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Saturday, May 28, 2011

Resist the Lure of High Risk – Part 2

“The weaknesses of a trader can bring her/him down, if she/he doesn’t correct them as soon as they reveal themselves.” – Dr. Mircea Dologa

“The market will place us in a position where we can find out what we're made of so that we can choose to correct our weaknesses (and also to see our good traits and try to strengthen them).” – Joe Ross

Hello:

My heart goes to all traders who’ve suffered big losses and/or margin calls. I believe it was not your intention to enter the market to purposely ruin your accounts, but you were either misguided or weren’t adequately educated about safety measures in trading.

The scars of margin calls are everywhere.

Awareness of the importance of risk management has been heightened in recent years. But has greater awareness reduced the number of incidents of margin calls? No, that hasn’t been the case. Greed among traders is prevalent. It’s clear that many traders are willing to ruin their accounts rather than change. Many traders prefer to go thru harrowing experiences before they can accept this. If the future were accurately predictable, the majority of traders wouldn’t be losing, and this is the reason why I often recommend very small position sizing methods in my trading strategies, but they’re contrary to what many traders out there would like to do.

Sadly many traders suffer huge losses due to high risk, and they go on saying that trading the financial markets online is a ruse. For example, some blame the markets for the losses they suffer, all of which are their own doing. Novices are easily deceived by vendors who talk about nice profit and neglect or fail to exemplify risk control. If a software vendor or an analyst tells you that you can make 30%-100% per month with a strategy, did you know that you’d also be exposed to 30%-100% drawdown per month? Can you handle this amount of loss? Even 40% loss is too much for most professionals to handle – not to mention novice traders. It’s the same story with every analyst or vendor: If you follow their dangerous position sizing recommendations in your trading and get it wrong, you’d be the one to lose your money, not the analyst or vendor.

Marko Graenitz, in one of his cover stories, reveals that the worst bankruptcies in history did not just happen ‘by accident,’ but were primarily caused by the excessive use of leverage. There are parallels here to many private traders who may have had a good strategy, but ultimately entered too large positions and then ruined their account in a losing streak. It’s somewhat reassuring and sobering at the same time that even a billion-dollar hedge fund controlled by Nobel laureates has imploded because of this fundamental mistake. Studies show that it’s often harder to recover heavy losses sustained on trading portfolios. If the losses are small, eventual recovery would be easier. But if the losses are huge, eventual recovery would be very much harder.

Many novices became bitter as a result of what they suffered in the markets. Wise traders, on the other hand, viewed what they suffered as a psychologically strengthening experience. If you had a bad experience in the market, you needed to feel as though you were being trained for glorious days ahead. As for me, I learned the value of risk management from what I passed thru in the past. I made sure I used my lessons as a catalyst for better trading performances and never regretted it. I saw how trading portfolios could survive provided we stop emphasizing huge profits. You must always be cautious and constantly aware of the dangers of targeting high returns in a short period of time. It doesn’t matter whether one is managing a billion dollars or a thousand dollars; both amounts can experience huge drawdowns or be kept safe. It doesn’t matter whether you’re the most popular analyst in the world; everybody is subject to the uncertainties of the future events. Now, if I ever feel I need bigger returns, I reflect on my past experiences. I’ve often wondered if I would’ve been a good trader if I hadn’t passed thru a trying experience. I was convinced that the market is the best teacher for foolish traders.

Do honest-hearted traders find it difficult to adjust to the kind of trading mindset required for lasting success? One of the traders I personally mentor reports: “At first, I found it difficult. Many times I felt like giving up. But I’m glad I didn’t, for I came to appreciate and love the right mindset and effective risk management in trading. Being aware of the need to watch our wallet made us focus on the noblest trading target, which is safety, and not to get distracted by greed. I and my colleagues thought less and less about huge profits and more and more about capital preservation. Indeed, the survival we began to enjoy was unsurpassed. In terms of profits, we mightn’t even make up to 10% per annum (but sometimes we make between 40% - 60% per annum), but we were completely immune from huge drawdowns. We saw risk management in action despite the uncertainties of the markets – not just in connection with capital preservation but in protecting our nerves. Now we can face the future with confidence. When you don’t go after huge profits, that’s when you truly rely on safe position sizing and witness a permanent safety of your capital.”

Are you willing to lose your money before you appreciate its existence? Don’t forget that the first goal of every sane trader should be capital preservation. There’s always another opportunity, but only if you’re still in possession of your capital. If you wait until you receive a margin call before you take risk management seriously, you may find that you end up struggling with emotion of self-pity instead of dealing with the challenge successfully. Tell yourself that its more important for you not to go broke than to get rich quickly. Back your words with a position sizing method that can help you meet this objective.

