Forex Education - Forex Discipline the Key to Winning Is Hard To Achieve

The first point you need to understand as part of you forex education is your success will not just depend on your method but your discipline to execute it. Most traders can't and lose and this is because they don't understand that discipline can only be acquired, if you take on traits that are not acceptable in normal society.

Discipline in forex trading means - you have to accept that you are going to need to act in a way that would normally be seen as acceptable in everyday life. People find this hard to do and some explanation will make this clearer.

1. Be a Loner

Man is a pack animal and since stone age times we have sought safety in groups - they make us feel safe, wanted and accepted. In forex trading however if you run with the pack you are going to lose, as 95% of traders do and thats a fact.

When man gets in a group he runs with the herd and the herd is always wrong in forex trading, as you are infleunced by the emotions of the crowd.

You need to be a loner and not listen to others - don't share your opinions with others and don't let others influence you. You're on your own - but that's the best place to be in forex trading and could make you a fortune.

2. Break & Make the Rules

You will hear lots of common wisdoms spouted in forex trading and do you know what?

Most of them are wrong.

This again goes with the fact the majority of traders lose.

In life were used to order:

We stop at red lights, don't drop litter, don't drink and drive etc or we know what the consequences will be - our lives are ordered for us.

Forex trading is different we get to make the rules and they will decide our financial destiny, as there are none to start with.

The forex market is chaos, an all powerful force, moving as when it wants and only it can be right and only the trader can be wrong.

You need to create a set of rules to work with it and earn your living.

You're a bit like the captain of a ship - the ocean is all powerful but you can make a living from it.

You can navigate it correctly and make a living or you can drown the choice is yours.

Most traders cannot take responsibility, cannot make their own rules and follow the herd, news wires gurus, or sure fire trading systems and lose.

3. The Work Ethic Doesn't Apply

In most jobs the more hours you put in the more you get out in terms of reward - not so in forex trading, you only get rewarded for being right and that's it.

You can spend 20 minutes a day or 5 hours - but that will not influence how much money you make.

Many traders work hard but they don't work smart they learn lots of information and lose - others work short periods work smart and win.

4. Most Traders Can't Accept Big Gains

This may sound odd but it's true.

Traders hit a trend and then rather than follow it want to snatch the profit.

Why?

Because they think it's too easy, they haven't put enough effort in and it really won't run on - but it does and they snatch it early, before it gets away.

In many instances they can't believe they can make a huge profit for so little effort or they simply don't have inner confidence in their ability and these traders let huge profits get away all the time.

Spotting big trends is easy, holding them requires huge mental discipline.

So if you learn one thing from your forex education, learn that it is not hard to learn a method but it is hard to learn the discipline to execute a method.

Discipline is hard because it sets us against the market on our own and makes us responsible.

Running with the pack, listening to the news or a guru won't help - you're on your own and most traders simply cant accept this fact.

Of course if you accept the above, take responsibility for your actions and understand yourself, you can earn huge rewards.

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Start Thinking In Terms of Risk-Reward

One of the cardinal rules of good trading is to always have an exit point before you ever enter into a trade. This is your worse case risk for the trade. It's the point at which you would say, "something's wrong with this trade and I need to get out to preserve my capital."

Most sophisticated traders will have some sort of exit criteria that they like. However, if you are a novice and you just don't know, then I'd recommend 75% of your entry price if you are an equity trader. That is, if you buy a stock a $40, then get out if the stock drops to $30 or below. If you are a futures trader, then calculate the average true range over the last ten days and multiple that result by three. If the contract drops to that level, then you must get out of the position.

Your initial stop defines your initial risk. In the example of our $40 stock, your initial risk is $10 per share and I call this risk 1R (where R stands for risk). And if you know your initial risk, then you can express all of your results in terms of your initial risk.

