”.

The new sources of “edge” are always diametrically opposed to the old ones. Where the edge had been momentum plays with growth stocks, the new edge can be found in fading low volatility markets. The erstwhile edge in harvesting ticks from inefficient markets yields way to an advantage trading the more protracted overreactions of these short-term players.

The insight I had on Friday was that the patterns defining the current edge are not resolvable into the terms of the previous advantage. They are emergent phenomena, to draw upon a concept from systems theory. No amount of counting and categorizing pixels on a television set can yield insight into the meaning of a broadcast; the laws that capture the firing of neurons cannot speak to the content of resulting thought. The overreactions of today’s traders form a larger pattern that becomes tomorrow’s source of alpha. The larger pattern cannot be seen from within the perspective of current traders.

Yesterday’s heroes always hope to hold on to their dying edge by blending the old with the new—oblivious to the fact that the new derives its edge precisely from the excesses of the old. Shades of Kuhn and paradigm shifts…

Carl McCoy is growling “Love Under Will”: a song about goodbyes at the graveside. I visualize the book in the eminis—the thick size and the frantic pulling and hitting of bids and offers—and I can see yesterday’s traders desperately hoping to catch the next few ticks. Like the Nephilim contemplating life in the cracks and hollows, I’m resigned to the reality that “someone’s gonna suffer.”

Explaining Market Success

2007-10-31T03:21:00.000-07:00

Numerous books have been written on the topic of trading success. Nevertheless, it is unclear how expert traders obtain their expertise. Several explanatory models are implicit in market writings:

1) The psychological model – What makes great traders, this model asserts, is self-mastery. Great traders don’t necessarily possess better trading methods or secrets, but apply common wisdom more consistently, with less emotional interference, and therefore with better risk management. Developing trading expertise is a function of developing oneself in this model.

2) The scientific model – What makes great traders according to this model is superior research. Markets exhibit cause-effect relationships, and these relationships shift over time. The role of research is to uncover these patterns and capitalize upon them. Such a model is, in a sense, the opposite of the psychological model. It hypothesizes that, once you discover inefficiencies in the marketplace, these can be incorporated into mechanical systems that eliminate any troublesome human elements from trading.

3) The hidden pattern model – Success in the marketplace, this model emphasizes, is a function of understanding. Patterns exist in the marketplace that do not shift over time, but also that are not necessarily observable on the surface. The role of the great trader is to successfully decipher and apply these universal patterns. This is not so much a function of research as experience; such approaches to trading as charting, Elliott Wave, and Market Profile are not systematic approaches to trading, but instead rely on the trader’s interpretive skill.

4) The performance model – Trading is viewed as a performance activity, like athletics, in this model. Successful trading can be broken down into component skills and attitudes that can be honed through intensive exposure and practice. Expertise is less a function of explicit research or pattern-based interpretation as rapid execution of perceptual and motor skills.

No doubt each of these models possesses elements of the truth, and it is quite possible that all of these models represent a portion of what it means to be a great trader, not unlike the descriptions of the elephant offered by the proverbial blind men. Models one and four emphasize qualities of the trader; models two and three stress the underlying qualities of the marketplace.

In a sense, these models are like lenses that traders wear, shaping how they view the world and prioritizing what they work on. They reflect deep belief structures about the nature of the world: whether reality is fixed (capable of being captured by universal patterns) or changing (capable of being captured through ongoing research); whether knowledge is explicit (obtained through psychological reflection) or implicit (reflected in performance).

Because these models of market success are drawn from our fundamental views of the world, I suspect that they are far less amenable to modification than is commonly appreciated. A researcher will be turned off by Elliott Wave theory not because of objective evidence (which the researcher finds lacking and the Elliotician sees aplenty), but because the very notion of fixed, unchanging Platonian realities does not mesh with a perspective that emphasizes dynamic interrelationships. To a trader who views trading expertise in performance terms, the idea that success is a function of mindset simply does not register: Can one become a good surgeon through self-development? And yet can one perform without the right internal harmony (as the recent experience of the Los Angeles Lakers demonstrated)?

