Forex Education

Forex training education with relevant trading articles to enhance and educate both new and seasoned traders.
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How Love Can Help Your Trading

Emotions are energy; and if acknowledged as such and put into use you could gain a great deal of momentum towards your trading goals with them. Try this, think about the last great vacation you had or a major experience in your life where you accomplished something outstanding. As you close your eyes and activate the memory hone in on the details of what this event looked, sounded and felt like. As you focus on the sensory specifics you’ll notice that your emotions will begin to intensify. All of the feelings of joy, happiness, excitement and enthusiasm of the original occurrence will return allowing you to feel as though you were right back in that situation, emotional energy.

Free Trading WorkshopThe same holds true for a painful and negative event. If you activate the memory, for example, of a trade that went sour where you lost a substantial amount of money, the frustration, sadness, anger and resentment will return. The emotional energy released in this exercise is remarkable and it will happen every time you stimulate the state that is connected to this memory. The fact that emotions are energy is well established. Additionally, it is important to recognize how central energy is to your trade. In fact, one of the definitions of trading is that it is energy management. Intensity of intention, focus and attention and the momentum of motivation pointed in the right direction of creating consistency in both mechanical and internal data will develop the capacity for emotional (energy) strength and endurance in the trade. This is a prescription for engaging your A-Game at the platform which translates to bringing your highest and best trader to execute and implement plans in your best interests.

What I am proposing is that, contrary to what many talking heads in and around the trading business say, it is not preferable to try to become an emotional robot. Firstly, it is impossible because emotions are an inextricable part of our humanness. Secondly, when humans make decisions, the research reveals that about 90% of what forms the foundation of the decision is based upon how you feel. Thirdly, even if you could become an emotional robot you wouldn’t want to because if you take away fear, anxiety, doubt, anger and/or envy, then the emotional energy created by those feelings of joy, happiness, calm, inspiration, determination and love must also be deleted; if you can take out some you must take out all. If this were to happen you could not take advantage of the massive positive energy that these emotions bring to the trade. When you feel the energy of confidence, self-esteem, faith and belief in your process and yourself, you are poised to be much more effective in following your rules and keeping your commitments.

Another element of energy management is in the way that you treat yourself before, during and after the trade. Consider this, if you talked to anyone else the way that you spew self-hatred on you, it would either end in fisticuffs or you might be defending yourself in court. Whether talking about trading or not, it is deplorable how people curse themselves, call themselves stupid, idiot, a lousy piece of you know what that is a poor excuse for a human being; and much worse.

Let me give a personal example. Years ago I was the executive director of a clinical group that was part of a large national managed care system. At one time my staff was close to 200 professionals, para-professionals and many line staff. During that stage in my career I began to notice that when I had made a poor decision I would go into a tirade toward myself. I caught myself saying things like, “You’re a worthless leader. What’s wrong with you? You are a disgrace. You’ll never be good enough.” Those thoughts aren’t merely critical, they reflect expectations I’ve struggled with my entire life: 1. I should be able to master things quickly and easily. 2. Learning should not involve frustration. 3. I want to be the best at what I do; anything less is without value. These statements are “limiting beliefs” that I held about myself and these beliefs became the main motivation for the unacceptable ways I talked to myself. I am not the victim of these perfectionistic expectations; a part of me demands that my life conform to the way I expect it to be. When those demands aren’t met anger usually results; it makes me furious that life and my expectations don’t match in the way I want them to. Does this sound familiar? In other words, do you denigrate, devalue and ostracize the part of you that is not living up to the standards of the perfectionistic part. The anger becomes so palpable that people have been known to assault themselves through beating their heads with their own fists!

When you become aware that you are verbally or physically assaulting yourself then you must step back, take a deep breath and remind yourself that you are greatly compromising your ability to accomplish the very goals that you have undertaken trading to achieve. It’s not easy but it is necessary to begin one statement at a time to reframe the offending declaration. In other words, change the content and/or the context of the statement. For example, to “You’re a worthless leader.” The reframe might be, “I am developing and I get better with every lesson that I learn.” This process requires you to become self-aware, meaning that you begin to monitor your thoughts and feelings. As you monitor them you will begin to catch yourself thinking and saying unacceptable negative statements. You must approach this as training for a long distance race. It takes a willingness to step-by-step develop the capacity for strength and endurance. In the beginning you may falter a bit, but just like training for that marathon, if you stay the course and take small baby steps you will begin to appreciate you and what you have to offer. After using this process and other mental and emotional tools I was able to substantially change my thoughts and therefore my behavior towards myself.  Self-love can be difficult but not impossible. This is what we teach in the “Mastering the Mental Game” on-location and online courses. Ask your Online Trading Academy representative for more information. Also, get my book, From Pain to Profit: Secrets of the Peak Performance Trader.

