Forex Trading Versus Binary Options: Which One Is Better? “Nobody can predict the future. A Harvard PhD and a high school dropout have equal skills at prophecy.” – James Altucher It’s no longer a secret that Forex market is the biggest and the fastest-growing market in the world. It’s also not a secret that majority of Forex traders end up sustaining negativity, simply because they don’t know or they fail to do what can really make them profitable. As a result of this, many people have been singing praises of binary options* as a wonderful alternative, casting aspersions on Forex. They think it’s easier to make money from binary options than from Forex. Is that correct? What are binary options? Investopedia defines it as a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes/no proposition, hence “binary.” “Binary” means “two parts,” since a speculator will only need to predict that an instrument would rise above (Call) or fall below (Put) a certain price level in a given day or week. Unlike Forex, in which you essentially trade currencies, binary options traders can trade indices, Forex, stocks, and commodities. Sports, markets and businesses are all zero sum games. Then what about binary options? Is it possible to make money trading binary option? Is it possible to make money trading Forex? The answer to both questions is yes…. If a binary options trader is much conversant with, say, oil market, he can make money predicting whether the price would rise or fall above certain price level in a day or a week. However, contrary to popular opinion, Forex has certain advantages when compared to binary options. The seeming simplicity of binary options trading – only Call or Put – doesn’t mean it’s easy for enjoying long-term success. Forex vs. Binary I’m a living witness to this fact. A trader who uses a system that has only 50% accuracy can survive in Forex, but there is no way she/he can survive with 50% accuracy when trading binary options. A trader with only 25% accuracy can make money in Forex, but she/he will quickly crash when approaching binary options with a system that has a hit rate of only 25% accuracy. I can risk $50 or $100 to target $200 in Forex, but that’s never possible with binary options. The risks are always higher than the rewards, and that’s a worse expectancy. In binary for example, you can risk $100 to gain $50 or $70 or $85 or even $90, but no broker will ever give you a risk-to-reward ratio of 1 to 1, let alone 1 to 2. Forex inherently gives you a risk-to reward ratio of 1 to 10 or 20 or 30, depending on how long you’re willing to let your profits run. We can enjoy everlasting success with positive expectancy only. Let’s say a broker allows a reward of $80 for every $100 you risk for each binary prediction, you’ll then need to achieve at least 70% accuracy to survive in the long-term. Believe me, this is very hard because the future can’t be predicated. With 70% hit rate, you’re likely to experience 4 or 5 losses in a row with 1000 trials, and with this, someone with a small account can deplete it before a winning prediction comes around. With rewards that are smaller than risks, chances of long-term survival using 70% accurate systems are slim indeed. Researchers have confirmed that people have trouble surviving with even 80% hit rate, owing to psychological factors. In Forex, people have made fortunes with trading systems that have reliability of around 25% - 35%. They do so by following the timeless Golden Rule of trading: Cut your losses short and let your profits run. You can’t do that in binary options. You succeed when an average loss is smaller than an average gain, not the other way round. We enjoy everlasting success as traders because there are many things we can control, save the market itself. We can control risks and manage our trades effectively. But in binary options, you can’t control anything, for you’re at the mercy of the market forces once a position is triggered. If a market moves in my favor before going against me, I can eliminate the risk or negativity with a break-even stop, so that a movement against me won’t result in negativity. This is not possible with binary options, for you lose your entire stake irrespective of the fact that a selected instrument first moves in your favor before reversing against you. Though some may say that binary makes you win even if an instrument first moves against you and later moves in your favor, before the expiration. This is also true of Forex; a position that is in a negative territory can later turn positive. I can decide to cut my loss before my stop is hit, so that my loss is even limited more effectively. If I gain, say about 200 pips in a trade, I can lock part of it and ride the move even further. I can even take part of the profit and ride the move further. These things aren’t possible with binary options. I’m happy when I see that my losses are smaller than my profits. I know if I traded binary, my stakes would be higher than my rewards. Trading binary options is inherently a negative expectancy game. If other financial markets are zero (0) sum games, the binary options is a minus (-) sum game. For those who don’t agree with the point raised here, only