Perhaps the successful trader differs from the unsuccessful one, not because of the superiority of one model over another, but because he or she has found a model for professional development that fits with his or her basic personality, outlook, and experience sets. The unsuccessful trader may lack a coherent model altogether—impulsively shifting from working on self to working on market, working on research to working on discretionary interpretation. Or unsuccessful traders may pursue models that utterly conflict with their fundamental personalities traits and life experiences, as in the case of intuitive individuals who attempt to force their trading into mechanical schemes.

In that sense, the models are like religions: There may be multiple paths toward spiritual growth, but it is necessary to find a path that speaks to you. One cannot be a devout Christian one day, a disciplined Zen practitioner the next, and still later an Orthodox Jew. By asking fundamental questions—Where is opportunity in the marketplace? What competencies do I need to capitalize on this opportunity?—you can begin to grind your own lenses and formulate a plan for furthering your success.

Risk and Success

2007-10-29T14:55:00.000-07:00

Sometimes you hear people debate whether trading success is attributable more to trading techniques vs. psychology. The answer, of course, is both—but the point where the two intersect is risk management. A huge percentage of trading success or failure can be laid at the doorstep of risk management. A recent book on risk management (that I’ll be reviewing next week) observed that, across different traders and trading firms, 90% of all profits were attributable to 10% of all trades. While traders would like to think of themselves as making money on a majority of their trades, the reality for frequent traders is that a minority of trades are winners—and it is the few large winners that produce a favorable profit/loss statement (P/L).

The book goes on to observe that, if 10% of trades account for a majority of profits, it follows that a large percentage of trades have to be “scratched”. A cardinal skill in trading is recognizing that a trade is wrong before it hurts the P/L. Time and again, I have seen good traders exit trades when the trades fail to move in their direction; bad traders exit only after the trade has moved against them.

And yet it is equally true that, if 10% of trades are going to account for the lion’s share of profits, traders must be willing to milk very good trades. This not only means finding the sweet spot where you can “cut your losses and let your profits run”; it also means being willing to trade sufficient size to maximize returns from a good trade. The worst traders I know put on their maximum size when they’re trading at their worst. Typically, they have just lost on one or more trades and now are trying to get the money back. The best traders are able to identify superior trading opportunities—and are patient in waiting for those—and will put size on to take advantage of these. This is how 10 good trades more than make up for 90 scratches and losers.

A favorite trading story that I tell concerns a very successful trader. He promised to tell me the secret of trading success. Of course, my curiosity was piqued and I asked, “What is that?” He responded with a question: “What the ratio of your largest position size to your normal size?” “Three-to-one”, I told him. He smiled. “Consider 20-to-1,” was his advice and his success formula.

I completely believed him. The reason he was successful had nothing to do with finding a better oscillator, regression analysis, or chart formation. He was successful because he had the ability to identify—and wait for—particularly profitable opportunities and then take maximum advantage of those. While 20:1 position sizing is—and will always be—rich for my blood, I think the principle is valid: success is partly a function of putting size on for the logical, not psychological, reasons.

This is one reason trading is so difficult. It is an unusual blending of traits that allows someone to be prudent with risk, scratching trades that don’t move promptly as expected, while at the same time milking opportunity. It is easy to find traders who are risk-averse and stick with their one and five lot positions; it is also easy to find traders who will swing size freely, including times when they are frustrated with the trade. What is rare is to find the mix: the ability to accept and limit the 90% of occasions that don’t work, and yet act aggressively on those 10% of times when there is a move to be exploited.

What is true for size is also true for time. Much can be learned simply by identifying how long a trader has held onto winning vs. losing trades. If a trader is quickly exiting trades that aren’t going in the desired direction, the average holding times for such trades should be quite low. Conversely, with the good traders, it’s not unusual to see a trading log that registers 10% of trades that are held for a lengthy period of time. Invariably, these are the winners that contribute significantly to the overall P/L. The truly unsuccessful traders will also display a minority of trades with long holding times—and these will be the losers. I recently asked a trader why he hung onto a long position for an unusually long period of time. He looked at me somewhat quizzically and replied, “Because I had the bottom!” He was willing to sit through a choppy trade as long as it went in his direction and as long as nothing happened to convince him that he didn’t identify the bottom. That one trade made his entire day.

