The four pillars for trading success

The four pillars for trading success

We all wish trading came naturally to us; after all that would’ve meant saving countless hours, (a lot of) money, friendships that were broken after having a shitty day in the market

Oh and these reflect my personal views and experiences, I am sure you could argue for something different

What are those four pillars?

(Wish their was like a way to drop a curtain or something)

  1. Persistence
  2. Risk Management
  3. Psychology
  4. Trading Edge
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Let’s break these four pillars into a section each:

Persistence

Trading is difficult. Like any other skill it will take time to master, the only way to through the deep water is to preserver, if you haven’t given up you haven’t failed.

As long as you get back up after being pushed back down there is still hope.

That being said, having fallen off (many) horses it does take persistence to get back up on the horse, the same goes with trading, there will be losses, there will be mistakes, but there is a need to continually get back up and get ready for another try.

There is also an undeniable need to spend countless hours in front of charts in order to develop and test an edge and persist until we feel comfortable with our own strategy

Trading is all about survival, protecting the assets we have, making them grow, without getting killed. Keep that in mind.

Image result for persistence quote paramahansa yoga

This point is rather straight forward so there’s no real value spending too much time dealing with it, we are left with

  1. Risk Management
  2. Psychology
  3. Trading Edge

Risk Management

Risk management is probably the first subject new trades should look into, we can break it down into two topics: protecting the initial capital and an understanding of probabilities.

Protecting the initial capital

One of the best ways to screw up your psychology and give up is by taking huge losses that will destroy the size of the trading account

In order to protect the initial capital, it is key for traders to understand how to size their positions and (ideally) maintain a constant risk profile.

Why is it so important to avoid large losses?

If a single trade isn’t properly sized, it is possible for a trading account to be blown – by that I do mean, it is possible with one trade to lose all the money (and potentially more) you have in the trading account…

Let’s dive into “smaller losses”:

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A 10% loss requires you to make 11% back in order to get back to the starting point, which when we think about it, isn’t that bad, it could be worse… However, if you take a 50% loss then you will need to double your account in order to bring it back up to the starting size…

Yep…. Here’s the example:

10,000+10,000*(-0.5) = 5,000

5,000*X=10,000

X= 2

(Mainly wanted to show the benefits of getting a university degree, I can do maths now 😊)

The key lesson here is:

 MAKE SURE YOU DON’T SCREW UP THE POSITION SIZE

The likelihood of you preserving and not screwing up your mental game after such a loss is extremely low so… If you want to have a career in trading, make sure you size your positions correctly.

Image result for it's not about being right or wrong soros

Understanding probabilities

Now this one may seem a bit more obvious, but over many discussions I’ve realized it may not be the case

There will be winning trades, but there will also be losing trades, this is a given, anyone that promises you a 100% strike rate is either into high frequency trading (and works at a huge fund) or is trying to get your money, and the likelihood of the second far outweighs the first…

Now it’s let’s dig into why I think it is key to understand your trading edge and your numbers (more on that afterwards)

If you are a trader you may have a 45% strike rate (it is possible to be profitable with a lower strike rate, as it is possible to be a consistently bankrupt trader with a higher strike rate)

As you can see on the following image, you have a 72% likelihood of taking 6 losses in a row over 50 trades taken, yep a 72% likelihood, that’s freaking surprising eh

The likelihood of taking 7 losses in a row is at a “more acceptable” probability of 49% (which is still super high!?)

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Knowing the probability of taking 7 losses in a row is close to 50%, no better than flipping a coin, how much should you risk?

If you risk 5% per trade, you shall be down 30.2% (assuming you adjust your $ risk after each trade) that means you’ll have to make back 43% to get to the level you were before this losing strike… A rather big number if you ask me – however if you only risk 1% then you’re only down 6.8%

Let’s say you’re trading a 100,000$ account, I would highly prefer being down 6,800$ instead of 30,200$… Can you imagine the impact on your psychology? I would be devasted with a 30.2% loss

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Don’t forget, trading is a survival game, and you can only survive if you protect your initial capital and risk the right amount… Don’t show off… Now onto

Psychology

Probably the less fun part of trading for most of us (I’ll admit, I actually love it!) but you’ve probably heard it from many people psychology is key for traders, it may even represent 80% of the work you need to do to become a profitable trader

Now what are common traps we can fall into

  1. Sticking to our bias
  2. Trying to prove we know better
  3. I can’t lose so risking more
  4. I just need to get even
  5. I’m just one trade away from being profitable this month

I always used to get told off for doing more than five bullet points but there’s so many other examples!

So how can we have a profitable psychology?

