My Personal Experience with Trading Robots

WHAT MOST TOP TRADERS DON’T DO

“Failures are the greatest teachers of any successful trader. All professional fields are replete with successful experiences as well as failures.” – Suri Duddella

“Investing is fun and trading more fun still. This is why even when people lose money they keep coming back for more.” – Clem Chambers

Hello:

The human brain is the most wonderful object in the universe. If a young person has more suits than an elder, he cannot have as many rags as the elder. It makes more sense to derive conclusions from a wealth of experience rather than naïve fantasy. There are many conflicting opinions when it comes to ideas that work in trading, but it’s the opinions that lead to long-term survival that are valid.

In my past articles titled “Manual Trading versus Automated Trading – Parts 1&2,” I tried to explain the pros and cons of trading robots against manual trading. I’m not going to repeat the contents of those articles here. No matter what you say, people will do what they’ll do. Someone may come to you for advice and still do what they’ll do. Some people would continue to do the same thing again and again despite one harsh experience after the other.

When I was a novice trader, I was helplessly captivated by the most common statement made by sly marketers: “This is the world number one trading product. YOU NEED NO PRACTICAL TRADING EXPERIENCE TO USE THIS SYSTEM/EA SUCCESSFULLY. GUARANTEED! (This statement is still very much in use today).” I wasn’t aware that what they were saying was tantamount to: “You need no practical experience to become a qualified doctor. Guaranteed!” I was in possession of nice trading accounts, but without adequate trading knowledge. I was initially afraid of high risk, but I soon ignored my fear, thinking that I would survive because those robots seemed to survive irrespective of high risk (as shown by their marketers). I was always fascinated by trading results of those robots, whether on web pages or account histories of those marketing them. Within the next few years, I spent a fortune buying one EA after the other, sometimes combining 2 or 3 EAs on one account with the hope of maximizing profits.

I can tell you that I used most of the aggressively marketed trading robots in the world. Either I initially made good profits for a while before experiencing extremely unbearable drawdowns on my trading accounts, or I experienced drawdowns straight away. Brokers were even making the matters worse, whereas the EAs manufacturers continued making new versions to replace old versions, raking in lots of money from huge sales – all without any long-term statistical improvements. I kept on buying new robots; the best available. I was using them on Remote Desktop Connection, writing down and implementing their configurations and optimizing settings, looking for better robots always, thinking that things would improve soon. I kept on being bombarded with newly manufactured robots almost every week. At last, I had to stop the madness when I got on the brink of bankruptcy. My career was seriously at stake, my pride was hurt and things became very difficult. In fact, I don’t want to go into details about what I later went through. It was a nasty experience. I couldn’t imagine what would’ve happened to me if I still depended on EAs. This was a long time ago.

Nevertheless I’m happy that I survived to tell the tale. I met an unforgettable turnaround in my trading career when I began to uncover some established trading facts and brought myself into harmony with them. Things have improved remarkably since then, especially with the permanently successful manual trading strategies in my possession. Yes the future is very much brighter!

Mr. L. Olanrewaju, a successful trader I featured in one of my past articles, experimented so much with a host of EAs for many years; only for him to conclude that: “Once you decide to automate your trading strategy, then you’d need to struggle to overcome many hurdles. I know when I must ignore a trading setup if other cogent factors don’t support it. An EA cannot do this – it can’t use discretion.”

There’s presently one EA that appears to be the best in the world. Many novice traders are blown off by the past performance, which is almost 500% returns in 5 months. The sense of greed of many impatient traders has already been appealed to. But a diligent scrutiny has revealed these pitfalls in the EA: a). The customer support service of both the marketer and the manufacturer of this EA is very poor. They don’t reply to email. b). The EA doesn’t work with any broker except one unregulated broker they use in a Scandinavian country. Plus they seem to have no plans to get regulated. It’s no longer news that any unregulated broker can manipulate anything to suit any purposes [even with possible collaboration with the manufacturer]. c). An independent simulation runs shows that the EA would’ve have suffered crashes several times. One person experimenting with the simulation is perplexed by good results on the manufacturer’s account and bad results on his own account. d). There are numerous complaints against the robot. e). The expectancy of each trade is unthinkably negative, i.e., very bad risk-to-reward ratio. e). The risk on each trade is roughly 30%. This is just one example of those hyped robots.

Many robots have blown many accounts, and as a result, many people give up trading prematurely because they initially thought that mastering the markets is easier than it actually is. Many people spend years polishing their trading skills. Hordes of traders resort to trading robots because they’re in a hurry to make huge profits on the markets and/or because they see that trading is hard. In trading, the earlier isn’t always the better. Robots can provide very quick profits, but if you’re not diligent about controlling your risk (small size and placing a stop). It can go against you in a hurry and damage your equity. One content contributor [who’s an ardent EAs enthusiast] at Elitetrader.com deduces: “One very important point I would like to make....EAs do not work always. Some of them work in trending and some of them work in chop...also ALL of them eventually stop making profit. So it is my job to try and discover WHEN to stop using them. I have not found an adaptive EA that is set and forget….I have learned to lower my expectations and take a slower approach to trading profits, I am much happier that way. I would rather make 20 or 30% a year with no more than 15% DD vs. 100% a year with a 50% DD. That is just me and many traders do not agree with me.”

