Make no mistake, trading is less about trading and more about eliminating trades. Trading is not an active hunt for a trade. Trading is a process of elimination. Other than our normal rules, which really should limit us to very few trades per week, we have a few things that automatically filter out potentially bad trades. Some of these are periods of illiquidity, major news releases, speeches by major players, and holidays. Periods of illiquidity include normal daily and weekly anomalies. The Sydney session and early Asian session are some of my least favorite times to enter a trade. There are exceptions to this rule. Many of my trading strategies are based on daily of weekly price action. I’ll enter those trades at anytime with no fear that normal illiquidity will take me out of a good trade. Summer months are another time that wreaks havoc on traders. From May through August, you can expect some pretty wild swings, but very little sustained movement. During summer, I prefer to put my daily and weekly trading systems on the shelf and move down to the intraday timeframes. During summer, I trade ranges on intraday during late Asian and London sessions. Major news releases are just nuts! Price moves up by 50-100 pips, back down 100-200 pips, then ends up right back where it started. Every once in awhile there is a real change in value. For the most part, however, news events just create a whipsaw. Great trading systems that are based on daily or weekly price action have a distinct advantage in this environment. The stop losses are usually placed outside the range of a news spike, however, price spikes in your favor can assist your trade by hitting your target days early. Speeches by major players pretty much just piss me off. These pole-smokers seldom have anything truly important to say, and when they do say something important it’s suspect at best. Once again, however, a trade based on the daily or weekly price action should survive almost anything these degenerates have to say. Holidays go without saying. When the big money is on vacation, the market is illiquid. In fact, from Thanksgiving on through New Year the market is pretty pathetic. There is money to be made, but it’s a great time to spend with family, or to learn more about your craft. Trading is a process of elimination. If you hunt for trades, you’ll find them. There are opportunities to enter the market every millisecond. Use as many filters as practical to conserve your equity and enter only the highest quality trades.

BZ1D Trade

Buy EURUSD @ 1.4818 – 1.4865  SL:  1.4716
Scale2:  1.4770
Scale3:  1.4738

Notes: This trade is from Blue Zone (Daily Chart).  If it works out, you should plan to be in this trade for several weeks or more.  I’ll make a call at some point to close 1/2 of this position for a risk free ride.

Update: 15 November 2009 @ 17:48 CDT – This trade is up by 90 pips on the first entry (worst case scenario).

Trade Management: Close 1/2 position when price reaches 1.5016.  Leave the stop loss where it is and leave both scale-in limit orders in.

Update: 16 November 2009 @ 17:23  Earlier today I closed 1/2 of this position.  This is now a risk free trade.

Trade Management: Updated 19 Nov 2009 – Move Stop Loss to 1.4775

Watch for Trade Management Calls on this post.

First, I’m going to explain that this article used to be used for marketing.  Since I am no longer in the pure signals business, I had to modify it a bit.  Please excuse any choppiness.  Second, I want to mention that the practice of reporting in pips is just PLAIN WRONG!  PIPS-DO-NOT-MATTER!  If you think I am wrong, try paying your utility bills with pips.  Reporting SHOULD only be trusted as a valid metric if it reports account equity.  More on that, later.

I know you’ve seen some ridiculous claims from signal providers.  Some claim thousands of pips per month in winning trades.  I’ve sampled some of my competition’s FOREX trade signals to see how well they match their claims.  To make a long story short, THEY DON’T!  In fact, most report using what I call, “Apples and Oranges Reporting.”  Apples and Oranges Reporting is when a FOREX Signal Provider reports his losses in single lots, but sums his wins, claiming all of the pips for two or three take profit points.  I found a great example at a well known signal provider who’s charging $299.00 per month for his signals.

FOREX Signal Provider X reports having placed the following FOREX trade signal:

Sell EUR/USD@1.3367  SL:1.3405  TP1:1.3337  TP2:1.3307 TP3:1.3257

The risk is 38 pips

The profit at TP1 = 30 pips

The profit at TP2 = 60 pips

The profit at TP3 = 110 pips

This trade was picked up and reached TP1 and TP2.  Price then turned around and the rest of the position was quickly stopped out.

