For the past five years my sole source of income has been profits made from trading on the forex market. Over that time period, many people, perhaps somewhat envious of my ability to earn money from home without having to report to a boss, have asked me what it takes to trade for a living. How can one arrive at a point where one feels confident enough to leave ones regular employment, strike off on ones own with no guarantee of a regular paycheck, and put what might conceivably be ones entire savings up to that point at risk in the markets?
While I unfortunately cant actually give you confidence in your ability to make it on your own, nor the stomach to risk your hard earned savings, I can tell you the practical steps that I took to get where I am today. These steps do not include the obvious ¨learn of the existence of the forex market¨, as presumably you already know something about forex trading, or you wouldnt be reading this article.
Furthermore, while these steps have been applicable to trading the forex market in my case, one could easily apply the same principles to becoming a professional trader in the equities markets, derivative markets, etc.
Step 1) Start saving your money.
To trade professionally you need a bankroll, and one that is large enough to withstand the ups and downs that are a natural part of trading. For me, this was easy. I had been putting money aside ever since I started working. Those like me that have been raised to understand and appreciate the value of saving, will accomplish this quite naturally. However, if you are a habitual spender and are accustomed to living paycheck to paycheck without putting anything extra aside, be prepared to expend some serious effort curbing your habits and learning to save instead of spend. How much money will you need? Unfortunately I cant answer that specifically because it will depend on the trading strategy that you use, the amount of leverage you plan on trading with, and the amount of money that you need to take out in profits. You should count on having a bare minimum though, of a full six months salary saved up before beginning full time trading. One years salary would be still better. Keep in mind that the larger your bankroll, the more money you can earn without risking an unnecessarily large percentage of your bankroll.
Step 2) Get an education.
You cant start trading before you know something about the market you are trading in. This education does not have to be formal (as in University classes), and you do not have to understand economic forces as well as Alan Greenspan prior to getting started. You should, however, have a basic understanding of why the market that you are trading in exists, how buying and selling on that market works, and the strategy that you are going to employ to take your profits out of the market. There are a lot of totally free resources on the internet that are worth your time to read (and there are a lot of opinions and ideas that are NOT worth your time, but reading some of those that are not worthwhile is part of the process of developing discernment about what is and is not a good resource).
There are also some inexpensive trading courses on the internet that are useful. Part of the education process is coming up with a trading strategy that you are comfortable with, as well as a money management strategy to ensure the long term viability of the trading strategy. There are many good trading strategies out there, but regardless of which one you choose, you must understand that the traders that are successful cut their losses early and let their winning trades run. This can be somewhat more difficult than it sounds, but is really the key to making money trading.
Step 3) Sign up for a demo trading account and start practicing while you are not at your regular job (or, if you have free time and internet access at your job, WHILE you are at your regular job).
We list some good forex brokers at forex-rates, so if you are planning to trade currencies, be sure and sign up for a demo account with one of the listed brokers. In order to get a real feel for the trading strategy that you have chosen, you will have to do a lot of practice, so take your time with this step. Dont start trading with real money until you have an actual history of successful demo trading
Step 4) If you are making money trading on paper and are comfortable with your trading strategy, go ahead and get started trading for real on a part time basis. Don't include all of your savings as part of your trading bankroll yet. Start slowly and gain a comfort level. As your confidence builds, move money from your savings to increase the size of your bankroll.
Step 5) When you can estimate that your average gains from real trading (from step 4) are at a level where, if you were to trade full time using your current bankroll, you would be making profits that slightly exceed your current employment salary, you are ready to quit your job and trade full time. Remember, you want your trading profits to exceed your present salary. This will give you the opportunity to maintain your current financial level, but at the same time continue to increase your trading bankroll, which will enable you to earn more and more money as the size of your available funds grows larger.
It is important to have patience with yourself at each of the steps mentioned. Maintain emotional equanimity and understand that fear and greed are a traders most dangerous nemesis. If you can keep these emotions under control and maintain the discipline established while following these steps, you can look forward to making it as a professional trader.
