Does Your Forex Trading Plan Encourage You To Overtrade?
Welcome Ryan, the author of this Forex Project guest post. Ryan trades from a quiet country lake house and helps traders through his blog at http://www.ryanokeefe.com.
Does your trading plan encourage you to over trade?
Recently I started a survey on my website asking traders to answer this question:
“What is holding you back from trading successfully?”
Currently the number one answer is “I make some money, and then I give it all back.”
Multiple factors contribute to this result however over trading is the most frequent concern struggling traders email me with. I have some thoughts to avoid over trading I hope you’ll find useful.
Consider Your Trading Plan
Over trading may be baked into your trading plan without you realizing it. I received an email from a concerned trader who struggled with taking too many trades although they were following their trading plan. I asked to look at their trading plan and found it was built around the 60 minute chart, the opening of each trading session, support and resistance levels plus the MACD indicator. How many opportunities do you think their trading plan generated on a daily or weekly basis?
I’m a big fan of slowing things down with longer time frames. Using a longer time frame automatically reduces the number of trades you will consider which reduces your trading plan’s built in propensity for over trading. You won’t be tempted to take a “valid signal” 10 times a day trading a daily chart. The vast majority of my trades are planned on the daily chart with the entry taken on a four hour chart.
Consider a Weekly Goal
In my trading plan I have a weekly goal of 50 to 100 points. This is a realistic goal for me to achieve and having the number written down reminds me that once I’ve made my weekly goal there is no reason to place it at risk. When the goal is achieved it is time to do anything other than trade. If you’re trading a lower time frame I think setting a weekly goal is even more critical because as we have discussed, shorter time frames offer more “trading opportunities” which place your profit at risk. I’ve had this weekly goal established for years and it works well against over trading.
Some traders may think a goal of 50 to 100 points a week is too low but keep in mind there are as many ways to configure a trading account as there are ways to trade it. With the right mix of leverage, lot size and risk capital you can do a lot with a goal of 400 points a month. Most important is to set your goal according to your personality; whatever you believe you can achieve and doesn’t stress you out in the process is best.
Do you really need to take that trade?
Before I open a trade I ask myself this question every time without fail. It seems obvious but so is lowering the landing gear before landing yet some pilots still manage to land with the gear up. Consider your emotions before you take a trade. Are you tired? Are you angry? Did you miss a good trade and now desperate to make some pips? Have you made your weekly or monthly goals? If you have met your goals you don’t need to trade, period. If you can honestly answer this question with a “yes” then pull the trigger but if not, don’t put your capital at risk.
Be accountable to somebody other than yourself.
Rob Booker pitched this idea in a presentation I watched online and I believe it is the strongest action you can take to eliminate any propensity you have to over trade. Whoever you report to should have a basic understanding of your trading plan and be able to question you on each trade in a constructive setting. This is a full disclosure exercise so find somebody you can trust.
I report to my Wife every Friday morning with a print out of our account statement. We go through every trade while I explain what system I used, why I took the trade, what mistakes I made and what I could do better next time. We also discuss what I should be doing during the upcoming week if goals are already exceeded.
If knowing you need to explain why you put hard earned profit at risk for an unnecessary trade at the end of the week can’t keep you from pulling the trigger, nothing will.
2 Percent Risk with 2R Multiple
I’ve been emulating my real account trades with my demo account for the January forex trading contest. I’m currently in first place with a return of 11.16%. After today though, my return will drop 2 percentage points to about 9% since I lost 2% on a trade. I don’t know if this will be enough to hold on to the lead.
This is an overview of how I’ve been trading so far in January 2008:
- I have been risking exactly 2% on every trade. No more, no less.
- I’ve been using my forex position size calculator everyday when figuring out my trade size and find it very handy. Some of you have commented the same.
- My R-multiple on every trade has been 2R. For those of you that haven’t heard of R-multiple, it’s really just an abbreviation for reward-to-risk. 2R means my reward-to-risk is 2:1.
- I’m not watching my positions so there isn’t any fancy money management going on. I haven’t once set my stops to breakeven. I’m just letting them ride. If they hit my target, they hit it. If they don’t and stop out, so be it. This is quite different from what I’ve done in the past. In the past, I’ve been quick to set my stops to breakeven when they move a little in my favor. The consequence of doing this was typically a gain/loss of zero. I can’t tell you how many times I’ve moved my stop to breakeven only to see it get stopped out. Then I have to watch as the price goes back in the direction I was trading where it hits my initial target price. This to me was more frustrating than losing. I’d rather stick to my guns on a trade instead of playing it scared.
Took My First Trade In Months
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/
New Forex Calculator
Phil McGrew sent me a note to announce his release of a Forex calculator. This calculator is pretty handy, particularly the position size tab which will calculate position size based on input variables such as equity, currency pair, risk in %, and risk in pips. The following are the rest of the features:
- Interest rollover calculations based on currency pair
- Currency pair correlation for three different durations, 5 day, 20 day, and 100 day
- Currency quote
- Margin calculation
I know there are probably other calculators out there that perform the same but he and his programmer(s) took their own time to develop this and offer it for free so I figured I would mention it. It is a windows application (not web-based). If you're interested, you can download here:
http://currensys.com/forums/viewtopic.php?t=447
Forex Risk Calculator Released
After weeks of development, the first beta release of the Forex Risk Calculator has been released. The calculator on the surface doesn't look too involved but believe me, there are a lot of calculations, logic, and validation that had to be taken into consideration. This calculator has all the functionality of the Excel FX Risk Calculator released from Alex Douglas. In it's simplest form, the risk calculator helps you manage risk. Ideally before each trade, you should know exactly what your entry price, stop loss price, and target prices are. After inputting these values, your account balance, and intended position size, the calculator will "calculate" your available leverage, pip profit, pip loss, profit at target, and loss at stop. In addition it calculates the most important values, the percentage of your account at risk and the percentage reward.