Happy Trading

Dr. Woody Johnson – wjohnson@tradingacademy.com

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Options – Which one is the Right One Part 3

In Part 1 of this discussion, I talked about the various types of options expiration dates that are available (monthly, quarterly, weekly and LEAPS). In Part 2, I explained why for most underlying assets, the monthly options are often a better choice than weeklies or quarterlies: because of better bid/ask spreads.

The final factor to consider in selecting an expiration date is the amount of time that we plan to be in the trade.

Free Trading WorkshopEvery trade with options, or anything, else is based on an opinion on the future direction of the price of what is being traded. When we buy a stock as an investment, we might do so in the general belief that its price will rise over time. We may not concern ourselves with just when it is going to move and how far. Shares of stock never expire and we can hold them as long as we want.

If we buy a stock as a trade (rather than as an investment), by definition we intend to close out the trade at a profit based on some pre-determined plan. If there is no pre-determined plan other than the vague hope of a profit, then the purchase is not really a trade, it is just a risk.

Our plan for a trade must include some signal to tell us when it is time to close it out. This implies that we need a target price. If I buy this stock and its price goes up, how much is enough? At what price should I sell? This must be decided before we enter the trade. Incidentally, we also need to decide at what price we will terminate the trade if it goes against us. If I buy this stock and its price goes down, how much is too much?

Exactly how we pick our entry prices, target prices and stop-loss prices is beyond the scope of this article, and is the entire subject of our Professional Trader class. You can assume here that these have been selected based on sound analysis.

If this is an option trade, we must make sure that the option(s) we select have an appropriate lifespan. If we are buying options, of course, we need to make sure that they are going to exist long enough for the stock to make its move, and there is a little more to it than that.

Since we have been looking at the stock of General Electric up to now, let’s look at its recent chart:

Determining the target price for your trades is essential

Let’s say (and this is not a recommendation, just an illustration) that we think the current price level around $28 is where GE will make its stand and reverse the recent selloff; and that we think GE could rally back up to the area of its recent highs around $31.

If we plan to take advantage of this move by buying options, we need those to remain in existence long enough for the move to complete. One way of estimating how long that might be is to look at previous instances where that same trip was made. Looking at the chart above, we can see that the last time this occurred, the rally started on October 15 and ended on November 12, 28 days later. This is considerably longer than it took for the price to make the return trip, which was just about ten days. This is not unusual. In general, stock prices fall faster than they rise. We say that prices tend to crawl up the stairs and then jump out the window.

So, if we planned to buy call options in this case, we would certainly want options that would remain in existence for more than a month. When buying options we not only need not a target price, but a target date. Picking options with too short a life won’t work as we will run out of time before the move completes.

Then why not just pick options with a very distant expiration date, say a year? The reason not to do that is that we have to pay more for an option the farther out its expiration date is. Calls at the $28 strike that expire in February cost about one dollar. Those that expire next January cost about three dollars. The best balance when buying options is to select an expiration date that is about two months further out than your target date. Not only will you have plenty of time for the expected move to happen, but you will also not own the option in the last days of its life. This is important because the value of options decline over time, at an accelerating rate. By planning to sell them before they reach the last couple of months of their lives, we avoid holding in that period.

Finally, we should consider the question of whether in this circumstance we would want to be buying call options at all. We could also make money from this move by selling put options short instead. That is a choice that we would make based on whether options were underpriced or overpriced, which is a subject for another day. If our choice does turn out to be to sell puts, then a different set of timing factors come into play. We’ll look into those in a future column.

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Cut and Run or Let Them Run?

“Cut your losses short and let your profits run.” So many traders chant that mantra while trading in the markets. Anyone who has ever had money in the markets knows that this is an easy thing to say but much harder to actually do. The emotions of fear and greed creep into our trading environment and influence our trading decisions.  My students often ask me if there is a way for them to hold on longer to their trades for greater profits. Fortunately, there are some things we can do to help us to accomplish this.

Free Trading WorkshopThe first is to have a trading plan that will detail your risk management and trade management strategies.  This is such a critical tool to be a successful trader that we involve trade plan development in every one of Online Trading Academy’s courses.  Having written rules for managing trades can help remove the effect of emotions on your trading since you will be following a prescribed strategy (basically following your orders) rather than trying to make decisions on the spot.  Writing the trading rules down allows you to review them on a regular basis and see if you are consistently following them.  You are holding yourself accountable for your actions and are more likely to follow them.

