1) Thinking that trading is a path to quick, easy money
One of the questions that’s part of the list answered in New Trader FAQs is “How much money can I make trading?” because it’s one that comes up frequently and it reflects the mindset of many coming into the markets. It’s said that 90% or more of new traders fail. I don’t know if that’s the actual number, but it certainly is a high figure and a big part of the reason for that is unreasonable expectations coming in. Trading is promoted to many as an easy way to make lots of money, either indirectly through stories of great success, or directly like in the case of overt forex marketing. While trading success can eventually be reached, it tends to take a lot of hard work and a fair amount of time to reach that point. Those who think they’ll be able to jump right in and have the profits rolling into their account from the start get slapped in the face with reality pretty quickly, and for many it is the end of their trading – whether they’ve lost a lot of money or not. Successful trading is a long-term thing (see Taking the Trading Long-Term View), and many folks just are not prepared for that.

2) Not effectively using demo trading
I will be the first to tell you to get into real money trading as quickly as possible, but taking the time to do proper demo trading is important. There are two purposes to demo trading. The first is to familiarize yourself with the platform you’re using and, if you’re a real newbie, with the basics of prices, P&L, and all that. The second is to work through the trading strategy development process to know that you have a workable methodology you can employ to good effect. Of course demo trading is not the same as live trading, as just about any experienced trader will tell you. If, however, you cannot profit in the demo environment, you don’t have a lot of hope for profitable live trading.

3) Failing to pay attention to detail
Making stupid, simple mistakes will cost you money. Yes, sometimes you mess up an order entry and it works to your advantage. Most of the time, though, when you make a mistake it hurts. I’m talking about totally avoidable mistakes here, like forgetting to put in a stop, or putting in the wrong price for an order, or buying rather than selling. It’s basic attention to detail. There’s really no excuse.

4) Not thinking through your approach to the market
A lot of folks jump right into the market with two feet without taking any time to think through what they’re doing. This is something which hit home with me when my book, The Essentials of Trading, came out. I wrote it for folks just getting into the markets, but found I was hearing also from many who’d been in the market for a while and found they needed to go back and revisit the foundational elements of their trading because they’d been all over the place in their development. They’d bypassed that aspect of things when they got started. By that I mean they didn’t think enough about things like trading timeframe, markets, and personal elements which feed into that what, why, and how they trade.

5) Getting fixated on your win %
New and developing traders spend WAY too much time thinking about the frequency at which they have profitable trades. I’ve written on the subject numerous times before (such as here), so I won’t go off on a long rant. It’s a simple question of whether it’s more important to you to be right or to make money. For some folks the being right (or at least not being wrong) thing is important to them. They probably shouldn’t be traders because trading is about making money. You can have 90% winning trades and lose money just as you could have 10% winning trades and see your account balance growing nicely.

6) Thinking more about rewards than risks
We trade to achieve positive results, to grow our account balance. As such, it’s quite easy to fall into the trap of thinking more about all the pips we can make rather than all the pips we could lose on a given trade. A good trader thinks about both at least equally, and if you listen to some of the elites in the business they indicate a clear focus more on the potential negatives. If you’re thinking to yourself “I prefer to be optimistic” then you’re being naïve. Trading first and foremost is about making sure you don’t expose yourself to the chance of getting taken out of the game because of big losses. After all, you cannot make gains if you can no longer trade. Traders with an “optimistic” mindset have a tendency to take on too much risk.

7) Getting too excited
Whether you are having a good run of success or coming off a bad performance, if you’re chomping at the bit to get into that next trade you need to take a few deep breaths. This sort of excited state can lead to very bad decision-making. I’m talking things like taking trades which don’t meet your system’s criteria, trading too big, or trading more markets than is good for you. Some folks can get away with trading while agitated. Most, of us, though, don’t readily notice how our emotional state feeds into our trading choices. Brett Steenbarger has written some good stuff on the subject.

Now, I’m sure others will have their own thoughts on the seven deadly sins of forex trading. What about you? What’s your list?

Live Trading Performance Not Matching Demo Trading Success

Over Two Years Trading and Nothing But Losses

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Understand from Where Expert Opinions Come

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The question was:

I’m at the point I’ve exhausted books, etc. and have a good sense of what I need…what sources/people are available to find a 1:1 coach?

I have written several previous blog posts on this subject in the past. Here are some of them which may be useful.