Perhaps this is a truism in all of life. The people who I have seen who have been very successful in dating and relationships have been willing to go on very many first dates, but not so many second and third ones. They “scratch” the unpromising dates and then focus their energies on the 10% that look worthwhile. The same is often true with respect to career and company success. A successful individual may take on ten projects over the course of a year, but focus efforts on a single initiative when it yields promise. A company may roll out ten products and quickly pull nine, making significant money on the one that finds ready acceptance in the marketplace. Even successful artists and inventors, researcher Dean Keith Simonton found, tend to churn out creative efforts, deriving their fame from the small minority of works that attract the attention of an appreciative world.

Successful traders risk manage their market exposure. Successful individuals risk manage their life exposures. It is not just how much we undertake, but how much we scratch in life that determines our ability to benefit from the episodes of promise that come our way.

How to Take a Loss

2007-10-27T21:19:00.000-07:00

There are quite a few books written on how to make money in the market. Some of them are even written by people who have made money as traders! What you don’t see often, however, are books or articles written on how to lose money. “Cut your losers and let your winners run” is commonsensical advice, but how do you determine when a position is a loser? Interestingly, most traders I have seen don’t formulate an answer to this question when they put on a position. They focus on the entry, but then don’t have a clear sense of exit—especially if that exit is going to put them into the red.

One of the real culprits, I have to believe, is in the difficulty traders have in separating the reality of a losing trade from the psychological sense of feeling like a loser. At some level, many traders equate losing with being a loser. This frustrates them, depresses them, makes them anxious—in short, it interferes with their future decision-making, because their P & L is a blank check written against their self-esteem. Once a trader is self-focused and not market focused, distortions in decision-making are inevitable.

A particularly valuable section of the classic book Reminiscences of a Stock Operator describes Livermore’s approach to buying stock. He would sell a quantity and see how the stock responded. Then he would do that again and again, testing the underlying demand for the issue. When his sales could not push the market down, then he would move aggressively to the buy side and make his money.

What I loved about this methodology is that Livermore’s losses were part of a grander plan. He wasn’t just losing money; he was paying for information. If my maximum position size is ten contracts in the ES and I buy the highs of a range with a one-lot, expecting a breakout, I am testing the waters. While I am not potentially moving the market in the way that Livermore might have, I still have begun a test of my breakout hypothesis. I then watch carefully. How are the other averages behaving at the top ends of their range? How is the market absorbing the activity of sellers? Like any good scientist, I am gathering data to determine whether or not my hypothesis is supported.

Suppose the breakout does not materialize and the initial move above the range falls back into the range on some increased selling pressure. I take the loss on my one-lot, but then what happens from there?

The unsuccessful trader will respond with frustration: “Why do I always get caught buying the highs? I can’t believe “they” ran the market against me! This market is impossible to trade.” Because of that frustration—and the associated self-focus—the unsuccessful trader does not take any information away from that trade.

In the Livermore mode, however, the successful trader will see the losing one-lot as part of a greater plan. Had the market broken nicely to the upside, he would have scaled into the long trade and likely made money. If the one-lot was a loser, he paid for the information that this is, at the very least, a range-bound market, and he might try to find a spot to reverse and go short in order to capitalize on a return to the bottom end of that range.

Look at it this way: If you put on a high probability trade and the trade fails to make you money, you have just paid for an important piece of information: The market is not behaving as it normally, historically does. If a robust piece of economic news that normally sends the dollar screaming higher fails to budge the currency and thwarts your purchase, you have just acquired a useful bit of information: There is an underlying lack of demand for dollars. That information might hold far more profit potential than the money lost in the initial trade.

I recently received a copy of an article from Futures Magazine on the retired trader Everett Klipp, who was dubbed the “Babe Ruth of the CBOT”. Klipp distinguished himself not only by his fifty-year track record of trading success on the floor, but also by his mentorship of over 100 traders. Speaking of his system of short-term trading, Klipp observed, “You have to love to lose money and hate to make money to be successful…It’s against human nature what I teach and practice. You have to overcome your humanness.”

Klipp’s system was quick to take profits (hence the idea of hating to make money), but even quicker to take losses (loving to lose money). Instead of viewing losses as a threat, Klipp treated them as an essential part of trading. Taking a small loss reinforces a trader’s sense of discipline and control, he believed. Losses are not failures.