The reported profit for this trade is +90 pips!  FOREX Signal Provider X claims the first 2 take profits as full positions—when they are really two thirds of one position—yet ignores the 38 pip loss for the last “lot”. There are a few things wrong with this scenario.  Remember, this is an actual FOREX Signal from one of those other guys.  Pay attention because this is a very popular way for FOREX Signal Providers to exaggerate their wins.  First, the reported profit is absolutely FALSE!  There was not a 90 pip profit. Price did not even move 90 pips during the trade, unless you count the reversal.  The real profit was 17.16 pips.  How do I calculate that?  I simply use a weighted earnings formula.  Since the trade is broken up into thirds, I use a 0.33 multiplier for each of the wins and losses.  Then I add the wins and subtract the loss.

(30 x 0.33) + (60 x 0.33) – (38 x 0.33) = 17.16 pips

The second problem is that the reward-to-risk ratio on this trade is horrible!

Using the same weighting formula as before, we find a maximum 66 pip gain [(30 x .33) + (60 x .33) + (110 x .33)] vs. a potential 38 pip loss.  Why?  Because our profits reduce as the trade progresses, but the loss is total.  I could get into more depth on this, but simply put, the best case scenario makes this a low value trade.  Market Mover Edge FOREX Signals are only considered with a reward-to-risk ratio of 2:1 or more.  I seek out—and often find—those “treasure trades” with a 4:1, 5:1 or even 6:1 reward to risk ratio.

Finally, I have to mention that this FOREX Trade Signal had almost no possibility of making it to the third take profit target.  This was a counter-trend trade that was projected to hit an important Fibonacci level near TP2.  Counter-trend trades are risky when they are good setups.  They’re suicide when the analysis is flawed.

Now that you know how to debunk the typical FOREX Signal Provider’s accounting practice, it’s time to demand the very best.  Honesty, accuracy AND performance can and does come in one service—Welcome home, fellow trader.  Let’s go rip some pips!

If you’d like to try a very affordable forex signal provider, Stop by Simply Signals.  I’ve known Caden for the better part of a decade and know her to be a very straight shooter!  And for $50.00 per month, you can’t go wrong!  I’d like to note that I have no affiliate relationshiup with Caden or simplysignals.com.  I recommend her based on her honest approach to business and her proven track record.

Before I get started, I’m going to warn you.  This is not a polite “article.”  This is more of an editorial column.  If you’re looking for someone to coddle you and tell you how insightful you are for trying to get 1,000 pips per month, you’re in the wrong place.  I’m a trader, not your guidance counselor.  And this IS the No-Nonsense Zone!  If you want to learn something, read on.

I get emails every week asking the same questions over and over again:

1.  How many pips per month do your signals make?
2.  What is your biggest drawdown?
3.  What is your winning percentage?
4.  Can I see a spreadsheet of your trades for the last ten years?

It’s as if there’s a website somewhere with these canned questions for people to ask a signal provider.  It’s great that someone out there has made themselves the patron saint of newbie forex traders.  The problem isn’t the fact that these questions are asked ad nauseam.  I can easily edit my FAQ to address these questions.  The problem is the fact that these questions are all 100% irrelevant.  Let’s take them apart and see how important these questions are:

How many pips per month do your signals make? I’ve made it clear in other blogs and articles how unimportant a pip is.  Reporting forex gains in pips is like a one armed man claiming to have caught a fish “THIS BIG!”  Only half the data is is being received.  A pip is a measurement of distance and a tool to be used for measuring the potential degree of profitability of a trade based on the stop loss.  A valid question might be “How much equity does your service gain/lose per month based on X% risk per trade?”  Now you’ll get some valuable data.  Hell, anyone can make 1,000 pips per month in Forex.  It just takes a 5,000 pip stop loss.

What is your biggest drawdown? This question is not terrible.  It’s just incomplete.  A person can answer this question many ways.  Of course the signal provider is going to tell you that his biggest drawdown has been 150 pips.   It’s a great answer, and probably an honest one too.  The problem is that the person asking the question was wondering what the largest monthly drawdown was, and she signal provider answered the question based on his worst 15 minutes.  Of course most signal providers are 100% honest…the salt of the earth really.  NOT!  Hell, many of them aren’t even traders.  More on that later.  I have more question to answer.

