Secrets of Market Wizards

4 Essential Trading Principles (Golden Rules)

“Sometimes people are so attached to the way things are that they would rather keep things the same and continue to fail rather than make those changes.” - Adrienne Toghraie

We tend to think of harvesting our gains and smoothing open trades; something that is easier said than done. Big institutions have very high stakes that would have impact on the markets if they were to be smoothed at once. This is often in the favor of those institutions. At the end, you’ll need to choose a trading system that fits you.

It’s sad that misinformed souls and even highly educated people feel that one can’t be triumphant in the market for the long-term. This is far from the truth. It’s true that only a small percentage of speculators would enjoy lasting success in the markets, for we’re competing against highly intelligent traders who have a great deal of knowledge of how the markets work. Then why should it be strange that the percentage of successful traders is usually small? This is also a fact in other areas of human endeavors – not only in trading. I’m confident that if you can adopt the essential trading principles discussed here in your trading, you’ll be a winning trader.

I incorporate 4 essential trading principles into my trading rules:

1. There must be an exit target for each trade: For each trade I open, there is always a predetermined exit target, and a maximum trading duration. Any negativity shown by my open trade is never a surprise to me for it may be presumptuous to conclude that an order is hopeless while it’s still open. Usually my trade is smoothed after it hits the stop, or the breakeven stop or the trailing stop or the target or the maximum trading duration (in terms of weeks) has expired. I don’t use discretionary exit.

2. Positive expectancy must be part and parcel of your trading system: What makes sense is a situation in which you aim to gain more than what you’re risking. It makes sense to risk $1 in trying to gain $2, but it doesn’t make sense to risk $2 in order to gain $1. Some risk $100 to make $1, or even risk their whole account to realize 5% profit. Doesn’t it matter if you make $200 today and lose $2000 tomorrow? This attitude isn’t OK, since it’s negative expectancy which ensures that you end up losing in the long run. It’s far better to risk $10 to gain $30 (or $50). This means your reward must be greater than your risk. This is what we call positive expectancy and it ensures that you end up winning in the long run.

3. Abort your losers and ride your winners: This is an excellent golden rule which makes peerless rational/logical sense. If you cut you winners and ride your losers, you’re like the gardener who uproots the flowers and waters the weeds. If you cut you losers, and let your winners run, you’re like the gardener who removes the weeds and waters the flowers. Isn’t that logical? I cut my losses with the aid of my hard, physical stops, and I ride my winners until they possibly reach their targets.

4. Use small lot sizes: I’m yet to see the guru who lasts very long in the markets by betting too big. In my trades, I use very small position, which may limit my profits, but also limits my losses. This ensures that I trade with peace of mind and remain indifferent to the outcome of an individual trades. Some think this is cowardly. Yes, coward people tend to remain safe as they point to the ruins created to overconfident traders. My sizes gradually increase with my gains and decrease with my losses. With this, I’ve found it easier to accept losses that don’t affect my accumulated profits, let alone my initial capital. I’ve also found it easier to recover my negativity. I’ve found it’s usually better to be a happy chicken than a sick tiger.

No matter the kind of trend confirmation patterns you’re using, no matter the trading methodology or chart analysis us use, you need to know that strategies don’t fail; only traders do. Systems are only strategies. They’re not traders. They don’t open trades. They are only a means to help you make trading decisions. If anyone using a trading strategy sustains a drawdown, then the drawdown belongs to her/him. I’m not saying loss is completely avoidable. Top traders lose sometimes, but not always. The inability to abort your losers is the real risk, not the strategy you use. There is no business under heaven that is immune from occasional loss. All enterprises have negativity as part of them.

What I mentioned above are far more important than any trading strategies. If you incorporate them into your trading management rules, you’ll be a permanent victor in the market. These principles are ignored at your own peril.

I’d like to end this article with the quote below:

“However, you are the most important part of your system. So, if you are not working properly, it is just as though your computer, or software, or any one of the trading tools you use is not working. In this case, the thing that is not working is you, not your system, which is doing just fine.” - Adrienne Toghraie (Source: http://www.tradingontarget.com)

Source: Paxforex.com

 

Conflicting Opinions in Trading

Which Opinions Are Correct?

