Successful Trading: Questions and Answers

I have been asked a number of questions by beginning traders over the last few years.

Here are their questions and my answers:

Question 1: Do you trade mainly on fundamentals or technical signals?

I used to always form my fundamental view first, and then wait for confirming price action. However my experiences in 2008 have taught me that my fundamental view can be and often is completely wrong! It is simply not possible to know even a tiny fraction of all of the fundamental market information, let alone know what each individual trader is thinking and doing. No-one foresaw the massive deleveraging of assets during 2008 for example. From now on I am only going to trade the technically i.e. on price action. I even have written on my wall:

Price is King
I will only trade price.


The second thing to say is that I ALWAYS calculate the dollar amount of my risk before I enter a trade, and I always have a stop loss. The dollar amount of the risk relates to the total size of my equity.

I generally do not risk more than 1% of my total equity (all the money I have set aside to trade with) on my first entry of my trade. So for example my personal trading equity is currently $350,000, so on my first entry I will risk less than $3,500 on my first trade.

Question 2: How do you determine your entry, exit as well as Stop Loss points for FX trades?

I use chart analysis. I especially like new highs, even better if they are new 20 day highs or new 55 day highs.

I also like to see (on a daily chart) a number of higher highs and higher lows if I am going to buy. And of course the opposite if I am going to sell.

Question 3: I gather that you add onto winning positions; what amounts do you normally do at a time and when do you add position?

I will start with a single entry that risks less than 1% of my total equity, and then I will add to that position ONLY when the first position is significantly in profit. Usually this is at a level where my stop loss on the second position is at or above the entry of the first position. I will generally add until I have four positions. I will also generally lift my stop loss on earlier positions as I add new positions. This keeps the risk low.

Questions 4: How do you work out your trailing stops?

See above.

Question 5: How do you decide whether you would use Spot FX or FX Options for your trade?

I have found that Options only really work well when there is a very fast moving market, or you anticipate a big move.

Question 6: When buying an option, what sort of Strike Prices or period will you be looking at?

I personally buy 2-3 months out, and far enough out of the money so the option is relatively cheap. But close enough to the money that if I am right as to the movement in the market, the strike price will be reached approximately one third of the way through the option period.

Questions 7: Considering time decay on options, when do you cut your loss for an option?

If after two weeks it is not profitable, I am clearly wrong (at least on the timing) and I get out. I may not even wait that long. This is safest because the time decay is the slowest in the early part of the option period.

Question 8: Assuming the first option is in your favour; when do you add options (you did mention doubling of the value of the first) and if so, what will be the strike prices and period for new ones?

That depends on how quickly the first one doubled. As a general rule I will again look for the same period (e.g. two months) and the same distance from the money as the original option.

Question 9: What do you look for as a sign of a trending market?

I look for a number of patterns or price action signals.

NB These examples are of an upward trending market:

1. A new 20 day high or a new 55 day high;
2. An all time high or a multi-month high or a multi-year high;
3. A number of higher highs and higher lows over a number of weeks using a daily price chart (candlesticks). Each high must be higher than the previous one and each low much be higher than the previous one;
4. Bollinger bands; where the bands are starting to splay outwards after a narrow channel has formed;
5. A clear channel in a candlestick pattern that shows an upward trend that does not break out of the channel;
6. A strong MACD signal in the direction I am taking.
7. A strong RSI signal in the direction I am taking.

Question 10: When you are looking for 20 and 55 day highs do you judge these off a daily line chart or a Candlestick?

Candlestick as it is much more accurate.

Question 11:  How do you decide if you have missed the entry point? i.e. are you concerned about intraday movements? If so how do they impact your trading or do you buy at the level of that 20 / 55 day high exactly? Can the market go past and come back intraday and you still make the trade?

Generally I put my order in one tick or one point above the 20 day high so I get hit as it goes through. If it goes through and comes back I would put my buy order in above the high that it just made, to ensure I am getting it on the way up. If I miss the market by quite a bit I will probably wait for the 55 day high or if there is a period of consolidation, wait for it to break out of that and enter then.

