3 Things to Turn Your Trading Around...Today

Beginner Questions
1

[B][U]Leverage, Growth and Journaling – Recognizing the Importance of Each to Become a Consistently Profitable Trader[/U][/B]
[I]Jake Abrahams[/I]

[B]The Questions[/B]
Ask yourself the following questions as they relate to your style of trading:
[ol]

[li]How would you describe your effective leverage? Are you able to leave trades open overnight, or walk away from the charts without “worrying” about your position? Do you manage your risk by maintaining positions under 10:1 leverage?
[/li]
[li]What type of profits do you seek out each day/week/month? Do you set realistic goals such as 1-5% / month profit, or, are you more aggressive seeking to gain 20-30% / week? What is your drawdown – is it under 10%? How does your risk of ruin table look – can you claim leverage competency and trade accuracy to the extent of needing more than 50 consecutive losing trades to lose 10% of your equity?
[/li]
[li]How many of your trades do you journal – 50%? 75%? 100%? Do you keep a trading journal? Do you mark down pre-during-post notes for each position? Do you review your trading journal consistently, each day before firing up your charts to seek improvement and refresh?
[/li][/ol]
Unfortunately, I’d venture to guess that many newer traders wouldn’t be able to accurately/properly answer the above set of questions. Why? Well – this is something I’ve talked about before – human beings are creatures which prefer to seek paths of least resistance. In other words, when provided with what looks like a shortcut or an “easier” way to tackle something complex, most individuals would chose to indulge and take the work-around rather than facing obstacles head on, without being spoon-fed.

[B]Reality[/B]
For years, I’ve scoured many investment forums and have interacted with thousands of traders, both on the professional and brand-spankin’-new level. One of the most disheartening commonalities amongst the most popularly advertised styles of trading is the lack of true risk management education, reasonable goal expectation-setting, and absence of requirements to journal every single trade. Instead, some educators simply supply what the demand is calling for – shortcuts. Shortcuts in the form of “easy” candlestick patterns and magic indicators from a single timeframe, or, simple copy trading. I’m doing everything in my power to change that demand.

I feel that newer traders are asking the wrong questions, simply because the wrong answers have been supplied for so long they don’t know any other approach. It’s like an evil cyclical process which a newer trader gets sucked into from the get-go. Whether it’s copy trading another, getting signals, paying absurd amounts of money for education, focusing on too many indicators and “magic EA’s”, or simply taking a rookie-approach to trading via relying solely on candle patterns off a single timeframe.

There’s nothing wrong with using candlesticks to read price action – at all. What I’m arguing is that reading price action off a chart is merely 1 aspect of trading amongst a plethora of others which you seldom hear mentioned. Rather than seeing rookies ask about position sizing, how to journal their trades and set reasonable profit expectations, the majority focus on merely awaiting the market to fire-off a simple candlestick pattern so they can “work their way backward” into a position, seek validation on a forum thread and that’s that.

Once you’re able to answer the abovementioned questions confidently and with accuracy, you will see your trading be elevated to the proverbial next level. Literally. Employing the below into your trading plan on the very next session your active in, will literally immediately improve your trading and enhance your mindset.

[B]Approach[/B]
So, what are the answers? Here’s what we feel:

  1. How would you describe your effective leverage? Are you able to leave trades open overnight, or walk away from the charts without “worrying” about your position? Do you manage your risk by maintaining positions under 10:1 leverage?

Trading is a marathon, not a sprint (not a new concept). Those who utilize leverage over 10:1 without immense accuracy, years of experience and a solid trading plan that can weather any market environment are merely setting themselves up to blow their account. Whether it takes 3 weeks or 3 months, it’s bound to happen when a typical loss is equivalent to 10%, 15% or even 20% of your equity. The words mini/standard-sized lots shouldn’t even be in a rookie’s vocabulary when first starting to trade. Every single position should be micro-sized. Ask yourself – why are you trading? Are you trying to become a professional, full-time investor who works from home? Are you trying to secure a position with a broker as a desk trader?