Who’s Your Role Model?

Are you a real market speculator? Could you survive on the market without EAs? As far as I’m concerned, anyone who can’t make long-term profit without robots (whether their trading style is scalping or intraday trading or swing trading or position trading or investing) isn’t fit to be called a professional trader. Who do you have as your trading role model, someone who solely depends on EAs, or someone who can consistently pull out profit from the markets with her/his trading rules? My role models don’t commit their financial fate to robots. I know successful full-time scalpers who wouldn’t let any automated systems do their job for them. They know that even scalping sometimes needs discretion. I’ve decided never to use EAs again in my trading. I take my trading decisions and manage my trades according to my rules. Many traders were consistently surviving on the market before the advent of robots. Therefore, contrary to what some people believe, it’s possible to be a successful trader without the use of robots.

Most top traders have found trading strategies that fit them and would never let a robot trade for them. Dr. Van. K. Tharp, a world-renowned trading coach, once said that free advice doesn’t mean anything for most people because people seldom appreciate what they get free of charge. Advice from experienced traders is always good; they offer it free of charge, and they got your best intention in mind. What contrast to the advice of deceptive marketers (using extremely high trading volume to attract unwary traders) who are wolves in sheep’s clothing! EAs have come to stay. Rookie traders would continue to be bombarded with robots from marketers, most of whom have little or no credibility. Many new robots would be manufactured in future and many traders would continue to learn bitter lessons.

NB: I’m completely in support of the use of automation to deliver trading signals to managed/clients’ accounts. As new positions are opened, managed and later exited; they can be executed automatically on subscribers/investor’s accounts. This type of service is highly beneficial – an excellent service which is totally different from committing all primary trading decisions to EAs.

I conclude this article with a quote from R. J. Hixson:

“The instrument you trade has less to do with trading success than working on your self, treating your trading as a business, understanding position sizing strategies and the other main factors…”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Yahoo! Messenger ID: saazalmu

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

Weekly Trading Update (January 28, 2011)

“The market follows a set pattern with great regularity, one that can be exploited if recognized early enough. And just when market participants get most comfortable, the pattern is broken.” - D.R. Barton, Jr.

"Some of the best trades come when everyone gets very panicky. The crowd can often act very stupidly in the markets. You can picture price fluctuations around an equilibrium level as a rubber band being stretched – if it gets pulled too far, eventually it will snap back. As a short-term trader, I try to wait until the rubber band is stretched to its extreme point." - Linda Bradford Raschke

Hello:

This is an update on some of the movements on the markets and what I’m doing about them, plus my losses and profits. The analyses are based on daily charts, looking at the Big Picture. My preferred leverage is 1:100 and my position size is 0.01 lots for each $1000. My maximum drawdown in a week is 2% (worst case scenario). I use the Price Behavior rules for strategic decisions and customized indicators and a shorter timeframe for tactical entries. I believe that a ‘buy’ signal that fails is a ‘sell’ signal; and a ‘sell’ signal that fails is a ‘buy’ signal. I open primary positions without predetermined exit target in mind, riding the trend for as long as it continues. The value of patience will forever be emphasized. As long as I stick to my rules and keep my risk low, I’m immune to fear.

There are many things many novice traders don’t know that they don’t know. They may think they’re great traders during easy markets but may quickly find out that they’re not during difficult markets. The markets can behave strangely sometimes. If you’re a good trader, you make money in easy market, and stay away or carry out minimal trading activities during bad markets. The losses in bad markets are then recovered when the market situations become favorable. It’s like presenting 43.60% annual profit regardless of 29.68% drawdown experienced during the year. You can see, it’s all about your ability to recover losses.

AUDUSD

Primary trend: Bearish

On this pair there has been a serious power tussle between bulls and bears. The bias is now bearish, but the downward movement is being impeded, whereas price has constantly failed to rally above 1.0000 level. If this failure continues, the pair is expected to fall heavily on any surprise news that may weaken the Aussie or boost the Greenback. I still have an open position on the pair.

Order: Sell

Entry date: January 20, 2011

Entry price: 0.9958

Initial stop: 1.0065

Current stop: N/A

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 46 pips

Percentage growth: 0.4%

NZDUSD

Primary trend: Bullish

Unlike the AUD, this pair has been able to bring the USD to visible subjection this week; thus maintaining its long-term bullish outlook. Since the NZD is ahead of time, I try to evaluate trading possibilities on it during the Asian session. Early times are crucial because the markets are heavily influenced by the different sessions and entry of different volumes of traders around the world.

