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minoo

Charting the Past Bears

Recommended Posts

Bear Market Phases

http://globaleconomicanalysis.blogspot.com/2008/07/bear-market-phases.html

 

Decades of Bear

S&P 500 comparision with Nikkie

Scared the Doogle$ out of me

http://globaleconomicanalysis.blogspot.com/2008/10/s-500-crash-count-compared-to-nikkei.html

 

What the heck is going on presently (6:00 AM EST 24 Oct) at S&P 855.25 Globex only session stuck their for over an hour ?

 

Enjoy Minoo

Hey TrderBG you are welcome

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Even without looking at the charts, this bear will be a big one. Personally I don't think the Dow will climb above 10,000 in the near future and I think the Nikkei will also stay below 10,000 for quite some time to come.

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Is the Bear feeling Bullish today

After the dip below 2002 line ?

Have we got the first cheek of the bottom ?

 

Time to trade off your Inverse-ETFs or atleast Hedge them

Oh those dividend yields makes me an weak-bear

 

Would like your opinion

 

Thanks Minoo

Edited by minoo

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Worth noting this bear has entered not only the area of the previous bear market of Oct 02

 

But also the Zone created by the rising Trendlines drawn from the bear market lows of Oct 87 & Aug 82 (Cyan & Blue lines)

 

There are seldom any Weekly Gaps but this Bear have got three of them not very visible on chart (magenta dashed lines)

 

The horizontal yellow line is drawn from the Oct 02 low,

Will the Trader Vic 2B Signal (Re: Suri) lift us out of this area ?

 

Move down from the 500 MA to 900 MA is off 253.37 points

(1227.12 - 973.75)

 

If you believe in Symmetry than the next low could be projected at 720.38

(900MA - Leg_Down, 973.75 - 253.37)

 

Any charts / comments welcome

 

Enjoy Minoo

Bear-MonthlyChart-Nov08.thumb.PNG.0b02640bd7cc53fcbf7531c145b0637b.PNG

BearWeekly-Nov08.thumb.PNG.95c41db445a7f095f07433852df43ca2.PNG

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Reply from Suri on the 2B Signal (refer previous post chart above)

 

+----------------------------+

Hi Minoo,

Thanks for your email...

I looked at the Monthly chart of $INX.

 

In order for 2B to form/confirm, within the next few bars, price must trade close the bar it breaks the prior low. On a Monthly chart, the high of the current Monthly bar is 1007.5, which is about 200+ points from now.

 

I am not sure about 2B here but your TL analysis might be good...

+------------------------------+

 

Thanks Suri, much appreciated and Congratulations man!

Regards Minoo

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Comparing Bottoms of 003 & 009 !

 

Extract from the below URL By Chris Vermeulen

 

+---------------------------------------------+

The charts below will really open your eyes as to how similar today's W looking bottom is to the W shaped bottom in 2003. Of course 6 years later the markets trade and move faster than ever before because of technology allowing traders to track and trade stocks from anywhere with a click of a button. So this years bottom formed much quicker.

 

Traders, individual investors, hedge funds, financial institutions and even some of the guys on CNBC are starting to buy stocks and etfs (exchange traded funds) at these price levels. I remember the market bottom in 2003 and it was much similar to the type of energy buzzing these past few weeks. Of course there is a lot more drama with Obama as president, Printing US Dollars, Scandals and bad news hitting the market day after day. But what makes all this normal is that it cannot get much worse in the news and everyone is expecting it for months to follow. Traders and investors don't even flinch when bad news comes out anymore and to top it off the SP500 has formed the same pattern it did during the last bear market bottom in 2003

 

 

http://www.marketoracle.co.uk/Article8661.html

 

Scroll down a page to view the charts

 

Enjoy Minoo!

Edited by minoo

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the SP500 has formed the same pattern it did during the last bear market bottom in 2003

 

He neglects to mention, however, that the bear market ended when and how it did due to the creation of the RE bubble. What bubble is going to save us this time?

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Thanks for the reminder, here is the update of the previously posted weekly chart

I have added the 1200MA and one more fib retracement to find the confluence

 

Confluence appears to be in the zone of 680

(two fib retracements and rising TL from 31Aug1982)

 

S&P have closed (770.05) first time below the rising trendline (Cyan in chart) drawn from the 23Oct 1987 and just above the low of Oct2002 (Yellow line) at 768.67; But this week bar has left gap above!

