Reader Questions Answered – Reporting Your Forex Results

Cash Grab Today – Booking 1,022 pips of Profit

Tonight I decided to take a “cash grab” in the Helix portfolio.  I booked a total of +1,022 pips.  Make n o mistake…there is a method to my apparent madness <evil grin>.  I don’t do anything in my trading account without a set of criteria being met.  Tonight, we met them, and I pulled out of the positions with a 10% equity increase.

I’ll watch closely for the re-entry signal to present itself.  When it does, we’ll enter the market once again with the same confidence with which we make every trading decision.

Tonight we closed the following positions:

EURUSD:  +460 pips

USDJPY:  +136 pips

AUDUSD:  +229 pips

GBPUSD:  +197 pips

New Forex Trend Followers Emerging!

A few of you have clewed me in to the all new trend following forex signal providers.  Honestly, I don’t mind if others want to copy me.  Heck, the two guys who are doing it have been stinking up the Forex world with crappy services for a couple of years now.  It has to be hard to see my results and “not” try to copy my systems.  Afterall, this is a big market.  If these guys want to survive in the signal business, they’ll have to give up the HYPE and start to focus onn reality. 

Most Forex traders are very intelligent!  they do fall prey to the sales letters…everyone does.  But eventually, Forex traders realize that there is no quick way to “real” wealth and find their way to a realistic, sustainable, superior returns.  Afterall, you’re smart enough to understand that a real 80% - 100% per year return is much better than a ficticious 2,000% return, right? 

Now, here’s what I predict.  In six months, the two new guys who are selling trend following signals will stop, and be selling whatever the new HOT trading method is.  They’re professional traders to be certain, but they are also Internet marketers.  They want your money, and whatever you’re typing into google to search for forex signals is what they’ll be selling.  Also, in six months, I’ll still be selling the same service that I sell today.  I’ll be selling trend following forex signals and mentoring. 

I sincerely hope that they prove me wrong.  There is plenty of room in this business for ethical signal providers.  Anyone who is interested in helping others create wealth and a better life for their families is more than welcome in my book.  

Trend Following makes money PERIOD!  It has for as long as there have been markets, and it will continue to do so! 

Everyone have a great holiday season!

Tim

Chinese Interest Rates Turn Dollar Sentiment

I don’t usually make trading decisions before the NY close. I’m a trend follower and focus on what IS rather than what I think or feel. However, my system rules are very specific and include a “score” from my daily fundamental analysis of world affairs. There are almost no single events that can change the sentiment of the “smart money.” But once in awhile, we do get a big surprise, and a prudent trader has to factor for those surprises in his system rules.

This morning the Chinese surprised the world markets by raising their interest rates for the first time since December 2007. This surprise move puts the global economic recovery in doubt and caused investors to move their money from energy, minerals and world currencies linked to those asets into the perceived safety of the USD.  Why does the Chinese interest rate move other currencies?  Well, let’s use the AUD and NZD as examples.  The AUD and NZD are tied closely to commodities.  The Chinese are major purchasers of these commodities.  When they increase interest rates, it’s a sign that they’re economic growth will slow.  As the Chinese economic growth slows, so will their appetite for commodities.  Everything is relative in markets.  big money traders have also likely priced in any Quantitative Easing efforts from the Fed. 

I’m not ready to say that we’ve seen the bottom for the USD, but I’m willing to sit on the sidelines and watch the retracement unfold and get back in on the next confirmed trading signal. 

Good luck out there!

Tim

What’s Your Hourly Rate as a Forex Trader?

What’s important to you? Just money? Your time? How about freedom? Many successful Forex traders that I personally know spend many hours every day looking at charts, trying to identify a trade setup. This is fine if you really love staring at a computer screen all day. It makes me wonder, however, why these same people left the corporate world to trade. Some of them certainly made more money with a 9-5 job than they do as currency traders. So basically, they have traded one mediocre job (with predictable hours, salary, and benefits) for another mediorce job with many more predictable hours, no guaranteed pay and absolutely no benefits.

