Forex Trading: Cracking the Trader's Code
Thursday, November 19, 2009 | Bill Poulos
A Special Note from The Tycoon Report: As a free investor-education newsletter, we continually look for opportunities to round out your education with different strategies and approaches.
Today, we are pleased to bring back Profits Run Founder Bill Poulos, who has talked with you about why trading forex now beats the stock market and how to find the right forex trading method.
In this third installment of a four-part series (which concludes tomorrow), today he'll teach you the steps to becoming an independent forex trader.
To learn even more about forex, be sure to visit the link at the end of this article.
Forex Trading: Cracking the Trader's Code
In my last installment, we talked about the keys to identifying a good trading method. This is imperative, especially in the forex markets, due to the speed at which these markets operate and the changes they can undergo.
But I’m frequently asked why traders should invest in methods as opposed to the many "systems" on the market today. I have a number of answers, which I’ll share with you today.
The Independent Trader or the Dependent Trader
This is the starting point: determining whether you want to control your trading actions, or give up control of your trading actions.
Which type of trader you are will dramatically affect the potential money you can make in the markets. In fact, it could well determine what the rest of your life will look like -- whether it is how long you work for someone else, when and where you vacation, or where and how you live.
You may think this is an exaggeration, but the reality is that those who take initiative can positively affect the outcome of their lives (and their trading) as opposed to those who let others determine the course of their lives for them.
I don’t believe trading the markets is any different.
It is important to note that anything requiring little to no effort will produce limited, temporary or no results. Conversely, anything requiring you to think and act for yourself will produce lasting and permanent results.
Trading -- whether forex, stocks, or other markets -- especially proves this true. Returning to the two types of traders, they illustrate very common mindsets -- which one represents you?
The Dependent Trader
This individual is looking for the easy way, wants to make a quick buck, or longs strike it rich -- but never wants to put any effort into the process of accomplishing such things (if such things even exist, and it should be argued that they do not).
Dependent traders will follow the crowd, trade based on hot tips, seek out automated "millionaire-making" trading programs, listen to all the news experts and blindly place "can't lose" trades (which do lose), all with no plan, no thought and no understanding of what they're doing.
Naturally they'll become frustrated with their losses and failures and do the only thing they can think to do: They give up.
Dependent traders are the trading equivalent of lottery ticket buyers; they know full well the odds stacked against them, but they believe anybody can get lucky, so why not them?
Needless to say, dependent traders exert little control over their lives and have little chance for financial success.
The Independent Trader
On the other end of the spectrum are independent traders, who want to have control over their financial future and who have learned (or will learn) how the markets work, which approaches to trading the markets really work, and how to empower themselves to trade without relying on others for advice or tips or news.
An independent trader understands and believes that only they can maximize their odds for success and only they can achieve their financial and life dreams. They will seek out and learn from others, educate themselves, learn from failure and strive to accomplish greater things.
It should be noted, however, that everyone has a little bit of the dependent trader in them at some point. The difference being, the person on track to become independent may take up with a mentor or lean on a reliable education source at the outset -- but as their knowledge grows, the independent trader will begin to apply what they've learned completely on their own.
The dependent trader never will.
Your 3-Step Plan to Becoming an Independent Trader
Step 1: Create and execute a trading plan.
Whether you want to day-trade or trade at the end of the day, or once a week -- decide what fits BEST in your daily schedule and then determine what sources from No. 2 and No. 3 (below) best align with your plan.
Don't try to apply day-trading methodologies to end-of-day trading and vice versa, as you'll likely discover they don't and won't work.
Step 2: Seek out two to three reputable education sources.
The goal is to identify one that you can understand and trust. Learn everything you can from those sources. Then, learn to apply it on your own.
Step 3: Learn from and test out multiple methods for trading.
You are unlikely to succeed without some basis in trading methodologies, especially when utilizing technical or fundamental indicators.
The steps above will require time and money investment. You should consider them your trading education costs -- it is far better to invest in yourself than to lose money too easily in the market.
That Darned Holy Grail of Forex Trading
This is what separates dependent traders from independent traders: Dependent traders believe the "Holy Grail" of trading exists. Independent traders know that it does not.
This is still a major trend that has been taking place in forex over the past year; a trend I believe will continue to grow and is only likely to STEAL your money from you.
If you've been curious about trading forex, or if you've been attempting to trade forex with little to no success, YOU will be the target of this trend.
What am I talking about?
Forex robots -- or, automated trading systems -- continue to flood the market right now. You've probably seen or heard about them, and you can easily pick them up for under $100.
Here are a couple of terrific examples, dedicated to the dependent traders:
The creators of these systems will tell you time and time again they have "cracked" some imaginary forex code … or they are former "insiders" … or they're going to "reveal" how they "legally rob the big banks."
And naturally, because they have such big hearts, they want to share these secrets with you.
Now I'd like to share a secret with you:
They don't work.
Truth is, we'd all like to find that secret program or code that never fails to make money in the markets -- whether we're trading forex or stocks or options -- and, we'd want a system that wouldn't require a single moment of our time … just load it up and watch the deposits rack up in our bank account.
Do you honestly believe this happens?
If you take nothing else away from the recent disaster on Wall Street, learn from this: Major investment houses lost billions of dollars last year -- and two, Bear Stearns and Lehman Brothers, went belly-up.
While it's true that their demise was caused in the real estate and derivatives markets, don't you think that -- if such an amazing, effective and profitable program existed (one that never failed to make money) -- they would have been using it?
Major banks around the world trade foreign currencies -- how is it that many of them are also recording record losses? Shouldn't they be profiting mightily from these "expert" programs? Wouldn't the capital they had to bring to bear have created huge sums of money for them?