  1. Focus on the process – they do not care about being right or wrong
  2. Understanding the numbers linked to your trading strategy
  3. Having strong opinions weekly held and being willing to flip sides
Image result for psychology trading quote

The most important part of trading is understanding that the market doesn’t care about you, and you shouldn’t really care about it. Instead focus on the process, be willing to jump ship and understand nothing is guaranteed in the market.

Instead, focus on yourself, spend time off the charts, recharge, meditate, empty your mind, and execute your trading plan

The worst enemy you have is yourself – and sadly you’ll never really get to beat him to the ground, even the famous Greek philosophers sometimes had urges (some were also doing the exact opposite from what they preached…)

Image result for conquer yourself zeno of citium

Truly believe I can’t make a better point than Yvan:

Confidence is not “I will profit on this trade.” Confidence is “I will be fine if I don’t profit from this trade.”

Yvan Byeajee, The essence of trading psychology in one skill

Try calming your mind, ideally empty your mind from all greed hesitation and passion, instead remain neutral and in control. The best way to do that is to meditate, and if you refuse to do that, go for a thirty minutes walk without your phone, just paying attentions to your thoughts, it should help you drop all those negative charges.

Tihbo puts it beautifully

Now I could spend an entire day ranting about the importance of psychology but I believe this is a journey you alone can take since it is deep inside you and no matter how many quotes I put in front of you the decision to let go and become present is yours.

Having a trading edge

Yep, this is the last point… Not necessarily because I believe it’s the less important, but you can make money with so many different markets and in so many different ways, you can skin the cat yourself.

However, it is extremely important to have identified your trading edge and be able to prove it exist in the historical market without having to adjust it, that’s one of the main problems quants are faced with, they adjust their strategy so it provides great returns in the past but does not work when the market conditions change

So what do you have to do?

Back test your strategy over several years and several pairs, forecast possible moves, use your trading plan with a reduced risk for the first few months in order to make sure the edge is there

Understand that even a profitable strategy will have losses

Here’s an example of my go-to set-ups after having backtested it over a few pairs for 2019

I have come to realize, that two of my favorite set-ups are not very profitable for me (the 3rd rejection and the hover) therefore I will have to adapt, another key point is understanding that my strike rate (without including BE) is of 34% however as you can see the returns are profitable, because my average win is a lot bigger than average loss.

Keep on working, keep on testing your strategy and never become over confident, because that will be your end.

The end 😊

Before I ask you to like this post and share, I would like to thank both Tiho Brkan and Yvan Byeajee I most of the data I used came from their tweets!

What do you think are the key pillars for success in the FX market?

Hope you enjoyed this article!


Onwards,

-Max

Forecasting is key

Forecasting, backtesting and having a trading plan are the three pillars of successful in the FX market.

Do you have a forecasting routine? If so, keep it up! (let me know what it is)

If you want to become a full-time FX trader, you will have to develop a trading plan, backtest it, and forecast potential moves.

That’s (more or less) everything you need.


What is forecasting?

Figured I probably should do a quick explanation of what I mean by forecasting…

It’s basically “guessing” where the market will go next and how…

Sounds rather easy right? It doesn’t even take that much time

Forecast for EUR/CAD on the 11th of September

This is my forecast for EUR/CAD, I just drew on trading-view the potential scenarios that could happen, I know there are many other potential ways the market could evolve during the day, but in my view, this is the most likely.

You could use different drawing colors based on “I’m willing to take this scenario” & “Not willing to take this scenario” (that’s actually a good idea, I should do that)


If it’s this easy what’s the benefit

Let me start this section with: I go a lot more in depth with my forecasting process, just scroll down if you already know the benefits

There’s five key benefits for a trader, but I was lazy while building this infographic so here’s 3 key points...

1- It will increase your confidence, you are able to track whenever or not your forecast actually took place, which in turn will increase your confidence in your ability to be a few steps ahead of the market (which is key to be profitable)

2- You’ll be prepared, doing your forecasting is basically drawing out all the possible/probably scenarios – you’ll be able to decide ahead of time what price action you’ll want to see before taking a trade – all you need to do is execute your plan

3- It’s easier to profit, having done your forecast in the morning you are a less likely going to miss a trade during the day since you are able to place your alerts at all the key areas. Plus, it also increases the likelihood of you sticking to your trading plan

And the bonus two…

4- It will decrease your emotional attachment to potential trades, and trades you are currently holding: by drawing out several possibility you know that there is no guarantee that the price will do exactly what you want it to, it doesn’t care, instead it makes you realize, we are only playing an edge

5- It allows you to switch from analyst to a trader.