Order: Buy

Entry date: January 10, 2011

Entry price: 0.7639

Initial stop: 0.7539

Current stop: N/A

Exit date: January 20, 2011

Exit price: 0.7639

Status: Closed

Profit/loss: 0 pips (breakeven)

Percentage growth: 0 %

EURCAD

Primary trend: Bearish

Yes the primary trend is still bearish but there’s a serious threat to it. If the present bullish correction continues for a few more days (something that’s been going on for almost 3 weeks), then the bearish sentiment is no longer valid. If there should be a remarkable weakness in the Euro, this outlook may change.

EURAUD

Primary trend: Bullish

There’s no doubt about it, the EUR is very strong recently. Unless there’s something significant that can change the present scenario, the trend would continue. There’s a strong resistance at 1.3800: which may halt the current bullish move. If this level fails to halt it, the price on this market would skyrocket, especially given the much anticipated further weakness in the AUD. Whether a trader is bearish or bullish, a worse case scenario would often be avoided with sensible use of Stops - always respect your Stop orders.

EURNZD

Primary trend: Bearish

The former bearish aura was almost rendered invalid because of the special strength the Kiwi is presently exuding. This cross is now experiencing a pullback to the downside. I went short upon the generation of a southward signal. The price is now being quoted below the SMA 20. The ADX 20 level showing low volatility, +DI is traveling below its –DI counterpart. Time would tell how the market plays itself out.

Order: Sell

Entry date: January 26, 2011

Entry price: 1.7827

Initial stop: 1.7927

Current stop: N/A

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 91 pips

Percentage growth: 0.9%

AUDJPY

Primary trend: Bearish

This cross remains volatile; a scenario that has been going on for many weeks. Intraday traders would’ve gone short several times whenever the price hits the upper Bollinger Bands, while going long whenever it touches the lower Bollinger Bands – with a measure of accuracy. Trade management should also be constantly applied, since a sustained trend on this market is imminent. Keep in mind that markets often rise much higher than you can imagine, and also drop lower than you can imagine.

Order: Buy Limit

Entry date: January 13, 2011

Entry price: 82.00

Initial stop: 81.00

Current stop: N/A

Exit date: January 20, 2011

Exit price: 81.82

Status: Closed

Profit/loss: -21 pips

Percentage growth: -0.2%

Conclusion: The simplest answer is typically the right answer. No trader can be successful without having a deep understanding of how and why the markets move. By accepting the trading principles used by consistently successful traders, you can make necessary preparations in your trading activities and become a permanently successful trader yourself.

This article is ended with quotes from Mike McMahon, a seasoned real market speculator with over 20 years of experience:

1. “There must be a buyer for every seller or the markets would collapse… We cannot know in the absolutes what the markets can and will do, but we can learn to be prepared for the possibility of a change in the ‘weather.’”

2. “The psychology of the media is to create enough disturbances in the minds of the common people that they consistently make bad financial choices for themselves – therefore, the uncommon people, the professionals, profit.”

3. “There are always, at least, two levels of involvement – the retail and the wholesale. There are two kinds of players, the uneducated, who invariably pay – and the educated, who invariably reap.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

Yahoo! Messenger ID: saazalmu

NB: There is risk of loss in trading, but it is possible to be a successful trader.

When Not To Reveal Your Trading Results

PRIDE GOES BEFORE A FALL

“When trying to master a challenging profession like trading, it's easy to react with overconfidence and unrealistic optimism. When your hopes are dashed, however, it's hard to continue fighting. It may not be useful to be a pessimist, but it is essential to be a realist…

You must think positively, but it's also vital to have realistic goals… If you can cultivate a winning mindset, you'll be able to handle anything the markets throw at you, and you'll end up a winning trader in the long run.” – Joe Ross

Hello:

I’ve always been an advocate of transparency in trading: reiterating that it’s professionally sensible to show profits and losses, plus how one moves ahead despite these. Many a so-called professional who talks on financial media tend to give an impression that the markets can be predicted. They make reference to an earlier prediction which comes to pass; but they’ll never make any reference to their previous forecasts which flopped. It’s not uncommon for those who speak on television and radio to talk of the direction they think the markets are going. Many (novice) traders like to ask: “Which direction is this instrument going? They won’t ask how they can make profit from the market whatever the directions of the markets are.

Philipp Kahler is a nice example of trading professionals who talk about losses and profits inherent in any trading system, including his own, plus how you can move ahead irrespective of these. Yes, I talk about my profits and losses in my analyses, and my subscribers also have access to seeing how I make overall profit irrespective of inevitable losses. I do this for professional purposes, not to show off or flaunt any skills. It’s also because many people won’t understandably believe if they don’t see any evidence. If you think you’re a good trader, then show your prospective clients or trainees your track records.

But there are times when it’s not sensible to show your trading results. This is the reason for this article.