• Choosing the Best Trading Coach
• Trading Coaching and Mentoring
• Trader Development: The Value of Coaching and the Difficulty of Finding One
• Does coaching of trading psychology, require a successful practitioner?

The trading coach thing is a tricky one because it’s not like there is some kind of central listing of coaches where new and developing traders can go to do a search based on their needs. That would be a great resource, though, wouldn’t it? To an extent, Currensee is developing just that sort of listing in the Marketplace there.

Furthermore, there’s no accreditation process by which trading coaches are certified. When I was coaching volleyball I went through a multi-level program run by USA Volleyball which certified coaches based on their fulfilling educational and other requirements at different levels. We have no similar system for trading. Sounds like that would be another really good thing if it were ever to come along, doesn’t it?

There are, of course, plenty of folks out there who offer coaching services to a greater or lesser degree. Finding them often is a question of identifying someone who’s writings you like to follow and/or someone whose trading style and approach matches your own, or the one you’re looking to develop, and investigating whether they do 1-on-1 work. Not all do because the individual coaching work can take up considerable time if the coach is working with more than just a couple people. If the coach is an active short-term trader, or has a job, their time will often be very limited. Some do, though, and if it’s not clear one way or the other you can always ask.

Before trying to find a coach, though, know quite specifically what you want, and it better not be “show me how to make 30% per month”. Coaches often get bad reviews from folks who go in with unreasonable expectations. They also get them from situations where what the coach had to offer was not what the coachee required. The latter issue comes down to good communication going into the relationship. Both sides need to be very clear on the expectations.

So basically, finding a coach comes down to research and communication. One piece of advice, though. Do not make the immediate assumption that someone who has done extremely well in the market will make a good coach for you. They may not trade in a fashion which makes any sense in your case and/or they may not be able to communicate well what they need to teach you or do a good job guiding you in the non-mechanical aspects of trading. To put it bluntly, not everyone has the skill to be a good educator.

Find a Trading Mentor

Trading Coaching and Mentoring

Choosing the Best Trading Coach

Trader Development: The Value of Coaching and the Difficulty of Finding One

Let’s help a school together

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The ECB’s money market operations have effectively delivered a significant tightening of monetary policy especially when compared to the effective easing of policy that has occurred in most other economies over the last month.

The result has been a substantial rise in the EUR yield advantage that the market has not been able to ignore.

The ECB policy of shifting the slide-rule on their 1% rate from 12mth to 3mth terms has lifted the overall money market yield curve. The 1% benchmark rate level now means more to where short term money market rates trade.

With less term funding, this has put upward pressure on all yields across the front end of curves. 2yr bund and swap rates rose a further 7.5bp today. Over the course of the last month, the USTr-Bund 2yr yield spread has moved in favour of the EUR by over 30bp to +5bp. The 2yr swap rate spread has moved up by 35bp to +44b in favour of the EUR. In a global environment of falling yields over the last month, EUR’s yields have risen against virtually all comers. The chart below shows the EUR/USD compared to the 2yr yield spread.

There are some complex elements to the commentary above, but the bottom line is that the recent technical moves on the funding side of things by the ECB has created a rate crunch on the short-end, and when short rates go up it tends to make a currency more attractive. Looked at a chart of EUR/USD lately?

What does it mean to drain reserves from the short term money markets?

Check out the Bond market – it could be worth your while.

Yield Curve Madness!!!

Predicting Fed Rate Policy with Fed Funds Futures

Alternative Ways to Play Interest Rate Moves

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Actually, one reaction was left as a comment on my post. It was left by someone who apparently is very shy because he/she left no name and a bogus email address. The comment was

“um you trade them in a ratio, the author assumed you would get this.”

I can perhaps understand the commentor’s reluctance to attach their name to this brilliant bit of insight which has absolutely nothing to do with the problem I have with the analysis in question. It speaks not at all to the whole “risk free” question, nor does it address the viewing of converging lines on a dual-scale chart as representing a spread going to zero.

On the ZH site the author left his own reaction to someone named sumo posting my assertion ”There is absolutely no mathematical or other direct linkage between the S&P and EUR/JPY.” At least I think it’s the author. As I understand it, several people actually author on ZH under the same nom de plume (that’s pen name), so it could have been someone else on the staff. In any case, the response was:

“I assume the gentleman has never heard of the carry trade and its implications.”

Hah! We’ll leave out a discussion of the fact that I was in the forex market long before ”carry trade” became common parlance and focus on the mechanics.

