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Saturday, September 24, 2011

Increase Your Odds Of Success Through A Sensible RRR

AN INTERVIEW WITH A TRADING ENTHUSIAST

Hello:

It’s common for interviewers to look only for popular traders to feature. Trading success isn’t the birthright of famous, institutional or billionaire traders alone. There are many unknown traders who’re also successful in their own world – whether they’re trading in their bedroom or they’re using a micro account. A humble trader who doesn’t seek popularity may have intriguing tips or lessons to pass across (something that can benefit trading enthusiasts out there). This article features an interview with a humble but successful private trader who makes consistent profits from the currency markets. His name is Iheuwaneme Davies.

Azeez: Please tell us your background.

I. Davies: I’m a civil engineer. I’ve taken part – and of course I still take part – in construction of individual houses, estates, public infrastructure, institutions, churches and universities. Civil engineering has lots of challenges, but over decades I’ve learned how to deal with those challenges. This is a wealth of experience that has helped me greatly in trading. I’m also a husband and a father.

Azeez: How did you become a Forex trader?

I. Davies: Just a couple of years ago, there was too much hype about Forex trading. There were posters, seminars, radio jingles and lots of noise about Forex and the benefits it can bring. In those days people thought that Forex was a get-rich-quick scheme. I wanted to be part of this apparent new income generation opportunity. I like new ideas and challenges. I saw Forex as a vehicle needed to keep me productive and keep giving me some income after I’m retired. In the end, my employers will ask me to go and that’s why I chose Forex as a good alternative or addition to my present job. Unfortunately, I started on a wrong road.

Azeez: What was the wrong road?

I. Davies: I first attended a one-day seminar at a media house, having been told that the seminar was all I needed to become successful. A margin call which I got on a demo account was enough to notify me that I was completely hopeless at trading. Then I arranged for further training. My trainer turned out to be someone who relied on robots alone since he couldn’t trade successfully on his own. I heard many tales of woes from those whose funds were wiped out by robots. My saving grace was that I stuck to demos only at this time because I didn’t depend on trading for my livelihood. Certain novices didn’t have this kind of luck. I later discovered that a vast majority of those who were making noise about Forex – doing seminars, coaching people or selling trading systems and robots were novices who were later proven wrong by the markets. Most of them didn’t have deep knowledge about trading. Some who seemed to have deep knowledge about trading had no long-term profits to prove their expertise. Myriads of people know about Forex, but consistently successful traders are a scarce commodity. Nobody mentioned risk management. I didn’t know that something like that exists in trading until 3 years later. Everybody was talking about profits and great wealth; no-one talked about risk management. Many people didn’t know what they were doing. Now, most of those people have stopped talking about Forex. Some don’t even want to hear of it again.

Azeez: Then how did you arrive at success in trading?

I. Davies: A hidden treasure won’t jump out of its hiding place and deposit itself into idle hands. One has to put forth effort to find it. I decided I’d never give up. I saw that trading is real. If it’s real, then there must be principles that work in it. My employers will soon ask me to stop coming to work because I’m close to the age of retirement. I don’t want to be redundant after retirement. I want to keep busy with something that can stimulate me. I began to search for the secret of success in trading. I wanted to know the truth and make it work for me. As a result of some frantic effort, I discovered the secret. I’ve been liberated by the secret and my life was transformed.

Azeez: Please brief us the secret?

I. Davies: What works in trading is an open secret which is, however, difficult for most traders to accept. The secret is repeated here:

1. Find a strategy that works and practice with it until it becomes second nature.

2. Use a risk-to reward ratio of at least 1:2.

3. Use very small lot sizes.

4. Cut your loss and run your profit.

5. You must be disciplined enough to follow your trading rules no matter what.

With very small lot sizes, you can experience many losses in a row without disheartening drawdowns on your account. When I place trades, those who’d not go in my favor would hit my stops instantly or later. Those who’d go in my favor would continue to develop in my direction, whether quickly or slowly. In the long-run, the profitable trades would add up, recover my losses and eventually add more profits to my account balance. One of your favorite principles should be to increase your odds of success through a sensible RRR. I also believe that you must be an amateur psychologist if you want to be successful in trading. Emotions of confidence, fear, greed and hope must be put in proper perspective. If you’re looking for a magic formula apart from the principles that are listed here, God help you!

Azeez: Could you tell us how you came across this secret?

I. Davies: I told you that I was first trained at a media house and later by an individual, who, I regret to say (as I discovered later), didn’t know what he himself was doing. I just knew that I was not yet a competent trader. My trading results were very much terrible. I was later introduced to a certain coach who has gotten some international fame. He explained to me what trading was really all about; in a totally different way. He introduced me to the principles I mentioned above. Since then, I’ve experienced breakthrough in my trading career. It’s unfortunate that majority of traders started their careers with the so-called trainers who themselves really need help. Those who started with the right education are extremely lucky.

Azeez: What now do you still find challenging in trading, and what do you find rewarding in it?