their personal experience after years will prove the point. Conclusion: I’m not discouraging people from binary options. There are successful binary traders out there, but I’ve realized that Forex gives me far more freedom to choose my fate in the markets. When you trade a market that you’re very good at, you make fewer mistakes and improve your results. Investing in what you’re conversant with is essential to your financial well-being. Genuine wisdom is scarce, and therefore, success is attainable only when you do what you’re good at. That’s why I enjoy trading Forex: that’s my area of competence. Please read the quotes above and below, and ponder them. The quotes below are from Markham Gross. They end this article: “A good trader by contrast will be focused on running a repeatable system having positivemathematical expectancy without need or regard for knowing or talking about the future.” “It would be impossible to have gains without some loss along the way. My strategy actually results in more losing trades than winners, which is sometimes shocking to people. We win by keeping losses small.” *Please note that there are differences between regular options and binary options. This article addresses Forex and binary options (not regular options, a good investment vehicle). In order to know the differences between binary options and regular options, please see this link: http://www.ibinarytrade.com/whats-the-difference-between-binary-and-regular-options/ Copyright: Tallinex.com
Leverage Isn’t a Bad Thing “The point [is] that a trader has to master their psychology to allow him or her to take many small losses, trade through drawdowns, and let winners run beyond expectations.”- Markham Gross Some people preach against leverage because of their own faults. They use trading methodologies that ultimately make average losses that are bigger than average profits, while they should be doing the opposite. While we may find it difficult at first (the same was true of me), controlling losses and making trading decisions become very easy when they become our nature. In order to know what leverage is in trading, plus the advantages in using it, please search for the information yourself. However, experienced traders should understand what leverage is. Leverage isn’t a bad thing- it’s irrational use of leverage that’s a bad thing. So I recommend the use of leverage. When leverage is used with strict money management, a heartwarming balance is then found between decent profits and risk control. For example, I use a leverage of 1:100. However, I risk only 0.25% per trades: which means that I use only 0.01 lots for a $2000-account, with a stop of 50 pips per trade. With an account that’s less than $2000, I’ll recommend conversion to cents, for greater safety. The greatest achievement in trading is controlling the treacherous statistics called drawdowns, not making profits, for profits are easy to make but difficult to retain. For example, if you made a profit of 10% in this month, you could start experiencing losses in the first and/or the second week of the next month (as it’s true of any trading approach you might adopt). A proof of your proficiency then lies in your ability to lose as little money as possible, going down by, say, 2% - 4% maximum. With this, it’s easier for you to bounce back when the strategy enters another encouraging winning streak. However, a bad trader would lose between 10% - 40% or even more, during such transitory losing streak. What’s the benefit of gaining 20% this month and losing 55% next month? It’s a good thing to help our friends and well-wishers to be the best they can be in their trading careers – hence my articles. Directly or indirectly, we benefit when our friends and acquaintances when they become successful. If your friend doesn’t become a king, you won’t become a friend of a king. The quote below ends this piece: “The problem is adjusting expectations so that your psyche survives long enough for you to be around when the big winner appears. The majority of traders quit simply because expectations and reality are out of alignment.”– Chris Tate Copyright: Tallinex.com
What Every Trader Must Know About Drawdowns “However, it is pleasant to win over the long term. Contrary to popular opinion, losses are part of winning. Take sports for example.”– Markham Gross A drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough. A drawdown is measured from the time a retrenchment begins to when a new high is reached. This method is used because a valley can't be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the smallest trough is recorded (definition source: Investopedia.com). As you can see, drawdowns (or roll-downs) are periods when you experience losses and your account goes down. If you open an account with $10, 000 and it drops to $9,200, then you experience a drawdown of 8%. Causes of Drawdowns Let’s put the issue of trading with no stops and high risk aside. Let’s imagine someone is using a good strategy that makes him cut his loss at 50 pips and runs a profit until it reaches 200 pips. That’s a good trading idea which makes money when currency pairs trend nicely. Nevertheless, when a period of drawdowns comes, more