Sam Eder – FXWW.com

You Get What You Want From the Market

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing” – Ed Seykota

Do you know what you want out of the markets?

Yes, I know people trade for money, but that is far from the only reason.

Maybe you like the thrill of trading, or maybe you like to be able to brag to your friends about your wins. Maybe you like them to feel sorry for when you have a big loss. Maybe you enjoy “understanding the market”, and so this is more important than making money to you.

The problem with this is that these motivations can interfere heavily with your trading activities.

If you subconsciously want excitement, then that is what you will get from the markets rather than profits. If you want people to feel sorry for you, then you will manifest losses. If you want to be right, you will end up feeling justified, without filling your pockets. If you truly and deeply want to win, then you will.

Ed Seykota tells the story of a trader who would consistently turn his 10K account into a quarter of a million, and lose it all like clockwork. His personality would change at a certain level of profit, and he could not help but lose it. He wanted to be the martyr in front of his friends, more than he wanted wealth.

Ultimately, it is your psychology that drives your trading. The more you solve any psychological problems that trading brings out of you (and the better you know yourself to begin with), the better your trading will be. Trading does not cause your problems, it simply a very clear window into your soul.

The market won’t let your problems hide.

Know thy self

“If people look deeply into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it”. – Ed Seykota

Socrates said: “Know thy self”.

I am an ex-army officer, and have a passion for leadership. I even have a master’s in it. What I find interesting is that I spent the majority of my master’s learning to lead myself, rather than learning to lead others. Like Socrates said, it’s all about self-knowledge.

If you don’t know what motivates you, how do you motivate others?

Leaders create their own little utopia in the organisations they lead, just like traders manifest what they want from the markets. (Think about leaders you have had, and the traders you know personally, and you will see this is very true.)

Like leadership, trading is a journey into the core of the self.

It’s not about techniques - though you will learn those too - it’s about your deepest motivations, desires and emotions.

It’s critical for your trading success that you are self-aware about what you truly want. Start to notice your tendencies and your hang-ups, and then work out what is driving you to act that way. For example, some people don’t feel worthy, and so they self-destruct after a good run. Are you trading the way you are to fulfil some unconscious script?

The hard work begins

If you come across negative behavioural patterns, that is where the hard work begins. You need to release them, and change them to be more productive. This can be very difficult if your pattern is emotionally charged.

Meditation can help, as can physical release like yoga or breathing techniques. Writing down your thoughts or verbalizing them can work too, and there are plenty of other techniques if you look hard enough.

The ball is very much in your court on this one.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (https://fxrenew.com/forex-course/). He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free (https://fxrenew.com/newsletter-sign-up).

by Sam Eder

Make Your Weakness Your Strength

Do you have market conditions that you just hate?

Maybe the trend is your friend, but your trading gets all in a knot during range bound markets.

But what if you could transform the market conditions you hate into the ones that you love the most?

I went through this exercise myself, and now the conditions I used to dread are my favourite set-up.

Stop trying to perfect what you are currently doing

If what you are doing is not working all that well, then it’s time to start thinking outside the box.

Put aside the indicators you have been playing with to build your trading strategy. Instead, bring up a chart and look for your least favourite part.

Perhaps choppy range bound conditions get you all flummoxed.

Or you lie awake at night sweating over fast moving markets.

Whatever is your bane is where you want to go.

When you have identified your enemy, start to ask yourself these questions about the market conditions:

What is it you don’t like?
Why does your strategy not work?
What trading approach will work?
How would you need to trade to start LOVING them?
What low risk/high reward opportunities can you spot?
What are your risks and how can you mitigate them?

This will force your creative brain to work overtime. (Despite first impressions, trading involves a large degree of creativity – I smell an upcoming post on this topic)

It is also going to force you to start seeing the market differently. It’s all lines on a chart, but traders see it in so many different ways. If your model of the market is wrong, this exercise will help you correct it.

Have fun

Have fun with this exercise. Try and see if you can figure how to pick tops and bottoms if you are a trend follower. Or to buy pull-backs if you are a contrarian. Let go of the shackles of your previous experience and see what happens. You might be very surprised at the results.

About the Author

by Sam Eder

How I Plan My Forex Trading on the Weekend

My girlfriend always laughs at me, but I like to look at charts for relaxation.

Much of my trade planning actually comes from chilling on the couch on the weekend looking at charts and catching up on the analysis I like to follow on my iPad. I keep a note pad beside me and write down my trade ideas or themes for the next week. I then keep those on my trading desk throughout the following week.

During the week I am quite busy with FX Renew, FXWW and monitoring the markets so, it’s important that I am prepared. As the saying used to be when I was in the army:

“Prior preparation prevents **** poor performance”

And the time I spend in the weekend puts me in very good stead.