It’s really important to be an analyst when it’s the weekend and when doing your forecasting, however, when the markets are live, and there’s a potential trade set-up in the making you need to become a trader, not an analyst. Having done the analysis that morning will help you execute.

Here’s a video explaining it if you don’t like reading…


My forecasting process

Now let’s dig into my process, that’s probably why you’re here (sorry for making you wait)

I recently did a tweak so here’s a breakdown of what I used to do and what I do now, not a huge difference, but really happy so far

I used to draw at least three possible scenarios:

  • Two potential entries, so how the price gets there and where I’d be interest
  • One scenario where I wouldn’t be able to take the trade, either the market goes in the opposite direction or just impulses through everything I was eyeing up

That was done first thing in the morning and last thing before going to bed, because that way I would force myself to think about the possible, the probable and admit, the price isn’t necessarily going to go where I want it to

In the morning it was to plan the day ahead, at night it was to have my subconscious think about the market while I was sleeping, and once again, forecast where the price would go over the next seven/eight hours

It was a really cool exercise, but I wasn’t getting the most out of it…

Now I do my forecasting somewhat differently

I use my trading journal to track those morning forecasts (I keep everything in my excel file, from reason to trade, to monthly asr, to journal, to forecasting etc, I like having everything in one place)

Here’s this week example

So to quickly explain, I track the day of the forecast, the pairs I’m interested in, the direction, then three potential scenarios that could play out (out of many), a screenshot of the potential moves + drawings.

Then here’s the addition, I then come back the next morning and figure out which one happened, sometimes it was a fourth option, that happens.

But here, you can see I had forecasted the move 12 times out of 15 – not picture perfect but pretty darn close.

How do you think that makes me feel? How would that make you feel?

More confident in your skill? Yes

Happy because you get to collect more data? Yes

More likely to execute the next time you see a trade set-up? Yes


I highly recommend you to do the same

It takes less than thirty minutes in the morning, yet you have the entire day planned ahead

You know what you want to see before taking a trade – that’s key, it reduces your hesitation to trigger a trade, and avoids you from taking low quality trades

You are also able to be “free” and that’s one of the main reasons people start trading, they want to have free time. If you don’t know what you want to see in order to take a trade you’ll just stay in front of your computer, and basically be a slave to the market.

Don’t be a slave to the FX market: Forecast in the morning

Anyway,

I hope you enjoyed this blog post! If you did, please leave a like or share it? ❤ Would mean the world to me!

Onwards,

Building a Trading Plan

Having your own trading plan, is (probably) the most important part to become a successful trader, would that be stocks, FX, commodities or whatever you want to trade.


Why is a trading plan so important?

It gives you the opportunity to write down exactly what you can do and how you should do it.

It’s like a cooking book, the only way to really improve a receipe is to know what ingredients to use, the amounts and how long you should cook it for.

I’m awful at cooking (Really bad, my old roommates refused to eat anything I cooked)

I know how to make salads tho, that’s the only thing I’m decent at!

Why do you think I spend so much time in cheap countries where I can eat out three times a day?? (Maybe it’s because I don’t need to cook)

Anyway, back to the subject at hand…

Becoming a good cook is relatively easy, you just follow instructions, it’s the “chef” that makes up the dish and writes down how to do it properly.

You can work in a great restaurant and make a lot of money if you’re a really good cook, especially if you work well with a famous chef.

Trading, is rather similar to working in a restaurant (not talking about the insane hours, but sometimes…)

The only way to become a chef (a really really good trader) is to become a cook (someone that can implement a trading plan), it will take time, but the more practice you get as a cook the easier it will be for you to become a chef.


Ask for help building your first trading plan

You become a good cook by learning from others how to cook, would it be your parents, siblings, a cooking book, youtube videos, an online course, a bootcamp etc etc

It’s the same with trading.

Learn from someone else

Find yourself a mentor, whoever that is (not me) and ask them if they can explain to you their trading style and share trades they took.

Once you know how they look at the market, the trades they took you can break it down.

Bring a bottle of coke to a lab and they can reverse engineer it.

You could know the exact ingredients Coca Cola use for their famous drink.

Do the same with a trading plan.

Create your first trading plan based on someone else, even better, if you can copy it. My mentor shared his to all his students, that’s what I used at first.

I knew:

  • The entry types
  • What he wants to see in order to take a position
  • How he manages trades
  • How he records them
  • His risk profile

That’s all I needed, I more or less copy pasted it at first.


Once you have a trading plan, backtest it

Now it’s time for you to work, you can’t let someone else do all the work for you…

You know what set-ups your mentor looks for so go and backtest.