Samuel Garcia is a full time forex trader based in San Jose, Costa Rica. He considers that being a successful trader is 90% due to proper money management and emotional discipline, rather than the trading strategy employed. Visit www.forex-rates.biz
Saturday, 29 September 2007
Friday, 28 September 2007
Learn Currency Trading - 4 Simple Steps to Success
If you want to learn currency trading you need to be aware that 95% of traders lose - not because they don’t put in the effort, its just they get the wrong Forex education. Here, we are going to give you a blueprint to devise a forex trading strategy for success in 5 simple steps.
1. Accept Responsibility
If you want to make money in anything and currency trading is no exception then you need to accept responsibility – no one else is going to give you success you have to take it.
This means no blaming your broker, a mentor, guru or the markets, you are on your own and that’s no bad place to be - ALL the successful traders in currency trading accept this fact.
If you want to make money in currency trading you can - but don’t fall for its easy, its not but with the right forex education you can become a winner, as everything about currency trading can be learned.
2. Accept These Facts
The most important fact to accept is that currency trading is a game of odds not certainties - so forget predicting the market and scientific theories, they won’t give you success.
You’re like a successful card player – playing the odds. You bet big when the odds are in your favour and fold when there not ad if you did this you will make a lot of money.
Accept that you have to have confidence in what you are doing ( which comes from self education) to give you the discipline to follow your currency trading system. If you can’t follow your currency trading system with discipline, you have no system!
Markets can be frustrating but you can win, if you get learn currency trading the right way – now on to your method for success.
3. Building Your Currency Trading System
Building a trading system should be based on the following and if you work smart and get the right knowledge ( and you can find it free on the net ) it should only take you a couple of weeks.
1. Use a long term trend following methodology.
2. Learn support and resistance and the timeless theory of breakouts – if you don’t know what they are read our other articles.
3. Confirm any trading signal you execute with momentum indicators – this is the key to getting the odds on your side.
4. Employ a money management system that ensures you have clearly defined get out area when you enter a trade.
And finally –
Keep your system simple! Simple systems are easy to understand, apply and are more robust than complicated ones. Clutter your trading system with to many indicators and it will break in the brutal world of trading.
You can do well with a system based upon support, resistance and just a few momentum indicators.
5. Putting It All Together
Don’t work hard at trading! Work smart.
This means once you have built your currency trading system, don’t do any more work on it.
Many traders bang on about learning all the time - but if you are happy with your trading system and the logic is sound, what more is there to do but apply it?
When you come to applying it – it should only take you 30 minutes or so a day and that’s it get on with your life.
If you follow the above plan, you will have the education you need to give you confidence and discipline to apply your forex trading strategy for big gains.
Most traders fail not because they lack a method, but because they lack the mindset to apply it with confidence and discipline. Trading are as much in the mind as in the knowledge.
If you want to learn currency trading, keep the above points firmly in mind and they will lead you to currency trading success.
NEW! PROFESSIONAL FOREX COURSE AND FREE TRADING PDF's
For free trading guides and an exclusive Forex Trading Course visit our website at: http://www.learncurrencytradingonline.com/index.html
1. Accept Responsibility
If you want to make money in anything and currency trading is no exception then you need to accept responsibility – no one else is going to give you success you have to take it.
This means no blaming your broker, a mentor, guru or the markets, you are on your own and that’s no bad place to be - ALL the successful traders in currency trading accept this fact.
If you want to make money in currency trading you can - but don’t fall for its easy, its not but with the right forex education you can become a winner, as everything about currency trading can be learned.
2. Accept These Facts
The most important fact to accept is that currency trading is a game of odds not certainties - so forget predicting the market and scientific theories, they won’t give you success.
You’re like a successful card player – playing the odds. You bet big when the odds are in your favour and fold when there not ad if you did this you will make a lot of money.
Accept that you have to have confidence in what you are doing ( which comes from self education) to give you the discipline to follow your currency trading system. If you can’t follow your currency trading system with discipline, you have no system!
Markets can be frustrating but you can win, if you get learn currency trading the right way – now on to your method for success.
3. Building Your Currency Trading System
Building a trading system should be based on the following and if you work smart and get the right knowledge ( and you can find it free on the net ) it should only take you a couple of weeks.
1. Use a long term trend following methodology.
2. Learn support and resistance and the timeless theory of breakouts – if you don’t know what they are read our other articles.