What I do

Here is what I do in the weekends.

First I check the market type on weekly charts for the major currency pairs and cross-rates, indices and some stocks.
I think look for weekly reversal chart patterns on the same instruments and as well as on an expanded list. For any that look interesting I will note them down on my pad. This is important as I lets me catch changes in market type early.
For my stocks I run a couple of screens that help me find “super-performance stocks” (just in case you were wondering why I have stocks on my list below).
I then scan ForexLive to get a feel for the markets fundamentals on my Ipad using feedly.
I check FXWW in-case I have missed anything.
I read Marc Chandler and Kiron Sarker (who posts on the Big Picture blog).
I also subscribe to John Mauldin’s Over the Shoulder service which I find very useful, so I read that along with his free articles.
I will read Van Tharp’s weekly update.

By the end of it I have something that looks like this:

(My trading ideas from last weekend)

Crude I know, but effective!

Weekends are for planning and weekdays are for stalking

When I come up with a trade idea (normally something like “buy NZD/JPY) I then switch into stalking mode.

I’m not placing the trade straight away. Often my weekly view won’t play out so I need to wait for an entry that lines up with my plan from the weekend.

I go to a lower time to stalk the entry. On the odd occasion I will place a longer-term trade straight away, but I find it’s generally better to wait for a low risk/ high reward trading opportunity.

This is where I perhaps have an advantage of people that are not full-time in the market, as I can check the market pretty often to see if one of my entry set-ups is occurring. But you can still do this if you don't have as much time, you will just have less trading opportunities.

Be flexible

You can still make changes to your plans during the week if the opportunity presents itself. For example I was talk to Sean about the NZD reversal and he mentioned that he was looking to express this trade against the EUR. So I started to look for a short EUR/NZD trade, which I managed to find.

Also don’t beat yourself up if your idea plays out and you missed the entry. It happens all the time, and if you get two good trades out of ten, then it should all be hunky dory.

About the Author

by Sam Eder

Trading what’s In-front of You with Market Type Transitions

Like the sea turns from calm to stormy so do markets.

As a trader, like the captain of a sailing ship, you want to notice these changes to adapt your strategy as appropriate.

In this previous post on market types, I talked about how you identify the market type you are in, and how to use it to trade what is in-front of you.

Today, I wanted to share what market types typically follow the one you are currently in. Trading is very much about probabilities, and if you know which market types will likely follow next then it can give you a big edge.

For example if the market type is a bull volatile you can expect the next market type to be bear volatile and tighten your stop-loss so you don’t give back you profits when the sudden sell off begins.

Here are the primary market types and the market types that generally follow next.

Bull normal. Followed by a bull volatile or sideways quiet
Bull volatile. Followed by a sideways volatile or a bear volatile
Bear normal. Followed by a bear volatile or a sideways quiet
Bear volatile. Followed by a bull volatile of a sideways volatile
Sideways quiet. Followed by a bull or bear normal, or a sideways volatile
Sideways volatile. Followed by a bull or bear normal or a sideways quiet

So if you are in a bull normal market you can expect a bull volatile to happen next, or if you are in a sideways quiet you can start to stalk the break-out to a new trend.

There is a lesson on market types in the Advanced Forex Course for Smart Traders.

About the Author

by Sam Eder

What to do When the Price Gets Close to Your Profit Target and Does Not Hit It

Have you ever been in a trade that has gone to within a few pips of your profit target and then reversed all the way back down and hit your stop loss?

Not a pleasant experience at all!

But fortunately if you use this simple technique it’s not one that you will have to suffer though any more.

Keep your risk reward to at least 1:1 though-out the trade

As your trade goes for you, your risk/reward is constantly changing.

For example if you enter into a trade with a 30 pip stop-loss and a 90 pip profit target, you would have a risk/reward ratio of 1:3. As the trade goes for you this changes very quickly. If you have a 30 pip profit, your risk/reward has all of a sudden become 1:1.

As you get to within 10 pips of your profit target, your risk/reward is now 12:1. You have only 10 pips to gain, but you can potentially lose 120.

So to avoid this scenario what you can do is tighten the stop-loss as it gets closer to the profit target so you have no worse than a 1:1 risk/reward on at any point during the trade

If your profit target is 10 pips away, trail your stop loss to 10 pips away. If your profit target is 20 pips away then move your stop-loss to behind the market.

Use your discretion

Using this rule in all circumstances might not be the best thing. There is no point getting stopped out on a big winning trade because the risk/reward ratio has dipped by 1:1. So watch whats in-front of you and use your discretion.

But it is particularly useful once the price gets close to your target, so keep it handy in your toolbox of exit rules.

