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  1. Many considerations go into creating and running a successful trading entity. We’ll look at the most popular which get the most attention, right through to the most important, which usually get the least attention. Here is the list: 1. Entry signals 2. Risk management 3. Exit signals 4. Reliability 5. Reward to Risk 6. Opportunity 7. Capital management 8. Objectives 9. Familiarity with Markets 10. Resources 11. Mindset 12. Style 13. Management Most, and by most I mean probably close to 80-90% look at number 1 and that is it! That is a startling reality, but a reality nonetheless. But there is a reason this happens. Most new traders are unaware that such a large number of traders ultimately fail in this business, and more importantly, this fact is well known by the very people who market trading in this way. But enough of that, let’s look at some serious considerations you should make and the order in which you need to do it. Objectives – Set a target, a goal, a reason. Without this, you can’t create or find the right system for you. You won’t know whether the system will work for you, or even if it is on track or not once you begin trading it. Familiarity with the markets – Quite simply, markets move in similar patterns which is all good, but there are different costs, margins, hours of trade, laws etc associated with each market that need to be considered. Resources – These are your physical and mental assets. Everything from your time, capital, computer, to your mental strengths forms your list of resources. Day traders need different resources to a long term trader, not only in hard assets but mentally too. Mindset – This is part of your self-image. Your self-image influences your decision making process on a continual basis. It stands to reason a trader would only become successful if they were making the right decisions. You need to see yourself as a success first. Style – This is something you’ll need to work out way before you look at any system. Are you mechanical or discretionary, in other words, do you want a system to tell you what to do, or do you want to be analytical? Do you want to trade for growth or income (part of your objectives)? These sorts of styles all require different tools, and so it seems silly to purchase a system before you even know your preferred style. Once you have these aspects thoroughly researched and sorted out, I can guarantee you that finding or creating the right system of entry and exit tools will become far easier and much more enjoyable too. You’ll naturally be attracted to the type of market tools that suit you. But even then, once you find the entry and exit tools that suit you, there is more work to do. You need to back test and paper trade your entry and exit rules to determine the rest of the considerations mentioned above. Reliability – How reliable is the system for producing winning trades compared to losing trades, and does this suit you? The latter part of this question is the most important part. The reliability of the system does not tell you its overall profitability. It tells you your ratio of winning trades to losing trades, and this is a psychological question. Do you need to be right more times than wrong? This is the simple question you need to answer. Reward to Risk – What is the average profit per trade? This is your total net profits divided by your total number of trades (if your system has a net loss then it’s no good - obviously). When you know the average profit per trade of your system over a decent sample, you can then determine the number of trades you need to make to reach your objectives. Opportunity – Now that you know the number of trades you need to make over a time to reach your goals, you must determine whether or not your chosen markets will offer the opportunities you need. Will you need to trade in multiple markets, trade both long and short and so on? Capital Management – If you do find that your chosen markets offer enough opportunities for you to reach your goals, you need to consider if your capital can handle it. Many systems will require multiple positions open at one time in order to reach goals in a specified time. This means your capital may be stretched, or may not even cope. The size of your positions in the market is a part of your capital management and is also determined by whether or not you have leverage and the margin required. Risk Management – Risk is what you are willing to lose per trade. Your exit strategy aids in determining this factor, but it also needs to gel with you, because your risk per trade is a factor in you drawdown. The higher the risk, the higher the drawdowns and you need to know the maximum drawdown you’re willing to tolerate. Management – The final consideration we’ll cover here is management. You are controlling an entity and so management of all key areas is important. If you log each trade, you can assess for human errors, bad habits, you can also assess costs associated with trading and whether or not they can be reduced. In fact management is the part of your trading that is always looking for ways to improve the running of the business. If you look at the list above it can seem like a lot. If one was to think of what goes into creating the great business models like McDonald's, Starbucks and so on, then I don’t think it even compares. But why should it be so daunting? Enjoy the process and it will be a lot easier than you think. Dean Whittingham
  2. Your major focus in trading should the softer side of trading, the business and psychological side of it; the harder side which relates more to the technical side is a secondary thought, however in this article I am combining the two because one of my favourite patterns is an ideal pattern for the impatient trader who does not like to hold on to trades for too long. Impatience is not a good trait to have in the markets when trading or investing. It breeds laziness when it comes to research, planning and analysis, it causes some to exit trades too early, and it causes other’s to constantly monitor their positions. To add to this, trades that linger on can incur costs such as time premium erosion for options traders, and interest costs for CFD traders or stock traders using margin, to name a couple. Weaknesses are a part of human nature; your job is to ‘manage’ them, not to try and eliminate them or even turn them into strengths. We were brought up to take our weaknesses and try and turn them into strengths which I believe