stops would be triggered and take profit levels would hardly be reached. The few take profit levels that are reached would be too few to recover the too many stops that are triggered. You open many a trade and it moves in your favor by a few or several pips and then turns negative, hitting your stop. For days, weeks, or months, false breakouts wouldn’t be a curiosity and sustained trending movement would be scarce. Trading ideas that let profits run are the best, but they generally suffer when the markets enter equilibrium phases. As in real life, doing the right things doesn’t always make you appear smart. In fact, you may sometimes look stupid by doing the right things. A trader that uses a stop may appear stupid when they are stopped out on a trade that eventually reverses and turns positive. A trader may appear stupid when a position they are trying to ride fails to meet its target, turning from positivity to negativity. But in the end, we’ll reap the benefits of doing the rights things. Soon, a time would come when the situation will change and the person will recover the losses within days, weeks or months. Treacherous Statistics Look at the long-term results of the strategies below: Strategy A: Growth: 343.80% Drawdown: 37.45% Monthly: 19.09% Strategy B: Growth: 119.40 Drawdown: 22.08% Monthly: 10.51% Strategy C: Growth: 12.04% Drawdown: 11.16% Monthly: 0.49% You can see that the strategies above have made nice profits in the long run, but not without roll-downs. Strategy A has earned a profit of 343.80% over the years, but it also went thru periods of losses amounting to 37.45%. The users of the strategies obviously deal with the roll-downs successfully; otherwise they’d have disappeared. One marketer was recently creating hype that he’d a strategy that could turn $500 into a growing monthly income. As you know, the job of marketers is to emphasize the bright side of what they sell, while glossing over the dark side. It’s like when a religious preacher is telling people nice things that will happen to them if they join her/his religion and become responsible, without telling them the reality that religious people aren’t also immune from suffering. For instance, when an earthquake occurs, it doesn’t avoid the religious people in the region. I never tried that hyped strategy – though I’ve tested over 250 strategies in my entire career. There’s no perfect strategy and there won’t be one. All excellent trading strategies experience drawdowns. All super traders experience drawdowns, albeit victoriously. Sadly, the subject of drawdowns is the least mentioned in the trading industry, and there’s only scanty literature about the subject, in spite of the fact that it’s one of the most important topics in trading. Drawdowns must be experienced from time to time by all traders irrespective of age, intelligence, expertise, years of experience, risk control ability and strategies. This is where majority of traders fail. Your ability to deal with drawdowns triumphantly is the greatest determinant of the end game and your ability to enjoy a long-lasting career. The smaller a loss is, the easier it’s to recover. The bigger a loss is, the more difficult it’s to recover. There are periods when you’ll make money; there are periods when you’ll lose money, and there are periods when your performance would be flat (you’ll never go up or down). There’s no way around this fact. There is no way around the fact that you must sustain losses that you must eventually recover. Flat and drawdown period may even be longer than you expect. Switching strategies isn’t the way out. Can a rolling stone gather any moss? That’s why it’s unrealistic to set a weekly or monthly target in a world in which you can’t really predict the future. That’s why it’s realistic to open a trade only after you’ve imagined the worst-case scenario. With that kind of mindset, you’ll realize the folly of not using stops and the folly of trading with large lot sizes. However, most of us have serious psychological and emotional problems. One of the most frustrating things is to keep on trading when you keep on making losses. Your hope of a monthly income would be dashed and your courage will evaporate. The frustration would even become more intense, especially if you live in a country where you’ve to generate your own electricity and fuel is extremely scarce and expensive. What Good Traders Experience I remember what happened to me in the year 2011. I was making good profits for about 4 months: up to 30% (6000 pips). Then suddenly, the market conditions change and I was having losses after losses. I kept on managing my risk, being faithful to the system I used. The losing periods lasted for about 3 months and I went down from 30% pips to 15%, and suddenly… the market conditions became favorable again and I finished that year with 49% profits. In a typical year, you can make 10% in January and 6% in February. You can make 3% in March and lose 9% in April. You can lose 4.5% in May and lose additional 5% in June. You can gain 4% in July and lose 4% in August. You can gain 11% in September and gain another 6.5% in October. You can gain15% in November and finish December with another 2.5%. How much would