So here’s a question I propose to all those who enter a high-probability trade: “What will tell me that my trade is wrong, and how could I use that information to subsequently profit?” If you’re trading well, there are no losing trades: only trades that make money and trades that give you the information to make money later.

Fibonacci Numbers

2007-10-27T20:59:00.000-07:00

Overview

Fibonacci numbers are the result of work by Leonardo Fibonacci in the early 1200's while studying the Great Pyramid of Gizeh. The fibonacci series is a numerical sequence comprised of adding the previous numbers together, i.e.,

(1,2,3,5,8,13,21,34,55,89,144,233 etc..)

An interesting property of these numbers is that as the series proceeds, any given number is 1.618 times the preceding number and 0.618% of the next number.

(34/55 = 55/89 = 144/233 =0.618) (55/34 =89/55 =233/144 =1.618), and 1.618 =1/0.618.

This properties of the fibonacci series occur throughout nature, science and math and is the number 0.618 is often referred to as the "golden ratio" as it is the root of the following polynomial x^2+x-1=0 which can be rearranged to x= 1/(1+x).

So that's were the fib # 0.618 comes from. The other fibs 0.382 and 0.5 commonly used in technical analysis have a less impressive background but are just as powerful in Technical analysis.

0.382=(1-.618)=(0.618*0.618)

and 0.5 is the mean of the two numbers.

Other neat fib facts (0.618*(1+0.618)=1 and (0.382*(1+.618))=0.618.

Use of Fibonacci #'s in Technical Analysis
Fibonacci numbers are commonly used in Technical Analysis with or without a knowledge of Elliot wave analysis to determine potential support, resistance, and price objectives. 38.2% retracements usually imply that the prior trend will continue, 61.8% retracements imply a new trend is establishing itself. A 50% retracement implies indecision. 38.2% retracements are considered natural retracements in a healthy trend.

ABC's
Price objectives for a natural retracement (38.2%) can be determined by adding (or subtracting in a downtrend) the magnitude of the previous trend to the 38.2% retracement. After the 38.2% retracement the stock should break through the previous swing point(B) on heavier volume. If the volume isn't there the magnitude of the move will usually be diminished, especially on very low volume.

A-B =C-D when B-C =38.2% of A-B

61.8% retracements are warning signs of a potential trend changes. For a more detailed explanation of Fibonacci price projections and price wave theory I highly recommend the Elliot Wave Principle links below.

Confluence Confluence occurs when you take fibonacci projections off of multiple trends and get the same number and strengthens when it corresponds with other technical advents such as gaps, swing high/lows, chart indicators crossovers (MACD, RSI, Stochastics, etc.), trading congestion, etc. The more confluence, the more significant the level. I really take notice when I get two or more fib #s (say a 38.2% and 61.8%) to correspond with a gap in the chart or a swing high. Confluence is very powerful as it combines multiple technical analysis techniques to arrive at the same conclusion, and should be relied on accordingly IMHO Trading Strageties JMHO

Once a new swing point is established in an equity, a new set of fibonacci numbers should be calculated, and confluence checked to determine potential support/resistance levels and trading strategies. (let the Fibonacci Calculator do most of the work for you). For instance:

If a stock is trending up, one may watch it until it forms a top then calculate the fibs. If she retraces 38.2% and turns with confluence, one could bite with an automatic stop under the 50% retracement and objective of the ABC. The Risk/Reward ratio for that trade is 0.118. (If you got stopped out 8 times and hit once you would have a 5.6% profit).

If she's trending down, you could bite at the 38.2% bounce with a stop at the 50% and get the same risk/reward ratio. Would both strategies it is critical for the volume to be heavier on the swing point breakout.

If a position is going with you and you're looking for an exit point, calculate the 38.2% fib once a top is clear and put a stop below it. Won't get you out at the top but you may not miss that monster rally either.

Think a stock is a dog but it's trading at it's high wait for a 61.8% retracement from the last trend and sell it, with the stop below the 50% retracement.

Does Trend Following Work?