is the wrong approach. Build on your strengths and manage your weaknesses is the best motto I ever heard. Some traders who don’t like to be in trades for too long will use an exit strategy that will force them out of the trade if the particular stock or market consolidates and moves sideways for a few days, which is a good strategy. Let’s look at an entry technique which is the trading pattern for the impatient trader. This pattern signals a turning of the market. It does not necessarily signal a top or bottom, it will sometimes just signal a correction, either way; it tells you that a swift and sharp move the other way is imminent, and usually enough to give a good reward to risk. The emphasis here is ‘swift and sharp’, because this is what the impatient trader is looking for. The pattern unfolds in 5 waves with the highs and lows of the waves overlapping each other to the point where the 5th wave ends in a spike. Here is a diagram showing what to expect at the end of a run up, and the end of a run down. This is what you need to see and how to trade it: 1. You join the highs of wave 1 and 3 together, and the lows of wave 2 and 4 together if in an up market, and these lines need to converge [or lows of waves 1 and 3, and highs of waves 2 and 4 if in a down market]. 2. You want the high of wave 5 to break the upper line and spike [low of wave 5 to break lower line and spike]. 3. The break of the lower line is your entry [the break of upper line is your entry]. 4. Your stop goes on the other side of the 5th wave. 5. You want your exit or your first profit target to be within the range between the low of wave 1 and wave 2. 6. You shouldn’t take the trade if this range does not offer you at least a reward to risk ratio of 1:1, however this is obviously a personal choice This is an example that occurred on the SP500 index in July 2008 on a 30 minute chart. Elliott Wave users will be familiar with this pattern, known as an ending, leading and 5th wave diagonal; others may know it as three drives pattern, and others may just say it’s a wedge pattern. The point I wanted to make in this article, so as to benefit you is that when these patterns occur they produce swift and sharp moves and this is an obvious benefit to those who don’t like spending too much time in the markets, whether it’s due to being impatient or because of trading instruments that are time sensitive. Dean Whittingham
  3. Picture this: you live outside the US, let’s say Australia, you think the price of Oil is going to appreciate over the next month or two. Your options are to buy the commodity through the futures markets, buy a CFD, or buy an ‘oil’ based ETF. Either way, you will be buying an oil based asset and in which currency? The US dollar. What happens? Well the price of Oil appreciates, and low and behold, so too does your purchase (whichever that may be), in fact it appreciates 20% over two months. Nice! Then something strikes you. You look at your financial statement only to be reminded that your sale price has been converted back to Australian dollars; naturally, this is where you live and so too does your broker. So, what do you do, you flip back through your statements to the day when you made the initial purchase to see what it cost you in Australian dollars and then Whammo!, it hits you, as you realize your purchase price in Australian dollars was 10% more than what you just received. You didn’t make a 20% gain, you made a 10% loss! The Australian dollar appreciated during those two months. The famous investor Jim Rogers was on CNBC one morning, so I decided to email a question to Martin Soong, to be directed to Jim Rogers, and the question simply was in general, “in your investing of commodities, all of which are priced in US dollars, how do you account for the fluctuations in your own currency?” You can see the interview, my question (around the 58 second mark), and his response here: News Headlines . Admittedly, I was a little disappointed with his answer, as his investment horizon is far more longer term than mine and as such I would have thought it an even more crucial factor for him than me, but it may also be that being as seasoned as he is, it may be something he does more instinctively or at a subconscious level. Anyway, the point is, currencies can be volatile and can appreciate or depreciate massive amounts against other currencies at breakneck speed, and unless you are prepared for it, you may face losses in what appear to be good trades. We will look at a simple rule of thumb approach, as there are always other factors, including time, leverage and interest costs associated with that leverage. The most general way to look at it if you are looking at overseas markets, and provided your trade ends up being correct, is that if you feel your own currency is going to strengthen, you are better off finding markets to short. If you feel your currency is going to weaken, then look for markets to go long. If you think your currency will be range bound, then you are a lot safer to play either way (long or short). If you go long a market and your currency also strengthens, this will reduce your profit potential (or even create losses as per example above). If however, you go short a market and your currency also depreciates, you have what is called a double whammy in your favour. Let’s look at some simple examples to demonstrate this (these examples are not taking into account brokerage costs, or the use of leverage), and let’s for illustrative purposes, give the Australian dollar the value of exactly one US dollar at the point of the initial transaction and show the changes from there. You purchase a US stock for $100. This will cost you $100 in US dollars, and obviously, $100 in Australian dollars. Look at what happens over a period of time, when the stock goes up 10%, and when the Australian dollar changes. Purchase price $USD 100 100 100 AUD/USD Rate 1.00 0.90 1.10 Sale price in $USD 110 110 110 Value in $AUD 110 122.22 100 Percent change +10 +22.22 0 We used a simple 10% change in the AU dollar, and a 10% appreciation of the US stock. When the AU dollar appreciated by 10%, the trade ended up being a no profit in AU dollars, even though it went up 10% in US dollars. However, when the AU dollar, depreciated by 10%, the trade ended up being a 22.2% gain in AU dollars, even though it was only 10% in US dollars. So I hope this illustrates how the change in currency exchange rates does affect the overall performance of any overseas trade on your financial statement.