In your trading rules, you should have some sort of guideline as to when you will move your initial stop to breakeven.  You could move it when the current profit is equal to the initial risk in the trade.  The disadvantage of this method is that you can get stopped out too quickly from time to time.  To avoid this, you could move the stop to breakeven once your profit is twice as much as the initial risk in the trade.  Or if you have multiple targets for your trade, perhaps you move your stop only after price has moved halfway to your first target in the trade.

Is it ok to move your stop?

In the previous chart, a trader that moved their stop to breakeven would not have been as nervous during the small correction as a trader who had not.  When small corrections in price occur in our trades, it often scares us into taking profits too soon.

You can also choose to use rules for adjusting a trailing stop as you are profiting in the trade.  This is not necessary for some traders as they let price either hit their target or stop out at breakeven.  But if you want, you can create a mechanical trailing stop that objectively exits you from a trade that does not quite reach your target before reversing.  One method I use is a moving average.  I will exit a profitable trade only if price closes beyond a moving average.  This is easy to observe and can also be programmed into most trading platforms to occur automatically.  The one thing you may notice about all of the above suggestions is that they are all rule based.  We need rule based strategies to become more objective in trading and not emotionally biased.

Another method to help you hold onto your positions and grow profits is to hide the P/L on your platform.  In TradeStation, you can see the current P/L of your position in so many places.  When you are in a trade you do not need to know how much you are making or losing.  You should have planned the trade before entry and should already know the potential loss if your stop is hit or the potential profit if you make it to your target.  How is watching the P/L change going to help you?  It does nothing but increase the power of your emotions as you become greedy or fearful which results in you breaking your trading rules.

Hid the profit/loss notification on your platform to reduce trade anxiety and allow you to follow your trading rules

Lastly, get paid for your effort.  I trade impulses of the dominant trend.  In our courses we teach you how to identify them.  Impulses tend to pause, but break through supply or demand on the lower timeframes.  Since that is the norm, I will often target supply or demand from a larger timeframe for my profit targets.  This allows me to be able to take larger wins and greater profits.  However, I am human and not immune to emotions like fear and greed.  To lessen the impact of them on my trading, I will often plan to take profits at two or more targets and effectively scale out of a position.  The first target will be the supply or demand from the timeframe where I entered the trade and the second will be from that larger timeframe I mentioned.  The larger timeframe that I use is determined by a formula that I discuss in the XLT program.

When you take partial profits at a smaller timeframe target, you are more likely to be relaxed and allow the remainder of your position to run to the predetermined target.  Already having been paid on the trade will allow you to mentally withstand the one or two candles that go against you or a small correction while you are in the trend on your way to your target.

So, the key to getting greater profits is to create trading rules that can make your trading more methodical rather than emotion based.  To be a successful trader, you need to be consistent.  To build consistency you need a plan.  To learn how to create that plan, join us in one of our courses at Online Trading Academy today.

Brandon Wendell – bwendell@tradingacademy.com

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Poor Performance Years and the Impact on Futures Traders

Welcome to 2016 and let’s hope the Futures markets finally decide to offer more opportunities for us swing traders.  During the year I was talking to some of my trading buddies and kept hearing the same thing, “What a rough year this has been.”  The ones who only day traded seemed to have a respectable year, but the ones who held overnight positions were not pleased with 2015.

I was updating my trading plan over the Holidays as I do each year and I noticed something I did last year that was unusual.  I actually made 3 other modifications during the year which is very unusual for me.  I’ve had the same trading style for many years and do my best to follow it just as it is written.  During 2015 I was making changes to my plan to accommodate the current market environment.

Free Trading WorkshopLooking back I wondered if I did the right thing or should I have just kept trading with my original plan?

As I reviewed the past year I did my usual Futures markets returns analysis for the year and found a rather interesting view of the Futures markets.

Out of 59 Futures markets only 10 of them had a positive return.   The 2 that had double digit returns were Cocoa 13% and Canola 12% while the rest were mediocre single digit returns.

Out of 59 Futures markets 30 had large double digit losses.  29 of those had losses greater than 10%.  And 17 of them were greater than 20% losses.  The worst performers as you might guess came in the energy sector.  Brent Crude was down -44%, Heating Oil down -42% and WTI Crude Oil down -38%.

The rest of the 59 were virtually unchanged for the year.

At the same time I found an article from a CNBC interview titled “2015 was the hardest year to make money in 78 years.”  The interview was conducted with Societe Generale and their comments just about summed up the year.