I think that I provide TRUE Set and Forget Forex Signals.  These trades don’t have a target, but they do normally offer traders seferal days to exit at a similar price to my exit.  Acutally, getting in and out late usually makes better money with my signals than I do.  I have a set of strict rules that I follow whether I want to or not, so my results are not sterilized.  They’re just damned good, and consistent across all market conditions year after year. 

My time is important to me. My freedom is important to me. Anyone who knows me knows that I LOVE my money and have a strong money “edge” to my personality. But I’m not willing to stare at a chart all day to get it, and I don’t think that you should either.

My clients spent approximately two hours trading my Helix signals since May 6 2010. During that time, my clients achieved a REAL 38% equity increase. If I factor in the open trades, that number goes up to a 48.25% equity increase. This is all verifiable by reviewing my live results at MyFXBook.  Let’s take a hypothetical trader with a $10,000.00 account trading my signals at my recommended 1:1 leverage. 

$10,000.00 * 48 = $4,800.00

$4,800.00 / 2 hours = $2,400.00 per hour.

What was your hourly rate with your last forex signal provider?  How much does your current provider pay you?  Is it less than $2,400.00 per hour?  I bet it is!  Think about it.  Even with a $1,000.00 micro account, my signals paid my subscribers $240.00 per hour.  They did this without stress, without worrying about closing trades over hte weekend, and without sacrificing vacations, children’s events, and family get-togethers. 

How’s that for a job?

Wins Losses and Profits! I’ll Take Em All!

I attended a webinar a year or so ago that was put on by another well known professional currency trader.  During this webinar, he went on and on about how much he loved his losing trades.  Like many of us pro traders, he’s a relatively weird guy.  I guess the isolation of trading makes us a little “off” at times.  He made comments about “making love to his losers”, and “cuddling with his losers.”  Well, I don’t know about all of that, but I can relate to the fact that a string of losses indicating a huge winner.  This is especially probable in trend following systems.  When I review my results year after year, I notice something interesting.  I see strings of relatively small losses in the 80-200 pip range, then a few small winners, also in the 80-200 pip range that make up for those losses.  Then I see a monster 1,600 pip winner.  Those monsters are the trades that I am looking for.  They are the reason that I wake up in the morning.  They are the only reason that I trade my trend following portfolio. 

If I seriously analyzed my results, I’d probably find that the split is about 40:40:20.  That is to say that about 40% of my trades lose, 40% of my trades are small winers (which make up for the losers) and 20% of my trades support my lifestyle.  In a trend following system, you must expect small losers…plenty of them!  Strings of losers come during periods of congestion.  That is to say that accumulation and distribution of an asset is pretty equal.  This just means that supply (roughly) equals demand, and the asset is fairly valued.  This is just part of a normal market cycle.  Then, something changes.  Some fundmamental weirdness occurs that causes the supply and demand to shift.   When this happens, we often see a monster trade!  Real beasts of 1,000+ pips are experienced by trend followers in these breakouts.  This is the trade I wanted.  All of the rest of those small trades are just noise to me. 

Many of you will find it odd that I consider anything under a 500 pip profit a losing trade.  It’s just another waste of my time and margin to sit on a flat market.  But I know that trend following is like fishing.  Sometimes a fish takes my bait (losing trades), soetimes I catch little fish that I can use as bait (small winners), and once in a great will, I catch a 50 lb Musky (Monster trades).  All the while, I wanted the Musky, but had to deal with the bait theft and the small fish repeatedly until that I finally hooked the big one. 

Traders are not all that different from fishermen, really.  Beginning fishermen are easily frustrated by the tiny bait fish, and the loss of time.  They stop fishing, maybe one cast from landing the big one!  The experienced angler knows that his best bet is to always have his hook in the water.  During periods when small ish are being caught, and bait is being taken, anglers know that a larger fish is sure to be near by, and HUNGRY…looking for an easy meal.