  4. In trading there is a factor known to many as the ‘R’ factor or risk factor. Traders determine their average or base risk per trade they’re willing to take and name it ‘R’, and then measure profits as a multiple of this ‘R’. For example, a 3R profitable trade means the trader has made 3 times the amount they risked. The idea is to determine the ‘R’ factor early on in the trading system building stage and keep it consistent, whether it is a fixed dollar amount or a percentage of available capital. The benefits of using an ‘R’ factor include measurability, especially during back testing, which helps to determine a systems potential, and being able to track your trades from a systematic point of view rather than a monetary point of view. However it is the monetary point of view that I would like to address as I feel there could be another angle or point of view that could aid struggling traders, especially those that find themselves cutting winning trades short (breaking their systems rules). First, let’s do a quick demonstration of the use of ‘R’. A trader has $20,000 in capital, and decides he wants to risk $200 of his available capital per trade. After much back testing, he finds that out of 100 trades, 40 were 1R winners, 10 were 3R winners and 50 were 1R losses. He now knows that after 100 trades he system will provide an estimated 20R profit (40R plus 30R minus 50R = 20R), and if ‘R’ is $200, then that equates to $4000. This trader can now use this information to help determine what he needs to do to reach his goals. Now, when determining the ‘R’ factor, there is one element this trader has missed, and that is, what is his ‘R’ factor from a personal point of view? Why did he choose $200 and not $300 or $100, or some other figure? This in my view is a serious question that needs to be asked and then answered, and in order to do that, one must look at their personal finances and spending habits. In your every day life you have small, medium and large expenditures all of which fall into the categories of either tangible or intangible. For the most part, most of us have no problems with medium to large tangible expenses, such as house or car payments, or a new TV as these are things we can see or touch. Medium to large intangible expenses are much harder, such as a seminar or course fee where the results are not guaranteed. Small expenses on the other hand are a different breed altogether. How often will you go and spend money on something small and intangible and think nothing much of the actual expense? An example would be some lunch on the go; where you buy some food and drink and know that the cost won’t change things much for you so you don’t concern yourself with it too much. But let’s say you get home that evening and decide you like the idea of eating out for dinner. Do you now think twice about where you will go and how much you are willing to spend? If so, you have a threshold on the amount of money you are willing to spend (as most of us do), especially on intangible items or items quickly consumed. This threshold or level of expenditure where you change from not thinking to thinking twice is a perfect example of where your comfort zone currently sits when it comes to the value of money relative to you. Go over it and you get uncomfortable and have to think twice. In trading, it will be no different. You will find it much easier to take losses where the amount, or ‘R’ factor, is under your threshold, than if it is over. I know many people will respond to this comment with the issue of, by risking so little it will take too long to make any decent amount of money or even the fact that brokerage costs etc will start to become a heavy burden, and these are fair responses. However, the fact of the matter is, the act of trading is not going to change the way your brain responds to such losses because there is nothing to show for the loss (intangible), and if the loss is out of your comfort zone then your brain is not going to like it. What’s more, imagine you are sitting on a nice paper profit which is in excess of your threshold; an amount that if you were to spend on something intangible would cause you to think twice. Your brain is way out of its comfort zone because a) it’s a lot of money to you, and b) you can’t realize the profit and thus bank it until you actually close out the position! When you are in such a position all sorts of justifications for breaking your rules start flooding your mind. Both of these instances of not being able to take losses well and cutting winners short are major hurdles traders face all the time and much of the issue lies in their personal relationship to money and the value they place on it. If you have a low relative value of money, it doesn’t matter what the system you use is or how well it performs for others; you are only able to extract from it what your relative value to money is. You should spend some time assessing your spending habits and determine where your threshold lies. If it is too low to even consider making substantial money in the markets, then you are faced with the tough decision of either looking for a different career or changing your threshold level. Much of the problem lies in the belief that money is something we generally lack, and that there never quite seems to be enough. Unfortunately, it doesn’t matter which way you look at it, this is a fundamental issue for most people, and it is no wonder 95% of trader fail.