When you’re at a party, socializing with strangers and acquaintances, it’s tempting to reveal your account history to them so as to impress them. You might want them to develop deep respect for you, thinking that you’re a super trader. Many people are interested in becoming financially free by earning consistent passive income, and they may suddenly become your friends because of what they think they can get from you. If you told people about a profitable position you were holding, what would you do if the trade later went against you? You might need to disregard your Stop Loss, thus violating your exit rules. You’d be determined to hold onto the position for as long as possible with the hope that the market might turn in your favor. You’d want to be right with the trade, and the overwhelming desire to be right with every trade usually ends in financial disaster.

If you eventually lost your socks with the trade, would you tell your new chums? If your new friends later asked about your open position, you’d be forced to tell them lies. Trying to meet their expectations might even color how you handle trading decisions. That’s one example of how a useful trading professional might became a useless professional – for showing trading results for wrong motives.

It’s crucial for you to avoid allowing your self-esteem to cloud your trading results. It’s thus judicious to keep your comments in the public sensible as far as your trading activities are concerned. The more you declare yourself publicly as a “super trader” the more strenuously you would have to grapple with the markets, struggling to be always right so that you could remain a celebrated super trader.

Please read what Joe Ross has to say more about this issue, so that you don’t flaunt your trading results solely for selfish and egocentric reasons. His quotes end this article.

1. “Trading is hard enough, why introduce additional social and psychological pressures that will adversely influence your trading results? Stay humble and quiet. There is no logical reason to discuss the specifics of your trading career socially. It's often done just to build up one's ego, and enjoy the attention of others. You'll pay a long-term price for this short-term gratification. But if you can just stay quiet and keep the specifics to yourself, you'll avoid embarrassing questions and comments that will interfere with your trading.”

2. “The attention may be enjoyable at first, but a need to maintain this reputation may impact your trading attitude and your ability to maintain an objective, emotion-free mindset.”

3. “The added pressure to perform so as to impress others may lurk at the back of your mind and impact your trading decisions. It's better to avoid getting into such a mess. Keep your trading activities to yourself. Find something else to talk about. You'll make your life easier.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Yahoo! Messenger ID: saazalmu

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

Weekly Trading Update (January 21, 2011)

“Proper Knowledge is Power in trading; this means making money if you have it and losing it if you don't.” – Sam Seiden

"Markets can remain irrational a lot longer than you and I can remain solvent." - John Maynard Keynes

Hello:

This is an update on some of the movements on the markets and what I’m doing about them, plus my losses and profits. The analyses are based on daily charts, looking at the Big Picture. My preferred leverage is 1:100 and my position size is 0.01 lots for each $1000. My maximum drawdown in a week is 2% (worst case scenario). I use the Price Behavior rules for strategic decisions and customized indicators and a shorter timeframe for tactical entries. I believe that a ‘buy’ signal that fails is a ‘sell’ signal; and a ‘sell’ signal that fails is a ‘buy’ signal. I open primary positions without predetermined exit target in mind, riding the trend for as long as it continues. The value of patience will forever be emphasized. As long as I stick to my rules and keep my risk low, I’m immune to fear.

Sam Seiden, quoted above, furthermore says: “I’ve noticed how so many students of the market can easily fall into the traps of over-analysis and to this day, I feel that this single aspect of trading is perhaps one of the greatest reasons why so many speculators find it increasingly difficult to maintain consistency in their performance. At first glance, the need to over-analyze could be interpreted as a means to find a way to win more often than not, thus resulting in a positive cash flow for the given trader. I would go as far to say that every single person trading the markets in some way, shape or form has fallen victim to this dynamic at some point in the journey. However, a deeper understanding of the mental aspects of "grail searching" tells us that really a trader is not looking for a system to help them win more frequently, but rather a system which will prevent them from losing more often than winning. This simple observation highlights the inner psychological frailty which is ever-present in all human minds and which needs to be conquered quickly in a speculator's trading career.”

AUDUSD

Primary trend: Bullish

There’s a very serious threat to the primary bullish trend on this pair. My last Buy Limit order was triggered, moved for sometime in my favor before it reversed. I closed about 56 pips when I got an exit signal and then went short with Instant Execution. If the price fails to rally against me, it means a nice bearish ride is imminent.

Order: Sell

Entry date: January 20, 2011

Entry price: 0.9958

Initial stop: 1.0065

Current stop: N/A

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 79 pips

Percentage growth: 0.7%

NZDUSD

Primary trend: Bullish

This pair had a remarkable bullish ride last week and early this week, but it’s coming down right now. If the present bearish correction holds out long enough, the primary trend itself would turn bearish. Otherwise a new bullish wave would soon begin. My last ‘Buy’ order on it went in my favor, and I was able to move the Stop to breakeven before the current reversal against me. It’s all about knowing what to do irrespective of the market actions: the less you know, the more mistakes you will make.