What would a risk of ruin table look like given the aforementioned variables? Would any professional firm look to hire an individual to trade millions in capital with drawdown greater than 15-20%? Food for thought.

  1. What type of profits do you seek out each day/week/month? Do you set realistic goals such as 1-5% / month profit, or, are you more aggressive seeking to gain 10-30% / week? What is your drawdown – is it under 10%? How does your risk of ruin table look – can you claim leverage competency to the extent of needing more than 50 consecutive losing trades to lose 10% of your equity?

A new trader risking anything over 1% on a single trade is purely reckless. Professionals on Wall Street tout on average 20% annual gains for a solid year. Why do newer traders seek to double their account each week/month or set crazy profit targets such as 2% / day? If this were easy, the millionaires on the Street would be billionaires. 2% / day isn’t impossible, but, you’ll need to be very accurate and manage your risk like a professional. You can’t secure 2% in a day and then go on to lose 10% the next.

Paying attention to your risk of ruin tables and drawdown are as equally important. In our book, if you can pull down 1-5% / month, for 6 months straight with drawdown < 5% - then, you’re onto something really, really good. This doesn’t mean that you should limit your profits if you’re able to secure more. What it means, is that from a psychological standpoint you need to be thinking with a professional mindset that is not fueled by recklessness and greed.

  1. How many of your trades do you journal – 50%? 75%? 100%? Do you keep a trading journal? Do you mark down pre-during-post notes for each position? Do you review your trading journal consistently, each day before firing up your charts to seek improvement and refresh?

Finding a setup and executing is only 70% of the battle when it comes to trading. The other 30% involves keeping a solid journal of every single trade you make. Why is this necessary? Many reasons. For starters, when you take a position that turns out to be profitable, when the market presents a similar opportunity you’ll want to look back on how you traded that situation and seek to mimic minimally. Could you have found a better entry point? Did you secure profit too soon? Should you have closed a portion of the trade and let the rest “run”? All key questions.

Additionally, after a few days off from trading and not focusing on the markets, one can become a bit discouraged on their abilities. Keeping a journal of both winning and losing trades can help rebuild that confidence.

How so? Well, each morning before you log into your broker’s software, run through your journal. Look back at the last few sessions, weeks, months. See what has been working, what hasn’t, etc etc. This is a great way to get the creative juices flowing in the mind and establish the proper mindset ahead of looking @ the charts for a setup. At minimum, one can use purely a text-based journal either hand-written or electronic. The best journals maintain screenshots.

Would you attempt to do anything in life, knowing that you’re missing out on 30% of what is required to competently finish the task?

[B]From my Trading Desk[/B]
Here’s one of my personal strategies: I have a separate portion of my journal just for trading NFP (NonFarm Payrolls). For those of you new to trading, NFP is a major market moving economic release out of America involving key employment figures. Currency pairs can spike anywhere from 20-100 points in a handful of minutes bringing mass volatility to investment vehicles and major money-making opportunities.

Before every single event – every one, every time – I’ll look back on how I previously traded last month’s release. I’ll go over the pair(s) I traded, what actions I took leading up to the release, how I managed during, and what analysis I made afterward. By doing this, one is able to not only prep their mind for the next trade, but, also make improvements in their strategy.
[B]
Recap[/B]
As mentioned, it bodes well for a newer trader to take the time and research risk management topics with a professional-mindset/approach. This is not easy though. Learning about the relationship between the amount of capital in your account and how much leverage one should use is absolutely critical. Managing your risk is the name of the game. By setting reasonable profit goals, you’ll not only immediately start to see improvements in your trading, but your mentality will shift from one of greed/fear to one of neutrality and patience.

Additionally, the proper employment of a journal is crucial to your success as a trader. Being able to rely on detailed notes before, during, and after each trade is made helps elevate your abilities to the next level. Think about it- if you’re not presently journaling every trade; can you remember the exact details of a trade you made 2 weeks ago on a Wednesday? Can you recall with 100% accuracy your mindset, how you analyzed the opportunity, how you traded it exactly, etc etc. I know I can’t, and I’d argue that the majority are in the same boat.