2007-10-26T23:02:00.000-07:00

The objective for any investor who wants to be active in the markets is quite simple. How does one make effective decisions in an uncertain and dynamic world? The problem is finding a generalized approach that will work effectively across a broad set of fast-paced asset markets. A realistic approach to decision-making should involve a methodology that reflects a functional world view or philosophy of how markets operate. This approach also should be replicable and tied closely to a system of management which can be structured in a variety of ways to fit a wide set of opportunities. Trend following is an efficient means of decision-making under conditions of uncertainty that reflects the peculiarities of asset markets that can be tailored to different time frames and risk profiles.

Hundreds of articles and books have been written on trend following, all of which purport to show that there are specific methods or formulas which can be used to outperform the market or at least give an investor an edge when one enters and exits trades. There may be just as many articles that show that many of these methods are ineffective. So which result is right? Most likely neither. There is no magic formula for following trends that will work for all investors all of the time. If there is no trend in the market, a trend follower cannot make money. However, many markets do have a tendency to trend, and trend following can be employed as a process for extracting thedirection of markets over many time frames.

Well, There Is a Holy Grail: Having a Good Decision-Making Process

So why spend time on developing a disciplined systematic trend-following approach relative to other approaches? Because more important than the attempt to find the magic formula, trend following is an effective method for making good investment decisions. It is this process of making good decisions

that in and of itself is the Holy Grail. When done effectively, a good approach will stand the test of time and allow for flexibility with a choice of decisions. This discussion concerns not the how of trend following through specific models or formulas, but the why of trend following as a decision process for solving problems.

Why Rely on the Trend?

So, here’s the question. Why should someone focus on price trends when it seems almost more sensible to employ all of the fundamental information that is available? Why should someone bind themselves to trend models for price moves when they can enjoy more flexibility through discretionary judgments? We seek to provide not a rationalization, but an explanation for why trend following is effective. To understand why disciplined, systematic trend following is a reasonable and rational approach for decision-making, a

commentary is needed on how investment decisions generally are made, not how they ought to be made in a perfect world. There also has to be a clear understanding of what markets do and how prices behave.

The classic and formalistic approach to decision-making as taught in most business schools seems easy enough. Generally, the investor gathers all of the information available, formulates a set of alternatives, and weighs all possible scenarios times the probability of them occurring. An investor’s forecast is just the probability-weighted average of all alternatives or one’s expected best guess of market value.

Unfortunately, this approach seems problematic with how markets operate, how prices are formed and how decisions actually are made in an uncertain world. The aggregation of information in markets is more complex than what is seen in any textbook or what can be accomplished in a perfect world. Gathering all of the facts is time-intensive, laborious work if it can be done at all; and besides, an investor should assume that someone else probably will be better informed. More importantly, there is no certainty that one will be able to interpret all of the information correctly or faster than the next investor. Most information is already incorporated in prices. Perfect knowledge is not the same as having the wisdom to infer the correct market direction. This will be a loser’s game especially if an investor wants to diversify over a large set of market opportunities. One cannot be an expert in everything. The individualistic approach of classic discretionary decision-making is quite difficult to employ.

There have been attempts to find expert systems or ways of explaining what experts do; however, the expected value process takes significant information and time requirements. The methods and type of information gathering also may not be the same for all markets. There has to be a more concise way –

or at least a more structured way – of making these intricate decisions. Even with all of the hard work and desire, there may be too much information for processing. An alternative to trying to beat the market with an information advantage is to simplify the problem.

Learn from Other’s Actions

We have to, in the words of Nobel Prize winner Herbert Simon, “satisfice” (or learn to make good decisions with limited time and information). One must attempt to find the best possible answer given the many restrictions faced in the complex market environment. For example, though viewed by most

traditionalists as controversial, following the crowd or herd is rational when there is significant uncertainty or a lack of information on a problem. We can learn from the action of others. This is especially the case when one may be at an information disadvantage relative to others. Reacting to market events

through observing the buying and selling action embedded in price changes is intelligent.

Those who have studied the complexities of decision-making also have discovered very interesting results when observing the behavior of those who face problems of significant uncertainty and complexity. Simple methods may be as effective as complex approaches when you have limited information. In

particular, “fast and frugal” methods for making decisions can satisfy our competing goals. Methods that can be implemented quickly and approaches that have limited inputs, so they are easy to use in any situation, are extremely helpful for investors. There can be methods for making decisions that break away from the potential failure from trying to think of all possibilities.