The assumption implied by the above statement is that all carry trading is done through stocks. It most definitely is not. In fact, the simplest and easiest carry trade is to just borrow the low interest rate currency and invest the proceeds in a debt instrument of the higher interest rate one. The carry trade need not have anything at all to do with stocks. That means, as I indicated, there is no direct linkage between the S&P 500 and EUR/JPY, meaning carry trade related movement in the likes of EUR/JPY need have nothing at all to do with the stock market. It can move independently. The current market environment is such that the risk tolerance of traders/investors creates a common driver of action in the forex and equity markets. Were something to happen like a Bank of Japan rate hike, however, there could be a very serious sell-off in EUR/JPY on yen appreciation which probably would have a very minimal impact on US stocks.

I’m not sure whether this comment by aldousd was directed at me:

“it’s ridiculous to say that it isn’t related. it’s been going on all day. I keep reading people saying that it’s a coincidence… a second by second coincidence.”

In case it is, though, I certainly never said anything about “coincidence”. In fact I noted that the drivers for the comparable moves are similar.

There’s another reaction offered up by BeerGoggles to the first comment posted:

He’s going on about zero prices as well and clearly has never looked at the ATRs of EJ and S&P.

I have no idea what this person is going on about. I definitely didn’t say anything about zero prices. Maybe he’s referring to the author, but aside from talking about a zero spread (which I contend is incorrect) I don’t recall him saying anything about zero prices either. For the record, though, as of June 7 the normalized 14-day ATR (meaning ATR expressed as a % of the 14-day average) was about 2.8% for the ES and a touch under 2.5% for EUR/JPY.

Here’s a comedian:

Does he use charts for his trading, or some secret method of essentials we haven’t yet heard of?

Whitty, but the incorrect application of the charts is exactly the problem I have with the analysis. For the record, I use charts all day, every day.

Here’s someone who gets it:

I’m not a trader or an FX expert, but I do know maths and you guys are missing the point.

What the “non-fan” is saying, is that a graph of two variables NOT on drawn on the same scale, is going to lead the observer to false conclusions about trading opportunities when they see a gap. It’s perfectly possible (and in this case highly likely), that you’d loose money by trading ONLY based on the existence of a large gap.

By all means do all the carry trades you wish, but not based solely on this gap information. You need more information to guarantee an easy trade.

Thank you virgule (commentor’s handle)! In case you were wondering, “non-fan” is me.

As I said in my post yesterday, it’s not about whether doing this kind of pair trade is the right thing. It’s about not employing faulty analytic methods to get there, and not thinking that this is a zero risk arbitrage trade.

Some of the worst market analysis ever!

Are People Really This Dense? Don’t Answer That!

Crude Oil Prices and the Economic Stimulus Package

Lehman and company, like bad carry trades

The Cost of Forex Trading

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I don’t have any problem with the general idea underlying the trade that stocks and the EUR/JPY rate tend to trade in tandem. It’s been the case for quite a while now that when the market’s are feeling good and buying stocks EUR/JPY (and really all the JPY pairs) will rally, but when the markets are nervous and shifting into a risk aversion mode both the exchange rate and the stock market falls.

My issue with this analysis is this. The author is using a dual-axis plot of the S&P and EUR/JPY (meaning two price plots with different y-axis) to determine the “spread”. When there’s a gap between the lines there’s a spread. When there isn’t, the spread is zero. That would all be just fine if the S&P 500 and EUR/JPY were even close in price, which they aren’t.  At this writing the mini S&P contract is at about 1066 while EUR/JPY is right around 110. Notice how they are not anywhere close to zero?

This has got to be some of the worst analysis I’ve ever seen. Please, please, please don’t every employ this methodology – if you can even call it that.

And calling or implying this trade is some kind of arbitrage is even worse. There is absolutely no mathematical or other direct linkage between the S&P and EUR/JPY. That means no arbitrage, just a coincident relationship. It just so happens that in this market cycle they are trading based on the same main drivers. That could change at any time. That means you most definitely have risk.

Again, I’m not necessarily arguing against the idea of the trade (stocks and cross get back in line). I’m just saying the analysis used to get there is severely flawed and dangerous.

Reaction to the “worst analysis” post

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A dealing desk is simply a feature through which your order passes through before being transferd to the market. This means that the broker actually processes each order that you place.
The fact that the broker stands in between you and the inter bank market place is the reason that they can offer fixed spreads, they in effect manipulate the prices to keep them constant. On a traditional non-dealing desk broker the prices of each currency would almost never remain constant or fixed because they are constantly streaming live prices provided by several banks at any given time.