So let's say that your initial risk is $10 per share. If you make a profit of $40 per share, then you have a gain of 4R. If you have a loss of $15 per share, then you have a 1.5R loss. And losses bigger than 1R will occur when you have a sudden big move against you.

Let's look at a few more. What if the stock goes up to $140, what's your profit in terms of R? Your profit is $100 and your initial risk is $10, so you've made a 10R profit.

It's quite interesting because portfolio managers like to talk about 10 baggers. By a 10-bagger, then mean a stock that they bought at $10 per share that goes up to $100 – in other words a stock that goes up in value 10 times. However, I think a 10R gain in much more useful to think about and much easier to attain.

When our 1R loss was $10 per share, then the stock had to go up by $100 to get a 10R gain. But to fit the portfolio manager's definition of a 10 bagger it would have had to go up 10 times the price you bought it for, going from $40 per share to $400. But what would that $460 gain be in terms of R-multiples when your initial risk was $10? That's right, it would be a 36R gain.

What I'd like you to do before next week is to look at all of your closed trades last year and express them as R-multiples. In other words, what was your initial risk? What was your total gain and loss? What's the ratio of each profit/loss to the initial risk? And if you didn't set your initial risk for your trades last year, then use your average loss as a rough estimate of your initial risk.

Let's look at how 10 trades might be expressed as ratios of the initial risk. Here we have three losses $567, $1333, and $454. The average loss is $785.67, so we'll assume that this was the initial risk. Hopefully, you'll know the initial risk, so you won't have to use the average loss. I call the ratios that we calculate, the R-multiples for the trading system. This information is shown in the table below.

Position	Profit or Loss	R-multiple
1	$678	0.86R
2	$3456	4.40R
3	($567)	- 0.72R
4	$342	0.44R
5	$1234	1.57R
6	$888	1.13R
7	($1333)	-1.70R
8	($454)	-0.58R

When you have a complete R-multiple distribution for your trading system, there are a lot of things you can do with it. But we'll save that for next week's topic.

Van K. Tharp, Ph.D.
TradingEducation.com

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Be Careful, Someone Wants Your Money

The United States Commodity Futures Trading Commission ('CFTC') warns consumers to take special care to protect themselves from the many types of commodities fraud being perpetrated in today's financial markets. The CFTC is the federal agency that regulates commodity futures and options markets in the United States. We have seen a great increase in the number of scams that falsely promise high profits with low risks. Many of these scams are targeted at ethnic communities in their language, from New York to South Florida and from the Southwest to California, among other areas.

The public should be wary of any firm that offers to sell commodities or commodity futures or options. They might be selling precious metals, such as silver or gold, or on foreign currency, such as Euros, Yen or Deutschmarks. They might be selling futures or options on precious metals or foreign currency, or on other commodities such as crude oil, heating oil, unleaded gas, or agricultural products such as corn, soybeans, or cattle. The firm might be offering to manage your money for you to trade in commodity futures or options, or to pool your money with other customers. If a firm offers any of these investments, and promises high profits and low risks, or claims that they have made profits for all of their customers, you should not believe them without proof. The commodities and futures markets are very risky, and you can lose your entire investment very quickly. Anyone who claims otherwise might be breaking the law.

Foreign currency trading scams often attract customers through advertisements in local newspapers, radio promotions or attractive Internet sites. These advertisements may tout high-return, low-risk investment opportunities in foreign currency trading, or even highly-paid currency-trading employment opportunities. The CFTC urges you to be skeptical when promoters of foreign currency trading claim that their services or account management will earn high profits with minimal risks, or that employment as a currency trader will make you wealthy quickly. Precious metals scams often work the same way.