About the Author

by Sam Eder

Don’t Care if You Make Money or Not in the Market

“Whenever a trader says “I wish” or “I hope” they are engaging in a destructive way of thinking” – Bruce Kovner, Market Wizard

A common mistake for the trader is to treat the market like a personal nemesis.

The market is, of course, totally impersonal, but sometimes it can seem like it is out to get you. Your stop just gets hit or your profit target just gets missed.

It can be hard not to take these things personally, particularly when you see your profits evaporating in front of your eyes.

But as a trader, is important to understand you can’t force the market. It’s not out to get you and it will give you what it will.

(By the way, for those of you who think that bank traders are out their hunting your retail stops, you don’t even come on their radar – it’s one of the biggest fallacies in Forex trading.)

The market does not care so neither should you

The market does not care about how much money you are making or losing, so neither should you.

If you make or lose money on any one trade, and you are worried about it, your focus is in the wrong place.

Instead, your attention should be on your trading, and the diagnostic process that goes along with it.

What did you do right?

What did you do wrong?

Did you lose because of a mistake?

Is the loss simply one of the “costs of doing business” for your trading system? Or has something changed?

Good trading is generally very process driven. Even for intuitive traders this is true, it’s just they have come to understand the inherent structure in the market though feeling and intuition.

By not caring about money, you become more productive in your trading activities, and take responsibility for your results.

If you are caring about money, your position size is too big

Have you ever lost sleep over a trade?

If you are relying on the performance of any one trade, and it is causing you to think about the money that you will lose or make on the position, then you could be trading too big.

Bruce Kovner’s advice on the matter is to “undertrade, undertrade, undertrade”.

He suggests that new traders should generally be cutting their position size to a least half of what they are currently trading.

So, if this is you, it’s time to take action. Cut down your trade size, and start to focus not on the money but on process. Your trading account will thank you.

About the Author

by Sam Eder

Trading Insights from the floor of the Sydney Futures Exchange

I have been having an interesting conversation via email with a gentleman trader who traded on the Floor of the Sydney Futures Exchange (SFE) when interest rates were 18%. He actually spend the majority of his career in a bear market.

Here are insights he graciously shared:

I loved the panic humans experience in a Sell market… it doesn't seem to manifest the same in a rally.
I learned that the mkt is made of humans and thus can be emotional.
I learned the best way to really be focused on the market is to have a position. It creates conviction.
I learned the best trader on the day can and often will be bad another.
I learned to cut losses, and that it is most important to protect your capital base to trade the next day.

Still all just as relevant today. Thank again to the trader for sharing.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider www.fxrenew.com (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free: https://fxrenew.com/newsletter-sign-up.

by Sam Eder

How to Stop Cutting Your Profits Short

One of the beautiful things about Forex is that you can get in on trends that just seem to go on and on.

But what’s the good in a having a trend if you can’t stick to it?

Cutting profits short is one of the cardinal sins would-be Forex traders engage in (another being letting losses run). Here are a few quick pointer to help you stay in your winning trades longer and occasionally capture a really big one.

Have a clear objective for the trade

Perhaps the biggest Forex faux pas that traders make is they fail to have clear objectives for what they want to achieve from the markets.

If you’re not crystal on what you want to get out of the trade then you are going to have difficulty getting past the emotions that interfere with your psyche when you find yourself in a winner. The fear of your winning trade evaporating before your eyes will cause you to quickly exit your position, only to see the market take off as you thought it would.

To avoid this un-wanted situation, set a very clear objective for the trade before you enter it – and then make your decisions throughout the trade with the objective in mind.

Have a variety of exit rules

Ever heard the expression “if you only have a hammer everything looks like a nail”?

It applies to trading too. If you only have one exit rule then every trade is going to look the same, no matter if completely different things happen after you enter.

If you want to stay in your trades and let them run then you need to know what to do depending on what happens in-front of you.

It’s really about confidence. If you know the different things the currency pair you are trading might do, and you know what to do when it does them, then you will have confidence in your abilities to manage the trade effectively. This means you won’t be tempted to rashly close your trade out of fear, instead you will be a nimble trader in the moment with the market.

Have a re-entry strategy

A re-entry strategy for when you have exited out of your position is critical.

Sometimes the market tells you to get out of your trade, and then re-bounds in the direction of your trade straight away.

If you have been trading for some time I bet that has happened to you.

Again, it’s about confidence. By having a way to re-enter into your position after you have been stopped out, you are not going to get trigger happy and close your position out of fear. You will close it at the right time, and calmly re-enter if that is what you are supposed to do.

This point may seem a little counter intuitive, but trust me it will help.

