Part 2 of 2
This is the second part of a great article we introduced yesterday about your emotions and the psychology of trading. Sometimes not trading is the best trade of all. Read on.
The GotForex Weekly Newsletter
by Rob Booker
Are you currently experiencing unusually large gains?
Here are some thoughts.
There is nothing quite like the joy of making a good trade. We like to be right. We enjoy the thought that we planned, executed, and closed a position successfully. Here are some thoughts if you’ve recently found yourself in this fortunate circumstance:
1. Well done! Congratulations on the profitable trading!
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More PMA!
“History will be kind to me for I intend to write it.”
-Sir Winston Churchill
This is what we all should be doing! Taking charge of our own futures and not let the world decide for us what it will be. Pick five things in your live that you can change today, this week or this month and set out to make those changes. Trading is only a thread of your life not your life. Make a difference to those who are counting on you. Let me end this with one more form Sir Winston Churchill. “We make a living by what we get, we make a life by what we give.”
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Part 1 of 2
This is a great article about your emotions and the psychology of trading. Sometimes not trading
is the best trade of all. Read on.
The GotForex Weekly Newsletter
by Rob Booker
Trading currency is risky. You can sustain the total loss of your trading capital.
In the midst of one of the most volatile periods in the forex market in the last 10 years, what are you doing right now to protect your capital? What are the top 10 ways you, every day, manage your risk? Your trading account doesn’t represent just the $500, or $1,000, or $100,000 that you have deposited. It represents possible future gains (or losses, of course). If you deplete all that capital on reckless trades, what will you have left to trade with?
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More of What We All Need To Hear
Unless a person has given their all, and what I mean is everything they have in them and about them, should they ever think if quitting. Winston Churchill made it clear when he said, “We shall not fail or falter; we shall not weaken or tire. Neither the sudden shock of battle nor the long-drawn trials of vigilance and exertion will wear us down. Give us the tools and we will finish the job.”
-Sir Winston Churchill, BBC radio broadcast, 1941
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Just Because You Can Pull The Trigger Does Not Make You A Good Shot
Knowing where, when, why and how to shoot makes all the difference. Trading is no different!
“A vote (choice) is like a rifle: its usefulness depends upon the character of the user.”
-Theodore Roosevelt an Autobiography, 1913
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Face the Fear And Do It Anyway!
Early on the biggest frustration that I had personally as a trader was getting caught up in the fear of losing a trade. It use to eat me up inside almost to the point of mental paralysis. Once in this mind set it would keep me out of a trade that was good and keep me I a trade that was bad. Real profits were always eluding me. It took me a long time before I could take a loss in stride and reenter the market unscathed. Loss is in part a large and even essential part of trading. The sooner one can learn and accept loss as a part of healthy trading and work with it the better trader one becomes at trading successfully and consistently.
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Hedging: A Cool Newsletter
This is a cool newsletter about hedging. This is the same way we feel. Thought you would like it also.
Question of the Month:
What is hedging, Rob? How can it get me closer to my dreams of poverty?
The GotForex Weekly Newsletter
by Rob Booker
If you like to lose money, but you want the pain of losing to last for as long as possible, and then result in a furious ball of exploding pips, then “hedging your trades” is right for you.
In the past few years, I’ve noticed an explosion (metaphorical) of interest in hedging — the act of buying and selling the same currency at the same time. Not coincidentally, I’ve also noticed an explosion (literal) of scores of trading accounts, as inexperienced investors have locked onto this method of trading and discovered, the hard way, what can go wrong.
What is hedging, anyway?
Why, Rob, are you so down about it? Relax, dude!
I am not writing this newsletter to tell you that you must, or must not, use any specific trading methodology. Remember that your decisions about what kind of pairs you trade, when you trade them, how you trade them, and what you use to trade them are personal choices between you and … you.
Now let’s cover some of the basics of hedging:
1. For a forex trader, hedging is commonly understood to be the act of buying and selling the same pair at the same time in the same trading account.
2. Equities, options, futures, and forex traders each have different definitions of what it means to hedge. Remember that when you are at a trader’s cocktail party, that you need to get your lingo correct, or you might look a bit wiggidy-whack.