So, what does this all mean?
[ol]
[li]Don’t leverage yourself out over 10:1.
[/li][li]Don’t set unreasonable goals such as 20% / week or 100% / month while learning how to trade.
[/li][li]Don’t forget to journal every single trade you make. Try to standardize your entries so they are fluent and not confusing. Review your journal every day for process improvement and mental refreshers / confidence.
[/li][/ol]
Employ the above three strategies the next session open, and I can guarantee your trading will immediately begin to improve.

Jake

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I think those who try to gain 20% or 30% per week will soon realize that they gambled themselves out of trading. It is just not realistic on a sustainable base and trading is all about sustainability.

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My problem with keeping a journal is how the heck do you keep the right information without it being too much information, if you keep ‘all’ the details, then you have too much information for it to be of use. If you keep less information, then i find I have to keep tweaking the information as I’m trying to refine my system.

This is why I intend to keep to just one setup, across many pairs maybe, but just the one setup, so I can get it in my head how to trade it, then move on and add another setup to my approach.

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Agreed! Thanks for commenting Bear!

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Hey Merry, thanks for the question…great one by the way.

So just like your journey to becoming a successful trader, the journaling process will be very similar. Think about when you first started learning about the FX market. How many different strategies did you come across on a daily/weekly basis? Tons!

Personally, I know that I was jumping from one-to-the-other every other week and sometimes even 2 or 3x / day I’d completely try a new strategy. But, the end result is what counts.

Going through the motions - going through each methodology and learning the in’s and out’s - what speaks to you naturally. All of these are crucial to develop your own unique trading style right? Well, creating a journal can be looked @ the same way.

Start with something that is general, and over time you’ll tweak it and add things and remove things - eventually you’ll get to the point where the workbook is second nature to you and you’re completely comfortable - just like you would with a trading strategy.

Don’t force anything, b/c that’s not going to be conducive to trading with the proper mindset of neutrality. If you don’t have strong descriptive skills, use screenshots. At a minimum, you need to be able to export your thoughts so you can recall upon them at a later date.

Here’s what I do: As I’m analyzing a pair and am starting to feel a potential trade opportunity coming on, I’ll start to jot down my thoughts or make notes on the chart itself using TEXT, ARROWS, LINES, etc etc. Check out some of the charts I’ve posted for live examples.

If you have any other questions, let me know.

Aside from the journal-aspect - what are your thoughts on the other 2 key messages?

Looking forward to your response,
Jake

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[QUOTE=MerryTrader;620856]My problem with keeping a journal is how the heck do you keep the right information without it being too much information, if you keep ‘all’ the details, then you have too much information for it to be of use. If you keep less information, then i find I have to keep tweaking the information as I’m trying to refine my system.
All you need to journal is:

  1. The Date:
  2. Trade ( Long or Short)
  3. Currency Pair
  4. Lot Size
  5. Trade Entry Logic
  6. Stop Loss and Take Profit
  7. Trade exit logic
  8. Profit/Loss
  9. Notes>

A simple spreadsheet should suffice.

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Thank you so much for this information you have provided and in such detail. I must say my two biggest downfalls are exactly as described above a greater than 1% profit target and i never kept a journal. Reading over this just makes me shake my head at my own ignorance.

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@Forexunlimted.

Yes 1 sounds about right, although I would never disregard someone else’s approach if they think it works for them.

  1. Generally I think targets are a distraction, I know they have been for me, especially after a winning streak, it got me thinking if I could do that much every month then I’m away. I think it’s important to disassociate it from any kind of resemblance of normal business, I mean in a normal business s if you’re not making money there are usually things you can do about it, you can change the business, location etc etc. with Forex you can’t the market does what the market does, one month 100% R.O.I. may well be unlikely but not impossible, next month you might be luck to break even. I think it is so important to remember this.
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Glad you found it useful Darkcade.
Don’t beat yourself up about it though - like the title says, I feel if you implement these three things you can literally start to see your trading turn around today.

