October 2015

Editor’s Note: Fx365i student Chris Gibson was kind enough to share some excellent insights  from his trading journal.  This is the first in a two part series.

The Issue

Sometimes when I trade, I find myself switching from being very conservative and controlled to being very reckless and out of control. I get desperate for pips and lose sight of the value of conservatism in the number, frequency and style of trades. This typically leads to taking too many trades, taking trades too often, and taking lower probability trades. Trades like this are often based on nothing but emotion. Most of the time the main problem here is that I take too many trades.

Why does this happen?

A) Desperation mindset kicks in

B) Defense is forgotten in the name of offense

C) The feeling that there is a quota to be met for the day

 

Understanding these issues

All of these issues tie together, but to get a better understanding of all of them, I want to focus on them individually.

A) Desperation Mindset

I sometimes become desperate for pips. I become overwhelmed with a desire to get pips, to the point of becoming blind to the fact that there is no room for recklessness in trading. I feel like this is based in ego, and the desire to succeed. It is very important that I keep the consequences of this in the forefront of my mind. There needs to be a clear understanding of cause and effect, of actions and consequences, because the truth is, that the very thing I think I need to do to get pips for the day is going to be the thing that can result in me being down 20-30 for the day (this amount is 50-75% of my weekly goal in the wrong direction!). I must always remember that if I choose to trade in a desperation mindset, it can almost be guaranteed that it will end terribly.

There is much to be said about the need to keep your cool when trading, and not trade based on emotion, the type of trading that desperate trading exemplifies. I think the solution to desperate trading is broad, since the idea is rather nebulous, but some good habits to form would be:

  1. Keep in mind the consequences of foolish trading, and the value of wise trading
  2. Take a break (or better yet stop trading) when I feel myself becoming emotional
  3. Exercise discipline in limiting trades
  4. Value discipline over pips
  5. Remember that there are always more trades
  6. Remember that less is more

 

B) Forgetting Defense In the Name of Offense

One thing that I have found important as I have been learning to trade forex is the value of a good defense. Offense is important of course, because I would get nowhere without it, I would have no pips if I had never made an offensive move to take a trade. Despite this fact, I think that it is more important to focus on defense of pips that I already have than to focus on getting more, and not allow my desire for more pips to leave me with less than I had to begin with.

The whole idea of defense in trading forex is kind of funny because no one is coming out to get you, you are safe behind your screen as long as you are careful with your trades, but as soon as you enter a trade, you have made a very serious decision to expose yourself to the risks of the market. So then, it is not necessarily the market I have to defend against, since I am the one who is clicking the rate indicator. The real fear should be of myself. This is who I need to defend against, this is the enemy. He is the one who takes my pips. The portion of my being who exposes myself, my money, and my emotions to all kinds undesirable things, this is who I need to watch out for. There is an expression: “the best defense is a good offense,” But the opposite is true in trading; the best offense is a good defense, and if I defend against my own tendency to become sloppy and careless in my trading habits, I have a great chance of being consistently profitable in trades.

 

Some good habits to form so that I can keep my defense strong:

  1. Take each trade seriously: Would I take this trade if I were trading $100 pips?
  2. Recognize the risk of each trade.
  3. Remember that my desire for more pips could lead me away from my goals if I’m not careful.
  4. Call it a day at the very first reckless trade, it is too easy to lose and make a couple more reckless trades after the first, especially if I lose a lot of pips early on.

Luckily for those of us that trade the Market Maker Business Model, the way in which Forex works is extremely simple.

I’d like to lay out an example of what I would consider a pretty standard technical trading screen. It was built with free indicators that are widely available, and widely used by Traders across the world.

You can obviously see how easy and intuitive this type of trading is just at first glance…

Not so much. And it isn’t even so much an issue of which ones were used in the example. Frankly whichever indicator is added into the fold or taken out is a moot point. In a world where technical system development runs rampant, screens that take this form often fail to produce results.

Less is More

If you have ever been down the road of system development in trading, this thought is sure to have crossed your mind at some point. There is a tipping point where you are being bombarded with information and can not make a decision that holds any water. This is when the balancing act of removing indicators starts to come into play. God forbid you have access to the calculation settings, because that’s where things start to get really crazy.

It is possible to tweak nearly any screen to give perfect signals on any given day. If the market moved in the exact same way day in and day out this would work exceptionally well. Unfortunately reality stomps on that dream. So close.

So how exactly can you apply the ‘less is more’ to system development in Forex trading? Get rid of every indicator?

No we’re getting somewhere. The issue with standard technical indicators, however many of them are used, is that they mask the simplicity of how the market actually works. Using technical indicators can be great if you are playing a metaphorical baseball game. The only problem is Forex would then be football.

The Market Maker Business Model works in 3 stages:

Accumulation

Manipulation

Profit Release

  1. The accumulation of orders.
  2. A belief in retail traders is created and then manipulated.
  3. The market runs the direction most everyone thought it was going to go in the first place.

The moment you add a moving average (or technical indicator) of any type, you have added a mask to this process, as it does not show you when and where money has changed hands. It is based off of price action that will never repeat itself in the exact way for the rest of history.

To conclude, I would encourage anyone looking for the perfect trading setup to research the Market Maker Business Model. If Forex were a casino the Market Maker Business Model is card counting, while everyone else is wearing their lucky socks looking for a machine that ‘speaks to them.’

 

Shane Guth

Director of Education