Try them out, figure out their results and ask yourself

  • Do they have a good strike rate?
  • What is their average return?
  • Do I like trading them?

Based on those questions and the answers you have for them you can quite easily make your mind up, should you keep those set-ups in your trading plan? It’s up to you.

Those are my results with a backtesting exercise I did earlier this year.

I was able to figure out which trade set-ups I prefer and how I wanted to manage them.

It also gave me a lot more confidence in my trading, I saw what was possible, and it became way easier for me to execute on my trading plan.

Once you’ve backtested your plan you can then decide what to edit, what to change, what to ignore, what you want to focus on etc…


Make it your own.

Make sure it becomes your own, don’t copy the exact same trades if they don’t fit you, adjust the trading plan to your own personality – and backtest it once again – it’s all about refinement,

To go back to the cooking comparison, a chef will try out so many variations of the same dish just to make sure he has the perfect mix of flavors, smells and texture.

It’s the same with trading, just keep trying it out.

Tweak it until it becomes your own, your precious, your trading plan.

Now, you can easily argue that you don’t need to write it down, it’s in your mind, or you can easily draw it.

But…

The best way to learn is to teach someone else.

But you don’t need to teach someone else, you just need to be able to explain it on a word document.

Take screenshots of your favorite set-ups

Write down what you want to see before being able to take a position

Explain how you are going to manage your position once in the trade

What are your rules in term of taking a second trade once you got tagged out of a position, are you allowed to re-enter? Once? Twice? Three times?… Create rules and put it in your trading plan.

If you want a video about creating a trading plan, check-out this interview on Chat with Traders, I’ll admit, I have only watched it once, but Chat with Traders is hands down one of the best podcasts out there for anyone interested in trading.

Now I feel like I’m probably rambling… but…

GET YOURSELF A TRADING PLAN.

Honestly, I truly believe it’s the best way to improve your results if you’re in the FX market.

Copy someone else trading plan, (or spend countless hours trying to build one)

Backtest it (it’s worth doing the work!)

Refine it

Make it more personal, something that fits your personality

Backtest it again, keep updating it

Write down your rules

Stick to it.


The only way you can improve your trading is to have a process, otherwise you may just be lucky or unlucky but you wouldn’t know because your trading is not consistent.

Being consistent with your process, will turn you into a consistently profitable trader.

Anyway, I hope you enjoyed this article, if you did it would mean the world to me if you could share it! Or let me know in the comments what you would do!

Not doing shit is key.

Let me rephrase: Not taking trades is key.

Yep, you read that right, I’m here to say that doing absolutely nothing is (a hell of a lot) better than taking trades every single day.

Okay, this subject is mainly going to be about trading and investing, but it may apply to over industries too…

Do you know why you shouldn’t take too many trades? (Think about it for a few seconds)

Just wanted to give you a few seconds to think – I’m not addicted to pineapple photos!

There are three key reasons you may have thought about:

1- Trades in your trading plan don’t happen every single day so you definitely shouldn’t be taking more trades than what your plan tells you to. (Absolutely agree with this one)

2- Your broker commission, hell, I enjoy trading with FXCM, I don’t have (too many) issues with them, yet I’m still paying 5% of the risk I am willing to take per trade on average… (Fuck… I just realized it, it’s way too much )

3- Focusing on quality trades instead of just average trades.

I’ll mainly focus on this third point (even though the commission one just pissed me off ugh)


The importance of focusing on quality trades & not over-trading.

This may sound pretty obvious, but sadly it’s a lot harder to actually follow this rule. Mark Hutchinson (from Falcon Trading) brought up an interesting concept.

80% of the trades taken should be high probability trades and the other 20% can be valid trades.

You want to wait for those high probability set-ups before putting a trade on, but sometimes you can have a gut-feeling the trade will just go in your favor before you see the perfect set-up and you should still act on it.

I really like that rule, usually my trading follows a very similar breakdown between valid and high probability, and I do believe it’s really beneficial for me.

That being said, I didn’t stick to it last month (July) and I ended up having a negative month… Yep… It happened I have no shame, I committed a few mistakes, anyway, that’s not the subject.

You may know of Michael Marcus (he was one of the traders interviewed in Market Wizards) who, in less than 20 years, managed to turn 30,000$ into $80 million trading commodities.

I really like this book…

One of the quotes of his I really enjoyed is:

“One of the secrets to trading success is cutting down the number of trades you take”

When someone with his track record talks, I tend to listen, and that advice, is (I think) spot on.