As for the 1% comment - it’s not necessarily setting a fixed % goal each month / % to risk as much as it is about managing your effective leverage firstly. If you keep your leverage between 5:1 - 10:1 across the board, it’ll be less emotional when you need to cover a position and take a loss.

Now, that doesn’t mean that you should limit your profit targets. What I’m saying is that for NEWER TRADERS SPECIFICALLY, you shouldn’t be utilizing full leverage provided by your broker b/c you’re simply gambling and will blow your account eventually.

When learning how to trade / developing your own trading plan and working it out real-time, you don’t want to be risking too much capital on each position. Instead, small conservative growth over time should be the name of the game.

If you can bank 1%-5% profit each month, for 6 months, with drawdown between 5-10% then you have a solid trading plan. At that point, your experience level will be much greater and you can begin to risk a bit more capital if you’d like - it’s all about personal preference @ that point. Once you can claim consistent profits for a minimum of 6 months, with a very good-looking risk of ruin table, you can up your risk / trade if you’d like.

Agreed for the most part Merry. I’d never advise someone to abandon a trading method which is profitable for them and is tailored to fit their personality. Most newer traders don’t have that luxury though, and, they usually end up paying for it (literally). Focusing on the process (i.e. developing your strategy) will yield more consistency than focusing on the results (i.e. monetary gains). To truly hone in on your strategy, you need to journal. Without journaling, you’re leaving too much room for assumption and not truly maximizing your abilities.

Thanks for the comments!
Have a nice day,
Jake

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To Jake Abrahams, New to Baby Pips, this is my first response please forgive any errors. Could you please give some simple examples of the leverage you were talking about? Why is 10-1 good? Ive heard the pros use 1-1 up to 1-5, Im in Australia and i think we can get up to 400-1, is it the lower the better? Again does that mean your starting capital to put on one full contract increases? Your journaling section was fantastic i understand that. I have the risk of ruin tables but have never understood how you can predetermine the 1-1, 1-2, 1-3 or 1-4 etc profit targets .Am i missig something in there application. Any help in any of this would be great thanks

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Hey pal,
No worries - just stick with it and you’ll learn more about yourself through trading than almost any other endeavor in life.

As far as your questions relating to effective leverage: Read this - I hold this is the single-most important aspect of retail Forex trading which is overlooked by most rookies. Overlooked in the sense that most new traders are so anxious to get their feet wet that they focus on candlesticks, indicators and how to execute strategies rather than understanding the most important factor of trading which is managing your risk/exposure through proper leveraging.

After you go through that article- let me know if you have any other questions :).

Thanks for the compliment.

Some traders like to aim for 1:1, 2:1 Reward to Risk ratios when placing single trades. I was talking more about ROI (or, Return On Investment), which is just a sum of your daily/weekly/monthly gains as a percentage of your total account equity. Individuals can “predetermine” profit targets and where to place stops using logic and reading price action history. Every position you take, you’ll want to know where to secure profit and where to “get out” if the trade moves against you - all of this dictated by your unique trading plan.

As far as how to determine the ratios - I use a FIB. Modify your fibonacci settings so that the only values are 0.00, 1.00, 2.00, 3.00 and 4.00. Start the FIB @ your entry point, and trace back to where your stop would be. 1.00 would equal entry, 2.00 would equal 1:1, 3.00 would equal 2:1, 4.00 would equal 3:1. Now, not every trader employs methods calling for a certain amount of risk vs. reward for every trade. I advocate both practices (R:R and “live management”) - it’ll depend on your style, and ability to watch the charts throughout the sessions.

Does this make sense? Let me know.

Sorry for the delay, was traveling and had internet connectivity issues.