Commodity pool operators often solicit investments from friends, neighbors, co-workers and fellow religious or social group members by using their reputations in the community or their personal relationships. In many cases, however, the investment schemes turn out to be fraudulent, and investors lose their entire investment, in many cases as a result of outright theft. Individuals and firms that fraudulently solicit funds from investors for commodity futures and options trading are usually not registered with the CFTC. They may operate 'Ponzi' schemes in which little or none of the money sent in by investors is ever invested as promised ' in the commodity markets. Instead, the operator of the scam steals the funds, and creates the illusion of a successful business by using some of the money put in by later investors to pay phony 'profits" to earlier investors. This tactic makes it appear to investors that the investment is actually making money, which in turn attracts additional investors. Be wary of such payouts if you do not fully understand the source of any purported profits.

Introducing Brokers often use advertisements on radio and television, as well as infomercials ' program-length television commercials ' to promote commodity futures and options. These advertisements may claim that seasonal trends in the demand for certain commodities or well-known current events create an opportunity to make big money by trading in commodity futures and options. The advertisements and infomercials promise quick riches ' such as turning $5,000 into $20,000 in just a few months ' with predetermined risk. The CFTC has brought actions against wrongdoers who lured customers by claims that one could earn large profits with little risk based on predictable seasonal demands, published reports, or well-known current events.

Warning Signs of Fraud

1. Stay Away From Opportunities That Sound Too Good to Be True

Get-rich-quick schemes, including those involving foreign currency trading, tend to be frauds.

Always remember that there is no such thing as a "free lunch." Be especially cautious if you have acquired a large sum of cash recently and are looking for a safe investment vehicle. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. Getting your money back once it is gone can be difficult or impossible.

2. Avoid Any Company that Predicts or Guarantees Large Profits

Be extremely wary of companies that guarantee profits, or that tout extremely high performance. In many cases, those claims are false.

Be sure you get all the information about the company and its track record and verify the data. If you can, before you invest with any company, check the company's materials with someone whose financial advice you trust

3. Stay Away From Companies That Promise Little or No Financial Risk

Be suspicious of companies that downplay risks or state that written risk disclosure statements are routine formalities imposed by the government.

If in doubt, don't invest. If you can't get solid information about the company and the investment, you may not want to risk your money

4. Question Firms That Claim To Trade in the "Interbank Market"

Be wary of firms that claim that you can or should trade foreign currency in the "interbank market," or that they will do so on your behalf. Firms that trade currencies in the interbank market, however, are most likely to be banks, investment banks and large corporations, since the term "interbank market" refers simply to a loose network of currency transactions negotiated between financial institutions and other large companies.

5. Be Wary of High-Pressure Efforts to Convince You to Send or Transfer Cash Immediately to the Firm, via Overnight Shipping Companies, the Internet, by Mail, or Otherwise

6. Be Skeptical about Unsolicited Phone Calls about Investments, Especially Those from Out-of-State Salespersons or Companies with Which You Are Unfamiliar

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Forex Money Management

Money management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is.

It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.

There are different money management strategies. They all aim at preserving your balance from high risk exposure.

First of all, you should understand the following term Core equity
Core equity = Starting balance - Amount in open positions.

If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade,your core equity will be 8,000$

It's important to understand what's meant by core equity since your money management will depend on this equity.

We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway,you can adapt this strategy to fit smaller or bigger trading accounts.

Money management strategy

Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%
We prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3%

1% risk of a 100,000$ account = 1,000$

You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.

If you are a short term trader and you place your stop loss 50 pips below/above your entry point .
50 pips = 1,000$
1 pips = 20$

The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage,your trade size will be 200,000$

If the trade is stopped, you will lose 1,000$ which is 1% of your balance.

This trade will require 10,000$ = 10% of your balance.

If you are a long term trader and you place your stop loss 200 pips below/above your entry point.
200 pips = 1,000$
1 pip = 5$

The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$

If the trade is stopped, you will lose 1,000$ which is 1% of your balance.

This trade will require 2,500$ = 2.5% of your balance.

This's just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This's how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.

Diversification

Trading one currnecy pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your core equity not of your starting balance!. Itmeans that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$

It's important that you diversify your prders between currencies that have low correlation.