Order: Buy

Entry date: January 10, 2011

Entry price: 0.7639

Initial stop: 0.7539

Current stop: N/A

Exit date: January 20, 2011

Exit price: 0.7639

Status: Closed

Profit/loss: 0 pips (breakeven)

Percentage growth: 0 %

EURCAD

Primary trend: Bearish

This cross’ act of defiance is taking it far in a contrarian bullish direction in the present southward outlook. Please don’t get mad at the Loonie if it doesn’t currently favor you – it simply can’t withstand the present assault from the Euro. There’s a need for some amount of weakness in Euro for this cross to come down.

EURAUD

Primary trend: Bearish

There also has been a serious threat to the present bearish scenario. The market bottomed out at 1.2928 and had over 600-pip rally to a new high of 1.3552. The next action for me is to wait and buy when a massive correction takes the price to a new demand level or when there’s a new confirmed ‘sell’ signal. The MA that was a kind of flat some weeks ago is now pointing in the present trend direction. Moving averages are trend following indicators. As such, they will only work well in trending markets - not when the market is trapped in a trading range.

Order: Sell Limit

Entry date: January 6, 2011

Entry price: 1.3153

Initial stop: 1.3253

Current stop: N/A

Exit date: December 10, 2011

Exit price: 1.3051

Status: Closed

Profit/loss: 100 pips

Percentage growth: 1%

EURNZD

Primary trend: Bearish

The current price movement on this instrument is similar to that of the EURCAD and EURAUD. The reason for this is that the fundamentals are currently in favor of the Euro. Nonetheless, should there be any weakness in Euro, things would come tumbling. This is likely; given the long-term bearish outlook that’s still intact. The price is still traveling far above the SMA 20. The ADX 20 level now indicates that the market seem to have gone too far. +DI crossed its –DI counterpart to the upside late last week and has remained in that format. I opened a Buy Limit order, but unfortunately the market didn’t retrace to my entry level before moving up. So I missed the present northward move. There are always opportunities in future.

Order: Buy Limit

Entry date: January 18, 2011

Entry price: 1.7309

Initial stop: 1.7209

Current stop: N/A

Exit date: January 20, 2011

Exit price: N/A

Status: Cancelled

Profit/loss: 0 pips

Percentage growth: N/A

AUDJPY

Primary trend: Bearish

The primary trend has turned bearish. My last order was first profitable before going negative at the generation of a new short signal. I closed the position with a small loss, and I’d not want to enter short on the market at the present tempting price. I’d be looking for another sensible low risk, high reward entry price. I haven’t made any significant changes to my strategy for over ten months, since I know that the secret lies in money management. Even if things don’t go as we envisaged, we can still come home and dry. If you didn’t make money last month, you could make it this or next month. if you had no money to give your loved one last month, and you programmed your phone to say, ‘The number you’re calling is not available at the moment, please call back next year,” how would you fare with your loved one this ‘next’ year?

Order: Buy Limit

Entry date: January 13, 2011

Entry price: 82.00

Initial stop: 81.00

Current stop: N/A

Exit date: January 20, 2011

Exit price: 81.82

Status: Closed

Profit/loss: -21 pips

Percentage growth: -0.2%

Conclusion: Sagacious top traders don’t rush into making trading decisions, nor do they blindly follow popular opinions. Instead, they weigh their options and examine their trading rules before making decisions. There’ll be challenges in your trading life that’ll separate you from your trading goals if you allow them to. You can’t afford to fail to bring yourself in harmony with trading ideas that work. As long as you do your best to do what’s right while trading, you can be confident that your long-term survival is sure.

This article is ended with thought-provoking quotes from Nick McDonald, a very popular international trader:

1. “I worked in a support role alongside some of the best full service brokers that the country had to offer and they put me thru various training courses. I learnt a lot about the markets but the problem was I learnt how to ‘talk about’ rather than how to ‘profit from’ the markets.”

2. “The market dished up all the lessons that most traders get at the start of their careers, mine was just delayed a few years… Mindset as compared to ability or intelligence is what separates the winners from the losers. The same could be said of many professionals. I realized that I had to eliminate… emotional response and started to reward myself for good trading, not profit or loss.”

3. “I also knew that the best traders I knew personally were the most humble and I learnt a lot from them on managing emotions. I used to talk about my successes and rarely discuss my losses, exactly like amateurs tend to do. I now treat it in a professional way and I’m neutral on profit and loss. The main time I get emotional is if I break my rules. Losing money from trading badly upset me the most as I know I shouldn’t have done it. Losing money from trading well I can easily accept.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

Yahoo! Messenger ID: saazalmu

NB: There is risk of loss in trading, but it is possible to be a successful trader.

Drawdowns: Treacherous Statistics

DO YOU CONTROL YOUR TRADING PORTFOLIO OR IT CONTROLS YOU?