Here are three common examples of hedging:
Example 1:
Joshua is a forex trader, and a major economic report — the Wisconsin Cheese Index — is going to be released in the next 30 minutes. He is unsure about which way the market is going to go, so he buys and sells the EUR/USD in his account, at the same time, at almost exactly the same price.
Example 2:
Alicia is a forex trader. She has an open buy trade on the EUR/USD at 1.3800, but the currency pair keeps falling, and she is losing more and more money every day and she is starting to wonder what she should do. Her friend, Ray, suggests that she simply open a new trade, this time a sell. Now, for every pip she is losing as the pair goes down, she gains a pip. Wow! She just kept herself from seeing only negative numbers in her account.
Example 3:
Corbin is a high-powered trader-guy who has really bet big this time, and he’s riding a losing trade. He mistakenly believes, in his heart, that it will come back. It’s Friday, and he is worried about gaps and volatility on the Sunday night open — so he hedges his position going into the weekend.
Wow! This hedging stuff sounds fancy!
You’re right: it is fancy. And this fancy technique can turn into a cluster-bomb of ridiculous proportions. Here are some things you need to think about before you start running off and hedging all your losing positions:
1. Think about why you want to hedge. What are you trying to accomplish? What will a hedge do for you that you can’t accomplish in some other way? Does your hedging fit into a method of trading that you have become comfortable with? Or…
2. Are you hedging because you want to avoid a loss? Many times, people will hedge a trade because they simply don’t want to accept a large loss. They see themselves down by 20-30% in their account, and rather than accept the fact that they have lost a lot of money, they hedge their trade.
And then…
3. Remember: if you hedge, you are locking yourself into a loss. Once you put on the hedge, you are locked into that loss. You’re going to live with it day and night now. It’s not going away. It is going to stare you in the face every time you go to your trading account. It could become an emotional burden for you. You could start to focus on getting out of the hedge more than you can plan and benefit from new trading opportunities. And here’s something about those trading opportunities:
4. Being in a hedge could distract you from those other trading opportunities. I call this (and I am not making this up) Trader Attention Deficit Disorder, which is a serious condition affecting many hedged traders. It means that when you are locked into a loss, you can become so focused on the loss and the hedge that you don’t notice other good trades. If you have a hedge that lasts longer than 4 hours…
5. Being in this hedge will probably cost you interest. Realize that if you buy and sell the same currency pair at the same time, you are most likely to have a net debit on interest at the end of every day. For some pairs, this interest payment can add up substantially day after day.
6. How are you going to get out of the hedge? You’re going to have to pick a top or bottom. And if you already knew how to do that, you wouldn’t have been in the hedge in the first place, right? You don’t want to put yourself in a position where you have to practically be a Psychic Friends Network Call Center Manager in order to extract yourself from the trade. Often times, people will remove one side of the hedge, only to see the pair trade lower (or higher) and then they feel like they have to put the hedge back on all over again. That’s just an endless cylce of trying to pick a bottom or top. And remember that the wise man said: He who tries to pick a bottom gets a stinky finger.
Fancy, indeed! There are all sorts of reasons why a hedge, which was intended to solve your trading problems, just brings a host of new challenges to the table. I’m not saying that you should never hedge; I am saying that before you do it, consider what it is that you are trying to accomplish, and get yourself prepared for the consequences that result.
Rob, you just mentioned something about trading economic reports and hedging at the same time. This sounds like something I would like to do, because I love trading near when economic reports are released.
Well, let’s tackle this issue right out in the open. Is hedging a reasonable strategy in advance of an economic report?
We all know that some economic reports create a massive amount of volatility. We also know that it is nearly impossible to predict, ahead of time, exactly which direction a currency pair is going to move after the report.
InIn the last few years, an increasingly (and alarmingly) large number of forex traders have begun to simply buy and sell the same currency, at the same time, before an economic report. Their goal here is to close the losing side of the hedge after the report comes out, and then ride the winning side for sweet profits.