The trading world is full of too many different ideas that are hyped excessively. Many a professional often asserts that her/his own trading idea is the best.

Many traders breathe intraday trading, and many endorse investing. Some worship tape reading, while some idolize Fibonacci ratios. Some use supply and demand levels in trading, and some simply scalp. Some espouse chart patterns with Elliot waves, while some use indicators. Certain traders do trend-following only, while certain traders have adopted contrarian trading methods. Trading performances of dedicated chart analysts and dedicated news analysts have been showcased, but each group attempt to disparage the kind of analysis adopted by the opposite group, which has been triumphant. Some say the use of stops is mandatory; some say they’re successful without stops.

The list can be endless…

As Dr. Van Tharp has always put it, people trade their beliefs, not the markets. Dr. Tharp trades according to his beliefs. I trade according to my beliefs, and you trade according to what you believe. What’s useful for you mayn’t be useful for others. If you use something successfully and you’re happy with it, others mayn’t use it successfully. The reason why is because that thing doesn’t fit them. If you disagree with others, you may want to assert that your opinions are superior. What you disagree on mayn’t be useful to you. If you argue that your opinion is the best: remember that many others would always use logical reasoning to underline what they believe and make what others believe appear useless.

The Best Trading Ideas
Experiencing a losing trade or a positive trade turned negative often results in painful feeling, anger, and frustration. Are you in the midst of a discouraging situation? Remember that the markets have immense riches in them. Keep this fact in the forefront of your mind; remind yourself of them repeatedly in your career. Why we mayn’t understand why some market circumstances seem unfair to us at times, we understand that we can still be permanently triumphant in the market.

I know that from personal experience. After I’ve accepted the truth about trading, my experience in the markets has become smoother and better. That’s not to say that I never have losses in trading after this, but every loss is faced with the knowledge that I’m using a positive expectancy system. I never feel sorry I started trading, and I still love the profession today. My only desire is to keep my portfolios safe in face of permanent uncertainties in the markets. I never feel any desire to back down regarding trading.

In the trading world today, the quest for great profits can lead in many directions, but only those who focus on how to control risk and DD will be truly triumphant in the markets. Some contrarian techniques would even allow positivity consistently.

Then what is the best trading idea? Jack D. Schwager’s latest book is titled: ‘Market Sense and Nonsense.’ Ok, this means that there are senseless and sensible ideas in the markets. Good trading ideas would allow you to risk far less than you aim to gain. These ideas would let you know when to enter the market and when to stay out of the market. They’d give you some effective risk control rules. Good trading ideas won’t let you sustain big losses during unfavorable market conditions. Sensible trading ideas would make you victorious in the long run. With these kinds of ideas, you can’t avoid losses, but you’re sure to make more money than you lose ultimately.

Note: Any trading ideas that can’t achieve the objectives in the paragraph above are useless ideas, no matter how popular they’re. Any trading idea is useful only if its balance increases over a long period of time, or there are gains to make at the end of a specified trading period.

Conclusion: Trading isn’t always easy, but the results of commitment to trading success will be evident in your career. You shouldn’t expect to get an emotional uplift or feeling of quiet peace every time you trade, but as you continue your commitment, your attitude, outlook, and conduct will be like those of matured traders who are called market wizards. Speculation is full of challenges, but we can overcome them all.

This piece is ended with the quote below:

“The best theory doesn’t do you any good unless it works in the real world.” – Larry Connors

Source: Paxforex.com

 

"2. Positive expectancy must be part and parcel of your trading system: What makes sense is a situation in which you aim to gain more than what you’re risking. It makes sense to risk $1 in trying to gain $2, but it doesn’t make sense to risk $2 in order to gain $1. Some risk $100 to make $1, or even risk their whole account to realize 5% profit. Doesn’t it matter if you make $200 today and lose $2000 tomorrow? This attitude isn’t OK, since it’s negative expectancy which ensures that you end up losing in the long run. It’s far better to risk $10 to gain $30 (or $50). This means your reward must be greater than your risk. This is what we call positive expectancy and it ensures that you end up winning in the long run."