3. Confirm any trading signal you execute with momentum indicators – this is the key to getting the odds on your side.
4. Employ a money management system that ensures you have clearly defined get out area when you enter a trade.
And finally –
Keep your system simple! Simple systems are easy to understand, apply and are more robust than complicated ones. Clutter your trading system with to many indicators and it will break in the brutal world of trading.
You can do well with a system based upon support, resistance and just a few momentum indicators.
5. Putting It All Together
Don’t work hard at trading! Work smart.
This means once you have built your currency trading system, don’t do any more work on it.
Many traders bang on about learning all the time - but if you are happy with your trading system and the logic is sound, what more is there to do but apply it?
When you come to applying it – it should only take you 30 minutes or so a day and that’s it get on with your life.
If you follow the above plan, you will have the education you need to give you confidence and discipline to apply your forex trading strategy for big gains.
Most traders fail not because they lack a method, but because they lack the mindset to apply it with confidence and discipline. Trading are as much in the mind as in the knowledge.
If you want to learn currency trading, keep the above points firmly in mind and they will lead you to currency trading success.
NEW! PROFESSIONAL FOREX COURSE AND FREE TRADING PDF's
For free trading guides and an exclusive Forex Trading Course visit our website at: http://www.learncurrencytradingonline.com/index.html
Wednesday, 22 August 2007
Forex Beginner Systems - A Step-By-Step Guide to Trading Profit
(by Joe Ward)
This forex beginner systems article is a comprehensive guide to the steps needed in devising a forex trading system as a beginner. Knowing which way to jump with all the information floating around can be a daunting proposition; so having a step-by-step guide by a successful experienced (and humble: lol) trader is obviously a great start. There aren't any in depth explanations here as the purpose is to highlight the areas which require further investigation, and in what order of importance. I have articles specific to each category on my website which I will link to at the bottom of the page. Anyhow, follow through with each of these steps and you will be well on the way to forex trading profit.
The main steps are:
1.) Get background information on what forex trading entails.
2.) Learn how to manage risk and size positions correctly.
3.) Find a strategy you are comfortable with.
4.) Test your strategy.
5.) Interpret the numbers.
6.) Find a broker.
7.) Rake in the cash!
Basics:
First of all, with forex beginner systems, it is important to know just what you are getting into. Forex trading is just like any other business. You wouldn't go off and try to build houses without reading a book or getting some lessons now would you? Constructing systems is much the same. Without any knowledge of the market you are essentially building a "house of cards". You don't need a Phd in macro-economics, but a solid knowledge base will only aid in your trading decisions and help ease your mind throughout the entire process.
Risk Management:
The next thing to learn is how to manage risk and size positions. These factors should be the cornerstones of any system. In essence: you need to know how much to risk losing on each trade. People often make the mistake of ignoring this factor; that's why over 90% of traders fail. Think of it in terms of being a gambler or being a casino; we know who always wins right? Do your due diligence on risk management and position sizing and you will be well on the way to becoming one of the 10% of successful traders.
Strategies:
Once you understand the numbers a little better you can look at specific strategies to trade. Forex beginner systems should be quite simple. As with many other things; simple can also be very effective. I have found that trend trading and swing trading in particular can be very simple and also very effective. The main thing though, is that you feel comfortable trading a strategy. Psychology plays a large part in forex trading too, so having a simple yet effective strategy is often the best. It's a case of K.I.S.S. (keep it simple stupid!).
Testing:
The next aspect of creating forex beginner systems is testing. Testing your system is all important in knowing if you will turn a profit or not. Don't "go off half cocked"; you may wind up with a "blown up" trading account. It's a step closer to being a "casino" and another step away from being a "gambler". To add further perspective; just imagine if boeing didn't test their planes before they used them..... Would you be getting on one? I didn't think so! It's much the same with trading; test your hypotheses and make sure they work.
Analysis:
Analyzing the results of these tests is the next thing to do. Anyone can see if a system will be relatively profitable from the results of testing. The hard part comes with understanding how to interpret the results and how they will effect your trading in real time. Analyzing the results and making necessary changes to your forex beginner systems will also likely make you substantially more profitable. There is no end to what can be done with statistics. Again let's look at our jet-plane analogy. From flying the plane we know it doesn't crash. But how much fuel per mile did it use? How much will we need to fly from our place to a nice island in the Maldives? How can we get their faster or without using as much fuel. You get it? Knowing how to get there is one thing; but getting there the cheapest and fastest way possible is harder.
