A blog about my journey into trading......and other things

I’ve been playing golf since I was about 13, but more avidly starting in my late 20’s until now (I’m 40). Through all the years of practicing and playing and taking lessons and reading books and magazines I’ve learned a bunch about the game and the swing. Trading is fairly new to me, but from the start I have made note of the similarities in the psychology of trading and golf. There are all sorts of quotes from people about golf being 90% mental or something like that. But what does this mean? It doesn’t mean you don’t need a good golf swing and to practice your technique. It means that you need to apply sound thought processes to every swing. Watch the pro golfers and see if you notice the process they go through before they make a swing. It’s the exact same every time on purpose. What you don’t see is the mental checklist that they go through before each shot. Yardage, slope, temperature, wind speed and direction, grass type and length. All of these and more are considered before the golfer can properly commit to the shot at hand. And commitment to the shot is what HAS to happen for success.  Good results can happen without it, but that may be luck. The more I learn about trading, the more I understand the importance of the process that happens before a trade is made. Most of the time I know a bad trade right when I make the entry, just like a golfer knows a bad shot when it comes off the club. I know when I haven’t made the right preparations before taking the trade. I have watched numerous webinars given by pro traders and one thing sticks out like a sore thumb every time, the consistency in their approach. At first I thought I was hearing the same thing every time and wondered what I could gain from hearing it again. Then I realized how amazingly consistent the instruction is and how they go through the same process every time they look at a chart and set up a trade.  I haven’t learned enough about trading to develop a good enough mental checklist and pre-trade routine. I still make impulsive trades and then cringe when I see something obvious I should have considered right after I make the entry. Some things have clicked and I’m spotting good setups more often, but I have loads of work to do to get a process down that will help me develop into a consistently profitable trader. The other day I hit a 30 yard bunker shot from wet sand to 1 inch for a tap in. That didn’t happen without all the stuff that I have done over the years to learn how to do it and the short checklist I went through in my head before the shot. I knew the technique and was committed to hitting the shot a certain way with a certain club. I wish I had taken up trading when I was 13. Maybe I would have more time for golf now.

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Trade management has been my major focus over the last few months as I learn to trade the markets. By trade management, I mean taking profits at certain levels and moving stops to lock in profits. Trade management also means monitoring price action and other information to determine the continued validity of the trade.

When I started out I thought that a trade was this: enter trade, set stop loss point and take profit point, wait until either target is hit or stop is hit. Well, part of my account is missing because of this thinking on my part. I started to realize that trades would go somewhere in the “green” and then reverse to stop me out then keep going with the trend to my original target or beyond. This is a frustrating thing to have happen and is the major reason I all but stopped trading the Asian session, since I would set up trades and go to bed and wake up with this type of loss. I figured out I need to be more actively watching the trades as they develop and managing them. How to manage them was the thing that I didn’t really know. After several IBFX webinars and e-mails with my trading sensei, I think I got the picture.

There are several profit targets along the way in a trade and they come from different places, i.e. Fibonacci levels, past support and resistance levels, and psychological levels. I set these levels on the chart and use them as intermediate targets. I use MT4 only, so I don’t know about any other platforms yet. In MT4 I can close out portions of a trade even if I entered with 1/10 of a mini lot. Ideally I would enter a trade with as many lots as I see profit targets, but I have to keep my risk low as I learn. So, I enter with what I am willing to risk and then manage the trade as if I had multiple lots. Two major things I learned are to take partial profits at the first target and to move the stop to a few pips from breakeven when I take that first profit. Doing these two things has changed my outlook on trading in general.  I think I realize now that I wasn’t making bad trades before, I was just didn’t know a thing about trade management. So, the way it works out for me now is that if I have an entry that never turns profitable I get stopped out , but if there are profits I almost never lose on it. I just may not get all the profits I thought I might. The way I have learned trailing stops is not to set a certain pip number trailing stop, but to move the stop to the last take profit level after a clear break of that level.

To me this information should be some of the first stuff beginners learn. It seems that most people are concerned with the system and how to set up trades. This is really important, but what to do with a trade once it starts going your direction is really important as well. My biggest problem with trade management lately is the last part of the trade and getting the most out of it. I tend to be weak at sitting through pullbacks. I’m currently concentrating on being patient with the last part of the trade and trying to sit on my hands through pullbacks in order to realize the fullest potential of the trade. This has been really hard to do, but having already realized profits at certain levels along the way helps.