This person who wrote this doesn't understand positive expectancy. Total bs.

 

How Much Is Needed To Open A Forex Trading Account?

The question above, as commonplace as it seems, is still asked by many people who’re interested in Forex trading. How much do you need to invest for optimal returns? How much is needed for full-time or part-time trading? This piece is my take on the subject.

In one of his past articles, the world-famous Dr. Van. K. Tharp stresses one of the most important reasons why most people find it very difficult to make money in the markets. One of the most important reasons is that most people don’t have enough money. Too many people open accounts with too little money, so they can’t execute proper money management, neither can they expect to live on small accounts.

You can open a Forex account with $1; you can also open it with $50 billion. While most brokers have minimum deposits limit, they’ve no maximum deposits limit. Some brokers even offer micro or mini and/or cent accounts so that traders with small money can trade while having many options to control risk. Happily, gone are the days when traders needed huge amounts of money to capitalize on market opportunities. Nowadays, high leverage allows you to make larger transactions with smaller capitals. High leverage is a curse to those who’re ignorant of sound position sizing and risk control, while it’s a blessing to those who’re aware of that.

The bigger your capital, the bigger your returns, and the smaller your capital, the smaller your returns. Let’s assume trader A opens an account with $1000, trader B opens an account with $10,000 and trader C opens an account with $100,000. If traders A, B and C make 20% each on their respective accounts on an annual basis, here’s their personal income in that year.

Trader A makes $200. Trader B makes $2,000, whereas Trader C makes $20,000. You see, hedge funds managers make billions or millions of dollars as profits because they invest billions and millions of dollars.

As you probably know, your account must be big before you can make good profits (for a small percentage gain would make a huge difference). You can open an account with small money; say $50 or $250 or $500. However, don’t expect to make a living from such small capital. Personally, I believe that if one want’s to make a living from trading, one’s account mustn’t be less than $20,000. This would give you an excellent position sizing and risk control flexibility. You need to check my strategies articles and see my position sizing recommendations for each various account balances. You’ll then see why it pays to have big accounts.

For you to make a living from $1,000 or $5,000 or $10,000, you need higher risk, which also comes with a possibility of a worrisome roll-down. With $100 or $300 or $500, one can experience the thrill of speculation, but one must never expect to make a living from that. Those who want to make a living from an account that’s small would need to double the account many times. Do you know what that’s? It’s called suicide trading. This is because what can double your account also has the potential to result in big losses or a margin call.

If you’d like to open a big account but your financial circumstances preclude you from doing that, you can still open a small account and begin to trade. Just don’t expect big profits from a small account; which means that you need to be realistic and lower your expectations. As long as you have other source(s) of income, you should be fine, and there shouldn’t be any pressure on you to double your account quickly.

Conclusion: You can start trading with a very small account, but that one has fewer merits than a big account. Evidently, you need big accounts to trade safely and make decent profits. As you trade, you shouldn’t forget to have entry and exit points in mind. Great speculators have an exit target for each of their position, whether the position ends in a positive zone or a negative zone. Then don’t risk too much per trade. Risking less per trade would surely give you good profits as you also have the ability to curtail losses so that they don’t have a big impact on your portfolio. Long-term survival in the trading world means that your past errors have made you to become a better trader.

The quote below is taken from Dr. Chris Kacher. It shows that it isn’t correct to say that one can’t enjoy lasting success in the markets.

“I realized the efficient market theory was not relevant in the real world when it came to developing a sound strategy that put the odds in its favor. In the long run, statistics always win, and is why the house in gambling casinos always comes out ahead.” (Source: Tradersonline-mag.com)


Source: Paxforex.com

 

The 2008 Bear Markets Revisited

Recently, I went to a local cash office. There were many customers there, and while I was waiting for my turn, a man asked me what I did for a living. I was happy to reply him that I’m a Forex trader and a market analyst. “Forex,” the man said, “ruined many people, including me, especially during the bear markets of the year 2008.” I immediately sensed that the man was ignorant of the realities of the markets. Since I was in a hurry and it was my turn to be attended to, I couldn’t explain anything to the man.