Brokers:
Now it's time to find a broker to trade your forex beginner systems with. Brokers offer free trial accounts with play money to check out their wares. By all means take advantage of these offers. Also, you should be aware of some of the different types of brokers and the features they offer. This is important as well. Think of it as choosing to fly "Econo-miser" or "Champagne" airways.
Conclusion:
Now you should be all geared up with some shiny new forex beginner systems if you have investigated all these things thoroughly. If you're still not sure, there is loads more information on my site and others. There are loads of people researching new ways to make money in the currency markets, so please, check the web regularly and see what else they have found. Some offer their information free (like me) and others charge for their info. Do not be too tight with the purse strings though; as one profitable trade can often see an item paid for many times over. Now off you go and rake in some of that cash!
The original article with links to all relevant articles can be viewed here
Joseph Ward is an experienced, successful currency trader. He teaches his simple, practical and profitable forex trading methods, for free, via his website www.forex-trading-profit.org Take a look at some articles, tutorials or reviews and start your journey to forex trading profit today for free!
This forex beginner systems article is a comprehensive guide to the steps needed in devising a forex trading system as a beginner. Knowing which way to jump with all the information floating around can be a daunting proposition; so having a step-by-step guide by a successful experienced (and humble: lol) trader is obviously a great start. There aren't any in depth explanations here as the purpose is to highlight the areas which require further investigation, and in what order of importance. I have articles specific to each category on my website which I will link to at the bottom of the page. Anyhow, follow through with each of these steps and you will be well on the way to forex trading profit.
The main steps are:
1.) Get background information on what forex trading entails.
2.) Learn how to manage risk and size positions correctly.
3.) Find a strategy you are comfortable with.
4.) Test your strategy.
5.) Interpret the numbers.
6.) Find a broker.
7.) Rake in the cash!
Basics:
First of all, with forex beginner systems, it is important to know just what you are getting into. Forex trading is just like any other business. You wouldn't go off and try to build houses without reading a book or getting some lessons now would you? Constructing systems is much the same. Without any knowledge of the market you are essentially building a "house of cards". You don't need a Phd in macro-economics, but a solid knowledge base will only aid in your trading decisions and help ease your mind throughout the entire process.
Risk Management:
The next thing to learn is how to manage risk and size positions. These factors should be the cornerstones of any system. In essence: you need to know how much to risk losing on each trade. People often make the mistake of ignoring this factor; that's why over 90% of traders fail. Think of it in terms of being a gambler or being a casino; we know who always wins right? Do your due diligence on risk management and position sizing and you will be well on the way to becoming one of the 10% of successful traders.
Strategies:
Once you understand the numbers a little better you can look at specific strategies to trade. Forex beginner systems should be quite simple. As with many other things; simple can also be very effective. I have found that trend trading and swing trading in particular can be very simple and also very effective. The main thing though, is that you feel comfortable trading a strategy. Psychology plays a large part in forex trading too, so having a simple yet effective strategy is often the best. It's a case of K.I.S.S. (keep it simple stupid!).
Testing:
The next aspect of creating forex beginner systems is testing. Testing your system is all important in knowing if you will turn a profit or not. Don't "go off half cocked"; you may wind up with a "blown up" trading account. It's a step closer to being a "casino" and another step away from being a "gambler". To add further perspective; just imagine if boeing didn't test their planes before they used them..... Would you be getting on one? I didn't think so! It's much the same with trading; test your hypotheses and make sure they work.
Analysis:
Analyzing the results of these tests is the next thing to do. Anyone can see if a system will be relatively profitable from the results of testing. The hard part comes with understanding how to interpret the results and how they will effect your trading in real time. Analyzing the results and making necessary changes to your forex beginner systems will also likely make you substantially more profitable. There is no end to what can be done with statistics. Again let's look at our jet-plane analogy. From flying the plane we know it doesn't crash. But how much fuel per mile did it use? How much will we need to fly from our place to a nice island in the Maldives? How can we get their faster or without using as much fuel. You get it? Knowing how to get there is one thing; but getting there the cheapest and fastest way possible is harder.
