Majority Traders Will Lose Money

The market is not a zero sum game. It is worse than that, as rightly pointed out by Edler:

"Markets are like pumps that suck money out of the pockets of the poorly informed majority and pump it into the pockets of a savvy minority. People who service those pumps, such as brokers, vendors, regulators, and even janitors who sweep exchange floors, are paid from the stream of money flowing through the markets. Since markets take money from the majority, pay help, and give what’s left to the savvy minority, the majority, by definition, must lose. You can be sure that whatever the majority of traders does, believes, and says, is not worth doing, believing, and saying. You have to stand apart from the crowd in order to succeed. Smart traders look for situations where a large majority does something one way, while a small, moneyed minority goes the opposite way." - Alexander Elder

The market has a huge overhead in order to support the trading structure. The money they need is obtained from the various traders through various fees.

Forex Trading results 2010-08-17

Last 2 weeks was marked by some losing streaks. See below. There are almost every trade taken has resulted in losses.


Whether you believe if or not, once you are out of sync with the market, you will keep entering at the wrong time and exiting at the wrong time. You would totally lose the rhythm of the market and keep going at the wrong direction. Even though your overall long term trend is correct, your individual trade still can go the wrong way.

The Importance of Discipline and Confidence in Trading

This week (2010-08-02 to 2010-08-06) is marked by many trading mistakes. There are a few lessons to learn from the trading. Even though the result showed net gain for the week, the major win was an over flow from last week's trade.



To summarize, here are some pointers to remember during trading:

• There were still too many times where I was looking at the 5-minute chart after placing a Swing Trade. This has to be stopped.
• Need to ensure entry point is correct for any trade. If missed the point, wait for it to come back or forgo the trade.
• Differentiate between Momentum Scalping vs Swing Trade.
• Trade along MAJOR TREND.
• Ensure CLEAR & GOOD Setup before entering trade. DO NOT Take HALF CHANCES.
• DO NOT OVER TRADE!!!
• WATCH YOUR GOAL AND STOP OR GO SLOW WHEN REACH YOUR GOAL!

The above lists summarizes the mistakes that was made during the week. Many of them were made within one single trade.

Risk Management in Trading & Investing

Everybody talks about the importance of Risk Management. So, what exactly is RISK? To start with, I have very faint idea of how to define RISK at the moment within my trading context. I can only group my RISK into 2 categories: 1) Known Risk. 2) Unknown Risk.

For the Known Risk, there are different ways to handle it and each will depends on the situation. For the Unknown Risk, there is no specific ways to handle it as it is unknown. For me, unknown risk will be group under one item and handle it as one unexpected event based on worst case scenario. In trading, the worst case scenario is to lose everything I have in my account. And my advice to all traders is to always be prepared to lose everything. If you are trading under that pretext, you will not have to worry about any unexpected events.

The rest of the risks which are already known will have a solution to handle it. Each will not be of any worry too. We cannot assume our strategy or theory will always work or even always be able to have an edge. It may turn out that we are having lower probability than 50% chance. The way to handle is to always monitor them.

Some possible events:
1. Complete market crash suddenly
2. Computer Failure
3. Your Broker gone bust
4. Political event
5. Natural disaster
6. War

Either of the event could mean that we cannot take out our money.

Key Trading Component / Concept - Leverage

We trade Forex using leverage. Using of leverage allows us to have exceptional gains when the market moves in our favor. On the other hand, if it moves against us, it will crash us badly. Because of leveraging, we must have stop loss so that we will not be wiped out by just one wrong trade. Not only that, it may end us up in trouble. Fortunately, almost all brokers have internal control where they will close out your position when you fund dries up. This is important in 2 sense. One, it protect the broker itself from unnecessary credit problem. Two, it protects the customer from over committing. This is win-win situation.

The concept of LEVERAGE is very important in trading particularly in Forex. The reason that a good trade can make lots of money fast because of leveraging. Without which, it would not have been possible unless someone has huge capital. The use of leveraging also means the proportional increase of risk.

When you are trading using leverage, you cannot take long term position. The simple reason is that even though you are CORRECT in your LONG TERM view of the market, you may be STOPPED OUT of your position when you are using LEVERAGE. The fluctuations in the market will be amplified by your leverage and you may end up with margin call even though you know that in the long run, the market will move towards your favor.

Because of leveraging, FOREX traders will take short term position up to a few days only. Because of that, it also caused the fluctuations to be rather high. That itself provides ample opportunity for short term traders like day-traders to make very profitable trades (or make huge losses).

In essence, at the end of the day, Profit = Reward - (Risk + Transaction Cost). In order to make a profit, the Reward must exceed Risk by bigger amount. Assuming Transaction Cost is 1% then:

Reward / Risk > 0.51

in order to be profitable.

Forex Trading 2010-08-03

Here is a snapshot of the trading results. After 30th July 2010, I only managed to make 2 trades. The trading strategy is slightly different from earlier trades. Now I focus on taking position instead of scalping trades. First 2 trades were unsuccessful because the price never come to the point that I wanted. So, I canceled the orders.



The first trade taken was shorting USDJPY. This trade was taken based on Fibonacci. Unfortunately, there was statement released by BOJ talking about intervention. This cause the pair to move in the opposite direction. To avoid risk, I decided to cut the losses short.

The second trade was based on pre-ISM news. Based on the market expectation and the major trend, I long EURUSD and held the position over 2 days. It went through very well but a few points shy of the target. After reviewing the chart pattern, I decided to take profit. It may not revisit the point in short term but in the next few days, I believe it will be there again. So, I am monitoring this pair. Over 2 days, this resulted in over 120 pips of profit.