I implore you, think about the techniques that successful funds managers may have used in keeping their funds permanently safe. Decide which of their risk management strategies you’d like to imitate when trading. Also decide which, if any, bad attitudes and trading methods you want to avoid repeating. Discuss your conclusion with an experienced trading risk manager. A novice trader can succeed more quickly if he takes safety measures very serious instead of thinking about getting a magical entry system which supposedly bring colossal profits.

NB: Please watch out for my coming articles with these titles: ‘Carrying Out Stealth Raids in Weak and Strong Markets,’ ‘Worst-case Scenarios’, ‘Effective Swing Trading in Forex’, ‘Advanced Gap Trading’, ‘3 Recent Gap Trades,’ ‘Trading for a Livelihood, ‘If I Were a Trading Neophyte…,’ ‘Developing the Right Attitude towards Losses (Part 2),’ ‘The True Holy Grail,’ ‘Monthly Trading Report,’ etc.

I end this article with quotes from Dr. Van K. Tharp:

1. “Do you remember your last big trading loss and how painful it was? Did it leave you shaking your head, clenching your jaw, feeling tight in your gut, or just staring at the screen in shock?”

2. “In terms of your equity, how big was that last big loss? Was it more than 1% of your equity? If it was, beware! You may be risking your entire trading account by not understanding the concept of position sizing strategies!”

3. “When applied to your trading system, your position sizing strategy—not the indicator, entry, or even your trading system—determines your profits and losses… If you risk more than 1% of your equity per position, you take on a higher risk of burning through your equity. Stay safe to live long enough in the markets so you can learn and improve.”

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.

Friday, May 27, 2011

Weekly Trading Update (May 27, 2011)

“This approach might seem somewhat exaggerated for inexperienced traders, but my experienced for more than 10 years has taught me the value of psychology and money and risk management. Watch your wallet! Without capital there’s no trade, and there’s neither trading nor investing. The trader will become a dead duck”– Dr. Mircea Dologa


Hello:

Why are many systematic and discretionary trading approaches prone to short-term success and long-term failure? If there’s anything that financial history teaches us, it’s that the daunting job isn’t acquiring wealth but holding it for a long period of time. Isn’t this the reason why many traders enjoy huge profits in favorable markets and suffer huge losses in bad markets? Therefore the noblest aim is to gain as much as possible in good markets and lose as little as possible in bad markets. This is the way to survive. Results don’t come quickly in trading and if they do, they tend not to last. A disciplined trading approach is an investment in your future and you’ll reap enduring, consistent rewards if you have the strength of character to implement it.

Below is the summary of some of my trading activities this week.


AUDUSD
Primary Trend: Bearish
Within the newly formed bearish trend, the price was making attempts to rise; something that caused me to be stopped out at breakeven. It seems the bulls’ power is presently limited. If the bullish rise can’t go on further, another bearish move may resume.
Order: Sell
Entry date: May 20, 2011
Entry price: 1.0662
Stop loss: 1.0765
Trailing stop: 1.0662
Take profit: 1.0065
Exit date: May 27, 2011
Exit price: 1.0662
Status: Closed
Profit/loss: 0 pips (breakeven)

NZDUSD
Primary trend: Bearish
The bearish trend has already been violated seriously. If the present condition continues for a few more days, this would spell another phase of an uptrend. So I’d be looking for a way to buy, and of course I’ll set my stop and target. Every trade must have its stop loss and its target(s).


EURCAD
Primary trend: Bearish
There have been constant weak attempts by buyers to drive the price higher, but there’s great resistance at 1.3900. This resistance was challenged unsuccessfully. The price is still threatening to move upwards, and if it succeeds in doing that, another bullish phase would resume. I was stopped out of my short position with some profit.
Order: Sell
Entry date: May 5, 2011
Entry price: 1.4204.
Stop loss: 1.4404
Trailing stop: 1.3908
Take profit: 1.3617
Exit date: May 26, 2011
Exit price: 1.3908
Status: Closed
Profit/loss: 296 pips

EURAUD
Primary trend: Bearish
The primary bearish trend on this cross remains intact (and therefore my position is still open). The Euro remains weaker than the Aussie and this is expected to continue – it may even be more serious in the nearest future. Traders would do well to look only for opportunities to short this cross, minding the safety measures that can preserve their portfolios. One shouldn’t focus on winning, but on not losing.
Order: Sell
Entry date: May 5, 2011
Entry price: 1.3795
Stop loss: 1.3995
Trailing stop: 1.3511
Take profit: 1.3202
Exit date: N/A
Exit price: N/A
Status: Open
Profit/loss: 471 pips


