Fear in trading

How do you define fear?

"A strong emotion caused by anticipation or awareness of danger, it implies anxiety and usually the loss of courage." This definition of fear is useful in helping define the issues that traders face when coping with fear. The reality is that all traders feel fear at some level, but the key is how we prepare to address our concerns related to taking on risk as a trader.

Mark Douglas, in his book, ‘Trading in the Zone’, says that most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting too high and too low and causes them to react emotionally, with excessive fear or greed after a series of losses or wins.

All traders will encounter fear at some stage, no matter whether you are a professional or a novice trader, this seems inevitable, and to succeed and fight fear, traders will have to work through this positively. Winning traders manage their fear, while losers are controlled by it. Winners take positive action in spite of their fears.

Two of the greatest fears that a trader will encounter can be,
1. Fear of Loss
2. Fear of letting a profit turn into a loss

Fear of a Loss

No matter how skilled you may be in your technical analysis, or your study of fundament and analysis, or your having devised some brilliant trading strategies – but you may still face roadblocks on becoming a successful and a profitable trader. Why? – Overcoming fear of losing money. I have never met a trader who really likes losing money – at the same time I have never come across any trader who has NEVER lost any money. I know of one leading “guru” on charts and technical analysis in UK, who regularly lectures at seminars, once admitted that despite being brilliant in his study of technical analysis, he has failed miserably in his trading, having blown his account many times – now he just concentrates on teaching trading to others!

Fear of losing is not a problem, but it is how you handle the loss. A trader, who is relaxed, can look forward to another trade. Your success or failure in trading depends on your attitudes towards your gain as well as losses – and how you handle them.
The market does not know that you, the traders exists, you or for that matter any trader cannot do anything to change the market or influence it. Only YOU can control your behavior.

Whether it is a big drawdown on an account, or a good profitable trade, a professional trade ruse his head to stay calm and will look for his new trade. Only a novice trader will become excited and depressed. You are simply wasting your precious nervous energy!
The primary difference between a professional trader and a novice trader is how they handle a loss.
One of the greatest reasons for a lack of success in trading is because most traders played it safe, they are so afraid of losing that they simply do not pull the trigger, even when they have a great trade!, winning means being unafraid to lose.fearImagine how many times did you fall down, before you finally learnt to ride a bike? Or how many times did the baby fall down before the child went from crawling to walking to running?

So for most novice traders, the reason they do not win in their trading is because the pain of losing money is far greater than the joy of being a winning trader, on the other hand losing inspires a professional trader, for he will look at that as a way to learn from that loss and he will always ask the question, how can I profit the next time?
The winning trader will have a trading journal, where he records his trade; he will pull out the chart, and study it carefully, why the trade made a loss. A professional Trader is more concerned about avoiding a big loss and less concerned about small losses.

One trader that I had recently coached had an overall winning trade of 80%, yet his overall monetary record is of having a massive loss. He likes trading stock futures, particularly the stock Google, had many, many successful trades on the long side, but finally he went short at $179 and at the time of writing this book, he was still short with the price at $198. He had many opportunities to come out with a small loss, but “he did not want to take a loss”.

This position has stopped him focusing on new opportunities.
The longer you can stay in the game with a sound trading plan, the more likely you will start to experience a better run of trades that will always serve you well in times of temporary trading slumps. Being a cricket follower, I see that even a world-class cricketer goes through a lean patch, be it Botham, Tendulkar or Richards – But they all come back with a bang, so it should not be different for a trader.

What is important is how well you execute your trading plan, and stay focused with ruthless discipline. With a good trading plan you should be able to have an entry and exit strategies, which you will action decisively and not hesitantly.

Fear of letting a profit turn into a loss

I am often asked when I take my profit. - I simply say, “Go with the trend! – Let the profits run, and cut the losses short” But what do most Traders do? They SNATCH PROFITS and let the losses run! Too many traders want to lock in a quick profit to guarantee that they feel like a winner.

So when do you take profits? For example I tend to break my trade into 2 lots, or 4 lots, depending on what time frame I am trading. So let’s say if I am trading a shorter term time frame, I break my trade in 2 lots, so that as soon as I am say 30 points in profit, I close 50% of my trade and then for the remaining, I move my stop to break even. This way I am guaranteed that I will not lose! I will let the second lot run and I am seeking to ride the position with a trailing stop on the remaining portion of the position. Quite often I get stopped out, but imagine if only 2 out 10 trades you catch are a “big move” – what would that do to your bank balance! – The key is patience.

If however, I were trading a longer-term time frame, I would break the trade in 4 parts, taking 25% profits gradually, and at the same time trying to catch the big move. This strategy has given me the most confidence.