What is your winning percentage? Once again, who in hell cares? I can develop a system that is a 90%+ winner that loses money.  If you think I can’t…”place your bet.”  A 1 pip target with a 5,000 pip stop loss would do that for me.  Get real guys.  Many professional traders make a very good living with a 30% winning system.  They do it with a superior money management system.  A valid question for this is “What is your overall financial edge per trade?”  Assuming the signal provider is honest, and of course a trader or gambler, he’ll be able to answer the question.  In case you are wondering, an EDGE is a number per trade that a system wins or loses over time.  In fact, you could forget every other question and just ask this one and know whether or not you want to do business with the guy.  A positive number is good.  A negative number…not so much.

Can I see a spreadsheet of your trades for the last ten years? Yes, I have REALLY been asked for ten years of data.  HELL NO!  I’m not giving you ten years of data.  If I did, it would be irrelevant.  Ten years ago I was using different systems than I am today.  The trades were my PERSONAL trades too, and none of your damned business.  In fact, my personal trading is NOTHING like my signal trading.  Nobody would stay very long when they lose 7.5 out of every ten trades.  Even if they do make money on them.  Asking for a list of all trades placed by the signal service is fine.  Just don’t be lame.  You should be suspicious if someone hands over ten years of trading results.  Come on…  Do you really care how much I made or lost trading the Deutsche Mark?  I didn’t think so.

I’m not blaming the people asking these questions.  They just don’t know any better.  It’s the people teaching you that pips are more important than equity that piss me off.  It’s the Internet Marketer than lures thousands of traders to his website to suck your money with these irrelevant metrics that pisses me off.

So, I promised to help you with your question list.  Here it is:

1.  What is the mathematical edge of your signals for the last year?

2.  What is your average stop loss?

With that information, you can calculate your expected financial performance.  This assumes, of course, that the provider is honest, and that future performance matches his past performance.

Good Luck!

Tim

Forex Money Management – No-Nonsense Style

By Tim Barnby

If a Forex trading system promised to (and you KNEW it would) consistently make you money, would you pay $1,500.00 for it?  How about signals?  If you knew that a signal provider would make you $2,000.00 per month, would you pay $1,500.00 per month for the service?  Of course you would.  You’re smart enough to add and subtract.  If you w0uldn’t pay $1,500.00 for signals that produce $2,000.00, please do us both a favor and switch from trading to something in the retail industry or something.  Perhaps a Wal-Mart greeter?

Would you pay $1,500,00 for a forex money management system?  Ummmm…probably not.  I’ve actually asked these questions in my trading room.  Clients almost always answer the questions the same way.  Of course they will pay top dollar for profitable systems and signals.  When it comes to money management and the mental-game of trading, they answer negatively.  There are reasons for this that I’ll get into later.  This is a money management article.

There are probably more than 100,000 different Forex systems available for purchase on the Internet.  Some of them are good and some of them are crap.  All of them will make pips when the market is in tune with their signals.  I say that they make pips because they don’t necessarily make profit.  Positive pips counts do not equal positive equity. Pips and profit do not have a strong positive correlation.  I have proven this dozens of times in the past and will prove it again here in a video.  I know, I know…you’re tired of seeing that you canm lose 300+ pips while gaining money.  If you’re tired of hearing it and still losing money, you might want to take a serious look into your goals.

People are superstitious.  We think we have a $10,000.00 account even after a 30% drawdown.  We always try to sling a big line, no matter what our current financial condition is.  Even worse is the poor guy who has to “get back” at GBPJPY for the 300 pip loss he took in the previous trading session.  A trader can’t get back at the market.  The market is bigger than all of us, and she’ll take what ever we offer her, whenever she wants.  The idea behind money management is to not offer her much (even less when we’re losing) and take more from her when she’s generous.  Proper money management will protect you from yourself.  Money management is no different from everything else in the trading profession.  It’s a series of steps that are taken every single time you trade.  When I wake up in the morning I put on my pants before I step out the door.  When I get in the car, I put the key in before I drive away.  When I open a trade, I follow my money management steps.  It’s that routine.  It’s so routine that it requires absolutely NO THOUGHT!  No deliberation, no self-negotiation.  There are no exceptions to trading rules.  I view trading rules much like I approached combat in the Army.  Exceptions get you killed!  Excuse yourself one time from following your rules and your blood will be sprayed all over the room.  Get it?  Do you see how important it is to follow these rules?  Just in case you didn’t get this earlier, I’ll say it again here:  There are no exceptions to money management rules. If you break your money management rules, I’m going to be spending ALL of your money instead of a little bit of it.  Remember that every trader in the market wants you to lose.  It is a market.  We’re traders, not investors.  We make a living speculating on psychology, supply and demand.  Even the best system has long periods of drawdown.