 

Db I will let Chris get back to you, hope you have not miss out the concluding para of his article though.

 

Enjoy Minoo

5aa70eb3c82a4_SPWeeklyBearUpdated22Feb09.thumb.PNG.1d1b75a5688ea820d978c9c74c033484.PNG

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Db I will let Chris get back to you, hope you have not miss out the concluding para of his article though.

 

Nope, didn't miss it. However, another pundit stated that we would be "rocketing" higher at the red line:

 

 

attachment.php?attachmentid=9533&stc=1&d=1235392898

 

 

As for what traders, investors, etc, are doing, they've been trying to support the market since last March, so whatever buying they're doing now is not necessarily a harbinger of Spring.

 

The market can as always do what it wants, and will, even to the extent of turning on a dime. But I would not start buying up stocks and ETFs just because the guys on CNBC are doing so or because a couple of patterns appear to match. When the bottoming process begins, there will be more than enough time to jump aboard what will likely be a very slow-moving train.

:)

Image3.gif.4f4fbc6431acc79f67dd74214c9ed8a8.gif

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DB,

 

I completely agree with you opinions and outlook. My article simply showed how we are currentin showing similar chart patterns as we did on most other bottoms. I'm not saying its a bottom as we cannot have a bottom until the banks get sorted out. But this is a good place for some long term cash to be put to work for those who are not active traders. We could get one more leg lower before things go higher, but some of the dividend funds are paying 10-17% dividends making them a pretty good investment for the average Joe if they want to average down and earn some dividend income on top of what ever gains happen in the next 4-5 years.

 

Most of us on here are active traders so waiting for a bottom and taking advantage of it using leveraged funds like TNA, FAS etc.. once things turn around gives us tones of time and opportunities.

 

Happy Trading

Chris

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DB,

 

I completely agree with you opinions and outlook. My article simply showed how we are currentin showing similar chart patterns as we did on most other bottoms. I'm not saying its a bottom as we cannot have a bottom until the banks get sorted out. But this is a good place for some long term cash to be put to work for those who are not active traders. We could get one more leg lower before things go higher, but some of the dividend funds are paying 10-17% dividends making them a pretty good investment for the average Joe if they want to average down and earn some dividend income on top of what ever gains happen in the next 4-5 years.

 

Most of us on here are active traders so waiting for a bottom and taking advantage of it using leveraged funds like TNA, FAS etc.. once things turn around gives us tones of time and opportunities.

 

Happy Trading

Chris

 

On the other hand, the dividends may not and will not likely hold if prices fall further. Therefore, I can't concur that this is a "good place to buy".

 

But then, it's not my money.:)

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Everything was negative today again, Played the Morning Gap close and than short on to Globex low, pretty much the same drill which I did last week. Though my expectation have grown towards the 'Bear Market Rally'. Waited right till the end and than went long on S&P 741.75 after big-brother NYSE close and the Algos started to kick in Buy Progs. This is the second time I have taken this contradictory action from my running Bear Market Trading Plan

 

After the market close I went quickly browsing for some info on 'Bear Market Rally' to may be justify my actions, results to be or maybe reason for a good night sleep, whatever .. . blah blah .... blah .. .

 

I came across this excellent site http://dshort.com/

Absolute worth checking out, short briefs and very intuitive charts on below topics:

-Four Bad Bears (also check the CPI adjusted chart below)

-Bottoming out process (brilliant interactive chart for base comparision)

-Regression to trend (what can I say .. .)

 

Got to review these charts again with fresh mind and add to journal some stats

 

I am not sure of my closing action or of my swing targets yet, though scale in orders are in place; Got to take responsibility and play it out in the same consistent style.

May have jump the gun.

 

Goodnight All

Enjoy Minoo

 

http://greatday.com/v.html?2217507MRpn8

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Another good & dare I say timely article by Andre of MarketTurningPoints.com

 

http://www.marketoracle.co.uk/Article9036.html

 

I like his take on Projections and Breadth

(MACD on NYSE A/D line ?, something to check out here .. .. .)

 

Enjoy Minoo

 

http://greatday.com/v.html?2218g07MRpn8

 

Note: A better version of the same was found on below website

http://www.safehaven.com/showarticle.cfm?id=12667&pv=1

Edited by minoo

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Apart from the various newsletters and pundits and gurus, what does your own analysis tell you? Looking at the chart, and only the chart, without any indicators or calculations of any sort,

 

1. what do you see as the next level of support, if we fail to rally here, and why?