“The market has symmetry: what can predictably lose you money should, if you do the opposite, make you profit.” – Clem Chambers

“A good trading system or strategy is absolutely worthless without a method of managing your money… Your number one goal as… a trader is to preserve your capital so that you can stay alive long enough to have some big winners that cover the costs of your losing trades and make a profit. You accomplish this through a sound money management strategy.” – Craig Ferguson

Hello:

“To make losses is human,” says Stefan Salomon without mincing words. We all need to recognize that the one thing none of us can escape in trading is loss. Accept this truth early in your career and things will improve by leaps and bounds. Try to avoid loss and inevitably, your actions will result in misery. I’ve always said that losses don’t matter as long as their average is smaller than the average derived from profits. Top traders know this and recognize the fact, but rookie traders think otherwise. This article was written so that you can appreciate drawdowns better and develop normal attitude towards them - something that matters in your personal evolution as a trader. Please see some trading strategy results below.

Portfolio Development Period (July 1, 2002 – June 27, 2008)

Trading style: Swing trading

Parameter: Long and short positions

Initial stop: 20%

Starting Capital: $100,000

Ending capital: $1,448,715

Net profit: 1348.72%

Annualized gain: 52.20%

Exposure: 39.7%

Number of trades: 1342

Average profit/loss %: 2.04%

Average bars held: 4.93

Winning trades %: 63.79%

Average profit: 6.43%

Average loss: -5.69%

Maximum drawdown: -16.35%

Profit factor: 1.79

Faik Giese (a swing trading maverick and funds manager) is the one who presented the candid results above in one of his articles. The lesson is straightforward: a good trading system will intermittently experience drawdowns, but will recover ultimately. It also means that part of the accumulated profit would sometimes be given away. You may’ve observed that as good as the portfolio performance above is, it has losing trades and periods of considerable drawdown. You may check the average loss and maximum drawdown again. There were losing months, plus some years were better than others. It’s also noted that the wider the Stop, the larger the annual returns, but the tighter the Stop, the smaller the annual returns (whereas tighter Stop reduces the exposure of the portfolio). The tighter the Stop, the higher the number of trades, and vice versa. The tighter the Stop, the lesser the trading accuracy while a wider Stop brings more accuracy (but lesser accuracy also brings good results). A tighter Stop brings higher drawdown whereas a wider Stop brings smaller drawdown. The same trading system exemplified above, coupled with the initial Stop of 5%, has a maximum drawdown of -20.01%, annualized gain of 29.63%, net profit of 373.86%, and average winning trades of 49.47%. This is still a good result which recovered irrespective of drawdwons. Trading rookies and impatient traders may conclude that a trading system is bad during a losing month and a period of drawdown. A trading system that worked well in the past would soon survive any present losing streak. You shouldn’t abandon your trading idea because of a losing streak: just as you shouldn’t abandon a loving, caring, faithful, honest and humble spouse because of a mistake on their part. Someone who treated you well in the past might continue doing so in future in spite of occasional shortcomings on their part. If you abandon you good system for another, you’d soon experience drawdowns with your newly-found system; just like someone who experiences the same problem with a new mate after divorcing the former good mate.

Trading systems require extensive tests prior to being used. If you see that you’re still ahead after several weeks of practice, no matter how small the profit is, why can’t you then go live? Nothing is worse for a trader than seeing how the system performs on paper but finding that they themselves haven’t consistently implemented the trades. Your strategy is most likely to work as it did in the past. This doesn’t mean you won’t have losses; but it simply means you’ll be able to preserve your trading capital. Therefore you need to work seriously on your trading mindset rather than blaming your trustworthy system. The problem lies with the trader, not the trading system. In spite of alternating losing and winning streaks, a skilled trader remains effective because he patiently handles every situation, faithfully keeping at his trading rules in the face of occasional and transitory disappointments.

Mr. Stefan, quoted earlier, continues saying that it’s not we as individuals that control the market, but it’s the market that’s always right. All we can do is subject ourselves to the market action, but we exercise no control whatsoever… So the first step on the way to success is to accept that the trader is no superman, but just a human being with all the innate and acquired automated behavior patterns that are downright counterproductive in trading… Ultimately it’s all about recognizing and changing old behavior patterns that are either innate and\or acquired but not sensible in your trading.

You cannot control the markets but you can control your money and your risk on each and every trade that you make. Even, most good funds managers, who deliver 15 – 20% per year, are highly commendable for their results (however most traders are deluded by seminar people and deceptive marketers that they can make 15 – 20% week and go scot-free in the long run.) The whole secret to winning in the market is to lose the least amount possible when you're not right. You need to accept this fact or go do something else.

Drawdowns versus My Strategies

I’m completely aware of how drawdowns may affect each of my current 4 trading strategies and how I’ll move ahead despite these. This is revealed so that my existing and potential subscribers can better understand.

A. GBPJPY/USDCAD strategy; swing cum hedging trading (not NFA-compliant).You could get its password and login of the account on which it’s traded on request. The target profit for this year is a minimum of 2000 pips. A few considerable drawdowns are envisaged with this trading system this year, and each of it would be eventually recovered – especially with the present combination of two instruments.