Question 12: Do you for example see that AUD/NZD is trending up and get your broker to let you know when that point/high is reached and decide on whether to take the trade then? As I have been keen on long AUD/NZD but I have missed what I would see as a good entry point.

I never get my broker to tell me anything! I really only use him to execute trades.  In other words it is me who sees the price go to a point I like and it is me who calls him to initiate the trade. If you have missed an entry point you are better off waiting for another opportunity.

Question 13: Starting out my capital is very small. Do you have any advice as it seems that even a little volatility in a given market it’s very easy to get stopped out trying to only risk 1-3 % of your capital per trade? I guess it’s a matter of being very patient and looking for the Beautiful trades as you put it. Or do you have to accept more risk initially? Or am I better to wait and just build up more capital so that trading risking less is easier?

My view is that you should build good habits now while your equity is small. That way the mistakes you are going to make will be the cheapest. So yes, only risk 1-2% of your equity on each trade. If your stops are too tight leading you to getting stopped out too often, your position size is too big. Use a trading platform to trade smaller sizes even $10,000 trades. Trading $10,000 with at a 2% risk only allows a $200 loss and of course a 2% stop loss position should be plenty for Forex.

Question 14: What are your thoughts on long AUD/JPY still looks positive to me. What else do you like in the market at the moment that you are following?

Actually I have to be careful because I am not licensed to give specific advice on trades and there are legal issues if I do.

My BEST ADVICE is to trade SMALL and WAIT FOR THE BEAUTIFUL TRADE!

Question 15: Sorry to bother you. But you are the best person to turn to for a bit of help and guidance in my situation right now. Yesterday I made 4 trades all on USD.

Bought the eur/usb, gbp/usd, sold the usd/cad, usd/chf. And the next morning all 4 trades went south and I got stopped in all 4 trades and sustained substantial loss to my trading account.

I had $17,000 and now down to $10,000 I guess I used more leverage on these trades than my usual.

Anyway lesson learned very harsh about not to over leverage, I will never let this happen. Now i am just skeptical about putting on any trades no matter how sure i am. It’s stopping me.

What do you think? I am sure you've been there, so what spotlight can you flash on me to move on? Any wise words from the wise man??? :)


Thank you for your honesty! Being honest with yourself is half of being a good trader.

I can tell you one problem you have straight away. You are taking WAY too much risk.

Top traders tend to take very low risk per position, usually under 1%. I allow myself a maximum of 1.6% per FX trade.

So 1.6% of $17,000 is $272. That is the MOST you can risk on any one trade. And those should be the trades that tick EVERY box. So generally limit your risk to 1% per trade.

Okay so assuming every one of these four trades were trades that met ALL of your criteria, your maximum loss would have been $272 x 4 = $1, 880 rather than the $7,000 you lost.

I know it is frustrating because you want to make a lot of money, but traders who take too much risk inevitably LOSE lots of money.

So now you have $10,000, your MAXIMUM risk per trade can only be $160. This should enable you to place the trades you like because the risk is nice and small.

Also one final word of caution, if you have say seven trades all correlated you still would have too much risk even if each trade only had $160 risk. Because as you found out last night correlated trades can all go bad at the same time.

Think of the $7,000 you lost last night as tuition fees you have paid the market. As you say you will never make that same mistake again so in a few years time when your trading account is large, it will seem like a cheap lesson the market taught you.

Question 16:  What are your main strengths as a trader?

I think my main strength is that I viciously cut losing positions. I think of them as a cancer. The quicker I get rid of them the healthier I will be.

Add to that, if I am unsure of a position I immediately cut it as well. If all you have left is hope, get out and put the money into something you believe in, or wait until a trade comes up that you really believe in.

ALSO, if you are trend trading as I have detailed above you MUST expect to take small losses on approximately 7 out of every 10 trades on average. The 3 winners will cover your losses and give you big profits. So another of my strengths is that I am happy to take multiple small losses in a row while I am waiting for the big winner.

Finally, sometimes the best trading decision you can make is to do nothing. It is far better to sit on the sidelines and wait for a BEAUTIFUL trade, than to try to chase a market that is not working.

 
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