Brokers:
Now it's time to find a broker to trade your forex beginner systems with. Brokers offer free trial accounts with play money to check out their wares. By all means take advantage of these offers. Also, you should be aware of some of the different types of brokers and the features they offer. This is important as well. Think of it as choosing to fly "Econo-miser" or "Champagne" airways.
Conclusion:
Now you should be all geared up with some shiny new forex beginner systems if you have investigated all these things thoroughly. If you're still not sure, there is loads more information on my site and others. There are loads of people researching new ways to make money in the currency markets, so please, check the web regularly and see what else they have found. Some offer their information free (like me) and others charge for their info. Do not be too tight with the purse strings though; as one profitable trade can often see an item paid for many times over. Now off you go and rake in some of that cash!
The original article with links to all relevant articles can be viewed here
Joseph Ward is an experienced, successful currency trader. He teaches his simple, practical and profitable forex trading methods, for free, via his website www.forex-trading-profit.org Take a look at some articles, tutorials or reviews and start your journey to forex trading profit today for free!
Monday, 20 August 2007
A Simple Swing Trading Strategy You Can Put To Use Right Now
(by Dean Saunders)
I started to develop a swing trading strategy after 2 years of trying to day trade the EURUSD. I found trading the longer time frames were not only far more profitable but also less stressful and freed up allot of time to do things I enjoy.
A good swing trading strategy must trade with the longer term trend, all we are looking to do is cut our losses short and let our profits run. It must be simple, anything complicated is only making our trading decisions more difficult.
Lets go through what rules I follow and how I identify a good trade. I trade the 4 hour charts with this swing trading strategy, it works well on this time frame and I suggest you do the same.
First we need to find the trend direction on the daily charts, if price starts in the bottom left and finishes in the top right of your screen then we are in a up trend. If price starts in the top left and finishes in the bottom right then we are in a down trend. If you have trouble show the chart to a child they will get it right every time!
Next we have to go back to the 4 hour chart to find an entry point that gives us good odds of price going in our favour. Look for retraces to the 50% fib level that coincides with good support/resistance levels, I also like to target 00 areas as this is what the larger institutions will be targeting for there orders. Remember only take trades with the trend on the daily chart!
Once you have found a suitable entry point set your order with a 50pip trailing stop loss. Please note that if you trade a currency pair with higher volatility then you will have to increase your stop to suit, 50 pip stop is for the EURUSD which is the main pair I trade.
Once your order is triggered just sit back and watch, do not interfere with the trade, you have a trailing stop to do the work for you. As soon as your position is in profit the trailing stop will move up keeping your stop exactly 50 pips behind and locking in any profit along the way.
Although many new comers looking for a swing trading strategy will laugh at this simple system I can assure you that it works. The more you get a feel for the market the more you will profit with this strategy. Trading forex does not need to be difficult, it is the human physiology that makes it hard for people to see profits disappear. Unfortunately this is part of the business and you must focus on the month to month gains not the day to day gains.
Do You Want To Make Consistent Money In The Forex Market? Dean Saunders has created the *Ultimate* FREE trading system that has helped 100's of forex traders make consistent money. Click Here and grab your FREE copy of Dean's amazing trading system!
I started to develop a swing trading strategy after 2 years of trying to day trade the EURUSD. I found trading the longer time frames were not only far more profitable but also less stressful and freed up allot of time to do things I enjoy.
A good swing trading strategy must trade with the longer term trend, all we are looking to do is cut our losses short and let our profits run. It must be simple, anything complicated is only making our trading decisions more difficult.
Lets go through what rules I follow and how I identify a good trade. I trade the 4 hour charts with this swing trading strategy, it works well on this time frame and I suggest you do the same.
First we need to find the trend direction on the daily charts, if price starts in the bottom left and finishes in the top right of your screen then we are in a up trend. If price starts in the top left and finishes in the bottom right then we are in a down trend. If you have trouble show the chart to a child they will get it right every time!
Next we have to go back to the 4 hour chart to find an entry point that gives us good odds of price going in our favour. Look for retraces to the 50% fib level that coincides with good support/resistance levels, I also like to target 00 areas as this is what the larger institutions will be targeting for there orders. Remember only take trades with the trend on the daily chart!