When a non-professional trader is on a winning streak, he tends to attribute it to his trading genius.  The next Jesse Livermore gets five winning trades and is now a guru…  This is the point where he makes a fatal mistake.  He places a trade…a big trade.  He takes his $13,000.00 and puts on 5 standard lots.  Why not?  He is a Rock Star trader now…a real veteran.  Price turns against him by 20 pips.  He can’t stand the thought of losing $1,000.00 in five short minutes, so he moves his stop loss.  He fools himself into thinking that he made the right trade.  The market is just acting wrong.  It’ll turn around for sure.  Another 20 pips should do it.  An hour later, price is almost to his new stop loss.  He’s now about to lose $2,000.00.  He can’t lose.  The market will turn around.  He moves the stop loss back by another 100 pips this time.  He goes to bed knowing his position is safe.  It’ll never move another 100 pips against him.  After all, the 15 Minute trend IS Bullish and the 5 Minute stochastic is already almost over-sold, and the MACD is clearly in an up-trend.  He can almost smell the leather in the new Porsche he’ll buy with the winnings from this massive trade.  He wakes up and rushes to his computer.  He sees that his trade is closed out…his new balance is $5,000.00.  He sees that he’s gotten a margin call.  All that he has left is the money that he had leveraged.  Don’t laugh.  I know the guy that this exact scenario happened to.  He’s since become an excellent trader.

If the same trader had used sound money management and risked 3%, he’d have hit that 20 pip stop loss and easily swallowed the $400 or so loss.  His mistake was what I call “trading beyond the sleeping level.”  If you find yourself worrying about a trade, you’re risking too much.  Let me make sure you understand that…if you cannot sleep, go to dinner with your spouse, go golfing, or spend 6-8 hours doing whatever without thinking about your open trades, you’re risking too freaking much money!  You MUST Trade down to the sleeping level.  Your success as a trader depends on this.  There will be future articles on the mental game of trading.  I just told you the secret of the mental game though.

Here are my money management rules.  I’ve modified them a bit from earlier versions so take a look even if you have already read my money management system:

1. When you begin trading, risk only 1% of your base capital.
2. Reduce your equity by the amount of the financial risk for any open trades.
3. After 3 consecutive winners, increase your risk to 2.5% of your base capital.
4. After 1 loss, reduce risk to 2% of base capital.
5. After two consecutive losses, reduce risk to 1.5% of base capital.
6. After four consecutive losses, reduce risk to .5% of your base capital.
7. After two consecutive wins, we reset back to 1% risk per capital and move back to step one.
8. Between 1 June and 1 September, and between 15 November and 15 January, I risk no more than 1%.

My method isn’t the ONLY way to manage your forex trading.  It’s certainly not the most profitable.  It works for me.  In fact, I use a different money management system on my income account than I do with my growth account.  This system has proven to build my equity consistently.  Even if you choose to trade a set percentage, which is absolutley valid, be consistent in your money management.  Trading this way will help you profit, relax, and sleep like a baby even with open positions.

By:  Tim Barnby

Have you ever had one of those trading weeks that started out great?  You know the week I mean.  You’re on fire.  You can’t place a bad trade.  Then something happens.  You start losing.  You can’t get an entry, your stop losses are hit to the pip, price never gets deep enough to take profit, etc.  This is a symptom of a bigger problem.  The problem is over-trading.

There’s an easy cure for over-trading.  It’s called goal setting.  When you start your trading session with a goal in mind, you know when to call your efforts successful.  Without this goal, you have no idea when to quit.  You keep going and going and eventually lose all of your gains, and probably some of your carry forward equity as well.

I create a trading plan at the beginning of the month.  The first step in creating that plan is a SMART goal.  I know you’ve all heard several definitions for the acronym SMART.  It doesn’t matter what else you’ve read.  For my purposes, it stands for Specific, Measurable, Attainable, Relevant, and Time Constrained.  A good example of a SMART goal on a trading plan is:  “20% equity growth every 30 days.”  This goal is specific and measurable (20%), it is attainable and realistic (I teach my clients how to do this with 50 pips or less per week), and it is time constrained (30 days).