Because I very much overuse numbered lists, we’re going to use letters this time.
A. What happens if the spread increases when the report comes out? Both sides of your trade could stop out, and then there will be no sweet profit.
B. Are you hedging before the report because you are worried you won’t be able to get in on a trade after the report comes out? IfIf so, think about this: what makes you sure that you will be able to get out of the losing trade after the report?
C. Did you increase the size of your trade because the hedge made you feel more confident? Please don’t believe that simply because you are hedged, you are in a much safer position. That’s not necessarily true (see above). Please don’t ever do anything to risk losing a substantial amount of your account (I consider 1% of your account very substantial).
Once again, I’m not saying that you can’t do this, or that you absolutely never, ever should do this hedging stuff, even though I have only met one profitable “hedge-style” trader in my entire life — and he’s one of the smartest people that I have ever known, and he’s a doctor that works under pressure on a daily basis, and he has had his share of failures in the world of hedging, too. I count him as a very unique exception to a general rule: traders who hedge generally end up losing a lot of money, anyway.
I didn’t write this week’s newsletter so that I could criticize you personally (although I’m sure that some things that I write can come off that way — sorry). I wrote it because I’m worried for good traders out there, people who might otherwise have a profitable, happy future in currency trading, but they are led astray by the lure of easy profits or the idea that they will never have to accept a loss.
Rob, I am already in a hedged trade, and I have been riding a loss for a long time. What should I do?
The good news is this: if you are stuck in a hedged loss, it’s not the end of the world. You are not necessarily and positively going to lose your entire account. Here are some ideas for how you can work your way out of the problem:
1. Get a knowledgeable, experienced trader friend to look at your account. BBe prepared to tell that person everything about the circumstances that led up to you placing the hedge.
2. Write down on a piece of paper what is that you are trying to accomplish with your hedge, and what some of your plans might be to get out of it. This might work: “If I exit out of the sell side of my hedge, and it continues to go down, I am going to _____________.” Or this, “When I exit the sell side of my hedge, I want to see the pair rise up _____ pips, and then if it falls back down through the same price at which I removed the hedge, I am going to ___________________.” I can’t fill in those blanks for you — but I promise that if you work through the process of making your own plans, you are going to be much happier in the long run, and you will be on the road to taking full responsibility for the situation you’re in.
3. Write down on a piece of paper what you are prepared to lose as part of extracting yourself from the hedge. Perhaps you will be able to get out of the hedge without a loss, but at least you need to understand what you are prepared to sacrifice if it does not work out.
It’s my goal to help you do things in your trading account that keep you trading for the long term. Time and time again, as I have worked with traders over the years, I’ve found that traders who are willing to compound moderate gains over time are more successful.
To me, trading is all about survival, not about the big score. If you can keep your equity over time, you can learn more and more about what style of trading suits you best. You can see lots of different market conditions, lots of different market crashes, or how different pairs interact with each other, and much more.
Thank you for taking this journey into trading with us at IBFX. We are always here to help you — give us a call, or click on a link at left and let us know how you are doing.
Happy trading!
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Chasing the Illusive Moby Dick!
What I have seen that is a problem in this day and age and especially in the trading world is the addictive pattern many find themselves in called “chasing Moby Dick”. This is a plague that gets more people in trouble than any other trading challenge. The signs are as follows.
The trader is eager to trade the market and tools up with the latest and greatest trading system and platform they typically jump right into the market without taking the appropriate amount of time to learn the trading platform and they think they know the indicators they are using because they sat down with their brother-in-law every weekend for a month and a half looking at past charts and back test all kinds of untold riches.
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Be A Doer-Trade Well!
“It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.”
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A Financial World in Panic
In this article you will find more great information and advice on trading. This article helps a lot when dealing with success and failure in markets that are challenging. Trading is planning in advance how things can be if you plan and how things can be if you do not plan. Trading is not a race it should be a well thought out money making activity.
What to do in Times Like These:
A Financial World in Panic
The GotForex Weekly Newsletter
by Rob Booker
The financial world is panicking again.