“According to data from Societe Generale, the best-performing asset class of 2015 has been stocks, whose meager 2 percent total return (that is, including dividends) still surpasses those of long-term bonds, short-term Treasury bills and commodities. These minimal gains make 2015 the worst year for finding returns since 1937, when the cash-like 3-month Treasury bill beat out other major asset classes with a return of 0.3 percent.”

The interview went on to say lack luster returns is why money managers have done so badly in 2015.  Hedge Funds were hard hit with the average return being down about 4% for 2015 according the Hedge Fund Research.

“It’s been an absolute meat grinder of a year,” McDonald said. “Hall-of-fame legends, [Warren] Buffett, David Einhorn, Carlos Slim, those are my favorite investors of all time and they all had bad years.”

According to other reports Warren Buffett is seeing his worst year since 2008 down 11% year to date.  Bill Ackman of Pershing Square Capital advised his investors that 2015 may be the Fund’s worst year since it was founded in 2004.

Most managers agree that even in bad years from the past there was at least one other asset class that offered substantial yields.

An interesting point from the interview was “2008 was a terrible year in the stock market, but bonds were up 22 percent. But this year, not one major asset class had a good year, and that’s what’s made it so difficult across the board.”

With T-Bills returning a meager 0.11% and the CRB Commodity Index falling more than 23% it was a tough year overall for parking money and expecting a decent return.

After performing my annual year review I still had that nagging question in my head.

Looking back I wondered if I did the right thing or should I have just kept trading with my original plan?

At this point I referred back to my trade sheets I keep for my trades.  For each trade I make I fill out a trade setup and execution sheet, much like a trade journal.  The most important part of that sheet to me is the question at the end of the worksheet “Why did I take this trade?”

If I took the trade out of my plans rules I must document that.  Or if any other emotional event caused me to break my management of the trade then I must document that as well.

This allows me to see if I had been following my rules or was there a change in the way my rules are working in the current market environment.  Interestingly enough I found I had been following my rules the majority of the time (only human, so I can’t expect to be perfect).

With this information I feel I did the right thing adjusting my rules to follow current market conditions.  If I had broken my rules more than I followed them then obviously I know the problem was with me and not my rules.

For many of our Futures markets this is back to back negative year to date returns.  Many of the Commodities are at or near production cost and this could cause a price rally if we get any domestic or export demand.

Don Dawson

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Thinking Better Odds

sseiden-20160119-trading-opportunities

Much of the time the trading articles I write are focused on where to enter a position more than any other topic. This is because it’s the most important part of the trade. If you can’t get your entry correct, meaning low risk, high reward and high probability, the other components to your trades such as the exit and management will not work. Today I want to focus on a simple yet powerful technique related to how you exit positions that should help you increase your winning percentage. To explain this, let’s look at a recent trade from the Mastermind Community Supply/Demand grid.

Profit Zone

In short, your profit zone is the distance from your entry to your target. So in the example below, the profit zone is the distance from the short entry (supply) to the demand level below, which would be our target. The black line on the bottom of the chart is the origin of the rally (demand) that brought price up to supply for our short entry. Many would take that demand area as their target, thinking, sell short at supply and buy back for a profit at demand.

NASDAQ 1/07/16

Find trading opportunities that increase your success and know where to enter your trades at Online Trading Academy

Profitable Thinking

Demand, as we know, is a price level where there is competition to buy. So, if we buy where others are looking to buy we are going to have to compete with them at that level which makes getting filled difficult. So, if we know there is competition to buy at demand that is the last place we want to buy. If we want a much easier time getting our buy order filled, we need to buy before price reaches the area of demand. Instead of buying back our position at the black line (demand area); buying back at the blue line (circled area) will give us a much easier and better chance at getting filled. Another way to say this… Instead of buying when there is competition to buy, buy back for your profit when there is still competition to sell. While you will often miss out on a little profit, that’s ok. You are giving that up for trading opportunities with a stronger probability of success.

The Tip

If you have been reading my articles for a while, nothing I have said so far is brand new information. Let’s get to some of that now. For all our short term and long term trading opportunities, one component that must be present is an ideal/risk reward. No matter how many Odds Enhancers are present, the risk/reward must be there. To help define this for the purposes of this article, when we say 3:1, we mean risking 1 to potentially make 3. Furthermore, the “1” is the distance from entry to your protective stop and the “3” is the distance from your supply/demand level to the nearest opposing supply/demand level. However, given the information we discussed above on competition and how it relates to the probability of getting filled, we have an opportunity to increase our odds of a profitable trade.