the trader end up with in the year? This is the reality of trading, which you must accept or go do something else. Many so called Forex traders are gamblers who think they’re good. They lose hugely or earn margin calls during drawdowns. Anton Kreil says you will have about 3 months (or more or less) in a year in which you’ll experience drawdowns no matter what you do. How do you explain this to your investors? How do you explain this to your family? When you limit a loss, you accept the fact that it won’t have any major impact on your portfolio anytime, no matter how terrible the situation may be. You can check your account history or past trading results in order to get comfort, knowing full well that your system will soon start working again because it worked in the past. You’ll be encouraged to keep on taking new signals (for you don’t know the ones that would win and recover your losses), maintaining discipline and calm. To be a permanently victorious trader, you must control your loss and limit your roll-downs. It may be emotionally satisfactory to refuse to accept a mistake and ignore the use of stops, and the temptation to do silly things will balloon. In most cases, prices may go back to your entry points after harrowing periods of waiting and hope, which may be longer than normal. There’ll also be cases in which the hopes would be dashed as prices refuse to come back in your favor, going further and further against you instead. All the profits plus the capital you’ve would vanish. All market veterans acknowledge that the importance of loss control can’t be emphasized enough, because that’s the reason why over 95% of traders can’t be successful as traders. On Trade2win.com, Barjon says… Perhaps all this makes it sound as though our trader’s reasoning will be spot on or that he is a fortune teller who can foresee the future. There is not such a trader. All trading is about making assumptions based on experience of what has happened in similar circumstances in the past. Those assumptions may be right or they may be wrong and from the business perspective the aim is to gain the necessary advantage when they are right and limit the damage when they are not. This piece is ended by the quotes below: “Our worst case scenario for the basic strategy is where the trader can lose 70 per cent of the time with a reward-risk ratio of 3:1. With these statistics the trader can still be consistently profitable. The winners take care of the losers.”– Manesh Patel “The difference between top-notch winning traders and those who barely get by is the attitude they take toward losses. Trading is a tough business where setbacks and losses are commonplace. If you aren't careful, you can feel beaten, knocked down, and afraid to get back up. It may be difficult at times, but it is often necessary to forget about the past.”– Joe Ross
Michael Platt: One of the Most Effective Risk Managers INSIGHTS INTO THE MINDSET OF SUPER TRADERS – Part 12 “I am actually trading because I learn a lot of important life lessons from it. Trading helps me get to know myself. It helps me think about why I believe things and why I do things.”- Van Eekelen Name: Michael Platt Date of Birth: December 12, 1968 Nationality: British Occupation: Hedge fund titan Career Born in Preston, England, Michael attended London School of Economics and earned a BSc with Honors. He was influenced by his grannie who was an investor. With the help of his grannie, he got his feet wet and was hooked. He began working at JP Morgan in 1991, being a managing director in charge of value investing. He took advantage of challenges and opportunities he encountered at JP Morgan. He co-founded BlueCrest Capital Management LLP in the year 2000, and that firm is now the Europe’s third biggest hedge fund firm. The firm manages over 30 billion GBP and has 350 employees. They mainly employ systematic trading approaches, using computer programs to facilitate the approaches. As of April 2015, Michael was worth 1.5 billion GBP (3.5 billion USD). He’s married and currently lives in Geneva, Switzerland. He’s an avid lover of arts and paintings. Insights: When you make useful decisions in life, including trading, you’ll simply end up having enough. You’ll not need to be striving after money. You’ll then see trading as an interesting activity, not an onerous task. At the end, you’ll be so rich to the extent that big money would not matter so much to you. For example, Michael Platt has become so rich to the extent that he once turned down an offer from George Soros. The latter wanted him to manage more than $1 billion USD for a 0.5 percent management fee and a 10 percent performance fee. But Michael said his investors were willing to pay management fees of 2% and performance fee of 20%. Many desperate professionals would jump at such an offer. Please see the quote at the bottom of this article. Risk control is extremely important for your everlasting career as a trader. That’s your life insurance. Michael acknowledges that risk management is the most important thing. In bear markets, many funds crashed and burned, especially when they faced credit crunches in 2008. Yet Michael finished the year with 6%. He avoided loss and even