Good questions all-around.
Jake

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Hey Jake, thanks so much for your reply. Ive spent the last few hours getting through yr link on leverage, money managemnet, risk reward ratios. It has been a GREAT help, its still slightly confusing but ive nearly got it. I have more questions ??? if you can answer any that would be great . Yr comments on ROI , do you have a weekly? monthly? percentage that you aim for ? if so it it a target you MUST achieve or just try to get close to? Is this correct if had 100,000 in capital and wanted to open 1 standard contract of say aud/usd at $10 pip at 100,000 is that 1:1 leverage? if had 50,000 and wanted to open 1 contract is that 2:1 leverage ? 10,000 in my account on 1 contract is that the 10 to 1 you were refering to? Another silly one as im new, what is the correct way to return a message ? Are you forex unlimited? is that yr handle? or company or is it just jake? I dont yhave a trading plan, I know what it is but dont know how big it should be or how to start one. The fib ratios are a bit out of my league at the moment, know a little about it, again thanks for the help the link was extremely helpful , can SEE the top of the mountain but can only get there one step at a time

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You’re welcome.

Good. That article has a ton of information in it, which is crucial to understand. Of course the premise is going to be confusing, most likely because it is brand new to you. Which speaks to one of the themes of my article- i.e. [I]most educators simply do not talk about leverage but rather focus on entry/exiting the markets[/I]. Just don’t be too hard on yourself. Those are new concepts, and it’s going to take some time for your brain to soak it all in.

This is a common question, and my answer is always the same. It’s not “my answer”; it’s simply the most practical and commonly given one available for any type of challenge you’re faced with in life:[B] Focus on the process, not the results[/B]. Do you understand why that may be?

Yes.

Not trying to be harsh, but, first of all - erase that type of “speak” from your vocabulary. Don’t classify yourself as anything. Don’t put yourself down; ever. The moment your start to think like a professional and act like one, the moment you begin to change your mindset toward life. The psychological aspects of trading are very important to understand.

Forex-Unlimited is just my handle. I founded the site back in February. You can call me whatever you want :). If you’d like to get personal, send me a direct message, or contact me via <[email protected]>.

That’s fine - every single trader whose ever traded anything has been in your shoes in one-form-or-another. Just think about it…a 40 year-old-man just doesn’t decide he wants to be a professional trader over night. It takes years and years of learning, practice and execution. Be proud that you even know the terminology “trading plan” - to me, you’re steps ahead of most newer traders out there.

A trading plan is nothing more than a guiding principle which you follow to help keep your actions consistent. It allows room for tweaking, and also aides in keeping you on the right track. Just because you have a trading plan doesn’t mean you’ll properly execute/follow it 100%. That’s where the mindset aspect of trading comes in.

It all comes with experience. The more time you can devote to learning how to trade, watching the charts, and keeping a neutral mindset, the quicker you’ll learn (obviously). There aren’t any shortcuts to becoming profitable.

Understandable. Ignore that part then.
It’s not about getting to the top, [U]“it’s” about each and every tiny little step on the way to the top[/U].
Some of the time, you’ll find that those @ the top, aren’t really happy at all. To them, it was the challenge of the journey which was the most rewarding aspect- not the actual mastering of the craft.

Jake

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Hello FOREXunlimited,

Thank you for creating this thread. I think it is a good reminder of what trading is all about. It is not so much of finding “strategy” or a system but also what do you do once you finally found one? This is the most tricky part because you deal with this every single trade and everyday. I too been caught up with “shortcuts” sometimes but I always tried to get back where I was from when I used to do Journal entry for every trade(s) that I take and finally found those habits (bad habits) that I have been doing early on. Luckily, I have corrected some of it and I am still trying to correct the others. I think it might take awhile for me to correct some of those but all in all I am liking the progress that I am making at the moment. I am still not to the point where I wanted to be but I know I am getting there. I always look for some “improvement” on how I can do a little better. As much as I would like to do 100% journal entry. I think I am down to 60% at the moment. I actually just started doing it again…

Leverage- This is a tricky part. I use to be consistently using 1% every trade. As I gain more experience, I tend to be more flexible. When I was winning a lot, I increase my risk between 2-3% however, if I am in a losing streak I lower it back down to 1% or sometimes, I just wont trade. The draw-down is what I am still figuring out. This is what I think I am missing right now. Is it possible that you could have a large draw-down and still come out profitable say in about 6 months to a year?