In a word: No.
If such a "perfect" never-lose system existed (which, in a financial sense, is really a cross between the Holy Grail and Utopia), our markets would always move systematically in the same direction.
And, of course, everybody would be using it.
Obviously, that isn’t the case.
The reason is simple: Automated systems fail after constant, extended exposure to the forex markets.
3 Key Reasons These Systems Fail
1. Automated systems respond to technical indicators in the market without regard to what drives the markets.
2. They are designed for extreme short term trading and are easily wiped out when markets move against them. The best profits are actually made in longer moves (not 10 minute moves).
3. Robots are robots and not human beings. Markets are driven by psychological factors more so than any other. Technical and fundamental indicators and their impact on a forex pair or stock issue (or any other instrument) are NOTHING MORE THAN the psychological RESPONSE to current and future conditions. Robots cannot account for those factors and cannot respond to fast-changing emotional indicators or responses (fear and greed).
2. They are designed for extreme short term trading and are easily wiped out when markets move against them. The best profits are actually made in longer moves (not 10 minute moves).
3. Robots are robots and not human beings. Markets are driven by psychological factors more so than any other. Technical and fundamental indicators and their impact on a forex pair or stock issue (or any other instrument) are NOTHING MORE THAN the psychological RESPONSE to current and future conditions. Robots cannot account for those factors and cannot respond to fast-changing emotional indicators or responses (fear and greed).
By the time they do, most traders have been wiped out (as I showed you in my first article, which you can access here).
What REALLY happens to traders who buy automated systems is this:
They buy one. It works for a few days or weeks, and then it fails -- and fails again and again.
Then the trader becomes frustrated and jumps to another black-box program, which may work for a short period. But it, too, then fails.
So, the trader again jumps to another automated program ... see the pattern? The trader never realizes that the systems are not at fault.
The trader is at fault. And he or she becomes dependent upon such systems and continues to hunt for the elusive Holy Grail.
Let’s take a quick look at something -- for the amusement of it:
If this magical software really could turn $200 into $30,000 in a week...
...that means the second week it can take that $30,000 and turn it into $4.5 million. Then in week three, it can take that $4.5 million and turn it into a whopping $675 million.
I could choose to let it ride one more week to create numbers so big that neither you nor I could even comprehend them ... but hey, why be greedy? (Actually, at those rates, you could corner the USD market in about seven weeks.)
Here's the Real 'Insider's Code' -- the True 'Secret Weapon'
Your brain.
Think about this: Nobody has yet created a computer that can emulate the human brain. (Oh, they've come close ... in chess.)
We can process an incredible amount of data from multiple sources in ways a computer cannot -- AND, we can apply a psychological understanding of our response to that data, which a computer cannot yet do.
That's why black-box systems don't work over the long haul.
Sure, a system can be curve-fitted for back-testing purposes -- but, as we all know, past performance is not indicative of future returns.
So what does work?
Simply put: Trading methods work. Trading systems do not.
Methods allow you to pull together a stream of data (from simple to complex) and draw a more robust and complete picture.
A trading method allows the trader to remain IN CONTROL of his or her own money at all times. A trading system requires a trader to be OUT OF CONTROL.
If you don't have control of your money, you are at risk of total loss. Turning your forex trading over to an automated system means no control.
Learn from different trading methods that teach you how to trade forex -- not systems that do it for you. You'll remain in control of your trading activities, and you'll be surprised at how quickly you can outperform your own expectations.
Why Most Amateur Traders Fail to Become Independent
One phenomenon that derails amateur forex traders time and time again is what I call "method complexity syndrome."
They research a trading method, buy it and, the minute they receive it, they jump ahead to what they consider to be “the guts” of the method.
In doing so, they completely ignore all of the other aspects of trading -- including risk management, discipline and psychology.
They get into the "guts" of the method only looking for the big, mysterious, slap-your-forehead, jaw-dropping "secret" that will suddenly unlock the mysteries of the forex universe and make them Master and Commander of every forex pair.
All too often, they find themselves completely disappointed or the "guts" reveal something they'd already heard about (but had not practiced).
Amateur traders will then dismiss the method as "too simple."
Or, the amateur trader will look for that complicated formula, cryptic combination of indicators and -- all too often -- what they actually discover is a set of simple indicators working together in an uncommon way, and they say, "Well I could have done that!"
And they become disappointed or frustrated, because they wrongly assume that any method MUST BE complex; it can't possibly be SIMPLE!
So, they shelve the method or return it and complain that it's "not complicated" enough.
This is a serious mistake -- because the amateur trader will then repeat this error method after method and they will never take the time to learn and understand the full process of trading.
And they will never become an independent trader.
Don't make this mistake.
Understand that most trading methods out there are not complicated. They weave a smaller set of rules together in a simple manner (simple enough that anybody can apply them) but apply them in an uncommon way.
Complex systems are for computer geeks and big banks -- if you can't understand something, you can't possibly apply it.
Never skip ahead when learning a powerful new method for trading forex. Make certain you learn the setup, entry and exit rules (which should exist). Ensure that you learn how to protect your trade with stops. Learn how to apply your method on a timely basis (be it hourly, daily or weekly).
These steps will enable you to get the most out of the method and to learn how all facets of what you learn work cooperatively to make you a better trader.
Remember, simple but powerful -- using just a few indicators or rules applied in a non-textbook approach -- is the key to getting an edge in the markets.
Maintaining control, or taking control of your trading activities and your education process, will take you much further on the road to becoming an independent trader.
And in time, you’ll be more successful for that journey.
Good Trading,
(Please let us know what you think about Bill Poulos's article.)
Rate his article here »
Rate his article here »
Bill Poulos
Chief Investment Officer
<