Taking too many trades reduces the quality of your portfolio

Now let’s think about an investment portfolio, your returns will be the sum of all the trades and opportunity cost is really important here (in FX too due to leverage requirements) …

If you take trades that have a lower expected value you’ll reduce your overall yearly return and therefore make less money while increasing your risk, is that something you’re into? (I’m definitely not, I want the opposite)

I came across a cool website by Safal Niveshak – which I would highly recommend checking out (especially if you’re into investing)

The last article he posted was: Is your stock portfolio a warehouse or a museum?

In it he argues that we want our stock portfolio to be a museum and not a warehouse, which makes sense, so do go and check-it out

In it he quotes Jason Fried book Rework (a book I really enjoyed) :

“You don’t make a great museum by putting all the art in the world into a single room. That’s a warehouse. What makes a museum great is the stuff that’s not on the walls. Someone says no … There is an editing process. There’s a lot more stuff off the walls than on the walls. The best is a sub-sub-subset of all the possibilities.”

Jason Fried – Reword

Makes sense when explained like that? Right? We want our trade portfolio to be a “sub-sub-subset of all the possibilities” and only the ones where we truly believe to have an edge in.

From there, he picks the explain of Costco v. Walmart

Yep a screenshot, I’m lazy

We want to focus on returns on invested capital, 28% sounds a lot more attractive to me than 12% (which is still good).


Less is better – quality over quantity.

Now in this part of the post I’m really tempted to bring up Bruce Lee quote about not fearing a man that practiced a thousand kicks once, but fearing a man that practiced one kick a thousand times (see what I did here?) but that won’t be my main focus.

Instead I’ll just pick a recent example

One of my friends (Aldo) realized that taking better trades is not only more enjoyable but also doesn’t necessarily reduce your trading returns. Especially while traveling and not being able to spend as much time on trading.

That being said, I’m kinda forced to bring it up, I mean I love the guy…

Bruce Lee has another quote (not about the number of kicks this time)

He probably didn’t say this quote thinking about investing or trading, but it applies to everything in life.


Anyway, I hope this was helpful.

If this was useful and you enjoyed reading it, it would mean the world to me if you’d leave a like or even commented 🙂

Cheers!

Focus on trade execution, not your PL

That’s probably the hardest part of trading, or at least it is for me, I mean it’s human, we correlate making money to doing good because that’s how we are brought up – if you do well you will be rewarded. It’s pretty counter-intuitive that doing something great will end up making you lose money.

(Maybe if we were to give more to charity that wouldn’t be the case, but I am myself not the biggest donor out-there so I am not going to preach you to do something I personally do not do)

But in trading you will have to accept the fact, sometimes a “perfect” trade will be a loser.

Sometimes I feel like this when it happens – shouldn’t but hey I’m human

Sometimes a shitty trade you definitely shouldn’t have taken will result in a winning trade.

Yet, you should feel bad about yourself when you make money by taking trades that aren’t part of your trading plan, and feel great when you end up losing capital when taking a trade that fits your trading plan.

We are in the industry of playing out our edge, the aim is to stick to it and in the long-run avoid fucking it up.

Sometimes a “perfect” trade will be a loser.

(that does suck, but you have to accept it)

One trick you can do to start accepting the fact that you will take amazing trades – that result in losses is look at the balance statement of your favorite company. Are you thinking about Amazon? Tesla? Blizzard? Starbucks?… Whatever it is, they all have costs associated with their business, even your local coffee shop (even if you live in Amsterdam)

Try to understand and see trading as a business, not as something entirely different.

Another trick to trade your plan instead of your profit and loss is, once you are in a trade, hide your risk reward – instead of managing it according to your potential return it really increases the likelihood of you moving your stop according to the structure instead of potential return

EU on the 19th of August

For example, I am currently short on EUR/USD my stop is “randomly” placed a 1.14% profit, had I placed it at 1.25% or 1.5% I would be out of this trade by now, I barely stayed in it

The only reason I placed it at that level is because I didn’t know it was 1.14%, otherwise I would’ve made it a round number

If you use tradingview to get your charts, here’s how to hide your RR tool:

Don’t forget, trading is a business, you will incur a loss and a similar business model to ours would be a casino, they make insane amount of money every single year, but they have down days too when there’s a really good/lucky player betting big

Like read this:

The University of Las Vegas found that the 23 Vegas casinos bringing in over $72 million each in the 2013 fiscal year ended up with over $5 billion of their visitors’ money, altogether. That’s an average of over $630,000 a day, per casino

All they do is apply their small edge day in day out and they don’t care about the daily or even weekly profit, they know that in the end, they’ll make money.

We are in the same game.

Focus on your trading execution, not your PL