There are many wrong trading assumptions that are being nurtured and propagated by too many people. A few years ago, I wrote a series of articles covering 10 most widespread myths about online trading. This time around, the supposed crashes in the bear markets of the year 2008 were another myth that needs to be busted. How?

Contrary to what most novices think, there’s nothing like an everlasting trend. There’s no instrument or market that can go upwards forever, and therefore there must be some protracted bearish reversal and continuation. This is what ignorant people call a crash. The so called ‘crash’ is only a significant bearish market which can’t last forever, since it would give way to a bullish trend. When the markets go up, buyers gain and only sellers lose. When the markets go down, sellers gain and only buyers lose. If a professional trading risk manager was caught in wrong positions, she/he would simply cut the losses. That’s all.

Here are additional ideas about handling the bear markets that happened in the year 2008:

I’m not interested in the fundamentals that led to those bear markets. What I know is that bear markets must follow bull markets – though fundamentalists would always pinpoint reasons for that. Bearish trends give you great opportunities to make money by short-selling. Many great traders have made fortunes in bear markets. People like Jesse Livermore (the Great Bear of the Wall Street), John Paulson, Paul Tudor Jones, Robert Prechter, Tim Knight etc. accumulated great wealth from bear markets. There are individual traders who also make money in bear markets.

People lose in bear markets because they use big position sizes, they don’t use stops, and they decide to run their losers indefinitely. Little do people know that a bear market would continue to be bearish as long as people think it would soon end. However, as soon as most people think that the market will continue in a downtrend, then a northward reversal would happen. Likewise, a bull market would continue for as long as people are skeptical about it; it’ll reverse significantly only when almost all people show confidence in it.

In the year 2008, a competent trader who suffered initial losses would’ve exited when the losses were still small. Then she/he would see the new bearish signals and trade accordingly, thus recovering the initial losses and moving ahead. Sadly, there were certain traders who continued buying in that downtrend.

Based on my trading style and risk control parameters, what could I have done? Since I risk only 0.5% of my account per trade, I wouldn’t have lost more than that per trade if a trade went against me in that year. If I bought and was stopped out on a trade when the bearish biases began, I’d have taken the small loss (If I lost 6 trades in such a way, my drawdown would’ve been 3%) and started looking for new trades. So in the case of a bearish outlook on the markets, I’d have gone short or sold rallies in the context of the downtrend.

For instance, let’s look at the chart attached with this article. From August to early December, 2008, the GBPUSD fell by over 6000 pips! There are many currency market instruments that went bearish protractedly in that year, so the lessons below are also valid for them.

By looking at this chart, you’d agree with the lessons below:

1. When trading on the GBPUSD during that period, if your position sizes were very small and you respected your stops, the losses on this trade would be negligible. But if you used big position sizes and/or refused to honor your stops, you’d sustain huge losses.

2. With small position sizes, even huge losses can be sustained if you rode your losses in that kind of protracted bear markets.

3. By running your winner, you could’ve made huge profit in that bear market.

4. If you were initially caught on a wrong side and you were disciplined enough to cut your loss, you could’ve regained the loss and moved far ahead if you opened another trade and followed the trend.

Conclusion: Bearish and bullish biases are normal part of the markets. Sometimes, a bearish or bullish bias may last very long, and sometimes it may be short in duration. Nothing is wrong with the markets, for they’ll do what they’ll do, irrespective of what traders want. On the contrary, it’s our trading styles and approaches that bring us the results that we see. In the year 2008, the markets didn’t crash, only ignorant, undisciplined and greedy traders did. On the other hand, informed, disciplined and patient traders survive and made money. Can you see the difference?

The quote below concludes this piece:

“You will not continue to get better as a trader if you don’t track and measure what you are doing and how you are doing it.” – Dr. Woody Johnson


Source: Paxforex.com

 

Reactions from Readers

“Everyone wants results without the struggle. We want success faster, more easily, and without the risk of failure. As a trader though, we know that we have to accept that this is an immature way of living.” – Louise Bedford

There have been reactions from readers of my past articles – whether here or somewhere else. This piece features those that sent me personal email. It shows that some have either appreciated or benefitted from the articles, especially the ones that reveal principles of success in the markets.