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I’ve been seeing a lot of traders give their opinions lately about stop loss orders. Most people never enter a trade without placing a stop loss order and others leave it up to themselves to monitor the position and close it when their mental stop is hit. I saw a great quote in a blog post from @milktrader the other day, “You can place a “quote” – stop – on your trade and thereby console yourself that you have defined risk, when really you’ve just described how much you are going to lose.”

When I reflect on all the trades I’ve made that were stopped out, I tend to think he’s right. Every one of those trades would have eventually gone back in my favor and been a “winner”. Many of them stopped me out and then reversed a few pips later to go past my profit target, while I watched in horror. This is the scenario where being able to take the heat and know prices will reverse comes in very handy and a hard stop loss order doesn’t. I mentioned before that I’m down roughly 25% in my trading account since opening it. Most of this could have been avoided had I known then what I know now, but I also think it could be worse had I not had protective stops in place.

I have been taught a different way of placing stop loss orders than maybe most others have. I feel like most people are placing stops using a set number of pips, using a percentage method, or using a risk/reward ratio. I mostly swing trade on whatever time frame I’m looking at and the stop loss order gets placed at a point when the trade idea is “no longer valid”. Usually a few pips on the other side of the 34ema wave. But the idea is that if I’m making a trend following swing trade, I don’t want to be in that trade any more if the trend is reversing. The stop is not placed based on the amount of money I want to risk on that trade. I figure that out with the position size.  Also, if the stop loss validity point is further away than the first profit target, then the trade has less than a 1:1 risk/reward ratio and I move on to another set up.

If I was trading for a living and watching my screens every second, I would probably set an alert at the point where I wanted to get out and close the trade manually with a few pips wiggle room. However, I have a full-time and very demanding  job so I have to place the stop order and profit targets when I enter a trade. I typically see a setup during the day and enter the trade and get called into an impromptu conference call or something. I can only hope the trade is working in my favor while I’m gone. If so, it’s like opening a present when I get back. If not, then I’m hatin’ it. Either way I’m glad I had the stop loss order. I think most traders that do use stop loss orders would be better served by placing a wider stop and using smaller size to manage the total risk to your account. For me, this has cut down on the number of trades that get stopped out and reverse shortly after.

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I compiled some statistics from my live FX trading account to illustrate some lessons I’ve learned in the first few months of my trading journey. I started the account in mid-February and we are now in mid-August, so it has been exactly 6 months of live trading. 

As you can see, my trading activity ramped up in March with 53 trades and peaked in May with 86 trades before decreasing. The percentage of winning trades decreased over the March-May period as I traded more. At this point, you might think from these stats that I was somewhere around break even in my account. After all, the losing percentage was never much higher than the winning percentage. Really, I had about 75% of the account I started with, or in other words, I lost 25% of my account. It’s OK , since I consider it tuition paid. I learned some valuable lessons about trading the live account that I could not have learned in a demo acct.

First, I learned about trade size and how much to risk on one trade. Part of the reason for the 25% drawdown was that I was trading the same size on trades that were risking 100 pips as with trades risking 15 pips. I had to realize large losses on single trades to realize how to scale down when I was taking a trade on the daily chart as opposed to the 15 minute chart. I use the MT4 platform and have a mini account, so I can trade from a penny a pip on up. Figuring out how much to risk on each trade has been eye opening. It really makes a difference.

Next, I learned to control the urge to make trades if there isn’t a solid setup. Winning trades feel great and it makes you want more. So, I would look for another trade immediately after taking profits and most likely lose. Sometimes more than I won previously. The invincible feeling of making a profitable trade makes you do stupid things that you might not otherwise do. Learning to control the urge to chase trades and to wait for setups that I like has helped turn my trading to the profitable side and along with profitability comes confidence, which you must have to trade well.

Obviously my trading volume has decreased dramatically. This is due to not wanting to lose any more of the account and concentrating on setting up trades that have good risk/reward ratios. My goal is to claw my way back to where I started in the account. I realized this wasn’t possible trading the way I was, so I slowed it down and started looking for reasons not to take trades instead of reasons to take trades. I heard this a million times from my trading mentor, but had to realize it through hard knocks for it to finally sink in.

Analyzing other markets with forex pairs has also been a key lesson that has helped me make better decisions. Each day I am looking at several futures contract charts, including YM (mini DJIA), ES (mini S&P 500), QM (crude oil), and DX (US Dollar index) in conjunction with the forex pair in order to make more informed decisions. I’m even trading these markets in a demo account (more about this later).

For now, I’m trading very small size and looking for profitable months overall. I was able to achieve this in July and so far in August. I plan to start increasing the size of my trades a little at a time as my confidence increases. So far, I’ve learned some valuable lessons and look forward to more light bulbs appearing over my head as I look at charts going forward.

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