Once you have found a suitable entry point set your order with a 50pip trailing stop loss. Please note that if you trade a currency pair with higher volatility then you will have to increase your stop to suit, 50 pip stop is for the EURUSD which is the main pair I trade.
Once your order is triggered just sit back and watch, do not interfere with the trade, you have a trailing stop to do the work for you. As soon as your position is in profit the trailing stop will move up keeping your stop exactly 50 pips behind and locking in any profit along the way.
Although many new comers looking for a swing trading strategy will laugh at this simple system I can assure you that it works. The more you get a feel for the market the more you will profit with this strategy. Trading forex does not need to be difficult, it is the human physiology that makes it hard for people to see profits disappear. Unfortunately this is part of the business and you must focus on the month to month gains not the day to day gains.
Do You Want To Make Consistent Money In The Forex Market? Dean Saunders has created the *Ultimate* FREE trading system that has helped 100's of forex traders make consistent money. Click Here and grab your FREE copy of Dean's amazing trading system!
Saturday, 18 August 2007
Day Trading Futures Contracts - How To Win
(by D.Bennett)
The successful futures day trader knows that trading is a form of betting. It is a numbers game based on probabilities. The trader’s task is to adopt a strategy with favourable odds and execute the strategy as perfectly as possible.
To be successful, the trader identifies one or more setups which signal high expectancy trades. The setups are most often related to some kind of chart pattern, or a signal given by one or more technical indicators. I look at some ideas for setups in other articles. For now it is sufficient to understand that a setup should be measurable. It is a clear, unambiguous signal to enter a trade, and each trade should be managed in exactly the same way so that the results of the trade can be accurately determined in a theoretical test situation.
The expectancy of a trade cannot be estimated without testing the strategy. You test by either trying out the strategy on historical data (back-testing), or paper trading the strategy for a period of time. In either case you are unlikely to get a decent estimate unless the sample includes a minimum of 20 trades, preferably more.
You should observe the results for the trades in your test sample and calculate the Probability of Winning - P(W), the Probability of Losing - P(L), the Average Win in dollars - A(W), and the Average Loss in dollars - A(L). Use the following formula to estimate the Expectancy for your strategy:
E = P(W) x A(W) - P(L) x A(L)
For example, you test 50 trades resulting in 30 wins (60%) and 20 losses (40%), with an average win of $300 and average loss of $200.
E = (60% x 300) - (40% x 200) = 180 - 80 = $100
This means that in the long run you expect to make $100 per trade using this strategy.
Many people examine historical data to determine a good trading strategy. After this, you cannot use the same data to estimate Expectancy, because the strategy is optimised for this particular set of data. To estimate Expectancy, back-test data from a different period or run an independent paper trading trial. Ignoring this principle results in curve fitting and you delude yourself into thinking your strategy is better than it really is.
No strategy can be profitable unless it has a positive expectation, but higher expectation does not necessarily lead to higher profit. You must also consider the opportunities to trade generated by your strategy. A strategy averaging 10 trades per day with an Expectancy of $50/trade is better than a strategy providing 2 trades per year with an Expectancy of $1,000/trade.
You can see from the formula that Expectancy is a function of both the Probability of Winning and the Average Win to Average Loss ratio. If you only win 1 in 4 trades, but the average win is $400 versus an average loss of $80.
E = (1/4 x 400) - (3/4 x 80) = 100 - 60 = 40
This is a situation where a strategy with a low probability of winning has a positive Expectancy because wins are much bigger than losses. In contrast, suppose you win 8 out of 10 trades with an average win of $80 and an average loss of $300:
E = (0.8 x 80) - (0.2 x 300) = 56 - 60 = -4
This strategy wins much more often than it loses, but has a negative Expectancy because losses are substantially bigger than wins.
There is no right answer for the balance of these parameters, other than that the Expectancy for your trading strategy must be positive. Often, improving your average win to average loss ratio will decrease the probability of winning, and vice-versa.
However, for a small trader there is an advantage in gaining positive Expectancy by having a high probability of winning. Sticking to a strategy that generates a lot of winners is less strain on the trader!
A positive Expectancy is no guarantee against a run of losses. Indeed, with most strategies it is almost certain that there will be significant strings of losses at some time. However, a positive Expectancy should lead to profits in the long run, providing the trader uses proper money management and can survive losing sequences.
