October 31, 2007
First, let me state for the record that I do not trade Forex full-time. The fact is that I have just started getting back into it after a couple of months of hibernation. It was initially my goal to trade full-time within 1 year of discovering Forex but this just hasn't happened due to many factors. I'll talk about my evolution since then, the mistakes I've made and learned from, and where I intend to go from here.
I’ve been looking back over 2 years ago to when I first found out about Forex and it got me to thinking of my evolutionary history. I’m sure what I did first is similar to what many others have done, read, read, read. The first book I bought was a decision made up for me considering it was the only Forex related book in the investing shelf at my local book store. That book was “Forex Made Easy” by James Dicks. I immediately saw through the fluff and came to the conclusion that Dicks was nothing more than a marketer. Nevertheless, the information in the book at least gave me some basic knowledge, like what a currency pair and what a pip was. From what I recall, the next book that I read was Luca’s, “Trading In The Global Currency Markets” which gave me more information like who the main players were, what makes currencies move, technical analysis, and fundamental analysis. If I could choose now what books I would have chosen to read if I knew then what I knew now, they would probably be “Trading in the Zone” by Mark Douglas and “Trade Your Way To Financial Freedom” by Van K. Tharp. The main reasons for these choices are because both books deal with psychology and how greatly this comes into play during, before, and after each and every trade. Tharp’s book also talks more about expectancy and position sizing than any book or online resource I’ve ever encountered.
After reading these first two books in addition to many online references, I decided to apply for a demo account at FXCM. I’ll be the first to admit that I had no idea what I was doing. What the demo really did for me was get me familiarized with order entry and exit. It also gave me an idea of how much I could expect to lose on a particular trade. During these first few weeks of demo trading, I just randomly placed orders without a care in the world. I’d do things just for the hell of it without thinking of the consequences. Why should I have? This wasn’t real money. It was a game like monopoly. There was no way that I could take this seriously. This was not going to motivate me to learn and I knew it. After a few weeks, I jumped right in and opened a mini-trading account trading 10K lots at FXCM with about $1000 USD. What happened from here can easily be guessed based upon others experiences. I’ll continue the story further in part 2.
October 27, 2007
I took my first trade in months this past Thursday. I have been slowly trying to get back into the forex market by cautiously watching the GBP/USD. It's been a while since I followed any currency pair so I wanted to be sure that I watched the GBP/USD for a couple of days before taking any trade. I've decided to start referring to my profits/losses in terms of expectancy. Expectancy is "simply the mean or average R-multiple generated." (Source:http://www.iitm.com/sm-Expectancy.htm)
The "R" in R-multiple is short for risk. The best way to understand it is to either read the source above or continue reading. Let's take my first trade as an example. I knew my total dollar risk before entering the trade, that amount being $650.94. (yes, that exact) I exited half of my position when I had profited $329. I moved my stop to breakeven on the remaining position. Unfortunately I was stopped out on the rest giving me a total profit of $329. To figure out the R-multiple, you would take (profit / amount risked) which in this case was $329/$650.94 = .5R. Ideally, the higher the R in a profit situation, the better. For instance, a 2R multiple would be obtained in a 2:1 reward/risk trade and a 3R multiple in a 3:1 reward/risk trade. In a loss situation, a higher R is actually worse. Ideally, if you lose on a trade, the R-multiple should be 1R or less. If it's 1R, it simply means that you lost the amount you were expecting to risk. So in my above example, if I lost $650.94 on the entire trade, my R-multiple would have been 1R. Let's just say that I got stupid and decided to stay in the position and not honor my stop loss setting. Because of this stupidity, let's also say that I wound up losing $1301.88, twice as much as my initial risk. Calculating using (loss / amount risked) I would have an R-multiple of $1301.88/$650.94 = 2R.
So what does all of this mean? Well, I only have 1 trade to calculate my expectancy which would currently be .5R. I'll get more into calculating mean expectancy once I've compiled more trades. But having .5R isn't desirable because it basically means that I risked twice as much as the reward I obtained. This is exactly why I want to try to use R-multiple when I talk about my trades because even though I had a $329 profit on my first trade, it isn't as rosy as it may seem. The R-multiple was only a .5R and although it was profitable, if I trade this way in the long haul, I'll surely lose.
Another good source that also mentions the critics of R-multiple can be found at http://tradermike.net/2006/09/r_r-multiples_defined/
October 27, 2007
Forex Project and my other websites have been undergoing a hardware upgrade as of last Thursday. The speed and responsiveness of all sites has most certainly improved. Upgrades have been completed and there should be no further interruptions.
October 21, 2007
I've been slowing getting my Forex "legs" back by reading a book I picked up months ago. The Book is called "Trade Your Way To Financial Freedom" by Van K. Thorp. I picked it up months ago based on recommendations from Simon over on his blog. I can see why he thinks so highly of this book because it is so different from the plethora of trading books out there. Van stresses managing reward to risk in your trades and position sizing. I was certainly most interested in his position sizing chapter of which I'll be talking about more in the future.
Poor position sizing can kill your account. Risk too much on any given trade and it could be impossible to recover. I've been down this road before and the reasons for this were inexperience and greed. If you were to open a $1000 trading account and you lose $200 on your first trade, this would be a 20% drawdown. The percentage gain you need to recover from this loss is a possibly manageable 25%. But if you were to lose $400 on your first trade, or a 40% drawdown, you would need a 66.7% gain to recover from this loss. This information may be trivial and known by many, but the extent isn't quite noticeable until you see the following table. Losses beyond 50% require "huge, improbable gains in order to get back to even."
Recovery after Drawdown
|Drawdowns, %||Gain to Recovery, %|
October 16, 2007
Forex On Top has been updated. Not much change at the top…. http://www.forexontop.com
October 3, 2007
I was reading an article in the latest Currency Trader Magazine and they tried to prove or disprove that the Forex market has been trendier than other markets. I've heard for years that the currency market is a preferred market by traders because it trends more so I was interested in what conclusion they reached. They compared three currency pairs, the EUR/USD, the GBP/USD, and the USD/JPY with the S&P 500 Index, the 10-year T-note yield, and one NYSE listed stock, Boeing. I'm not going to summarize the article; if you're interested in it, you can download the magazine for free but their conclusion was that the Forex market IS NOT trendier than other markets. In fact, they found the S&P 500 Index and the Boeing stock to be trendier than all three currency pairs. This is interesting considering I always just took others word for this misconception despite never being shown evidence to prove this. If you want to download the October issue of Currency Trader Magazine, you can do so by going to http://www.currencytradermag.com.