Stop watching your trades

A sure way to cut your profits short is to stare incessantly at your charts. We have all done it.

Try setting alerts on your trades, or checking them at a set time. If you are still developing the discipline of a professional trader then you don’t want to be obsessing over the computer screen.

Of course, also place your stops in case something big happens while you are not watching it.

Next steps

Make sure you plan what you want out of your next trade by writing down your objective.

When you get into the trade develop a set of exit and re-entry rules that take into consideration how the market moves so you can protect your profits whilst letting them run (More in the Advanced Course).

Finally set your alerts, your stops and avoid watching the trade unless it’s the appointed time.

About the Author

by Sam Eder

Core Forex Risk Management Concepts: Risk Multiples

“The truth is that, while you can't quantify reward, you can quantify risk.” – Larry Hite

Good traders don’t talk about the money they make in the markets.

Not because it’s crass to talk about (though it can be), but because it’s not what they are thinking about when they trade.

To the good trader, money is the by-product of successfully following their trading processes.

And instead of thinking about money they think in terms of risk/reward, which brings us to Risk multiples (R-multiples).

What are R-Multiples?

R-multiples are a concept developed by Van Tharp (a trading coach), in order to quantify the amount you are will wins or loses in terms of risk/reward.

Sound complicated?

It’s actually not. The initial R-multiple is simply the distance between your entry and your stop loss. For example if you stop-loss is 30 pips away from your entry then 30 pips is your 1R, or one times your risk.

If you then make 90 pips on the trade you will have made 3R or three times your risk. If you made 60 pips you would have made 2R.

A good trader who thinks in terms of risk/reward might finish the day’s trading and say “I made 3R on my trade today”.

The power of the R-multiple

You can make an R-multiple whatever dollar value you want it to be by adjusting your position size. This is what makes it such a valuable concept.

For example you can make that 30 pip loss worth $30, $300 or $3000, or you can make it worth a percentage of your account, simply by adjusting the position size.

This means that you can keep your risk constant when you trade. For Example if you have a position with a stop-loss of 50 pips you can adjust the position size so that you are risking the same dollar amount as when you were risking 30 pips.

Then you would have to make 150 pips to earn 3R on the trade, instead of 90 pips, but your dollar amount risked would remain the same.

You must master these concepts if you are serious about trading

You don’t need to have a PHD in statistics to be a good trader.

But you do need to master basic concepts around risk/reward if you want to trade well.

So take some time to practice and apply what you have learned here, and your trading account will thank you.

About the Author

by Sam Eder

How to Stalk a Low Risk/ High Reward Trade

“Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, preferably one that is sick or lame. Only then, when there is no chance it can lose it's prey, does it attack. That, to me, is the epitome of professional trading” – Mark Weinstein, Market Wizard

Mark Weinstein is wrong.

Cheetah’s stalk their prey by sitting on a rise in plain view so they can make use of their excellent eye-sight, and they stay away from bushes as it hampers their ability to run.*

But the analogy is still a great one for traders.

The best trades are found by patiently stalking an entry that allows you to risk less if you are wrong, and make more if you are right.

What is a low risk/ high reward trade?

A low risk/ high reward trade does not mean a high probability trade.

You can be wrong 50% of the time or more and still make significant amounts of money in the Forex market.

Rather a low risk/ high reward trade is when you have a profit objective several times bigger than your potential loss on the trade because you can have a tight stop loss.

Why is this important?

Because if you can find a position that will allow you to have a tight stop, you can trade a larger size than if you have a wide stop. This means that your profits if the trade goes for you will be greater, but the loss will be limited to the same amount.

Think about it this way.

If you have a maximum risk of $500 on a trade and you have a 100 pip stop loss you can afford to trade a lot size of 50K. But if you can tighten your stop-loss to 50 pips by patiently stalking the right time to enter you can afford to trade a 100K lot size, meaning any profits will be twice as big.

Plan your trade

Stalking an entry starts with a good idea.

Plan the trades you are wanting to take based on:

Your model of what works and what doesn’t in the market
The current market type
Higher time-frame technical analysis
Any micro-fundamental drivers (My fancy way of saying “news”)
Your profit objective

Once you have formulated a solid idea about the direction of the currency you are planning to trade, you then go into stalking mode.

Stalk your trade

I’m going to give you a specific entry technique that you can use for stalking called a low volatility breakout.

(You can find out more about this and other techniques in the Advanced Forex Trading Course for Smart Traders)

The Forex market contracts and expands from quite to periods of high volatility. These expansion and contractions can make excellent place to enter your trade with a tight stop.

On the currency pair you are looking to trade go down to a lower time-frame. Personally I tend to formulate my trade ideas off weekly and daily charts and then go down to four hour and one hour charts when I’m stalking. It works on the 15 minute charts too.