B. Effective Gap Trading (NFA-compliant). The setups for this trading system are rare, but once they occur, just note that it’s time to collect money from the ATM of the financial markets. The system would be explained in the middle of February 2011, after which you could opt to have an access to the account on which it’s being traded. Risk per trade is limited to 1% while Stops are moved to breakeven wherever prices move in predefined directions. The risk-to-reward ratio is 1:2, making it possible to move ahead nicely with easily achievable 50% probability.

C. Results-oriented EURUSD-USDCHF Correlation Strategy (NFA-compliant); to be released early March 2011. This is another income-generating strategy which makes you profit regardless of the market directions and uncertainties, although there are times when trades won’t be taken... The proper use of correlation is even profit on its own! The login and password of the account on which it’s being traded would soon be made available, so that real trades can be accessed. This kind of trading idea is against what the majority of traders would like to do (remember that the majority aren’t always right). No matter what happens on the markets, the trading risk is inherently compensated for, therefore reducing the potential drawdown on each trade. Open position are smoothed whenever there’s a minimum predetermined positive difference between an open negative position and an open positive position. On demo accounts, 0.01 lots size is recommended for each $500. For live accounts, 0.01 lot size is recommended for each $1000. This ensures long-term survival on the markets.

D. Sure-fire Strategy: The minimum target with this trading strategy is 1000 pips this year. The drawdown sustained from this strategy is limited to 3% per week. Trading is stopped for the week whenever the loss reaches the predefined minimum (so that we avoid further drawdown in a bad week). If the accumulated profit is 20% and a bad trading week takes away 3%, thus reducing the profit to 17%, trading is stopped. As long as there are winnings, trading continues. This strategy is on its way to becoming a possession of each of my subscriber.

Similarly, the fact that majority of traders fail doesn’t mean that trading is a dead end activity. Traders who are successful prove otherwise. Occasional losses leading to transient drawdowns are inevitable but not insurmountable challenges in trading. The secret to success lies in developing deep love for trading and willingness to apply trading principles that work.

NB: Effective Gap Trading system would be explained in the middle of February 2011, after which you’d gain an access to the account on which it’s being traded.

In my penultimate article last year, I featured some recent trading results from Thomas Stridsman, a CTA and well-known trading systems developer). I’d like to conclude this article with more quotes from him.

1. “As far as where to enter and exit, let’s just say I strive to keep things as simple as possible… There’s no way around the fact that you’ll have to suffer through many losing trades as a trend-following trader, but in the end your patience will be rewarded.”

2. “In my experience, knowing how to trade is much more important than knowing when to trade… Then comes positive expectancy, which doesn’t mean that you should expect a positive outcome everyday and every trade, but in the long run. That’s why you need psychology first.”

3. ‘‘Building trend-following systems that perform reasonably well is easy. Making your strategy competitive relative other good trend-following fund managers is the really hard part. This has everything to do with money management and very little to do with when you enter or exit a trade.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Yahoo! Messenger ID: saazalmu

Are you facing any challenges in trading? You might want to explore the secrets of markets wizards and duplicate their success. Get the secrets from my past articles at:

www.fxinstructor.com/blog/author/amustapha

www.fxinstructor.com/blog

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

NB: There is risk of loss in trading, but it is possible to be a successful trader.

Weekly Trading Update (January 14, 2011)

"The financial markets generally are unpredictable. One has to have different scenarios. The idea that you can actually predict what's going to happen contradicts my way of looking at the market." - George Soros

“… We are NOT predicting what is going to happen in the future. That is a waste of time. Instead, we are reacting to whatever the chart tells us to do.” – Craig Ferguson

Hello:

This is an update on some of the movements on the markets and what I’m doing about them, plus my losses and profits. The analyses are based on daily charts, looking at the Big Picture. My preferred leverage is 1:100 and my position size is 0.01 lots for each $1000. My maximum drawdown in a week is 2% (worst case scenario). I use the Price Behavior rules for strategic decisions and customized indicators and a shorter timeframe for tactical entries. I believe that a ‘buy’ signal that fails is a ‘sell’ signal; and a ‘sell’ signal that fails is a ‘buy’ signal. I open primary positions without predetermined exit target in mind, riding the trend for as long as it continues. The value of patience will forever be emphasized. As long as I stick to my rules and keep my risk low, I’m immune to fear.

Long-term survival is a situation experienced by real traders, not gamblers. Real traders take price itself (the most important indicator) serious because in trading, price is king. By taking price itself serious, how the financial markets truly function is not that difficult to figure out. It’s a well known fact that trading can be profitable in bull and bear markets.

AUDUSD

Primary trend: Bullish

This pair reached a high of 1.0226 early this year but soon after that, it was corrected to a low of 0.9803. The pair has been caught in a remarkable rally since then. Clearly, the correction from Swing High to Swing Low was a good opportunity for professional traders to sell high (and of course buy low and sell high). I got a pending order on this pair.