EURNZD
Primary trend: Bearish
The bearish ride noted last week still continues. The Kiwi is presently too strong for the Euro and the chances that this situation can change are very slim. The price is still quoted below the SMAs 50 and 200. The ADX 20 level is close to 39 (showing a formidable strength in the bear market). The -DI is still above the +DI, indicating a persistent bearish pressure in the presently strong trending mode. My short position on the cross reached its target.
Order: Sell
Entry date: May 17, 2011
Entry price: 1.8130
Stop loss: 1.8256
Trailing stop: 1.7888
Take profit: 1.7556
Exit date: May 26, 2011
Exit price: 1.7556
Status: Closed
Profit/loss: 574 pips

AUDJPY
Primary trend: Bearish
I have an open position in this market right now. The market shows a real tussle in the context of the downtrend. The best thing to do now is to sell on rallies; since every bullish correction simply leads to a new selling wave. When the markets are reacting to unexpected news, correlations between the different markets would increase (as they often do in times of crises).
Order: Sell
Entry date: May 19, 2011
Entry price: 86.91
Stop loss: 87.95
Trailing stop: N/A
Take profit: 80.95
Exit date: N/A
Exit price: N/A
Status: Open
Profit/loss: 18 pips

Conclusion: Successful traders had had long struggles to adapt to the trading principles that work, but their patient efforts paid off. They’d been subjected to severe tests of their aims and ambitions as traders: but they’d learned many lessons, and their determination remained unbroken. Indeed, they emerged from the onslaught with great trading skills and valuable experiences.

When asked what his worst drawdwon was, Dr. Mircea Dologa answered with some of the quotes below:

1. “It happened many years ago. It was $3500 for a single day! Do you want to guess why? I did not follow the stop loss rule. I… simply made the error of not having a stop loss in place”

2. “Another thing is that most novices aren’t even aware of how much fraud there’s in the trader training and education business. Traders call it snake oil. But there are many ways to efficiently avoid it.”

3. “It takes a lot of hard work to reach the professional level by way of the labyrinth of the learning. Secondly, we should talk about what personality traits are indispensable in making an excellent trader: perseverance, patience, mastering impulsive behavior, giving-up some of one’s strongly-held beliefs, training oneself to the feel and practice of routines and specifically paying attention to details. As you might guess, the list can be very long. The trader who’s not capable of changing, creating or re-inventing these traits will have a very difficult journey, in the process of beating the learning curve.”


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.

Saturday, May 21, 2011

Another Way of Using the Williams’ Percentage Range

NOT WHAT YOU THINK

“If your trading isn’t going the way you want it to, change what you are doing… Maybe you need to change something about your trading system (your exits or your position sizing strategy). Or maybe you need to change how you approach your life in general.”

“Life is a process. There is no success or failure—only feedback. You’ve been getting feedback about what you’ve been doing for a long time. How have you been responding to it so far? Have you been making up a lot of excuses? Are you more interested in being right than making progress toward your goals? Are you willing to change now? It’s never too late. You’re never too old.” – Dr. Van K. Tharp

Hello:

The kind of trading approach that ensures survival is trend-following, and in view of any other trading methods, one should do trend-following only. Those who trade against the trend tend to pay those who trade with the trend.

One of the time-tested secrets of successful trading is to follow a trend. This prevents us from trying to pick tops and bottoms in the currency markets, which is part of the reasons why novice traders often get slaughtered and cooked for dinner. This article shows you how to trade alongside the ongoing trend. It also suggests a safe position sizing rule that goes with the strategy; something that can help you meet your trading objective.

A 50-period SMA and a 20-period Williams’ Percentage Range are used for the purpose of this strategy. The William Percentage Range (%R) technical indicator was developed by renowned futures author and trader Larry Williams. The system attempts to measure overbought and oversold market conditions. The %R study is similar to the Stochastic indicator, except that the Stochastic has internal smoothing and that the %R is plotted on an upside-down scale. The %R indicator is designed to show the difference between the period high and today’s closing price within the trading range of the specified period. The indicator therefore shows the relative situation of the closing price within the observation period.