Add the Bollinger bands to your chart with a setting either 10 or 20 periods (I use both depending on my discretion).

Then you look for a time where the Bollinger bands have contracted into a tight range. When the price closes outside this range then you can enter your first position.

Let’s take a look at some examples:

You can see on this chart of 1 hour chart of the AUD/NZD how price contracts before expanding.

On this chart of the GBP/USD you can see how you could join the downtrend with a tight stop.

There are plenty of other ways to stalk an entry. The important this is to relax and wait for the opportunities and take action when they come.

Note: if the break-out bar is too large you might not want to take the trade as the risk/reward profile will have deteriorated.

It’s your turn…

Stalking an entry takes steely resolve.

Be patient, like Mark Weinstein’s fictional cheetah, and only strike when the time is right.

Time to get out your trading plan and note down how you are going to stalk your entry.

Want more? Get the Advanced Forex Trading Course for Smart Traders for free.

*Thanks to the trader that pointed this out to me.

About the Author

by Sam Eder

Are you structuring your trading month for success?

Good trading, like anything else, requires proper research, planning, and execution. A prepared trader can implement a structure to make this happen.

Too many traders treat trading as a pastime and not a serious business. They dabble at this and that because it’s interesting, and the leave the real work on the sidelines.

But if you actually want to make money from trading, and in particular trade at any sort of size, you need to operate out of a carefully planned structure that promotes your success.

One of the best ways to do this is run your trading over a monthly timeframe.

This gives you the opportunity to mentally reset at the beginning of each month and forget last month failures or successes (success can be as dangerous for your trading as anything).

What should your trading month look like?

Your trading month has ten key elements in place for peak performance.

Well-crafted objectives
An optimized and distraction free trading environment
Scheduled trading time
Careful monitoring of your trades
A plan for when your trading goals
Detailed Risk Management
Productive daily and weekly routines
Thorough contingency planning
Tools for managing your psychology
End of month evaluation

You should also be planning your month ahead, including how you will carry profit forward into the new month.

I am doing a webinar today on Investor Unity on this topic. It is one of our Mastering Signals Lessons, and it will only be done once. After that it will be locked for members only. You can register here:

See you there!

Cheers,

Sam

About the Author

by Sam Eder

The Pitfalls and Benefits of “Back-testing”

When I first started trading I would have spent hundreds of hours poring over charts back-testing my trading strategy.

I even enlisted my girlfriends help to record my back test results in a spreadsheet (much to her chagrin).

But what exactly is back-testing and does it help?

Two types of back-testing

There are two main types of back-testing, each with its own strengths and weaknesses.

Manual back-testing is when you sit down and scroll though historical charts looking for pervious occurrences of your trade set-up to see if they have an edge over the market.

For example if you have a trading system that buys when two moving averages cross with a 15 pip stop-loss and a 30 pip profit target, then you would go back in time in your charting package to see what happened on previous cross-overs. You then record the results of at least the previous 30 trades (always a minimum of 30 for statistical significance), and see if you would have been profitable if you had taken them.

This can be a helpful process to work out if your strategy is viable. In addition it can be a useful way of “getting to know” the market you are trading.

On the downside you need to be aware of your own bias to see only the positive results, and the impact of slippage and costs that you cannot see all that clearly from your manual back-test.

Rise of the robot

The second type is computerised back-testing. You have your strategy coded and you run it on historical chart data and then get a report based on the results.

Sound fantastic?

Computerised back-testing eliminates mistakes of human bias, but it is a difficult science to master. You have to deal with:

Mistakes in coding the system compared to your vision
Problems with past data that may not be accurate
Curve-fitting your strategy to fit past data

You also need a very good understanding of what reporting metrics you should be looking at.

Some great trading strategies cannot be back tested

It is particularly important to note that many good (and great) trading strategies cannot be back-tested.

If you limit yourself to strategies that can only be back-test, or only perform well in back-testing then you may close yourself off from reaching your full trading potential.

While the idea of having a perfectly back-tested and automated approach to trading may sound great, only about 10% of really good traders are automated traders, the rest are “rules-based” discretionary traders.

Your plan never survives contact with the enemy

One of the big challenges is that your system will very rarely perform like its back-test in real-life. Your performance will very much depend on the market type the strategy was designed for vs. the market type we are in now.

Be very wary of your back-tested system when you first trade it live, and notice when if it’s working as expected.

To back-test or not to back-test?

So should you back-test?

Sure, if you are aware of the pitfalls of back-testing and you use it as a tool to achieve certain goals.

Just don’t fall prey to idea that having a back-tested system is the be all and end all and forget to trade trade what is in-front of you.