For example, If you have long EUR/USD then you shouldn't long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.

If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (1% risk rule) then you can trade 5,000$ EUR/USD and 5,000$ GBP/USD. In this way,you will be risking 0.5% on each position.

The Martingale and anti-martingale strategy

It's very important to understand these 2 strategies.

-Martingale rule = increasing your risk when losing !

This's a startegy adopted by gamblers which claims that you should increase the size of you trades when losing. It's applied in gambling in the following way Bet 10$,if you lose bet 20$,if you lose bet 40$,if you lose bet 80$,if you lose bet 160$..etc

This strategy assumes that after 4 or 5 losing trades,your chance to win is bigger so you should add more money to recover your loss! The truth is that the odds are same in spite of your previous loss! If you have 5 losses in a row ,still your odds for 6th bet 50:50! The same fatal mistake can be made by some novice traders. For example,if a trader started with a abalance of 10,000$ and after 4 losing trades (each is 1,000$) his balance is 6000$. The trader will think that he has higher chances of winning the 5th trade then he will increase ths size of his position 4 times to recover his loss. If he lose,his balance will be 2,000$!! He will never recover from 2,000$ to his startiing balance 10,000$. A disciplined trader should never use such gambling method unless he wants to lose his money in a short time.

-Anti-martingale rule = increase your risk when winning& decrease your risk when losing

It means that the trader should adjust the size of his positions according to his new gains or losses.
Example: Trader A starts with a balance of 10,000$. His standard trade size is 1,000$
After 6 months,his balance is 15,000$. He should adjust his trade size to 1,500$

Trader B starts with 10,000$.His standard trade size is 1,000$
After 6 months his balance is 8,000$. He should adjust his trade size to 800$

High return strategy

This strategy is for traders looking for higher return and still preserving their starting balance.

According to your money management rules,you should be risking 1% of you balance. If you start with 10,000$ and your trade size is 1,000$ (Risk 1%) After 1 year,your balance is 15,000$. Now you have your initial balance + 5,000$ profit. You can increase your potential profit by risking more from this profit while restricting your initial balance risk to 1%. For example,you can calcualte your trade in the following pattern:

1% risk 10,000$ (initial balance)+ 5% of 5,000$ (profit)

In this way,you will have more potential for higher returns and on the same time you are still risking 1% of your initial deposit.

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The Why Wall Street Doesn't Know About Position Sizing

In the last two tips I've talked about the importance of position sizing. You've learned that:

1. The most important questions you can ask yourself (other than questions about your personal psychology) is what are my objectives and how can I use the "how much" variable to meet my objectives.
2. That position sizing accounts for most of the variability of performance between individuals
3. That many professionals call the "how much" variable asset allocation.

This week I'm going to be a little controversial because I'm going to put forth some rather bold statements.

First, it is possible with small amounts of money and a reasonable trading system to make outstanding rates of return (50-100% or more) through position sizing.

Second, if you have too much money, then you probably cannot achieve these sorts of goals because your activity moves markets.

Third, professionals either don't know this, or don't want to know this, because they have other rules to justify their performance.

Today there are still more mutual funds trading the market than there are stocks on the major exchanges. And the portfolio mangers who trade those mutual funds stress relative performance rather than absolute returns. Thus, they compare themselves to some index such as the S&P 500 and believe they have done well by outperforming that index.

Most mutual funds have to be at least 90% invested so that concepts like stops and position sizing don't mean much to them. Instead, their idea is to buy the major index that they are trying to outperform and by doing manipulations on their assets, try to outperform the market. Most of them cannot do it because of the fees they charge their clients.

However, most mutual funds want you to believe that what's important to success is picking the right stock. You are slammed with that concept on a regular basis by the financial media.

Asset allocation is also thought to be important. I've already shown you that asset allocation, when defined as how much (i.e. position sizing) accounted for 90% of the variability of performance on 82 pension fund managers over a 10 year period. But asset allocation doesn't sound like how much, does it? Instead, it sounds like "how do you select the best asset classes?" And that's what most professionals talk about.