Selling just because a price seems to be overbought (or buying just because it is oversold) may take a trader out of the particular market long before the price falls (or rises), because overbought/oversold level can remain in an overbought/oversold level for a long time – even though the market prices continue to rise and fall. If you choose to use any technical indicators, they should be used as tools to confirm your trading decision, rather than depending solely on them to initiate a trade. Simply taking trading signals off an indicator, or analyzing several indicators at the same time usually would have a negative effect on a trader’s bottom line. It’s very important that you’re able to make a trading decision based on your observations of the price action and by what you see on the chart.

Details of the Strategy

Time frame: 30-minute charts

Indicators: Simple Moving Average (SMA) and Williams’ Percentage Range (%R)

Indicators parameters: EMA 50 and %R 20, levels -30 and -70

Entry Signals: In a downtrend, sell short when the %R goes below -70 (oversold region). In an uptrend, go long when the %R goes above -30 (overbought region).

Orders type: Instant executions

Position sizing: 0.01 for each $1000 (thus making it 0.1 for each $10000)

Stop loss: 50 pips

Take profit: 150 pips

Risk-to-reward: 1:3

Potential risk per trade: 0.5%

Number of pairs and crosses: 7

Names of pairs and crosses: EURUSD, USDACD, GBPUSD, AUDUSD, NZDUSD, EURJPY, and GBPJPY

Maximum duration per trade: One week

Note on hit rate and survival possibility: Long-term survival assured with only 33.3% hit rate. If you hit only 3 out of 10 trades, you’re a survivor

Trade Management

Once a trade has been placed, the market should be allowed to play itself out, since the price might sometimes reverse against you by a few tens of pips before going in your direction. Simply put, either the stop or the target would be hit, but some trade management must be put in place so that trading results can be optimized. As soon as a trade moves in your favor by up to 40 pips or above, you may move your stop to breakeven. Moving your stop when the price has moved by only a few pips would usually result in premature exits (tighter trailing stops would often get you stopped out by negligibly transitory fluctuations in price before continuing in your favor). Then the position should be left until it gains up to 80 pips before 40 pips are locked by moving your stop. Adjust the trailing stop to 80 pips if the trade goes in your favor by 120 pips or more. A favorable trade may or may not hit the target, or it may hit the trailing stop within the one-week duration of the trade. Once an open trade is up to one week old, it must be smoothed regardless of the profit or loss status. The stop must never be widened under any circumstances.

A Trade Example

Attached is a chart depicting where the trade on the EURJPY was entered and exited. Please don’t forget that the SMA 50 would be used to determine the overall trend on the chart, then the %R would be used as entry points (see ‘Details of the Strategy’). In this example, the EURJPY was clearly in an uptrend and a long position was taken when the %R confirmed an entry point in the direction of the trend. The trade was profitable. Take note that the 2nd signal would’ve resulted in a breakeven at worst, and the 3rd signal would’ve made you enjoyed a nice bullish ride.

Instrument: EURJPY

Order: Buy

Entry date: May 17, 2011

Entry price: 114.60

Stop loss: 114.10

Trailing stop: 115.80

Take profit: 116.10

Exit date: May 17, 2011

Exit price: 116.10

Status: Closed

Profit/loss: 150 pips

A Note to Readers

This is another gift for you, my loyal readers. It’s another way of saying ‘thank you for reading my articles.’ It’s important to know that the %R should be used alongside the ongoing trend and every signal it generates against the trend should be ignored. This is another way of using the %R indicator – a simpler but more effective method. Going contrary to the entry rules may put you in the danger of trying to pick tops and bottoms or getting caught on the wrong side of a new wave of the market direction. If you follow all the trading, money management and exit rules explained here, your long-term survival is then possible. You’d do well to open a long-lasting demo account with a reliable broker who allows flexible money management and practice with this strategy for at least, 2 months. You’d be able to verify the effectiveness of this strategy yourself. What would be your trading results after that? Please, I’d love to hear your thoughts, questions and feedback on this strategy. You can email me at my email address provided below.

NB: Please watch out for my coming articles with these titles: ‘Worst-case Scenarios’, ‘Effective Swing Trading in Forex’, ‘Advanced Gap Trading’, ‘Resist the Lure of High Risk (Part 2).’ ‘3 Recent Gap Trades,’ ‘Trading for a Livelihood, ‘If I Were a Trading Neophyte…,’ ‘Developing the Right Attitude towards Losses (Part 2),’ ‘The True Holy Grail,’ ‘Monthly Trading Report,’ etc.

A quote from Boris Schlossberg ends this article:

“I have seen traders make the same mistake a thousand times. Instead of following market direction, traders always want to fade it, because they think they know best. I find it ironic that the single most popular video on the BK Youtube website is “Picking Tops and Bottoms” which has more than 10,000 views while my videos on flow - a much more effective trading strategy - garner only 1,000 views. Perhaps that’s as it should be. Perhaps if everyone traded trend and didn't try to second guess the market, we would never be able to make any money out of it. But all I know is that being too clever for our own good never ends well when you are trading FX,”

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.