  5. Hi Mark, I doubt you'll read this if you are long gone now, but I was wondering what it was that got you into trading in the first place..what was it that made you look at trading the markets for income or growth? I ask this because I remember the first time I looked at trading the markets, I was in the process of looking at becoming a business owner, and found an ad on starting my own trading business. I bought a $7000 two day course that promised exactly that, to help my create a trading business. During those two days, I thought I'd died and gone to heaven. I remember saying to my dad who was with me, this is brilliant, I am in love with trading, I love this whole thing! I failed! Well, initially at least. To summarize what happened with the 'trading business', I was taught to build a mechanical system, using technical indicators, back test it, and if proven profitable through backtesting, then apply it in the markets, first as a paper trader and then live. That was basically it. Once I started trading live, I tripled my account in a matter of months and was making money I hadn't experienced before. Then it all fell apart. Now, as far as trading as a skill, and by this I mean using indicators to look for buy and sell signals, they (the company I paid $7000 to), passed with flying colours. But where they failed, and miserably I might add, was they didn't teach me to be a business owner. The skill involved in actually trading, is way overrated. It is easy, a 5 year old can do it. It is being the business owner that everyone fails at. For me, I first had to come to grips with the idea of bull and bear markets. My system was starting to enter the end of a bull market phase when my profits started to erode, but I wasn't aware of it until it was too late. Who was I to know of these bull and bear markets and how they effect EOD mechanical stock trading systems. A trader doesn't need to understand this, but a business owner does, just like every other business owner must understand their market. Next, I then tried to become and intraday forex trader. Again failed! Why, because I didn't understand who I was. I have never been able to daytrade..it is not something I can do because I can't sit in front of a computer all day unless I'm actively doing something and it is not repetitive, but it took me a lot of time and money to learn this. I had to learn this, not as a trader but as a business owner. A business owner must know his strengths and weaknesses, and operate a business that utilizes his strengths. I then had to learn that I was poor with money full stop. Again, a trader does not require money management skills, but a business owner must. A great mechanic does not necessarily make a great business owner. He must learn the skills of being a business owner too, otherwise he could fetch top dollar for his great mechanical services, but then the money seems to disappear all the time and he has no idea where it is going. This is not the job of the mechanic. On the subject of money, I had the privilege of seeing my parents win the state lotto, to the tune of half a million dollars, only to be bankrupt 4 years later. When I researched this, I found that this actually occurs to 95% of lotto winners. Have you ever seen that statistic before???? I reckon you have! 95% of trader fail too, and to add to this, 95% of businesses fail. Think this is a coincidence? I don't think so. The upshot of all this was that a business owner who is trading should never risk money on a trade that they would think twice about spending in real life, for example dining out. At what price point would you think twice about spending on dining out? This is your threshold, and should be applied to trading too. This may seem silly, and believe me, most will scoff at this, but if 95% of people who win large amounts of money end up losing it all and more, then it is pretty obvious, they have a huge issue with dealing with larger sums of money than they are used to. Trading is no different. If $100 expense is your threshold, it will take a considerable amount of time and trading with this as your risk amount, before you have the confidence to start risking more. And this applies to profits too. Someone with a $100 threshold will always start getting nervous once profits hit this amount and beyond. Can you see a pattern here, one of the hardest things a trader business owner will ever have to do is let their profits run according to their systems rules. So, I hope this helps to open your eyes to the fact that you haven't failed as a trader, trading is easy, you have simply failed at being a business owner in the field of trading. You have to learn two skills, trading and being a business owner (and the skills required to be a business owner far exceed those required to be a trader). And discipline I might add, is not the skill required of the trader, but of the business owner.
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