The calculator is programmed using AJAX (Asynchronous Javascript and XML) so it's responsive and fast. There is also no need to hit any submit button.
Just be aware that this is a beta release so it's not perfect. This will come in time and I use it more and more.
I also added a link to the left Forex Resources menu.
Trading the News Redemption
With the threat of falling to unprofitability after 4 weeks of automated news trading via FXEngines, redemption prevailed this morning.
My automated moderate trade entered long on the EUR/USD at 1.2724 at 8:30:58 and closed about 15 minutes later at 1.2759 for a 35 pip profit.
So after 4 weeks and 17 trades, I'm up 48 pips. I remain suspicious of this method of trading but it makes me realize even more how important risk and reward are. Typically a losing news trade will cost me 10 pips. In 4 weeks, I have 7 wins and 10 losses for a win percentage of roughly 40% yet I remain profitable.
I'm done trading for the week. It's time to take an overdue weekend break. We have the 4th of July holiday on Tuesday of next week so I'm not sure when I'll jump back into the market.
Channel Trading in the Morning
Does anyone channel trade the US Session? I've been doing so here and there but have been keeping track of any and all channel breaks during the past 3 weeks in the following currency pairs:
- GBP/USD
- USD/CAD
- AUD/USD
- USD/JPY
I think that I can say that from my limited observations over 3 weeks, these pairs definately move more consistently in the morning US session than others.
Another observation I've made is that the AUD/USD seems to be a great pair to trade. I never would have thought this was the case but I've found it to be very steady once the price breaks a channel line. If anyone has traded the GBP, you know the wild swings that occur frequently but it doesn't happen in the AUD/USD. Once the channel breaks, it takes its time to reach a bit of profit but it eventually does. Over the last 3 weeks, this pair has 7 wins and 1 loss. Run-ups have ranged from 30 pips to 90 pips with the average around 30-40 pips. The drawdowns have been very good with a maximum of -18 pips. This is assuming that your using a 20-30 pip stop. This pair actually was good for 30 pips today for me and helped me bring my losses down to around -50 pips.
Let's assume that your risk/reward is 1:1 for simplicity. If you have a 30 pip stop and a 30 pip limit, here was the performance of these 4 pairs over the last 3 weeks. I should note that the runups on some of these trades were substantial so if you rode it out for longer, the risk/reward would have been much greater.
GBP/USD – 4 Wins, 3 Losses (+30 p)
USD/JPY - 6 Wins, 3 Losses (+90 p)
AUD/USD – 7 Wins, 1 Loss (+180 p)
USD/CAD – 8 Wins, 4 Losses (+120 p)
I pick and choose my channel break trades and therefore it is discretionary. I find that I don't pick the right one though but if I was to take every channel trade over the last 3 weeks, I would be up 420 pips and this is with a 1:1 Risk to Reward.
Trading in La La Land
I've said this before but there is no easier way to take the emotion out of a trade by placing the trade, setting your stops and limits and going to bed. I made a decent trade last night going short on the EUR/JPY and woke up to a nice surprise, +42 pips (limit reached, trade closed.) I'll post the journal entry for this one later. I still see a favorable trade lower but I'm waiting for certain levels to hit.
Today should be quite a crazy day to trade. I already missed a trade at 7 this morning on the AUD/USD that I was going to go long on but thought twice because of a resistance line up above. I'm trying to show some discipline by not going into the trade 2 candles late. By then the risk/reward isn't what it was and it's a good way to lose money.
Have a good trading day and be safe.
Week 2 Performance
After my 2nd full week of Rob Booker 1 on 1 training, my results have improved from last week, I only lost 153 pips! I'm being sarcastic and once again don't blame anyone for my results this week but myself. I made 17 trades this week, only profitable on 5. My average profit per winning trade was 18.8 pips and my average loss per losing trade was 20.58. Now it isn't unusual for traders to only "win" 5 out of 17 trades but when your risk/reward is only 1:1 like mine, it is difficult. That is why I find myself questioning Booker's channel trading strategies where most trades only give you the 1:1 risk/reward.
On an upbeat note, I ended the week on a 2 trade winning streak, my 1st was contrarian and my 2nd was during the jobs report on Friday. I actually have been quite successful trading the jobs report in the past and it was no exception on Friday. As I have done in the past, I drew channel lines for the high and low for the previous 12 hours or so. I placed a buy order 6 pips above the upper channel line with a 20 pip trailing stop. I placed a sell order 6 pips below the lower channel line with a 20 pip trailing stop. On Friday, the price broke the upper channel, my buy order was initiated and 15 minutes later was automatically closed when my trailing stop was hit with a profit of 30 pips. I could have made more if I didn't place a limit but I've never been greedy when it comes to taking profit. I'm a lot more stupid when placing stops.
Rob Booker Training Update
Well, the bottom line is that since my first winning trade, I have had all losers. It is quite discouraging but part of trading and training. Rob really recommends using a demo account or a mini-account but I'm going to continue to chug along here. I am using a lot of Rob Booker's methods with a touch of emotion so my results are in no way related to his performance. I'll be entering my trades later today so everyone can view my performance so far. They will be listed to the left menu in, My Trading History or the My Goal & Performance links.
I'm going to put together a spreadsheet for this week to more closely analyze my losses. Rob Booker's methods for trading the 15 minute chart really don't give more than a 1:1 risk/reward ratio and going forward I would like to keep track of maximum drawdown so that I can see if decreasing the stop/loss is possible.