 

2. what is the likelihood that we will rally and why?

 

3. if we do rally, how far do you think we might get and why?

 

I don't mean for this to sound like a quiz, but I'm much more interested in what you think than in the opinions of the usual professional technician.

 

One other point. Chopping up charts in order to support a conclusion at which one has already arrived is easy to do and common and dangerous. Each bottom is unique, and one must evaluate what is happening in his own market in his own time in order to determine when and where and how the bottoming process is unfolding. There then remains the equally and possibly more difficult task of deciding what to do about it.

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Hi Db

 

On the intraday side I have now become an cautious and reluctant Bear and will go grazing more willingly with the bulls

 

I think the bear has made enough headway on the south path for the time being

In market nothing remain in unidirection so far we had a good run in this direction

 

So its simply time / cycle for me this week to be more contradictory and look out for change. 740 is a good area for me to look for an rebounce (anticipating Volatility as well)

Simply put, I will scalp the short side and swing the long side

 

Below is another good article by Ray he uses MP, Delta and Normalised Vol to give an perspective on the present Bear's stance

http://www.greenfaucet.com/print/6188#

 

Enjoy Minoo

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Thanks for asking Db

 

Just anticipating an corrective cycle / phase to this Bear run

I would say time and cycle from an area

but be aware of the News & Volatility

 

Best thing for me is not to form any BIAS but be clear about my preferences

 

As I said earlier I will Scalp with the Bear South of 740 and Swing with the Bulls North of 740, and implement an no trade zone around it.

 

Hope this helps

 