made a small profit. What do you want those who lost to say? Hear! Hear! Gamblers who think it’s stupid to risk less than 1% per trade. Risk control is something that must be enforced in trading. One of BlueCrest’s secrets is to make sure that each of their traders doesn’t go below 3% drawdown, or they’re deprived of 50% of the portfolio they manage. Another drawdown of 3% (making a total of 6%) would make a trader get their entire portfolio allocation removed. They may even lose their job if it’s found that their trading method is suicidal. I currently risk 0.25% of my account per trader, and so, I’ll need to lose 12 trades in a row before I can go down 3%. This is a good plan for survival. Many so-called professionals out there give advice that helps others make money, but not themselves. Ideas from professionals are valuable in that you can make profits from them, before the professionals themselves do so (they may not even do so). You can really take advantage of comments that are made by those trading professionals. There are winning strategies, and you need to find one of those so that you can attain ultimate financial freedom, as a result of consistent profits in the markets. BlueCrest Capital International fund hasn’t had a negative year since it was started – though some years were better than others. For example, the fund made a profit of 41% in 2009, earning hundreds of millions of dollars in fees only. Leda Braga, featured in one of my past articles, is a partner of Michael at BlueCrest. She manages a fund named BlueTrend. She’s a pro trader, and she has been a blessing to BlueCrest. Great minds think alike, for like will attract like. Do you have a good trader as a partner? Success attracts more success. The more successful you’re, the more investors you’ll attract and the richer you’re going to be. Because BlueCrest made a profit of 4 billion USD in 2008, they got about 5 billion USD in additional investment. But know this: the more you fail, the more investors you lose and the poorer you become. So you must know what you’re doing. Michael bets his own money alongside his investors. What a good trading idea! One trading specialist once advised that if funds managers’ money is tied to the portfolios they manage, there wouldn’t be rogue traders. When someone trades a fund which belongs entirely to her/his clients, they may be tempted to be careless because it’s not their money. Who encouraged you to become a trade? You should be forever grateful to such a person irrespective of what you’re currently facing as a trader. The advice to start trading is really a billion-dollar advice. Michael was inspired and encouraged by his late grannie, and he’s now a billionaire. I’m forever grateful to my uncle who advised me to become a trader. Michael’s dad was an engineer, and so, Michael wanted to study engineering. Suddenly, he changed his mind and studied Economics instead. This prepared him for the task ahead. Engineers can also become successful speculators; albeit the lesson is that one does not always need to take up a career one’s dad loves, especially if one doesn’t like the career. Michael started small and he’s now bigger. Please learn from this. When your performance is good, you’ll enjoy so much success in a relatively short period of time. Michael’s firm is now perceived with a higher level of credibility, even more than those who started the fund management business before them. That’s really an ideal achievement. Learn from that please. Conclusion: A judicious trader doesn’t act on impulses, whatever they may be. According to Joe Ross of Tradingeducators.com, from a purely physical standpoint, it is essential to minimize the potential impact that a losing trade may have on your account balance. If you lose a lot on a single trade, it will sting. But if you limit the amount of capital you risk on a single trade, it won't hurt at all. You can pick yourself up easily and put on the next trade. It's much easier to take a loss in stride when the real impact on your account balance is minimal. This article is ended with a quote from Michael. Please think about it. Safety first! “I’ve never hit the 3 percent drawdown… Ego is how you lose money in this business. I put a trade on, and if it doesn’t start working straightaway, I respect the price action and cut it fast.” What Super Traders Don’t Want You To Know: http://advfnbooks.com/books/supertraders/index.html
max drawdown is 4.5%, not 6% leda braga no longer works with platt, has her own fund now (spun off from Bluecrest) bluecrest main fund lost money in the past couple of years Copyright: Visaria