If you have back-tested in the past, has it worked for you?

(P.s. thanks to Mary who suggested this post)

About the author

by Sam Eder

Is Trading 100% Psychology?

People get exactly what they want out of the markets. Most people are afraid of success or failure. As a result, they tend to resist change and continue to follow their natural biases and lose in the markets. When you get rid of the fear, you tend to get rid of the biases.—Van K. Tharp, Ph.D.

Van Tharp’s supposition is that trading is 100% psychology. Do you agree?

Trading is all about the beliefs you have and the choices you make around those beliefs, i.e. your psychology.

Let’s take a look:

Why you trade – Based on a belief about what you are going to get from trading
What you trade – Based on your beliefs about the market
How you trade – Based on your beliefs about what works and what does not
When you trade – Based on your beliefs about
Your trading system – Constructed out of your beliefs
Your trading mistakes – Are mental errors

What do you think? Is trading 100% psychology? Or are there other factors at play?

by Sam Eder

How to trade what’s in-front of you with market types: A technical lesson

You know the saying “the definition of insanity is doing the same thing and expecting different results”?

Van Tharp (A Market Wizard – yep, they are a real thing) has a new definition for traders:

“Expecting the same system to work in all market types is the definition of insanity”

So as a follow up to my previous post: How to trade what’s in-front of you, I will teach you the method I use to identify market types in Forex.

Once you identify the market type you can then apply a strategy to that market type, stay out of it, or reduce your position size if your system does not work well in that market type.

There are six main market types:

Bull normal
Bull volatile
Bear normal
Bear volatile
Sideways quiet
Sideways volatile

There are also a multitude of variations of these market types (up to 26 according to Van).

Here you can see a few of them on the USD/JPY weekly chart.

My Market Type Identification Tool

To identify market types in Forex, I like to use the Bollinger bands. I use the 20 period Bollinger bands with 2 standard deviations. I also sometimes use the 10 period Bollinger bands with 2 standard deviations.

And I do it across multiple timeframes.

One of the keys to trading what is in-front of you is to be flexible and situational in how and when you apply the tools you have.

I will frequently stalk an entry on the hourly chart, when the market type has been defined on the weekly or daily or 4 hour chart.

The reason I use the Bollinger bands is it gives me a nice visual representation of both the trend and the volatility of the current market.

When the price is trending in the direction of the band it is a bull or bear market. If it’s inside the bands it’s a sideways market. If the bands are, or have, expanded it’s volatile. If you are contracted it’s quite.

Let’s look at an example for each of the market types above.

Bull normal

To identify a bull normal market type, look for the price to be trending with the upper band, and above the mid Bollinger band.

Bull Volatile

To identify a bull volatile market type you will long bullish bar’s or candle when the price trends with the upper band. The price may frequently cross above the upper band itself.

Bear Normal

Bear normal is the opposite of bull normal. The price trends with the lower bands and remains below the mid band.

Bear Volatile

Bear volatile is the opposite of bull volatile. You will see long bearish bars develop that sometime cross below the lower band

Sideways Volatile

In a sideways volatile market type the bands are wide and there is large sideways price movement.

Sideways Quiet

In a sideways quiet market type the bands contract and the price forms a tight range.

Trading the right way for the current market type is critical

If you are not trading the market type in-front of you then Van is right, you are practicing trading insanity.

There are a lot more subtleties around market types, which I will go into in future posts. In the meantime you can start by defining the market type on your favourite currency pairs.

There is also a detailed lesson on market types in The Advanced Forex Course for Smart Traders (you get free access).

About the Author

by Sam Eder

Future money managers, how are you spending your time?

Just a brief note today.

How do you spend your time during the system development process?

It should be something like this:

30% working on your objectives
30% working on your position-sizing
30% working on your exit rules (So you can trade what’s in-front of you)
10% on your entries

To reinforce the point I asked a hedge fund manager what his top tip for future money managers was today. His answer:

“I'd say gain an understanding of the metrics that they need to achieve, ideally before embarking on creating the track record - then devise a risk management/trading strategy that achieves those metrics.”

Next:

How do you spend your time during the trading process?

It should be something like this:

30% on psychology (maintaining the right state)
30% on managing existing positions/ risk management
20% on your entries
20% on recording/ journaling/ debriefing

How does your time spent compare to these?

(By the way this applies to all traders not, just money managers)

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider FX Renew (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free.

by Sam Eder

The nitty-gritty of risk management

I’m always disappointed by the level of the conversation about risk management.

Risking 1%-2% per trade is not the magic bullet that Forex educators seem to think it is.

Sure, it’s better than risking 5% of your account per trade, but the concept of risking 1% or 2% per trade is much better suited to system traders than rules-based discretionary traders like us.