Free Trading WorkshopIf you are looking for trading opportunities that offer you 3:1, make sure the chart is offering you at least 4:1. If you are looking for 4:1, make sure the chart is offering you at least 5:1 and so on. If you want to increase your winning percentage even more, try this… If you are looking for 3:1, make sure the chart is offering 5:1.

I employ this concept on most trading opportunities I find and take. Most people who find 3:1 on a chart set their trade up to take action at 3:1, I don’t. Instead, I would make sure the chart was offering at least 4:1 and then take profit at 3:1 or pass on the opportunity.

Of course, to do this objectively you must be able to qualify and quantify real demand and supply in any and all markets with a very high degree of accuracy. All the information you need to do this is clearly seen on a price chart if you know what you’re looking for.

Hope this was helpful, have a great day.

Sam Seiden – sseiden@tradingacademy.com

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Helping Your Odds in Forex Trading

Hello traders! Sooo…neither of us won the Powerball Jackpot of $1.5 billion dollars. Not that much of a surprise, is it? Knowing that the odds of winning were something like 1 in 292,000,000, we shouldn’t be shocked that we didn’t get the easy money. Now that the hype of the Powerball super- size jackpot has died down a bit, let’s discuss how we can increase the odds of success in trading, shall we?

Most people, when they first get into trading anything, end up reading a book about technical analysis or even perusing a few free websites trying to figure out how/when to enter and exit their trades. Very often they will use a set of “classic” technical indicators to make their decisions, such as a moving average crossover. In the following 240 minute AUDUSD chart, I’ve marked three moving averages crosses. Generally speaking, a new trader will buy when the faster moving average (in this case the 50 period) crosses upward through the slower moving average (the 200 in this example). This same trader will sell when the faster moving average crosses down through the slower. The “buy signals” are marked in blue, while the “sell signal” is marked in yellow.

Common mistake using moving average crossover to plan trades.

Here is the huge problem. When looking at the chart, many new traders are looking at the price point where the moving averages CROSS, not where the price is when the moving averages cross. No, I’m not making this up. Having taught thousands of traders in my ten year tenure with Online Trading Academy, I’ve seen pretty much every mistake that exists in trading.  (If you have a “new” mistake, one that hasn’t ever been done before, let me know!)

Free Trading WorkshopI’ve written on the chart what the prices of the crossovers were; the first buy in blue was .7081, the yellow sell was .7160, and the second blue buy was .7180. If you took these numbers as what you thought your entries were, you might have thought that you made about 80 pips on your first long trade (bought at .7081 and sold at .160). If you went short when you exited your long trade you would have lost only 20 pips (sold at .7160 and bought to cover at .7180) for a net gain of 60 pips.  Not too bad, right? However, what were the prices of the actual CANDLES when the moving averages actually crossed? Uh oh, now we have a problem!

I’ve marked the actual prices on the chart as well. The first buy in the pink circle would have been at about .7250, the sell at .7135 (in the green circle), and the second buy at about .7230. Suddenly this technique looks terrible! So, the actual performance would have been a loss of about 115 pips on the first long trade; again, if you reversed your position when the moving averages crossed the short would have made a loss of about 95 pips! You can probably surmise what I think about moving average crossovers…

Here is another picture of the same pair and time frame, but instead I marked in a couple of demand zones and a supply zone. If you are new to Online Trading Academy, our core strategy tells us to buy in (what we believe is institutional) demand and to sell in (institutional) supply. Using our strategy, a short trade could have been taken at .7355 and covered at .7085-a gain of 270 pips. A long trade could have been taken at .7075, and exited at .7355, for a gain of 280 pips! A bit better performance, wouldn’t you say?

Why trades using moving average crossovers fail

I want to mention one last tidbit to increase your odds in trading. Push back a bit from the screen you are reading this on. Now, notice how we have a relatively clear sideways channel over these couple of months of trading. Ever play the high-low game with a deck of cards, where you pull out a card and make a bet on if the next card will be higher or lower than the first? If you pull a 3, what are the odds that the next card will be higher than a 3? Pretty good, I would guess! If you pull a King, what are the odds that the next card will be lower than the King? Pretty good again! Now, if you pull a 9…now what? That’s pretty close to 50-50 odds that the next card could go either way.  Using Online Trading Academy’s proprietary Odds Enhancers helps us to determine (figuratively speaking) what card we have pulled. Selling at the .7355 is like pulling a King…buying at the .7075 is like pulling a 3. Pretty high odds that the next card (trade!) will work out. To more fully understand how these Odds Enhancers can help you in your trading, see you in class!

Until next time,

Rick Wright – rwright@tradingacademy.com

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