I just looked at a significant book on the topic of asset allocation. The back of the book contained a quote from Jim Cramer (of CNBC fame) saying that this book was a very readable discussion of the most important topic of investment success. But was it? I don't think so because:

• The book did not define asset allocation
• The book had no mention of "how much" or "position sizing"
• Instead the book was a discussion of the potential risk and reward of various asset classes and the variable that might influence those classes in the future.

And I submit to you, based upon my findings that it is through position sizing that you meet your objectives and that position sizing accounts for 90% (or more) of performance variability, selecting the right assets has nothing to do with good performance. And Wall Street doesn't understand this.

In fact, here is a challenge. Give me the names of 10 of the so-called geniuses of Wall Street. My guess is that less than half of them understand the real importance of position sizing. Their success is due to other factors, and they are at risk of losing a lot of money in the future. But that's another story.

Dr. Van K Tharp
TradingEducation.com

On The Sidelines

Newport fighter to compete for title

Newport's Daniel Stewart is set to compete for the Full Contact Fighting Federation Heavyweight Championship Saturday, Jan. 26, against Daniel Krug at Rumble at the Roseland XXXIII in Portland.

Stewart defeated Derrick Russell on Dec. 15 by knockout in 21 seconds to win the Super Heavyweight Championship. Stewart relinquished that belt to fight for the Heavyweight Championship.

Tickets can be purchased at ticketswest.com or by phone at 800-992-TIXX. For more information and the complete fight card visit thefcff.com.

Crab feed planned in Newport

The Newport High School softball team will sponsor a crab feed in the high school's multipurpose room from 4:30 p.m. to 7 p.m. Friday, Feb. 1.

The menu will include one-half crab, donated by local crabbers and processors, a cup of Mo's famous clam chowder, coleslaw, Franz French Bread, dessert and coffee or a choice of Pepsi products.

The cost of the meal will be $7 per person or $22 for a family (immediate family).

Tickets may be purchased from any Newport High softball player, or at the door.

The crab feed is being held in conjunction with the Newport vs. Philomath girls' basketball games. This allows basketball fans to have dinner and then take in an evening of high school basketball.

For further information, contact Newport High School softball coach Mark Schiewe at 265-7382.

Swim team to hold can/bottle drive

The Newport High School swim team is holding a can and bottle drive from 11:30 a.m. to 3:30 p.m. on Sunday, Jan. 27. Drop off bottles and cans at a collection site at the entrance to Newport High School's west campus. The money raised will help pay expenses for the district swimming championships in Astoria on Feb. 8 and 9.

Cheer clinic

Taft High School cheerleaders will teach a youth cheer clinic from 9 a.m. to noon on Saturday, Feb. 2.

This clinic is for children in grades kindergarten through 8th grade. Check-in time is 8:30 a.m. to 9 a.m. The cost is $15 per participant.

Cheerleaders will teach chants, jumps, and a short dance. Participants will receive a free ticket to the Taft High School varsity basketball game, where they will have the opportunity to perform at half time at 7 p.m. on Tuesday, Feb. 5.

Pre-registration is not required. For further information, call Tonia Roberts at Taft High, 996-2115.

Fly fishers set meeting

The Central Coast Fly Fishers normally meet on the second Thursday of each month, however, to avoid conflicting with Valentine's Day, the group's February meeting has been moved to 6 p.m. to 8 p.m. Thursday, Feb. 7, upstairs at the Bayshore Club House in Waldport.

The group will watch fly tying, hold a short business meeting, swap fish stories (the good, the bad and the ugly), share fly fishing ideas, and set up for fly tying for the beginner. All those who have never tied a fly but would like to give it a try are invited to come and participate.

For additional information, contact President Alan Canfield, 563-6976.t