Friday, May 20, 2011

Weekly Trading Update (May 20, 2011)

“Unfortunately I had no mentor. At that juncture I thought that I did not need one because I considered myself a self-educated person. After all these years, I realized I was wrong. I could have saved a lot of time and money if I had someone who could have mentored me.”– Dr. Mircea Dologa

Hello:

Suppose I walk into casino and while playing roulette, bet $15,000 on No.18. Number 18 goes on to win and I go home with $400,000. Obviously that’s a fantastic profit but certainly doesn’t yet mean that I’m a brilliant player or a professor of game theory, both of whom are capable of giving really good advice. This shows that a winning streak doesn’t necessarily portray one as a good trader. Good traders are known by their ability to avoid huge losses and sustain only small drawdowns during losing streaks. One seasoned trader wrote that he personally had a distrust of analysts and strategy salesmen who invariable only pointed out the winners. After all, in this game there are not just winners, as many traders have found out at their peril.

Below is the summary of some of my trading activities this week.

AUDUSD

Primary Trend: Bullish

There has been a serious threat to the long-term bullish bias. While the bearish correction has been halted, the bulls are having a serious difficulty driving up the price. I have a short position on the pair.

Order: Sell

Entry date: May 20, 2011

Entry price: 1.0662

Stop loss: 1.0765

Trailing stop: N/A

Take profit: 1.0065

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: -7 pips

NZDUSD

Primary trend: Bullish

There’s also a possibility that the primary trend here may turn bearish if there’s a bearish continuation. The price is trying to move up, but with a very limited momentum. Any weakness in the NZD may trigger further bearish move. Knowing when to enter the market and when to stay out; how to lose small and win big, constitutes a declaration of independence for a skilled trader.

EURCAD

Primary trend: Bullish

On this cross, there are constant threats to the bulls, just like some other instruments. My short position is still open.

Order: Sell

Entry date: May 5, 2011

Entry price: 1.4204

Stop loss: 1.4404

Trailing stop: 1.3908

Take profit: 1.3617

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 361 pips

EURAUD

Primary trend: Bearish

It’ll be very difficult for this cross to move up significantly. Anyone trying to go long on this cross can easily be sliced up, unless the person is going for a short-term trade. My position is still open, though the market is now consolidating. It’s better to remain shorted till the trend is definitely over. Then one would buy in a valley; selling on a crest after a substantial bullish move.

Order: Sell

Entry date: May 5, 2011

Entry price: 1.3795

Stop loss: 1.3995

Trailing stop: 1.3511

Take profit: 1.3202

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 373 pips

EURNZD

Primary trend: Bullish

If the present scenario persists longer, the long-term bias would turn bearish. The price is still quoted below the SMA 20. The ADX 20 level is far below 30 (showing a further decrease in the market volatility). The -DI is still above the +DI, indicating a noticeable bearish pressure in the present equilibrium zone. I have a new position on the cross.

Order: Sell

Entry date: May 17, 2011

Entry price: 1.8130

Stop loss: 1.8256

Trailing stop: N/A

Take profit: 1.7556

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 35 pips

AUDJPY

Primary trend: Bullish

The price is trying to force its way up – something that may present a good opportunity for some to sell. If the JPY gains enormous strength, the downtrend may be so strong. But if the present weakness in the JPY persists, the upward correction may turn into another nice uptrend.

Conclusion: Of course, keeping a trading portfolio permanently safe on a long-term basis can be a challenge, especially for beginners who were wrongly educated by those who presented their trading systems as a Holy Grail, neglecting to emphasize the importance of safe position sizing with risk management. Nevertheless, if a trader has a willing heart to adopt trade management principles that ensure survival in the market, success will usually follow. If you want to develop good qualities that befit a great trader, you’d have to work at it.

When asked how long it took him to be successful, Dr. Mircea Dologa answered with some of the quotes below:

1. “The first net profitable results came after three years of hard labor, but it did come, and the outcome was worthwhile. It’s very important that in order to get quicker results, it is indispensable that a novice trader follows the following learning sequence modules: basics of trading, trading strategies, money and risk management and the psychology of trading”

2. “In order to be successful in trading you need to do one of two things: a) Either, break the learning curve by yourself which takes a lot of time, money and very frequently, the trader will not be able to grasp alone, correctly and methodically, the principles of money management and psychological aspects of trading. Together these aspects make up more than 90% of the act of trading. b) Or do this with the assistance of a mentor, which takes far less time, but your money side would be more visible because you spend it in shorter period of time.”