When a market gets ready to break from a consolidation, big money traders start accumulating at the bottom (or top) of that consolidation range.  You can easily identify this activity by looking at the lower timeframes.  When a 5 minute chart shows single bars going to hte top of a range, then drifting slowly to the bottom, what do you think they are doing?  They are looking for an easy meal.  Don’t be that meal.  Wait for the breakout and trade a break on strong volume.  Then stay in that trade to the end! 

Winners…Losers…whatever.  I want that monster trade, and my hook will be in the water until I get it!

EURUSD (3/19/2010 – 6/15/2010) Making the Case for Large Stops

Look over your EURUSD  trade journal for this year.  Between 19 March, 2010 and 15 June 2010, how many losses did you have?  How many of those losses were on short trades?  I lost a few, to be certain.  Every one of them that cost me money  had a small stop loss.  How much did your tight stops cost you last year?

I opened a short position on EURUSD on 3/19/2010 and held that position until 6/15/2010.  It never even came close to the stop loss.  I pulled 1.272 pips from that trade.  You can see this trade, and the rest of my verified live results at MyFXBook.com.  The stop loss on the trade was pretty wide by most folks standards, but pretty small by mine.  This trade is not exactly “typical” of my trend following trades, but it is about an 8 point buck in hunting standards.  I’ve pulled 1,700+ pip trades, and even a 4,000+ pip trade on the GBPUSD with my trend following systems.  The 100% honest, and absolutely verifiable (by paying subscribers) results for the entire portfolio can be seen in my results page.

My point is that plush stop loss orders reduce the risk of your trade stopping out.  I use modest leverage (usually 1:1 – 3:1)  so that if I do stop out, I haven’t lost much.  I seldom ever see a stop out.  My trend following systems generate buy and sell signals to get me out of trades way before that happens.  The stop loss does play an important role when market weirdness occurs though.  I’m not talking about news releases.  Those never come close t one of my stop losses.  I’m talking about those massive world-events like unexpected wars or the second coming.  You know, those once in a lifetime events.

Small stop loss trading has its place.  I do my fair share of trading with razor thin stops.  But it’s much more busy than I care to be on a daily basis.

Trend Following History

Richard Donchian, Jesse Livermoore, Ed Seykota, John W. Henry, Richard Dennis, etc.  The list goes on and on.  None of these names will be “new” to you if you’ve been trading for any time at all.  What do all of these traders have in common?  They are, or were, all trend followers.

When you see names like Donchian and Livermoore on board with a style of trading, you really have to give it some serious consideration.  Trend following is nothing new.  In Remiscences of a Stock Operator, Larry Livingston (Jesse Livermoore) often eluded to the fact that when he sold his longs, he automatically got short.  Once his directional opinion changed, he just got back into the market in the opposite direction.  This is one of the defining features of a trend follower.  It’s also the reason that trend following works.  Trend following systems have beat the market for decades now.

My personal income over the last few years has been directly related to my trading performance.  My intraday trading has taken a lot of my time, while my trend following systems have taken almost no time at all.  At the end of each year, my trend following accounts have equaled or beaten my other systems.  When I look at a line chart of the performance, the trend following systems poduce a much smoother line than anything else I do.

Which would you prefer?

Four Types of Trades

There are basically four types of trades:

• Good Trades
• Bad Trades
• Winning Trades
• Losing Trades

Not all good trades win and not all bad trades lose.  It’s important to know the difference.  We’ve all placed bad trades that took profit.  How many times have you had a trade in that was obviously a mistake end up taking profit because of a news event or a market change-over anomaly?  Likewise, how many times have you placed a perfect trade, one of those one in a million opportunities with every type of confluence available, only to see it blow your stop loss in an illiquid market?

I’m going to ignore the difference between winning and losing trades.  You all know that difference pretty well.  I want to focus on the difference between a good trade and a bad trade.

Good trades are those trades that meet all of the criteria of your trading system.  It passes all of the filters, meets all of the positive criteria, and offers an attractive risk to reward ratio.  Taking these trades is a no-brainer.  Some of these trades will end up losing money.  If your system has a positive edge, the losses won’t matter.