Thanks again for opening up this thread.

PNR

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Thanks for sharing this, mate! A must-read for the newbies out there.

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Glad to.

Agreed pretty much across the board.
The biggest improvement in my “game” came when I really started to focus on the process, not the results- the process being properly following my trading plan, journaling each trade, executing with a professional mindset, leaving emotions outside my office. For some, you can elevate to an even higher level in trading by practicing yoga, meditation, a martial art or even exercising. These are all crucial components to success

That flexibility you mention is a sign of maturation as a trader - so that’s definitely a good thing. It means that you’re aware of what works best for you in certain environments and what doesn’t - and, the need to adapt.

As far as increasing the risk off a winning streak: Yes, that is a strategy which is employed quite commonly. I personally don’t agree with the convention. My risk / trade is based on my 1) account equity and 2) leverage rate I’d like to maintain - not on whether or not I’ve been profiting or losing. When it comes to trading, all “Wins”/“Losses” are going to be randomly distributed. Although we may have some probability that a win will be followed by a win and a loss by a loss, if it isn’t 100% (which just isn’t logically attainable) then I’m not interested.

I try to treat each trade independent of one another, unless I’m utilizing a strategy to hedge positions based off correlations.

Taking a break is a great way to reset your mind- especially if your account took a series of losses and you’re starting to get emotional / smitten with revenge.

Anything’s possible. Is it probable - well, that depends on some variables.
-What do you personally consider “large” drawdown?
-What do you consider “profitable”?

Just because a system has 3% drawdown one day, does not mean that the managing trader cannot lose 15% the next ya know…

What’s your definition of drawdown - how do you apply the term to your trading? Are you talking about ‘recent’ drawdown or maximum drawdown? The latter will be more representative of how much money a trader can lose, utilizing a system’s entire trading history.

If you’re consistently managing your risk to the best of your ability, then you should be able to nail-down max DD ideally < 10-15%. Anything over that (IMO) and you’ll want to start analyzing your accuracy and leverage parameters before you dig yourself into a hole.

Thanks for checking it out / commenting PipDiddy.

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Hi Forexunlimited,

Thank you for your detailed responses. I am glad you confirm what I have been doing so far is on a right track :slight_smile: I have not met any professional trader nor was I train to be one. It is pretty much self explanatory, trial and error and correcting them, read and read and read books/articles anything I can get my hands on that’s all I did. Most of them just a common sense approach and very logic. Despite of so many information out there, I tried to “filter in” what I needed to know and what it make sense to me. If it doesn’t makes sense, I disregard it and moved on to something that it will benefit me and how it can help me improved my trading approached. There is always room for improvement :slight_smile:

Anyway, as for drawdown, I didn’t really pay attention into this because I was so focus on other areas until recently. I understand that it depends on how I consider a large drawdown. You are correct that there maybe one day you can have 3% drawdown then maybe 15% or so on the next day. Since I am focusing on a monthly basis % rate of return, I would probably look into the maximum draw-down on a monthly basis say 5-10%. I don’t know how other professional traders look at drawdowns. Are they talking about the maximum by weekly, monthly, or yearly? Something that I probably need to look at…

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I learn something new almost every day when it comes to trading; whether it’s about myself, the markets, strategy, etc etc. Days I don’t feel like I’ve learned enough, I’ll go to wikipedia and click through the “Random Article” link for 10-15 minutes just to expose myself to randomness. :slight_smile:

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Lol I know what you mean… Sometimes, I click on that sale add for shoes and handbags lol… Now, I know where those drawdown came from :slight_smile: I blame it on my shoes…

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Yikes!

Do you trade NFP? If so, how’d you make out today? (If you don’t mind sharing).