This means that there are many times during a day when the spread on some of the more popular pairs is 0 pips. So for the broker to make money from providing the service that they do, they need to charge commissions. Many traders believe these commission charges to be expensive, and that brokers that offer “No commission charges” are the best way to go, however these brokers can only do this by keeping the spread fixed AKA manipulating the price feed, which of course is not the kind of environment that is ideal for free inter-market trading.

So what kind of brokers allow you to trade without a dealing desk? and how can you find such a broker?

Well the answer is in the type of broker that you choose, for example brokers that have no dealing desks are commonly known as ECN brokers, and i will be going into much more detail on these in my next blog, so stay tuned!

So why use a regulated broker? what are the benefits of doing this?

Well when a broker is regulated they must adhere to various rules regarding good practice and risk reduction, so for example a regulated broker would be required to hold a minimum amount of capital to facilitate customer withdrawals etc…. these rules are designed to prevent the broker being able to simply shut up shop and take customers deposits with them overnight. The process of becoming regulated is a long and expensive one, so the theory is that completing regulatory registration would be prohibitive if the broker didn’t plan to stick around for the long term.

Regulated brokers also usually keep clients funds in segregated accounts so if the company did come into financial difficulty there is less chance of your funds being sucked away with this. (although there are notable exceptions such as Refco in recent years.)

In summary, if you want to have the best chance of keeping your investments safe in Forex, the minimum safeguard that you can demand is that your broker is regulated in your home country.
If you have had any bad experiences with brokers or indeed good experiences let us know in the Forum so that our community can benefit from each others experiences.

The benefit of position trading is that the analysis is potentially much easier as it is more concerned with keeping tabs on just a few core economic indicators in one or two countries. therefore as long as this balance remains the potential for the trade to succeed should remain high despite any technical chart patterns or set ups that appear in the short term.

The reason that this style of trading is best suited to experienced traders is that it requires very large amounts of trading capital, and a great deal of patience. Positions can swing against you by many pips before reaching your profit target. Many new traders would simply struggle to hold throughout these draw down periods.

In summary, Position trading can be an effective way of trading the Forex markets but only if it is carefully planned and executed based on solid trading techniques, so not recommended for new and inexperienced traders.

Swing trading is basically taking a longer term approach to the market, so rather than looking to analyse the market on a daily basis you may decide to look at data from the previous week or perhaps even further back, when deciding on safe entries into the market. It then involves using higher timeframes to select entry point and take profit levels.

The benefit of swing trading is that it allows people to trade part time whilst attending to their other commitements such as their employment etc…. There is also far less emotion involved in taking a few long term set ups, and the effect of a loss is minimised as is the fear of taking the next trade, because by the time a new set up emerges there has been time to reflect and rationalise on your loss and reset your mind to taking the next qualified set up with out hesitation. There is also the obvious adavantage from a risk point of view, i.e it takes far longer to reduce your account balance through losing trades when your only taking one or two set ups a week etc…

The thing that many traders find negative about swing trading is the fact that there are not as many good set ups throughout the week, so if you do have the time to be at your charts during the day there can be a great temptation to “find” trades to take through boredom etc… and this in itself can have a bad effect on your overall profitability.

In summary i would reccomend that you only swing trade if it suits your circumstances or if you are happy to wait several days for a potential trading opportunity. but as an overall style it has to be one of the most versatile and well suited to both new and experienced traders alike, ,so definitely one to look at regardles of how long you have been trading.

The positive aspect of day trading is that trading can be carried out regularly and profits can be higher due to the higher volume of trades completed. It also a much safer way of trading due to the fact that the set ups are usually of a better quality.

The negative side to day trading is that there is still a large amount of psychological stress faced by the trader, for example several losses are still possible within a single day, which can create fear and aprehension when taking the next trade. The other problem faced by traders is that of a lack of patience, for example some traders get into particular mindsets  and a classic mind set of a day trader can be that they must be making trades every day. This is a bad mind set to have, especially if it leads you into taking trades just for the sake of trading, rather than waiting for perfect opportunities to present themselves. 

In summary, if you can avoid the common pitfalls that daytrading bring, you can enjoy the great benefits that regular short term trading brings, without the stress and risks associated with something like scalping. I would recommend that day trading be attempted once you have found a safe, robust methodology for entering and exiting your trades, and this has been tested on a small micro lot account for a sustained period of time.