Bad trades are those trades that you take and later (or even at the time of entering) realize that they do not meet your criteria, or that one or more of your filters was violated.  We’ve all done this from time to time.  Very few traders can tell me with a straight face that they’ve never tried to catch a falling knife or got impatient when waiting for a solid 1-2-3 to complete.  It happens.  Get over it.

The key to surviving the bad trades is to suck it up, take the hit, and exit the trade.  Don’t wait for break-even, and don’t even think about adding to your position.  Get out of the trade the second you realize that you’ve made a mistake.  Trust me.  I’ve seen this dozens of times.  A client, mentee, or good friend comes to me looking for advice.  The guy’s into a bad trade in a big way and it’s 1,000+ pips against him.  Every time it looks like a turn-around, the guy added to the position.  The problem with this scenario is that the turn-around is usually imagined.

The key to entering good trades is simple.  Follow your rules 100%, only trade a system with a positive edge and enter every trade that meets the criteria and fits the filters.  Once you are in these trades, you stay in them until your trade meets the system’s guidelines for an exit.

Knowing the difference between good and bad trades is a key skill to master for any trader.  Your actions in both of these trading situations will determine yuour success as a trader.

Trend Following and Forex Money Management

Money management, when  trend following, in the forex markets is handled a little different from what you may be used to.  If we use the traditional method in which we tie a percentage of our available equity to the stop loss, we may find it difficult to make much money at all.  The stop losses are usually much larger than many are used to.  But trust me.  The stop loss orders are almost NEVER HIT! The stop loss orders in my trend following system are there for a catastrophic failure in the early stages of a trade.  I exit losing trades and enter in the opposite direction long before the stop loss is hit.

My trend following system uses a leverage based model for money management.  The current state of the market determines what that leverage is when the trade is placed.  I’ve had trades with leverage as low as .5:1 (that’s 1/2 to 1).  I’ve also had leverage as high as 5:1.  It just depends on the trade.  I typically stick with 1:1 – 3:1 leverage.

To explain this, I’ll use a $1,000.00 account balance.  If I have a $1,000.00 account balance and I want to place a 3:1 leverage trade , I open an order for 3,000 units of the currency that I wish to trade.  You may be thinking that this is far too small.  That’s about 30 cents per pip.  You need to trade small if you want to win big, guys and girls.  You have to remember that if you can win a lot of money really fast, you can also lose money really fast.  Your market maker depends on it.  That’s why they give you 100:1 leverage.

Many of you want to trade 100,000 units for every $10,000.00 in your account.  Of course you do.  It’s fun to watch your account balance move up by $10.00 for every pip.  You can admit it.  We’ve all been there.  Trading at this level of leverage is absolute account suicide.

Now, when we decide what amount of money to base our leverage on, we have to first deduct any open risk.  That means that if I currently have a $10,000.00 balance and have trades open which have a $1,000.00 risk exposure (you could lose $1,000.00 in the worst case scenario), your leverage on the next position must be based on $9,000.00.  You must assume that the money is spent.  I like to think of open risk like a “check outstanding.”  it’s money that’s spent,  but has not yet shown up on my account.  Just because the equity is there does not mean that I can spend it, but that’s a blog post for another day.

Now, some notes -

Remember folks.  Manage your leverage.  If you don’t it will certainly manage you.  Few things feel worse than being in a trade, even a good trade, that turns against you when you are over-leveraged.  It is PAINFUL!  There is no other way to put it.

Also remember that 100:1 leverage is great, but you must know how to manage your own leverage.  You CANNOT trade 100:1 leverage unless your goal is a margin call.  Think of the 100:1 leverage as an open line of credit.  For every $1.00 you have on deposit, your broker will loan you $100.00.  Just because the bank will give me a 100:1 loan does not mean that I am willing to assume that risk.  Nor should you.  Trading is a business.  Run it like one.

Watch for more information on leverage management, risk management, and money management in the up-coming weeks.