Good trading to you all

Minoo

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We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair     Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. Why Do Many Forex Traders Lose Money? Here is the Number 1 Mistake David Rodriguez 11-14 minutes We look through 43 million real trades to measure trader performance Majority of trades are successful and yet traders are losing Reward to Risk ratios play a vital role in capital preservation Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through over 40 million real trades placed via a major FX broker's trading platforms. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately. Why Does the Average Forex Trader Lose Money? The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. We looked at over 43 million real trades placed on a major FX broker's trading servers from Q2, 2014 – Q1, 2015 and came to some very interesting conclusions. The first is encouraging: traders make money most of the time as over 50% of trades are closed out at a gain. Percent of All Trades Closed Out at a Gain and Loss per Currency Pair   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart shows results of over 43 million trades conducted by these traders worldwide from Q2, 2014 through Q1, 2015 across the 15 most popular currency pairs. The blue bar shows the percentage of trades that ended with a profit for the trader. Red shows the percentage of trades that ended in loss. For example, the Euro saw an impressive 61% of all trades closed out at a gain. And indeed every single one of these instruments saw the majority of traders turned a profit more than 50 percent of the time. If traders were right more than half of the time, why did most lose money? Average Profit/Loss per Winning and Losing Trades per Currency Pair Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite being right more than half the time. They lose more money on their losing trades than they make on their winning trades. Let’s use EUR/USD as an example. We see that EUR/USD trades were closed out at a profit 61% of the time, but the average losing trade was worth 83 pips while the average winner was only 48 pips. Traders were correct more than half the time, but they lost over 70% more on their losing trades as they won on winning trades. The track record for the volatile GBP/USD pair was even worse. Traders captured profits on 59% of all GBP/USD trades. Yet they overall lost money as they turned an average 43 pip profit on each winner and lost 83 pips on losing trades. What gives? Identifying that there is a problem is important in itself, but we’ll need to understand the reasons behind it in order to look for a solution. Cut Losses, Let Profits Run – Why is this So Difficult to Do? In our study we saw that traders were very good at identifying profitable trading opportunities--closing trades out at a profit over 50 percent of the time. They utlimately lost, however, as the average loss far outweighed the gain. Open nearly any book on trading and the advice is the same: cut your losses early and let your profits run. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. If a trade is in your favor, let it run. It is often tempting to close out at a small gain in order to protect profits, but oftentimes we see that patience can result in greater gains. But if the solution is so simple, why is the issue so common? The simple answer: human nature. In fact this is not at all limited to trading. To further illustrate the point we draw on significant findings in psychology. A Simple Wager – Understanding Human Behavior Towards Winning and Losing What if I offered you a simple wager on a coin flip? You have two choices. Choice A means you have a 50% chance of winning 1000 dollars and 50% chance of winning nothing. Choice B is a flat 450 point gain. Which would you choose?         Expected Return Gains Choice A 50% chance to Win 1000 50% chance to Win 0 Expect to win $500 over time   Choice B Win 450   Win $450 Over time it makes sense to take Choice A—the expected gain of $500 is greater than the fixed $450. Yet many studies have shown that most people will consistently choose Choice B. Let’s flip the wager and run it again.         Expected Return Losses Choice A 50% chance to Lose 1000 50% chance to Lose 0 Expect to lose $500 over time   Choice B Lose 450   Lose $450 In this case we can expect to lose less money via Choice B, but in fact studies have shown that the majority of people will pick choice A every single time. Here we see the issue. Most people avoid risk when it comes to taking profits but then actively seek it if it means avoiding a loss. Why? Losses Hurt Psychologically far more than Gains Give Pleasure – Prospect Theory Nobel prize-winning clinical psychologist Daniel Kahneman based on his research on decision making. His work wasn’t on trading per se but clear implications for trade management and is quite relevant to FX trading. His study on Prospect Theory attempted to model and predict choices people would make between scenarios involving known risks and rewards. The findings showed something remarkably simple yet profound: most people took more pain from losses than pleasure from gains. It feels “good enough” to make $450 versus $500, but accepting a $500 loss hurts too much and many are willing to gamble that the trade turns around. This doesn’t make any sense from a trading perspective—500 dollars lost are equivalent to 500 dollars gained; one is not worth more than the other. Why should we then act so differently? Prospect Theory: Losses Typically Hurt Far More than Gains Give Pleasure Taking a purely rational approach to markets means treating a 50 point gain as morally equivalent to a 50 point loss. Unfortunately our data on real trader behavior suggests that the majority can’t do this. We need to think more systematically to improve our chances at success. Avoid the Common Pitfall Avoiding the loss-making problem described above is very simple in theory: gain more in each winning trade than you give back in each losing trade. But how might we do it concretely? When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “reward/risk ratio”. If you risk losing the same number of pips as you hope to gain, then your reward/risk ratio is 1-to-1 (also written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 2:1 reward/risk ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades. What ratio should you use? It depends on the type of trade you are making. We recommend to always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Certain strategies and trading techniques tend to produce high winning percentages as we saw with real trader data. If this is the case, it is possible to use a lower reward/risk ratio—such as between 1:1 and 2:1. For lower probability trading, a higher reward/risk ratio is recommended, such as 2:1, 3:1, or even 4:1. Remember, the higher the reward/risk ratio you choose, the less often you need to correctly predict market direction in order to make money trading. We will discuss different trading techniques in further detail in subsequent installments of this series. Stick to Your Plan: Use Stops and Limits Once you have a trading plan that uses a proper reward/risk ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper reward/risk ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor). Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading. Does Using 1:1 Reward to Risk Really Work? Our data certainly suggest it does. We use our data on our top 15 currency pairs to determine which trader accounts closed their Average Gain at least as large as their Average Loss—or a minimum Reward:Risk of 1:1. Were traders ultimately profitable if they stuck to this rule? Past performance is not indicative of future results, but the results certainly support it. Our data shows that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent. Traders who adhered to this rule were 3 times more likely to turn a profit over the course of these 12 months—a substantial difference. dont forget- like subscribe Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com   Data source: Derived from data from a major FX broker* across 15 most traded currency pairs from 3/1/2014 to 3/31/2015. Game Plan: What Strategy Can I Use? Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for at least 1:1 regardless of strategy, potentially 2:1 or more in certain circumstances. Then you can choose the market direction correctly only half the time and still make money in your account. The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same reward/risk ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away. We will use this as a basis for further study on real trader behavior as we look to uncover the traits of successful traders. *Data is drawn from FXCM Inc. accounts excluding Eligible Contract Participants, Clearing Accounts, Hong Kong, and Japan subsidiaries from 3/1/2014 to 3/31/2015. Interested in developing your own strategy? On page 2 of our Building Confidence in Trading Guide, we help you identify your trading style and create your own trading plan. View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com     View the next articles in the Traits of Successful Series: Trading Leverage - A Real Look at How Traders May Use it Effectively Do the Hours I Trade Matter? Yes - Quite a Bit Analysis prepared and written by David Rodriguez, Quantitative Strategist for DailyFX.com
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