HYIPs – Solutions for Traders? “Illusions are something pleasant. The disadvantage is that they tend to burst like a burble.”– Wolfgang Kurz “It is true that the market is brutal to most of the people who challenge it. But so is Mount Everest, and that should not – and does not – stop people from trying to reach the top. What is expected of a mountain or a market is only that it has no favorites – that it treats all challengers as equals.”- Mark Minervini Investopedia describes a high-yield investment program (HYIP) as a fraudulent investment scheme that purports to deliver extraordinarily high returns on investment. High-yield investment schemes often advertise yields of more than 100% per year in order to lure in victims. In reality, these high-yield investment programs are Ponzi schemes, and the organizers aim to steal the money invested. Wonder Banks Another name for a HYIP is “a wonder bank.’ Isn’t it a wonder that one will double one’s money in a month or a quarter or a year without lifting one’s fingers, as compared to very low returns of legitimate banks? In my country, some wonder banks existed within the years 2006 – 2008. They promised high returns every month or quarter or 6 months. Some investors gave money to them, and while certain people got their money back, most people were unable to get their money back. The wonder banks failed and such entities were subsequently banned. It’s one of the reasons why most people hate online trading. That’s why one sage says that extraordinary claims require extraordinary proof, because if something sounds too good to be true, it probably isn’t. There are ‘wonder banks’ all over the world and most of them are scammers running Ponzi schemes. Recently, one wonder bank got access to the subscribers’ base of a legitimate financial organization. The wonder bank promised returns of 500% within 5 hours if an individual advert recipient deposited any amount between $1000 and $1,000,000 with them. Did you need to be advised before you knew the wonder bank was made of scammers? If their claims were genuine, then there wouldn’t be poor people on earth again. If their claims were genuine, they wouldn’t need to solicit the members of the public for such kind of investment program. Shady persons promised such returns because it fit the mindset of most people. 1% returns per month doesn’t fit the mindset of most people, and thus, they find it difficult to accept. On the other hand, sane people will agree that 1% returns per month are good and one can be rich with that ultimately. 10% per cent per months without a single losing month is impossible. 1.27% profit per day is impossible. No company would promise that and still be in business for a long time. I’m not saying that 10% per month or 1.27% is impossible in the short-term (though that’s based on pure luck and successful trading needs far more than luck), but I’m saying that there’s no firm that can last long aiming for that. How long will it take a unit of real estate to appreciate by 100%? What about fixed deposits and bonds? Could you force 5% appreciation on each of them on monthly basis? Yet, most traders can’t even accept 5% profits per month. One respected friend once asked me how much I make per month. I mentioned that I target only 1% per month, no matter my account size, and in some cases I make more than that in several months per year. He was disappointed, for he was expecting me to mention that I make between 20% - 50 per month. Please see the quote above: Illusions are something really pleasant. Another wise funds manager recently told me that it’s difficult to manage money for greedy people. Some of his investors complained that he didn’t make enough profits: not that he didn’t make profits, but that he didn’t make enough profits. They weren’t even thankful for the existence of their capital. It’s clear that these investors would be risking too high if they were to trade themselves and they’d end up blowing the accounts. People don’t appreciate the existence of what they’ve until they lose it. Someone nicknamed ‘Handle123’ on Elitetrader.com says that [the trader] is like the tortoise and the rabbit, no wonder the tortoise lives to be over hundred years old, he learned to go slow and don't take dumb chances of moving a foot before knowing if it can be life threatening risk. And rabbits have little defense other than speed, but many more rabbits in the stew pot than tortoises (square brackets mine). Please think about the preceding paragraph. Do you want to be like a tortoise or like a rabbit? Anyone who believes in excessively high returns over short periods of time isn’t psychologically prepared to make money. They can’t even settle for 2% growth per month. They’d rather go for at least, 100% per month (unrealistic expectations). In fact, such a person would end up being a loser in life. I end this piece with the quote below: “The best investment you can make is in your own education. Unless you are educated in how the markets work, how to invest in or trade shares, the psychology behind trading and investing, and which derivatives can give you the best returns, you have little hope of being profitable as a trader.”– Louise Bedford
I believe Warren Buffett has influenced many investors' thinking more from a long-term perspective. Buffett has suggested that investing in equity shares should be done as a prospective owner. And as a prospective owner one should ensure superior returns. And constant positive returns can be ensured when an investor bets on stock with real quality. High quality stocks can outperform the publicly traded benchmarks and does so with lower risk. I found an interesting read on the same perspective. Here's the link for the same: http://multi-act.com/warren-buffett-way-high-quality-stocks-emerging-markets/”