Decision-Making Is Filled with Biases

Making decisions in the real world is more than just a complex problem. It is all the more difficult because most individuals are not naturally good decision-makers. The great message from extensive research in behavioral finance is not that specific market anomalies can be found which are contradictory to the efficient market hypothesis, but the fact that we do not always act rationally or behave like robotic, statistical decision-makers who follow textbook approaches. We have to admit to our own fallibility in

thinking and that we are subject to biases.

We are human, which entails concerns about our ability to process information and understand probabilities. We are biased in our thinking about how to formulate a problem. We are biased with our actions of how to implement a trading strategy, and we are biased in our reflections afterwards on what was accomplished. Most certainly, we can fool ourselves with our beliefs. We generally are not good statisticians. We get emotional. We suffer from regret, which often means that we hang onto our losers and sell our winners. We are overconfident in our abilities. The list of our difficulties with making decisions

is quite long.

Nevertheless, problems can be overcome with simple methods. We need to apply discipline to our behavior and learn from our mistakes by reviewing our activity. Broadly speaking, we have to employ rules to “hard wire” good behavior. We all would like to be flexible with our decisions. Our streak of

individuality begs us to become discretionary traders, but the wealth of analysis suggests that the best way to beat behavioral biases is to monitor our actions and bind ourselves to good practices. The ultimate set of good practices is the use of well-defined rules for behavior or discipline.

Markets Get It Right

The most important keystone employed in the decision process of trend followers is based on some simple assumptions of markets and price. Markets usually get it right in the long-run. If markets are efficient, prices will incorporate all information and eventually move to their true value. Prices

incorporate expectations and react to all public and private information that investors use to make their decisions. Markets aggregate all opinions brought to the market with the dollar votes of every participant. Consequently, prices are a complex, weighted average of all the dollar flows committed to specific

opinions. Opinions are just that until committed through capital, so the best determinant to find out what the market will do is accomplished through looking at prices.

Nevertheless, saying that markets usually get it right is not the same as saying that they are always right immediately. Markets, while embedding all information from investors, are only a reflection of their actions. When a market is more uncertain, prices will adjust more slowly as a reaction to this ambiguity. When there is nothing going on, prices will not trend. When there is clarity with what new information is present, markets will react quickly with little ambiguity.

Unfortunately, prices in efficient markets actually may reflect too much information. The problem for the trend follower is trying to interpret prices – not raw information – in order to find the directional signal of markets. Because the markets move between different states of reflecting information, decision-making is still not easy; however, it may be more manageable than the alternatives. The focus can be placed on what prices are telling us. Interestingly, while aggregating information, markets will still surprise us and make mistakes. It may take time to find the true price, and it also may take time to get to market

equilibrium.

Price = signal (trend) + noise (error around trend). Prices can be broken down into two parts, a combination of a signal plus noise. The signal is the price trend. It represents a change in information or

state of the true value for a market. The price, as a signal that incorporates information, means that we do not have to know the actual information that is driving the price. We just have to know the signal. The noise is the volatility in price around the signal. This is the movement in price that is not associated with the direction or true value of the market. Sometimes prices move to information, and sometimes they move to price pressure between buyers and sellers. The problem is not gathering new information, but

decomposing what prices are telling us within the limitations of effective decision-making.

Trend following as a decision process ties our three views or market assumption together to form an operational model:

• Decision-making is difficult, especially in the face of uncertainty;

• We are fallible and subject to behavioral biases; and

• Markets reflect opinions and information.

The objective of the trend follower is to employ discipline to offset biases in order to extract signals from prices to the exclusion of other information. In fact, this has greater similarity to a statistical or engineering problem than to a finance problem. Because prices are surrounded by or filled with noise, trend following is a form of price smoothing. You eliminate the noise to obtain a clearer signal. It also can be thought of as a filtering problem. You throw out the excess information that may be associated with trades that are

not driving the trend signal.