Each week, I create a weekly trading plan.  Each weekly plan is completely independent of the preceding week unless a higher-timeframe goal is already reached.  If I meet my monthly goal of 20% equity gains in the first trade of the first week of the month, I’m done trading for the month.  There are no exceptions to this rule.  However, if I made only 2% the preceding week, I will not attempt to make that up in the following weeks.  I aim for 5% equity growth per week.  I stop trading when a trade closes and my account crosses that 5% threshold.  I have found that those short weeks are easily taken care of by trades that have tighter stop losses or run longer into profit.  There is no reason to try to catch up.  Catching up is an outcome of consistent plan execution.

Goal setting accomplishes several things for you:  First, it gives you a break from looking at charts.  Second, it tells you when you are successful.  Last, it gives you a complete reset at the beginning of every week.  This is a big help in the mental-game of trading.  When I started trading this way, I stopped carrying those terrible weeks with me into the following week.  This week, my personal trading was finished by about 01:00 CDT on Monday morning on a short EURUSD trade that ran for a 40 pip profit and netted me a 7.2% equity increase.  That brokerage account will not be opened again until Sunday and I can concentrate on other things.

If you are not as profitable as you should be, the chances are good that your goal setting needs some work.

For more in depth information or to Learn Forex visit The Market Mover Edge. Market Mover Edge is a Forex Learning Center which offers Live Trading Rooms, Forex Signals, and Online Forex Training.

The following data is as-of 10 August 2009 @ 16:00 CDT.

EURUSD has been trading short, as expected.  The Commercial holdings on USD futures are 100% long while they are in the single digits for the Euro.  This data was supported by the unexpected NFP report last week.  On the technical side, EURUSD’s weekly candle was a Shooting Star, which indicates a strong potential for reversal.

Last week’s bearish move continued in early trading without significant retracement.  EURUSD finally broke my probable reversal price at 1.4140 and now appears to be completing a 1-2-3 continuation pattern at that level.

I expect price to continue its bearish move through the 1.4140 level and move to the next probable reversal zone at about 1.4025 tomorrow.

I’ll be placing a short order between 1.4140 – 1.4150 with stops above 1.4200 and a target of  1.4025.

There’s no doubt in my mind.  The USD is going UP.  Not because of a candle pattern.  Not because of some NFP report that’s so statistically skewed as to make it worthless.  Not because of some MACD divergence, or strochastic over-sold condition.  Not even because the hairs on the back of my neck are standing up.  The USD is going up because the Commercial traders are 100% Bullish on USD futures.  You have to understand that these guys don’t lose money.  They are always right.  How can I be so bold as to make that claim?  Because they create the market conditions rather than responding to it.  Speculators and small traders are almost always on the opposite side of the commercial traders.  That makes sense in a supply and demand based market.  It might take a couple of weks for these directional changes to manifest, but they will manifest.  Of course economics is a science of relativity, right?  So what will go down when USD goes up?  Let’s look at the current commercial long positions:

USD:  100%

CAD:  8%

EUR:  5%

CHF:  7%

JPY:  57%

GBP:  28%

Now, if you take nothing else into account, and you trust that commercial traders who literally risk hundreds of millions of dollars on their positions, might know something that you don’t, which direction do you think that the currency pairs are going to go in the next few weeks?  Here’s what I see:

USDCAD:  Bull

EURUSD:  Bear

USDCHF:  Bull

GBPUSD:  Bear

USDJPY:  Bull but not yet.

Now, let’s add a technical indicator to the cookie jar and see if I change my mind.  I like price action.  Let’s look for reversal candles on the same pairs.  On the weekly charts, here is what I see:

USDCAD:  Hammer

EURUSD:  Almost a Shooting Star but not perfect.  But, price has failed to break 1.4350 several times since January.  The last time it broke the level was September of 2008.

USDCHF:  Insignificant candle.  Like the Euro, it has problems at this level.

GBPUSD:  Shooting Star

Looking at the above, I’d take a long on USDCAD and a short on GBPUSD this coming week.  I’ll wait another week on the USDCHF and EURUSD trades on the weekly timeframe.  I’ll only entertain USD longs though against those currencies.  In fact, my trading plan for next week is all about USD strength.  I could be wrong.  I probably am.  You probably should do the exact opposite of anything I tell you.  This isn’t an advice column anyway.  It’s an opinion column.  I know exactly what positions I am placing on Sunday afternoon.  I’ll be happy to share them with anyone who asks.  Non-SPAM comments are always welcome!

Tim