Order: Buy Limit

Entry date: January 11, 2011

Entry price: 0.9907

Initial stop: 0.9807

Current stop: N/A

Exit date: N/A

Exit price: 0.9910

Status: Pending

Profit/loss: 0 pips

Percentage growth: N/A

NZDUSD

Primary trend: Bullish

I’ve an open position on this pair. The pair, though generally in a bullish run, is now in the midst of price consolidation. The Bollinger Bands on the 4-hour chart clearly testify to this fact. Even while doing normal things, you may discover that the trading returns aren’t too smooth; they are realistic. Real life trading goes through peaks and troughs.

Order: Buy

Entry date: January 10, 2011

Entry price: 0.7639

Initial stop: 0.7539

Current stop: N/A

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 46 pips

Percentage growth: 0.46%

EURCAD

Primary trend: Bearish

This exotic cross has been trending down nicely for some amount of time, and it’s now clear that the price has bottomed out. I’m currently looking to enter at an optimal price. There was a recalcitrant support around level 1.2750, and as this held out long enough, as it were, the bears might say, “That’s enough!” Then it’d be no wonder if the present bullish attempt is sustained. The present bullish attempt has been truly sustained.

EURAUD

Primary trend: Bearish

My last short order on this instrument made a profit, and later was prevented from turning into a loss. For technical analysts who’ve also been following some economic news coming out of the Eurozone and Australia, the reason for the recent protracted bearish scenario will that not be difficult to figure out. Please note that there’s been a series of bullish corrections that each later led to a selling pressure. At this junction, it’s now clear which direction the market would eventually go: whether the each correction would metamorphose into an extended bullish rally or it would culminate in another heavy selling pressure. A popular candlestick pattern may form – yet the market would still behave contrary to the expectation. What many traders don’t know is that many candle patterns have lost their effects. Heresy? Nope!

Order: Sell Limit

Entry date: January 6, 2011

Entry price: 1.3153

Initial stop: 1.3253

Current stop: N/A

Exit date: December 10, 2011

Exit price: 1.3051

Status: Closed

Profit/loss: 100 pips

Percentage growth: 1%

EURNZD

Primary trend: Bearish

The price action panning out on the cross is similar to that of the EURAUD. It appears that it makes sense to look for a way to go long as soon as a sensible entry criterion is met. The price is traveling far above the SMA 20. The ADX 20 level shows that the market volatility is again increasing, and now significantly strong. +DI has crossed its –DI counterpart to the upside. The price would’ve moved up nicely if one entered at a good price.

AUDJPY

Primary trend: Bullish

I’ve set a pending order to buy at a lower price. This market has been so volatile recently. Buyers and sellers with tight Stops would have been stopped out. Yet it seems the bulls would ultimately prevail, and if that doesn’t happen, professionals know when to do. They’d either stay away or apply their risk control measures. Therefore, before telling your employer that the salary he gives you is no longer needed, you got to make sure that you have what it takes to survive on the markets, and of course earn a decent income.

Order: Buy Limit

Entry date: January 13, 2011

Entry price: 82.00

Initial stop: 81.00

Current stop: N/A

Exit date: N/A

Exit price: N/A

Status: Pending

Profit/loss: 0 pips

Percentage growth: N/A

Conclusion: The best way to learn is by example. Top traders have given us great examples to follow. Kathleen Brooks mentioned in one of her articles that the most successful traders are not necessarily the most well-read; instead they can think clearly, formulate rational trading strategies and remain disciplined. One such trader was Nicolas Darvas. He made $2 million in 2 years trading the… market during the bull market in the 1950’s. He wasn’t a fund manager or investment professional. In fact he was a professional dancer. As for me, I’ve come to grips with the fact that I don’t need to sit in front of my PC all day to make money; and there are strategies that can take care of this.

In support of this, 3 quotes from Philipp Kahler (a highly experienced and renowned technical analyst) end this article:

1. “I’d rather look out of the window now and I’m not obsessed with five-minute charts; weekly charts can make you money as well without the hectic pace of high-speed trading. This reduces not only the amount of time that you’re glued to the computer but also the risk of making crucial mistake in the hustle and bustle of workaday life, ruining everything in the process.”

2. Paracelsus knew that the dose decides whether it’s poison or medicine, and it’s similar for us traders when we’ve to determine the size of the next position… This ensures that we don’t ruin our portfolio with successive losing trades. On the other hand the position size is large enough to promote the development of our portfolio in case of a win.”

3. “…Trading carries a lot of responsibility, and it’s something you can make a living on. It can make you good money but only if you have a well though-out plan that you implement with discipline.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Are you facing any challenges in trading? You might want to explore the secrets of markets wizards and duplicate their success. Get the secrets from my past articles at:

www.fxinstructor.com/blog/author/amustapha

www.fxinstructor.com/blog

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

Yahoo! Messenger ID: saazalmu

NB: There is risk of loss in trading, but it is possible to be a successful trader.