See you in this forex trading system blog !

How to Develop a Profitable Trading System

5 Step to develop a profitable forex trading system

Top 4 Economic Indicators That Drive Forex Trading
Step 1: Select a market and a timeframe
Step 2: Define entry rules
Step 3: Define exit rules
Step 4: Evaluate your system
Step 5: Improving the system

Let’s take a closer look at these steps.

Step 1: Select a market and a timeframe
Every market and every timeframe can be traded with a system. But if you want to look at 50 different futures markets and 6 major timeframes (e.g. 5min, 10min, 15min, 30min, 60min and daily), then you need to evaluate 300 possible options. Here are some hints on how to limit your choices:
• Though you can trade every futures markets, I recommend that you stick to the electronic markets (e.g. e-mini S&P and other indices, Treasury Bonds and Notes, Currencies, etc). Usually these markets are very liquid, and you won’t have a problem entering and exiting a trade. Another advantage of electronic markets is lower commissions: Expect to pay at least half the commissions you pay on non-electronic markets. Sometimes the difference can be as high as 75%.
• When you select a smaller timeframes (less than 60min) your average profit per trade is usually comparably low. On the other hand you get more trading opportunities. When trading on a larger timeframe your profits per trade will be bigger, but you will have less trading opportunities. It’s up to you to decide which timeframe suits you best.
• Smaller timeframes mean smaller profits, but usually smaller risk, too. When you are starting with a small trading account, then you might want to select a small timeframe to make sure that you are not overtrading your account.
Most profitable trading systems use larger timeframes like daily and weekly, but be prepared for less trading action and bigger drawdowns.

Step 2: Define entry rules
Let’s simplify the myths of “entry rules”: Basically there are 2 different kinds of entry setups:
• Trend-following: When prices are moving up, you buy, and when prices are going down, you sell.
• Swing-trading: When prices are trading at an extreme (e.g. upper band of a channel), you sell, and you try to catch the small move while prices are moving back into “normalcy”. The same applies for selling.
In my opinion swing trading is actually one of the best trading styles for the beginning trader to get his or her feet wet. By contrast, trend trading offers greater profit potential if a trader is able to catch a major market trend of weeks or months, but few are the traders with sufficient discipline to hold a position for that period of time without getting distracted.
Most indicators that you will find in your charting software belong to one of these two categories: You have either indicators for identifying trends (e.g. Moving Averages) or indicators that define overbought or oversold situations and therefore offer you a trade setup for a short term swing trade.
So don’t become confused by all the possibilities of entering a trade. Just make sure that you understand why you are using a certain indicator or what the indicator is measuring. An example of a simple swing trading strategy can be found in the next chapter.

Step 3: Define exit rules
Let’s keep it simple here, too: There are two different exit rules you want to apply:
• Stop Loss Rules to protect your capital and
• Profit Taking Exits to realize your profits
Both exit rules can be expressed in four ways:
• A fixed dollar amount (e.g. $1,000)
• A percentage of the current price (e.g. 1% of the entry price)
• A percentage of the volatility (e.g. 50% of the average daily movement) or
• A time stop (e.g. exit after 3 days)
I don’t recommend using a fixed dollar amount, because markets are too different. For example, natural gas changes an average of a few thousand dollars per day per contract; however, Eurodollars change an average of a few hundred dollars a day per contract. You need to balance and normalize this difference when developing a trading system and testing it on different markets. That’s why you should always use percentages for stops and profit targets (e.g. 1% stop) or a volatility stop instead of a fixed dollar amount.
A time stop gets you out of a trade if it is not moving in any direction, therefore freeing your capital for other trades.