When put in these terms, all trend following tries to smooth or filter noisy prices to decipher the direction of the market over different timeframes using different methods. Most of these well-known models employ some form of measuring the trend signal relative to the noise to determine risk positioning. All of the information is in prices, so it is just a matter of trying to find or filter what is relevant.

J. P. Morgan, when asked what the markets will do, answered, “They will fluctuate.” The goal of the trend follower is to find which of those fluctuations are meaningful. However, trend following is more than just modeling or finding the signal. Markets move between periods of convergence or mean-reverting behavior and divergence or mean-fleeing behavior; consequently, there is need for risk management to attempt to limit the downside from false signals. Because markets are not always moving in transition and eventually all trends will end, the importance of risk management can not be underestimated to the process. Risk management tries to limit the losses during the non-trending periods in order for all the

models to continue their signal analysis until new dislocations arise and are detected. The form of risk management is a choice based on how prices are filtered relative to noise. When more filtering or smoothing is conducted to prices, it is possible that there is the risk of losing the signal. More

information is eliminated, and there will be greater differences between the smoothed price and the actual prices.

Avoid Behavioral Biases

But trend following is more than price smoothing with risk management. It follows a disciplined approach in order to offset the behavioral biases. By stopping out losses on the downside, problems of regret or overconfidence are minimized. Holding positions as long as trends continue eliminates other biases. Being systematic allows for repetitive success and can eliminate the behavioral biases that could overtake a discretionary trader who too often will have ego and overconfidence attached to his or her decisions. When combined in a complete system of signal extraction and risk management, the decision process employed by trend followers can look very much like a portfolio of call and put options. There is limited downside through the use of stops. Yet, there is the opportunity to gain from prices diverging or moving away from the mean. Observers have noted that trend following is like being long a straddle or a long volatility trade. Profits will be generated when markets move to extremes. The resulting portfolio will create a distribution which has positive skew or a higher probability of a significant upside return relative to a normal distribution.

What Markets Are Better for Trend Following?

Not all markets will be good for trend following. Some markets are more efficient than others, and some markets have noisy behavior that makes it difficult to implement an effective trend-following strategy. Nevertheless, we have found certain principles for where market trends are more likely. Overall, those markets that have greater uncertainty will more likely have trends because it is harder for investors to decipher what information is telling us about price. This environment creates greater risk aversion.

Markets that have fewer substitutes also generally will trend because demand or supply shocks cannot be offset easily. Markets that have fewer analysts or less information also will be more likely to trend. Markets that have more liquidity-based trading associated with hedging or indexing also will have a

tendency to trend. By picking these markets on which to focus one’s activity, the chances for success in trend following will increase.

Why Follow Trends?

When combined in a systematic fashion with disciplined risk management, it is an effective decision process in an uncertain world. This does not mean that trend following is any easier than discretionary trading. In fact, the discipline required for repetitive success may be harder to develop than the trader who wants to live by his wits. However, as a process, these models can be very effective. It is simple. It can be implemented quickly and can employ a limited number of inputs. It can offset many of the behavioral biases found with any decision-making. It also can take advantage of market efficiencies

through focusing on prices where opinions are aggregated. Trend following is not the solution to all decision-making, but for those who are willing to commit to a disciplined and systematic approach, it can serve as an effective foundation for finding the right directional signals.

Training New Traders: What Makes for Success

2007-10-26T22:47:00.000-07:00

I have had an unusually privileged perch from which to view success and failure among new traders. There is a general consensus in the trading community that, over time, the markets have become more efficient, making it more difficult to exploit inefficiencies. There is also a consensus that market challenges are only likely to increase, given the continued expansion of computerized trading. When you consider the many thousands of individuals who tackle trading and the percentage who can consistently sustain a living from their trading, you realize that trading is no different from acting or sports: many are called, few are chosen

I am often asked about The question most often posed is, “What are you looking for among applicants?” My usual response is to turn the question around: “What do you have to bring?” I know that if the answer is some variation of the theme of motivation, that the questioner won’t make it either in our program or in trading. Motivation is necessary for success, but not sufficient. There are very specific skill sets required for success in trading, just as there are for athletics, chess, or professional dance. No one would plausibly claim that motivation would qualify him or her for a spot on the Chicago Bulls. Why should motivation qualify one as a superlative trader?