In-fact I suspect the whole 1-2% came from futures trading when are large number of traders try to emulate the famous turtles* who were 100% systematic trend followers.

So why should traders, when they can risk whatever they want in order to achieve their goals, limit themselves to such a formulaic approach to risk management?

It’s time to get creative people! And think outside the 1-2% box.

Your position size should reflect your objectives.

It’s funny how an off the cuff comment can change the way you trade so much.

I was in a workshop with Van Tharp (an original Market Wizard and trading psychologist) and we were discussing objectives. Van off-handedly remarked that if he was day trading he would have a position-sizing model with the objective of risking 2% a month, while targeting 25%.

For me this sparked a new paradigm, and I went about developing a position sizing model that let me risk 2% and make 25%. As you can imagine risking 1 or 2% of your account a month is not at all sophisticated enough to reach this objective.

The point of this little story is that if you want to get serious about risk management your objectives come first, followed by your position sizing model. Be creative about setting the right objectives for yourself first and then your risk management rules can reflect these goals.

Minimise your risk to your core capital

One of the keys to successful trading is limiting your risk to your core capital (again this is not something that the 1-2% model does well). By limiting your risk to core capital you:

Stay in the game
Protect your psychology
Stop revenge trading

Unless you are a gun trader and really know what you are doing I would suggest limiting your risk to at most 3% a month. As discussed previously losing 3% in a year is almost enough to get someone fired in the money management space.

How to risk no more than 3% a month and still make decent profits?

Here is the nitty gritty.

You start by risking a small amount, say 0.5% of your account. If your equity falls you then start to risk less: 0.4%, 0.3%, 0.2%, 0.1% and then stop for the month if your account hits the loss limit.

Once you have winning trades you scale your position size back up again.

Once your account is in the positive for the month you can start to trade bigger: 0.5%, 1%, or even 2% of more. Once you get close to your monthly target, depending on how long you have to go in the month you can then reduce your position size so you don’t go giving back your gains.

Don’t forget you can add to winning positions too if you get a re-entry signal. This means you can scale into winning positions as the market goes up using your profits on the earlier position to take more risk. There are plenty of ways to build positions – which I will share with you in a future post.

Length of the trade

Another way to alter your position sizing is to risk different amounts depending on the length of the trade. For short term trades you would risk less than for long-term trades.

For example:

Short-term 0.1-0.5%
Medium-term 0.5-1.0%
Long-term 1.0-3.0%

CONFIDENCE!

The best traders don’t trade the same amount each time they trade. If they are confident in a position they will be prepared to risk more, if they are not so confident they risk less.

Of course this needs to be within your risk management limits and based on the market that is in-front of you. It’s not an excuse to risk big, to win back your losses.

You are not a robot, so why not use all the advantages you have and alter your positon size based on your assessment of the quality of the trade.

Risk Management is a process

It will take some time to build a risk management model that fits you.

So take some time away from your charts and reflect on the content of this post.

What objectives are right for your trading?
How much of your core capital are you willing to risk?
Do you need different position sizes for different length trades?
How will you adjust your position-size based on your confidence level?

If you need help, we cover this in more detail in the free Advanced Forex Course for Smart Traders and you can find out more about the 2&25 position-sizing model too.

Stay disciplined in your trading.

Cheers,

Sam

*The Turtles are a group of futures traders hired by William Eckhart and Richard Dennis to settle the debate over whether traders need to be born with it or can be grown.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider FX Renew (You can get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free.

by Sam Eder

How to “trade what’s in-front of you”

Your entry is not king. Nor is your exit.

In the realm of Forex trading it is what is in-front of you that is the ruler of your domain.

Unless you’re George Soros you don’t have the power to move the markets on your own, so your only choice is to flow with it, otherwise you are fighting a battle you just won’t win.

But how many of you have a plan that lets you place trades based on what the market is truly doing? Or are you simply trading on a combination of indicators or a piece of advice and just hoping?

Here are three things you can do to assist you trading what’s in-front of you.

Don’t trade unless you know what’s going on

Are you trading to scratch an itch?

Instead of placing trades for the sake of it, try and figure out what is going on. This generally will start with a big picture view. Develop a global macro perspective on the market and take a top down approach to your positions. This applies to you even if you are a short-term trader (yep, the big picture is influencing events all the way down to that 15 minute chart you are staring at).

You also want to look at the longer-term chart time-frames. Understand weekly support and resistance levels, and the longer term trend (or lack of). Then look global micro, what news events are going on that could impact the currency pair you are watching.

Once you have developed this understanding you will start to get a feeling that a trade is either right on wrong before you place it. Hope is replaced with knowledge.