3. “As for me, in the beginning, I used to go over some topics very fast, believing that they were not relevant to the performance of my trade output. For instance, I tried to short-cut the psychological aspects of trading. I thought that medical schools would have prepared me well enough in this field. But I was wrong. I found out to my own detriment that the psychology of trading is a separate branch of psychology, and that it needs to be seriously studied and understood in a detailed, well applied practical manner.”

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.

Saturday, May 14, 2011

Force Index Indicator

A TOOL WINNERS USE

“One of the most fascinating benefits of trading is that there are many helpful analytic tools that can be used in making informed trading decisions.”

Hello:

The Force Index was developed by Dr. Alexander Elder (who was quoted copiously in my past articles), and presented in his book Trading for a Living.

The Force Index (FI) is an indicator used in technical analysis to illustrate how strong the actual buying or selling pressure is. It focuses on three key pieces of market information - price change, extent of price change and trading volume. The force of every move is defined by its direction, distance, and volume. If prices close higher, the force is positive, if lower, then negative. The greater the change in prices, the greater the force; the greater the volume, the greater the force. That is the simple but powerful concept behind Force Index, and the basic manner in which force index can be used alone or in conjunction with a moving average to identify whether bulls or bears have control of the market. When volume is considered, an accurate sense of the market's momentum may also be quickly garnered. Force index is an indicator that can be further refined according to whether a trader wishes to adopt a short-term or a longer-term perspective. The two-day EMA of force index mentioned above supports a whole host of additional trading rules that offer precise trend indicators for exact trading situations. On an intermediate basis, a 13-day EMA of force index can point to the likelihood of sustained rallies or longer-term market declines, thereby generating trading rules for longer-term decision making.

The force index is calculated by subtracting yesterday's close from today's close and multiplying the result by today's volume. Force Index = (Today's Closing Price - Yesterday's Closing Price) * Today's Volume. If closing prices are higher today than yesterday, the force is positive. If closing prices are lower than yesterday's, the force is negative. And the strength of the force is determined either by a larger change in price or a larger volume - either situation can independently influence the value and the change in force index.

When using the indicator, it’s necessary to bear in mind the points below:

§ It is better to buy when the forces become minus (fall below zero) in the period of indicator increasing tendency;

§ The force index signalizes the continuation of the increasing tendency when it increases to the new peak;

§ The signal to sell comes when the index becomes positive during the decreasing tendency;

§ The force index signalizes the Bears Power and continuation of the decreasing tendency when the index falls to the new trough;

§ If price changes do not correlate to the corresponding changes in volume, the force indicator stays on one level, which tells you the trend is going to change soon.

In addition to the hints above, digging deeper into the characteristics of the FI shows that a flattening force index is also an important situational circumstance for traders. A flattening force index means that the observed change in prices is not supported by either rising or declining volume and that the trend is about to reverse. On the opposite side of the matter, a flattening force index could indicate a trend reversal if a high volume corresponds with only a small move in prices.

Please don’t forget that the higher the positive reading on the Force index, the stronger is the bulls' power. On the other hand, the lower the negative reading, it signals the strength of the bears. So for example, if Force index flattens out during a bullish move, it indicates that either (a) volumes are falling or (b) large volumes have failed to significantly move prices. Both are likely to precede a reversal.

I’d like you to be reminded that, though the FI is a tool some winners use, it’s no Holy Grail. Any trader who doesn’t make use of a safe and sound position sizing strategy in her/his trading activity has already prepared a recipe for pecuniary ruin.

One trading expert who’s successful with this great indicator concludes: “I regard the Force Index as one of the market's best kept secrets. To my mind this is the only credible attempt at combining both price and volume into one index. "On balance Volume" comes close; however, while it takes into account the direction of price movement, it does not incorporate the magnitude of price changes, and so, in my humble opinion, is decidedly inferior to the Force Index in its predictive power… I believe this combination of price and volume is important because while prices can lie and be subject to all kinds of games in this age of computerized trading, volume cannot lie - if it is there (or not there), then it means it is there (or not there). That to me is one of the few things I can hang my hat on in the …market.”

NB: Please watch out for my coming articles with these titles: ‘Worst-case Scenarios’, ‘Effective Swing Trading in Forex’, ‘Advanced Gap Trading’, ‘Resist the Lure of High Risk (Part 2).’ ‘3 Recent Gap Trades,’ ‘Trading for a Livelihood,’ ‘Another Way of Using the Williams’ Percentage Range,’ ‘If I Were a Trading Neophyte…,’ The True Holy Grail,’ ‘Monthly Trading Report,’ etc.