In summary, the trader needs to specify clearly defined strategies which can be traded in a mechanical manner whenever their setup occurs. The strategy should be tested (avoiding the trap of curve fitting) to ensure that it has a positive Expectancy. Thereafter, the trader should execute the strategy at every possible opportunity.
That is how to win.
David Bennett trades US commodity futures from his home on the Gold Coast in Australia. He provides coaching and mentoring services for people wanting to start trading for themselves. Visit http://www.12oclocktrades.com to read more futures trading articles.
The successful futures day trader knows that trading is a form of betting. It is a numbers game based on probabilities. The trader’s task is to adopt a strategy with favourable odds and execute the strategy as perfectly as possible.
To be successful, the trader identifies one or more setups which signal high expectancy trades. The setups are most often related to some kind of chart pattern, or a signal given by one or more technical indicators. I look at some ideas for setups in other articles. For now it is sufficient to understand that a setup should be measurable. It is a clear, unambiguous signal to enter a trade, and each trade should be managed in exactly the same way so that the results of the trade can be accurately determined in a theoretical test situation.
The expectancy of a trade cannot be estimated without testing the strategy. You test by either trying out the strategy on historical data (back-testing), or paper trading the strategy for a period of time. In either case you are unlikely to get a decent estimate unless the sample includes a minimum of 20 trades, preferably more.
You should observe the results for the trades in your test sample and calculate the Probability of Winning - P(W), the Probability of Losing - P(L), the Average Win in dollars - A(W), and the Average Loss in dollars - A(L). Use the following formula to estimate the Expectancy for your strategy:
E = P(W) x A(W) - P(L) x A(L)
For example, you test 50 trades resulting in 30 wins (60%) and 20 losses (40%), with an average win of $300 and average loss of $200.
E = (60% x 300) - (40% x 200) = 180 - 80 = $100
This means that in the long run you expect to make $100 per trade using this strategy.
Many people examine historical data to determine a good trading strategy. After this, you cannot use the same data to estimate Expectancy, because the strategy is optimised for this particular set of data. To estimate Expectancy, back-test data from a different period or run an independent paper trading trial. Ignoring this principle results in curve fitting and you delude yourself into thinking your strategy is better than it really is.
No strategy can be profitable unless it has a positive expectation, but higher expectation does not necessarily lead to higher profit. You must also consider the opportunities to trade generated by your strategy. A strategy averaging 10 trades per day with an Expectancy of $50/trade is better than a strategy providing 2 trades per year with an Expectancy of $1,000/trade.
You can see from the formula that Expectancy is a function of both the Probability of Winning and the Average Win to Average Loss ratio. If you only win 1 in 4 trades, but the average win is $400 versus an average loss of $80.
E = (1/4 x 400) - (3/4 x 80) = 100 - 60 = 40
This is a situation where a strategy with a low probability of winning has a positive Expectancy because wins are much bigger than losses. In contrast, suppose you win 8 out of 10 trades with an average win of $80 and an average loss of $300:
E = (0.8 x 80) - (0.2 x 300) = 56 - 60 = -4
This strategy wins much more often than it loses, but has a negative Expectancy because losses are substantially bigger than wins.
There is no right answer for the balance of these parameters, other than that the Expectancy for your trading strategy must be positive. Often, improving your average win to average loss ratio will decrease the probability of winning, and vice-versa.
However, for a small trader there is an advantage in gaining positive Expectancy by having a high probability of winning. Sticking to a strategy that generates a lot of winners is less strain on the trader!
A positive Expectancy is no guarantee against a run of losses. Indeed, with most strategies it is almost certain that there will be significant strings of losses at some time. However, a positive Expectancy should lead to profits in the long run, providing the trader uses proper money management and can survive losing sequences.
In summary, the trader needs to specify clearly defined strategies which can be traded in a mechanical manner whenever their setup occurs. The strategy should be tested (avoiding the trap of curve fitting) to ensure that it has a positive Expectancy. Thereafter, the trader should execute the strategy at every possible opportunity.
That is how to win.
David Bennett trades US commodity futures from his home on the Gold Coast in Australia. He provides coaching and mentoring services for people wanting to start trading for themselves. Visit http://www.12oclocktrades.com to read more futures trading articles.
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