Today I scrapped this week’s idea for a newsletter when I woke up and saw that just since midnight, the GBP/JPY had fallen 1,400 pips. The Dow Jones Industrial Average futures contract fell overnight by 550 points, until further selling was frozen by the exchange because the maximum allowable drop had occurred.
There are some of you who, in times like these, panic along with everyone else and now you’re holding onto some really bad trades. Perhaps you’re getting close to a margin call. Perhaps you’re wondering if it is even safe to trade at all.
Here are some thoughts about what is happening, and what to do, to do in times like these.
1. The world financial indexes are dropping precipitously. The US dollar has, so far, been the major beneficiary. Money is flowing out of emerging market economies which attracted huge amounts of investment during the past 8+ years. Money is still flying out of real estate, technology stocks, and financial stocks, and just about anything else you can invest in.
The US report on Treasury International Capital Flows has shown the following over the past 5 months:
Source: U.S. Department of Treasury
Historical information is not indicative of future results.
The US dollar is gaining on all of this as investors are pouring money into US treasurys. The data above shows that purchases of perceived “safe” investments like T-Bonds and Notes have been strong, but money has been flying out of US equities.
It might seem paradoxical, but so far, the US currency has been the major beneficiary of what started as a US financial crisis. The cold economic front has now moved off the east coast of the United States and is spreading to Europe and beyond, and as that happens, money has been going into what investors believe to be the safest investments possible: bonds backed by the US government.
None of this means that the pattern we’re seeing above will last forever. The US dollar could reverse course if the market becomes more calm over the course of the next few weeks and months. The greenback could lose ground if the world begins to perceive that the US government has taken on too much toxic debt and now looks like an irresponsible financial corporation. Or if the US job market implodes (see newsletter from a few weeks ago). There are plenty of scenarios I can imagine where the US dollar turns the other way again. None of those scenarios are playing out right now.
2. With the financial markets still in turmoil despite the efforts of global financial leaders, investors across the planet are panicking. This generally means that traders are making decisions based on their emotions — sudden decisions without a lot of planning or thought. It also means that they are holding onto bad trades and then praying at night that the trades correct themselves. Rational thinking can be clouded by overpowering fear. Fear does not produce good trading results.
3. Are you taking enough time to be patient? In times like this, are you taking a bit of extra time before you trade, to think about how your decision could play out both positively and negatively? Before you enter an order, consider what the worst case scenario is. What is the worst that can go wrong? What do you stand to lose if your stop loss is hit? What percentage of your account will you lose if that happens? Is that an acceptable amount? It can happen, no matter how “safely” we believe that we put our stop loss. Realizing that it can happen is a big part of realizing that maybe you should just walk away from some trades.
4. What will you do if your trade goes right? What’s your game plan for a trade that does move in your favor? What is your plan for managing the trade, for taking profit, for moving the stop along the way? What is the basis of your decision to do that? These are the types of questions you want to answer (and not quickly) before you enter the trade. Once the trade is on, our emotions can start to cloud our judgment.
5. Never trade alone. Do you have someone else you can trust with whom you can talk about your trading? This doesn’t mean you’re weak, or that someone else is going to make your decisions for you. It means that you have someone to talk with if things go really wrong. Someone that will listen to your ideas about how to get out of a trade (good or bad) and who will help you stay on track with that plan. Perhaps many of you need no such person, and you are independently able to stay on track, avoid bad decisions, and see the world objectively on a regular basis, even in the face of massive financial loss.
The most important thing in times like this is to realize that there are times when not trading is just as smart as trading. That the market is so volatile and unpredictable that it makes more sense to back away from the currencies, the stocks, the everything — and just watch.
At the same time, these could be — but we don’t know for sure, of course — a time of great opportunity, where currencies or other investments represent a bargain.
Only you can know for yourself how should best approach trading in a time like this. What’s right for you may not be right for others. What matters is that you have an understanding of risk, of how to manage a bad situation, a plan to deal with a trade that goes right or wrong, and a person in whom you can confide about your trading.
Let me know how you’re doing in times like these. I’d love to hear from you.
Happy trading!
Rob
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