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.

Friday, May 13, 2011

Weekly Trading Update (May 13, 2011)

“Nothing worth having is captured and mastered overnight. It takes time and energy. You need to develop the dogged determination and the endurance to go the distance and become a winner. The drive to persist and persevere is fueled by the initial vision…” – Dr. Woody Johnson

Hello:

You need to know when the trend is your friend and when it’s not; when you’ll do what others are doing and when you’ll not do what they’re doing. According to Joe Ross, the key is to know when to follow the crowd and when to go against it. The crowd is usually right, until a turning point occurs. When virtually everyone has taken the position that the market is headed in a particular direction, there are few traders left to push the trend further. At that point, a countertrend initiates and moves the market in the opposite direction. The challenge is predicting when that turning point will occur, anticipating it, and developing a trading plan to capitalize on it. Now, this all sounds easy in theory, but in practice, it is difficult to implement a trading strategy to capitalize on this cycle. How can you predict the turning point? Some say it is almost impossible. All you can do is develop a sound method that works most of the time, but also admit that it may [sometimes, but not always] fail.

Below is the summary of some of my trading activities this week.

AUDUSD

Primary Trend: Bullish

The bearish correction that happened from May 2 – 5, 2011, was followed by a bullish continuation from May 6 – 10; and yet another bearish correction has been in place since May 11. This condition made me got stopped out with some profit.

Order: Sell

Entry date: May 3, 2011

Entry price: 1.0913

Stop loss: 1.1113

Trailing stop: 1.0705

Take profit: 1.0317

Exit date: May 6, 2011

Exit price: 1.0705

Status: Closed

Profit/loss: 208 pips

NZDUSD

Primary trend: Bullish

Instead of bearish corrections followed by bullish continuations, this pair has been in a clear equilibrium zone since May 5, 2011. But there’s a greater probability that the uptrend would soon continue, and when it does, it’ll be nice to find a good way of going long.

Order: Sell

Entry date: April 27, 2011

Entry price: 0.8063

Stop loss: 0.8263

Trailing stop: 0.7925

Take profit: 0.7466

Exit date: May 6, 2011

Exit price: 0.7925

Status: Closed

Profit/loss: 138 pips

EURCAD

Primary trend: Bullish

The strong bearish reversal that started on May 5, 2011, is still in place. If this situation continues for more days, perhaps several, it’ll make the longer-term bullish bias invalid. I still have an open position in this market.

Order: Sell

Entry date: May 5, 2011

Entry price: 1.4204

Stop loss: 1.4404

Trailing stop: 1.3908

Take profit: 1.3617

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 488 pips

EURAUD

Primary trend: Bearish

The Euro is getting weaker – having lost some of its recent gains against other currencies. While this is something that seems to have come just recently, the Euro has been getting weaker and weaker against the AUD since March 17, 2011. When the Euro was strong, it was hopeless against the Aussie, then how much more when it’s now weak? I expect this bearish trend to continue, and therefore my position is still open – until my target is probably hit.

Order: Sell

Entry date: May 5, 2011

Entry price: 1.3795

Stop loss: 1.3995

Trailing stop: 1.3511

Take profit: 1.3202

Exit date: N/A

Exit price: N/A

Status: Open

Profit/loss: 430 pips

EURNZD

Primary trend: Bullish

This cross is one of the fastest moving instruments in the currency markets. The correction that took place last week hit my target, plus the correction is still valid. The price is now quoted below the SMA 20. The ADX 20 level is, however, below 30 (showing a decrease in the market volatility). The -DI has crossed the +DI to the upside. If the present domination by the bears hold out long enough, the primary trend may eventually turn bearish.

Order: Sell

Entry date: May 5, 2011

Entry price: 1.8687

Stop loss: 1.8887

Trailing stop: 1.8687

Take profit: 1.8109

Exit date: May 6, 2011

Exit price: 1.8109

Status: Closed

Profit/loss: 578 pips

AUDJPY

Primary trend: Bullish

Interestingly, the price movement on this market is quite similar to that of the AUDUSD, especially on the daily charts. I was stopped out by a bullish continuation (while holding a short position). I’m now trying to look for another entry level, preferably in the direction of the trend.