Use multiple exit strategies

After you get into the trade it really, really, really is not enough to have only one or even two reasons to exit.

If you are determined to always go for that juicy level as your profit target, and no matter what the market does you are going to hold on until it gets there, then you are not a discretionary trader. You might as well get a robot to do the work for you (they will do it with less mistakes).

The advantage of being a discretionary trader is that you can look at the market after the trade is placed and respond accordingly in alignment with your objectives for the position, and what the market is doing.

This means that you are going to want to have multiple exit strategies in your repertoire to pull out as and when you need them. You might have:

Initial target
Trailing stop for a slow moving market
Trailing stop for a normally moving market
Trailing stop for a fast moving market
An exit rule for when it goes close to your profit target but starts to drop (so you don’t give back your gains)
Fundamental reasons to exit
Exit approach for once the price hits the objective and you think the move will continue( to capture big wins).
And many more

Understand the market type and act differently when it changes

One of the biggest mistakes that traders make, is they fail to build different trading systems for different market types.

A big part of trading what is in-front of you is trading different systems based in different market types, or at least understanding how well your system works in other market types.

Take a look at this weekly chart of the USDJPY. You can see that if you traded the same system all the time you are going to get dramatically different performance based on the market type.

Be very aware of the market type you are in and trade accordingly. I use Bollinger Bands to help me identify market types. More on that in the advanced Forex course.

Don’t be the Jester

Take the following steps to get started trading what is in-front of you and you will be well on the way to ruling your Forex realm.

Stop trading when you don’t know what’s going on
Come up with at least 3 new rules for exiting your trade after you have entered
Define the market type before you trade.

Need help? You can join The Advanced Forex Course for Smart Traders free.

About the author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider FX Renew (get a free trial). If you like Sam’s writing you can subscribe to his newsletter for free.

by Sam Eder

Are You Doing This Correctly? Setting Proper Objectives for Your Trading

It’s far too easy to take this Forex thing casually.

You can open an account with a broker is the blink of an eyelid and in two more blinks you can be trading Forex.

But Forex is a game a skill played by some of the most sophisticated, well connected and intelligent men and women in the world. Every time you trade it’s like playing chess against a chess master. (Not to burst anyone’s bubble!)

So do you think that having sloppy objectives for what you are trying to achieve is going to cut it?

Nope… you are right they sure won’t.

The good thing is that once you do understand how to craft proper objectives a number of nice things happen:

You stop losing money (even if you don’t always make it)
You trade with purpose
Your disciple goes up several notches

And you already have taken steps that 98% of other Forex traders won’t (cause they don’t know or because it’s too hard work), to seat yourself on the side of the table that the chess master sits.

Beautifully crafted objectives take time

Van Tharp, market wizard, suggests that setting correct objectives for your trading should be about half if not more of the system development process.

Internalise that for a moment.

How much time are you focussing on your objectives? 10%? 5%?

Or are you TOO BUSY WITH YOUR CHARTS to take the time to think about your objectives. (How’s that sweet indicator combo coming along btw?)

You need to have these objectives

You should have at minimum these objective for your Forex trading, or at least variations of.

Account Return target over different time periods i.e. 5% a month, 30% a year
Account Drawdown objectives i.e. 2% a month.
Percentage chance of hitting both of the above. This will dictate how aggressive your position sizing model is.
Account Intra-time period drawdown target. I.e. if you are up 5% for the month how much are you willing to give back to make further gains.
Trading opportunity i.e. the number of trades you want to take a month.
Trade Return target. I.e. 3 times initial risk.
Intra-trade drawdown i.e. how much of your profits a trade are you willing to give back.

Why do I need to have all these things you may ask?

They all feed into your position sizing model. And that is how you achieve your objectives.

You achieve your goals though position sizing, and your position sizing comes from your objectives.

Again, as Van Tharp says, you achieve your goals though your position sizing.

Each of the objectives above is a factor in building your position sizing model.

For example, if you have a goal of risking no more than 2% of your account in a month, will you risk 1% a trade? Not likely on the first trade of the month.

It’s absolutely critical you get the “how much” factor right when you trade Forex, and it’s by establishing proper objectives that you do it.

Tips for future money managers: You need to work even harder in this area.

If you are planning on managing money one day, you need to work even harder on defining objectives worthy of a professional trader. Your future investors are not going to be very forgiving of big overnight losses that come from not understanding what you are trying to achieve.

As mentioned in this article, you also need to take into consideration notional funds.

Where to next

You can learn more about setting objectives in The Advanced Forex Course for Smart Traders. But you don’t have too. Take some time to really think about why you are trading and what you need to do to be successful.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter for free.

by Sam Eder