I. Davies: Before I discovered that without loss there can’t be profit, I used to get discouraged by loss. Now I’m no longer bothered by loss, even if all my open trades go against me. Sometimes, all or most of my open trades will go in my favor. Such is trading! During my novice years, I used to abandon a strategy that was in a losing streak, though the strategy worked well in the past. If I gained, say 35% or 50% returns with a strategy, I’d abandon it after I lost more than half of the returns. After I was convinced there’s no magic system, I stopped searching for what doesn’t exist and focused on risk control. Now, I think the key is to minimize losses in a losing streak. I won’t abandon my good strategy because of a losing streak. If I gain 25% profit with a strategy, I won’t abandon it because the profit is reduced to 15%. I’ll just make sure that I don’t lose too much during a losing streak. I know a winning streak is around the corner. The remaining 15% profit might be raised back to 35% when a winning streak comes around. The modest gains I get in trading are the satisfaction I feel whenever I remember I’m the master of my fate in the currency markets. I’ve found a real purpose in trading. I’m also rewarded by the long-term profit I make. I can now be retired with less anxiety. My knowing that trading can bring great rewards gives me a sound hope for the future.

Azeez: How do you apply risk management?

I. Davies: Before opening a trade, I make sure my lot size is very small. Then I use stop loss, take profit, breakeven and trailing stop to control risk. There are optimum parameters for these features, based on your strategy, trading style and timeframe. But I’d say that your risk control parameters shouldn’t be so tight so as to cause premature exits, and they shouldn’t be too wide so as to cause too much exposure.

Azeez: If risk management is that simple, how come some traders find it difficult to apply?

I. Davies: Gamblers think trading is as easy as hitting the ‘buy’ and the ‘sell’ button. They can’t imagine being in protracted training or using a small lot size, for that’s against their inordinate ambitions. They feel the trade they’re about to open must go in their favor because it has met their entry conditions. They don’t use stop loss because they think it unnecessarily stops them out of a trade that could potentially turn around and become a winner. Why would a gambler settle for 40% per annum when a marketer is promising them 50% - 100% per month? Disciplined traders have managed to get rid of this gambler’s fallacy.

Azeez: What kind of a trader are you?

I. Davies: I use a mechanical trading system, yet there must be some traces of discretion in what every winning trader does. I’m presently trading on a part-time basis, and therefore use daily charts for my analyses. Beginner traders tend to use smaller timeframes: its only lots of trading experience that can turn one into a long-term trader – using longer time horizons.

Azeez: What’s your trading approach?

I. Davies: I’m a trend follower. You can be surprised that I use common indicators like Moving Averages, Stochastic, and Relative Strength Index. The RSI is used to help in trend-following. I’m very good at candlesticks analysis, so I use it also in making decisions in the markets. I’m not good at trading news: I trade only what I see on the charts and I’m successful with that. I just need to trade what I see. For example, the Stochastic Oscillator may be in overbought region while an uptrend is intact. Ultimately, my trading system isn’t the secret of my success, as it’s true of all other systems. Trading systems aren’t the key, money/risk management is.

Azeez: What are your favorite pairs and crosses?

I. Davies: Some of them are GBPJPY, EURJPY, AUDUSD, EURCHF, GBPCHF and EURGBP. I like them because they’re prone to trend very well.

Azeez: On average, how many trades do you place per week? What’s your average performance per week?

I. Davies: I may place up to 8 trades per week providing that the markets are trending well that week. I also use pending orders to catch a new trend whichever way it goes. My monthly performance is around 2% - 5%.

Azeez: What was your biggest loss?

I. Davies: As I mentioned earlier, my biggest loss happened when I was still a novice. In those days, I used to feel bad after a loss. But now, due to a lot of experience in trading, losses don’t make any difference to me. A losing streak is temporary, and there’s nothing in this world that isn’t temporary. Just make sure you don’t suffer big drawdowns in a losing streak.

Azeez: What do you have to say to encourage those who’re still facing challenges in trading?

I. Davies: Be aware of your past mistakes, but try not to dwell on them. In trading, even a widely held idea can be false. One can remain a novice for many years. Still, you might hesitate to change your wrong beliefs, especially if you’ve held them for a long time. While correct trading principles can help every trader, I know that many traders won’t follow them. Maybe you learned about trading before without feeling that you’ve benefited from what you learned. If so, don’t give up. Trying to trade successfully when you’ve been taught wrong principles is like trying to assemble a puzzle using a wrong picture as a reference. You might put a few pieces together correctly but then give up in frustration when these don’t match the overall picture you were given. Start with the right picture, though, and the pieces will fall into place. Learning the truth about trading is more than intellectual exercise – it can change your life for the better. Similarly, taking risk management serious can help you gain serenity and peace of mind in an uncertain market.

Azeez: Engineer Davies, thank you very much for sharing your trading thoughts with us. We wish you the best of luck and success for the future.

NB: Please watch out for my coming articles with these titles: ‘Another EURUSD-USDCHF Correlation Strategy,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple RRR – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Excellent Money Management Flexibility – Make the Best Choice!’ ‘Resist the Lure of High Risk – Part 3’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Advanced Gap Trading – Trading with Insane Accuracy,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses - Part 4 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Suicide Trading Techniques,’ ‘ Clarifying Some Issues – Part 5,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Overview of My Signals Strategies,’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Is It Realistic to Give Guarantees in Trading?’ ‘Monthly Trading Report (Augsut 2011),’ 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

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