Order: Sell

Entry date: April 21, 2011

Entry price: 88.47

Stop loss: 90.47

Trailing stop: 86.12

Take profit: 82.49

Exit date: May 6, 2011

Exit price: 86.12

Status: Closed

Profit/loss: 235 pips

Conclusion:: The markets are currently in a critical phase: it’s becoming difficult to see clear directions. Only time would tell whether the ongoing corrections would lead to resumption of the trend or sustained reversals on the market.

I end this article with another quote from Dr. Johnson:

“Greatness lies in the understanding that it is not focusing on the win, but mastering the fundamentals and consistent implementation that leads to the win. Greatness is in your grasp — you can program yourself for success with the right combination that unlocks the power of intention. Success is where opportunity meets preparation.”

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.

Sunday, May 8, 2011

Developing the Right Attitude towards Losses

“While many traders equate being right to making money, I believe that you are right if you follow your rules, regardless of your results. If you don’t have any rules, I would consider everything you do to be a mistake. I define a mistake as not following your rules.” – Dr. Van K. Tharp

Hello:

You’re definitely happy whenever you make a profit, but what about a loss? Do you have the right attitude towards losses? Do you overreact when you incur a loss? Do you consider yourself a failure because of losses (something transitory)?

You needn’t feel too bad as a result of losses, and there’s no need for you to feel inferior to any trading expert. You might think that trading is also easy for them (whereas it’s not). You might wonder what’s wrong with you whenever there’s a loss. If you don’t address this issue properly, you can become your own worst enemy. Sooner or later every trader has some losses, but those who can deal with losses are resilient. Past losses shouldn’t preclude you from seeing the new opportunities the markets can offer you. Whenever your entry criteria are met, bear it in mind that you have reasons to place the trade, despite the risk of loss.

Profits and losses, which are a good example of polarity, are an experience every trader in the world must accept up front. You need to come to terms with your trading failure – real or perceived or potential? Does a temporary run of losses or another trader’s success really mean that you’ve failed? Certainly not. When top traders or marketers talk about their profits (and some of them hide their losses), you mustn’t feel that you’re a failure by comparison; neither should you think that the trade you want to take right now would be a failure. This unhelpful thinking attitude can hold you back from making an attempt, out of the fear that your chances of success are slim.

If you think all your trades must win, or if you never try new trades for fear of failing – then you’re involved in self sabotage. You can learn from your losses and be motivated to improve, or you can focus on what went wrong and stay within you comfort zone. It depends on what kind of trader you choose to be.

It’s not bad to evaluate the performances of a successful trader, providing it’s done in an objective manner. Instead of ‘stirring’ up competition – even if it’s just in your mind – acknowledge the accomplishments of others. At the same time, without becoming boastful, recognize your own unique abilities which can help your trading results if applied.

If I feel I’m likely to fail at a trade, I’d reduce my risk and make light of the situation. It’s better to gain small and lose small, than to gain big and lose big. If you’re always after big profits, you’ll never enjoy a long-term survival on the markets.

So instead of letting fear of losses immobilize you, put your heart into the task. Why not think of an occasion on which you had more profitable trades than you expected. What lesson did you learn form those profitable trades? How can that lesson help you conquer any fear of loss you may be experiencing now?

Which personal failing do you find most discouraging? For example, if you’ve given in to some trading weakness, does that mean you’re a hopeless trader? Or is it merely an indication that you need assistance? Instead of focusing on your losses, reflect on your profits as well.

No-one is perfect. Everyone fails at something, sometimes. If you give yourself a sensible risk-to-reward ratio, you’ll eventually gain more than you lose.

NB: Please watch out for my coming articles with these titles: ‘Worst-case Scenarios’, ‘Effective Swing Trading in Forex’, ‘Advanced Gap Trading’, ‘Resist the Lure of High Risk (Part 2).’ ‘3 Recent Gap Trades,’ ‘Trading for a Livelihood,’ ‘Force Index Indicator – A Tool Winners Use,’ ‘A New Way of Using the Williams’ Percentage Range,’ ‘If I Were a Trading Neophyte...,’ etc.

I’d like to conclude this article with more quotes from Dr. Van:

1. “Most people spend years training for their profession. Then, after they accumulate a little money, they just open an account and expect miracles. Trading success doesn’t happen like that; it only happens when you get training that would be equivalent to preparations for any profession… It’s more difficult to be a successful trader without a strong commitment and complementary personality traits.”

2. “If trading were easy, big money would make it almost impossible for people to enter the markets. But trading well is very difficult, so the entry requirements are easy.”

3. “A strategic trader is focused on the big picture rather than lots of facts and details; he is also more logical than emotional; and he is organized but not compulsive.”

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.
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