Interestingly, the “motivation” response generally means that the applicant is motivated to succeed at trading. It doesn’t mean that the individual is motivated to put in the work required to succeed at trading. You would be amazed at how many traders say they are motivated, when what they really mean is that they would dearly love to be successful. These are the same traders who leave the office at the sounding of the closing bell, who show no evidence of having studied the markets after hours and on weekends, and who put minimum effort into studying their own performance. Even when these traders keep a journal, the entries consist of superficial comments, written in a few minutes time, containing such generalities as, “I need to be more disciplined.” What form of discipline is needed? Why have they failed in their discipline? How will they be disciplined in the future? What specific steps will they take to implement the discipline? How will they track their progress with these steps? All these questions remain unanswered, because answering them takes real effort and real motivation. Desire is not motivation. Motivation is measured by demonstrated effort; not feeling, not good intentions to make efforts.

Many successful traders I know started their careers by intensively reviewing their trading at the end of each session. After hours they would study their trades, observing how the market moved, reviewing their trading decisions. Along the way they made notes, highlighting what they did right and wrong. From those notes, they developed specific things to look for in the market; specific things to do or not do in their trading. Such review took hours each night. The cumulative impact of daily review meant that, after a few months, the hard working traders had far more exposure to the patterns of the market—and their own patterns—than the “motivated” traders. That is why those hard workers built a career as traders, while others were unable to do so.

My personal belief is that we are rapidly reaching a time when a trader’s potential will be evaluated objectively, through carefully crafted metrics, and not just subjectively through self-report and simple P/L summaries. As markets become more efficient, trading firms will increasingly turn to such objective tools to assess the factors that lie beyond motivation: aptitudes. I have taken the first step toward such performance-based training by incorporating an advanced internship into our program. Following the first, introductory month, interns select the market(s) of their choice and begin an intensive month of simulation-based trading under the direct observation of a mentor. Performance statistics are gathered at the close of each session, and feedback is offered as the trade is occurring for real-time work on trading skills. Without having the worries of profit/loss, advanced interns are encouraged to experiment with strategies, trade with size, and identify their particular strengths and weaknesses. I believe this new facet of the training program has the potential to accelerate the trader’s learning curve and cut the amount of time it takes to “become green”.

Firms often say they’re looking for motivated traders, but the sword cuts both ways: those firms are “motivated” to hire successful traders, but often show little evidence of putting in the hard work needed to develop trader competence. How much time and effort does a trading organization put into mentorship, direct teaching, and the detailed assessment of performance? In sports or professional dance, coaches/teachers intensively practice with their pupils every single day. Does that happen at the trading firm you are considering? Think about it: If a mentor is spending hours with traders each day, he or she will not have time to trade. That means that the firm has to subsidize his or her salary—a major commitment. If the only mentorship is a few words of wisdom after the close of trade from people more interested in their own trading, you have to wonder about that firm’s “motivation”.

Successful traders possess some edge in the marketplace that distinguishes them from the thousands of other market participants. What is going to be your edge? What evidence do you have, right now, that leads you to believe that you can cultivate that edge? Those are some of the questions we ask of applicants, and they are ones that beginning and experienced traders alike should be prepared to answer. “Passion”, “motivation”, “desire”, and “hard work” are wonderful, but ultimately those have to be yoked to skills. Observe and interview traders, read about traders, try trading in a simulation mode: learn about those skills. Ask yourself, honestly, if you possess those skills and—if the answer is yes—then develop a plan to hone those. That is what makes for success in trading.

Cheers

Can I trade forex for living?

2007-10-09T08:48:00.000-07:00

Do you know 9 out of 10 traders keep losing money in Forex market; while the rest of the 10% work freely at home and earn millions annually?

Wonder what differs between the losing 90% and the winning 10%? Many People don't believe about "Trade for Living" That statement like a MYTH. I want to share this website to give beginner about information forex trading skills and the trading system! If you want to work only 10 minutes a day at home, if you want to make millions by trading freely at home, if you want to have financial freedom by trading Forex; you better LEARN & DO PAPER TRADE Forex trading before you start trading Forex. Forex market is definitely not a game for newbie and you need to brush up your skills before getting your hands wet.