Step 4: Evaluate your system
The first figure to look for is the net profit. Obviously you want your system to generate profits. But don’t be frustrated when during the development stage your trading system shows a loss; try to reverse your entry signals. On our website www.rockwelltrading.com you already learned that trading is a zero sum game: So if you are going long at a certain price level, and you lose, then try to go short instead. Many times this is the easiest way to turn a losing system into a winning one.
The next figure you want to look at is the average profit per trade. Make sure this number is greater than slippage and commissions, and that it makes your trading worthwhile. Trading is all about risk and reward, and you want to make sure you get a decent reward for your risk.
Take a look at the Profit Factor (Gross Profit / Gross Loss). This will tell you how many dollars you are likely to win for every dollar you lose. The higher the profit factor the better the system. A system should have a profit factor of 1.5 or more, but watch out when you see profit factors above 3.0, because it might be that you over-optimized the system.
Here are some more characteristics you might want to consider besides the net profit of a system:
• Winning percentage many profitable trading systems achieve a nice net profit with a rather small winning percentage, sometimes even below 30%. These systems follow the principle “Cut your losses short and let your profits run”. However, YOU need to decide whether you can stand 7 losers and only 3 winners in 10 trades. If you want to be “right” most of the time, then you should pick a system with a high winning percentage. . .
• Number of Trades per Month Do you need daily action? If you want to see something happening every day, then you should pick a trading system with a high number of trades per month. Many profitable trading systems generate only 2-3 trades per month, but if you are not patient enough to wait for it, then you should select a system with a higher trading frequency. .
• Average Time in Trade some people get really nervous when they are in a trade. I have heard of people who can’t even sleep at night when they have an open position. If that’s you, then you should make sure that the average time in a trade is as short as possible. You might want to choose a system that does not hold any positions overnight. .
• Maximum Drawdown A famous trader once said: “If you want your system to double or triple your account, you should expect a drawdown of up to 30% on your way to trading riches.” Not every trader can stand a 30% drawdown. Look at the maximum drawdown the system produced so far, and double it. If you can stand this drawdown, then you found the right system. Why doubling? Remember: your worst drawdown is always ahead of you. .
• Most consecutive losses the amount of most consecutive losses has a huge impact on your trading, especially when you are using certain types of money management techniques. Five or six consecutive losses can cause you a lot of trouble when using an aggressive money management. In addition this number will help you to determine whether you have enough discipline to trade the system: Will you still trade the system after you have experienced 10 losses in a row? It’s not unusual for a profitable trading system to have 10-12 losses in a row.
Step 5: Improving your system
There is a difference between “improving” and “curve-fitting” a system. You can improve your system by testing different exit methods: If you are using a fixed stop, try a trailing stop instead. Add a time stop and evaluate the results again. Don’t look only at the net profit; look also at the profit factor, average profit per trade and maximum drawdown. Many times you will see that the net profit slightly decreases when you add different stops, but the other figures might improve dramatically.
Don’t fall into the trap of over-optimizing: You can eliminate almost all losers by adding enough rules. Example: If you see that on Tuesdays you had more losers than on the other weekdays, you might be tempted to add a “filter” that prevents your system from entering trades on Tuesdays. Next you find that in January you had much worse results than in other months, so you add a filter that enters trades only from February – December. You add more and more filters to avoid losses, and eventually you end up with a trading rule that I saw recently:
IF FVE > -1 And Regression Slope (Close , 35) / Close.35 * 100 > -.35 And Regression Slope (Close , 35) / Close.35 * 100 < .4 And Regression Slope (Close , 70) / Close.70 * 100 > -.4 And Regression Slope (Close , 70) / Close.70 * 100 < .4 And Regression Slope (Close , 170) / Close.170 * 100 > -.2 And MACD Diff (Close , 12 , 26 , 9) > -.003 And Not Tuesday And Not DayOfMonth = 12 and not Month = August and Time > 9:30 ...
Though you eliminated all possibilities of losing (in the past) and this trading system is now producing fantastic profits, it’s very unlikely that it will continue to do so when it hits reality.
The Top 5 Reasons Traders Lose Money
That's all for this moment, please always visit this forex trading system blog to get the new strategy on forex market.

Trade Terminology

 TRADING TERMINOLOGY

Ask – the price at which a trader will buy from the dealer the
price at which a trader will buy from the dealer
Bid – the price at which a trader will sell to the dealer the price
at which a trader will sell to the dealer
Open Position – an active trade in the market an active trade in
the market
Open Order – an order to buy or sell at a specific price that an
order to buy or sell at a specific price that has not
yet been filled has not yet been filled.
Buy/Sell Order – an order to buy or sell into the market at a an
order to buy or sell into the market at a specific price
Market Order - an order to buy or sell into the market at the an
order to buy or sell into the market at the current price
Stop (Loss) Order – an order to get out of an open position an
order to get out of an open position at a specific price if
the trade goes against you at a specific price if the trade
goes against you
Stop/Limit Order - an order to get out of an open position at an
order to get out of an open position at a specific price in
order to take profits a specific price in order to take
profits
Trailing Stop – moving your Stop (Loss) Order to follow moving your
Stop (Loss) Order to follow behind the market movement so as
to begin locking in behind the market movement so as to begin
locking in profits
Trend – sustained price movement in a single direction sustained
price movement in a single direction
Resistance - a level where the market is unable to penetrate a
level where the market is unable to penetrate further up
Support – a level where the market is unable to penetrate a level
where the market is unable to penetrate further down
Band/Range/Bracketing – tight price action, moving within tight
price action, moving within a limited price range for a
sustained period of time a limited price range for a
sustained period of time
Breakout – when prices suddenly move away from the when prices
suddenly move away from the persistent price range