1. “Thank you, Mustapha. It was very kind of you to write so wonderfully... And, I’m most happy… Trading is indeed a calling, but I also feel mightily called to help others, and to share what I know. Teaching is a calling as well. All the best…” – J. R.

2. “Hi Azeez, Thank you for writing a great article…. I appreciate the time you took to research everything. I can tell from reading it, and the way you wrote it that you really understand trading. Thank you!!! Regards.” – A. K.


3. “Azeez. Wow! I'm so impressed with your article! It's just wonderful. Thanks so much for that. You are a wonderful writer, and frankly, I'm very touched by your words…
Best wishes and I do hope the markets treat you well. Cheers.” - L. B.

4. “Dear Azeez: Thank you so much for the article. Very nice write up...and I love the photo too… Regards…” - D. W.

5. “Dear Mr. Azeez, I would like to congratulate you for sharing with us very valuable insights into the markets... Once again thanks for sharing the knowledge. Regards… Another knowledge sharer.” – T. D.

6. “Your article in… August - worth reading, again and again.” – Anonymous

7. “Dear Mr Mustapha, your article 'Keep your portfolio safe' has many gems of wisdom, worth reading again and again. Best Regards.” - S. S.

8. “Thank you for the mention in your excellent article…” – C. E. K.

9. “Hi Azeez, I enjoyed your… article... Well done. I have implemented it on Ninja Trader. It's an excellent article… Kind Regards.” – M. F.

10. “Thank you very much for you post and really moving presentation...” - E. T.

11. “Good morning and thank you for your very interesting article published on… September… Kind regards.” – G. L.

12. “Dear Sir: I read with interest your article in… December… I really enjoyed this article. Thank you very much.” – J. C.

13. “Mr. Mustapha, I recently read and enjoyed your article…” - K. L.

14. “Good morning and thank you very much for your valuable article…” – G. L.

And the list could go on…

Conclusion: For years I’ve been striving to help others to be the best traders they can be. One good way of doing this is to write articles that reveal the principles that can guarantee one’s success in the markets. Better articles are coming on this website, written by me and my other colleagues who work tirelessly to bring out the best trading knowledge for the benefits of our readers.

If you’re passionate about trading success, I‘d like to recommend TRADERS’ magazine to you. It comes free of charge and you can get invaluable trading information from it on monthly basis. Just go to the link at the end of the quote below (an expert from the magazine), and you’d be able to register for past and coming editions – at no cost.

“I picked up unhealthy habits of telling people what they want to hear, and most fatally developed a need to be right, which was only further fostered by that environment. Now, as a trend follower, knowing that I will have a low strike rate has all but removed that ‘need to be right.’ I don’t live from one trade to the next, each one is a tiny part of an overall process. I accept that there will be more losers than winners, and I can never know what each trade brings, so after a while you learn to treat them all the same with little emotion. Your only job then is to manage risk to ensure those losses remain small enough for the big winners to outweigh them monetarily.” - Jon Boorman (Source: www.tradersonline-mag.com)


Eye-opening trading lessons: http://www.harriman-house.com/experttraders

 

“It is so important in the training for trading to do the right things from the very
beginning.” – Norman Welz

I recently met someone who doesn’t even know how to trade Forex, though he’d heard the word ‘Forex.’ We were chatting together and he, interestingly, said that when he was ready to do Forex, he would just put down his money with a funds manager that has a proven track record, and he would then forget the investment for many years. He said he’d even be happy when small but consistent profits accumulate of the account on a quarterly or annual basis (totaling about 15% to 30% per annum).

Unlike those who prefer gargantuan profits very quickly, the man didn’t mention doubling accounts again and again in a short period of time. What do you want from trading? Latest automobiles, beautiful girls and financial liberty – which can all be gotten at will. The hope of making money without lifting one’s fingers looks feasible, though some don’t think that the hope could be out of touch with what are real. Many a speculator targets the probability of living affluent and carefree lives. Plus there seems to be the probability of attaining the goals thru trading. We’re grateful!

Online trading remains one of the best jobs we can do. It incorporates self-employment with liberty and the chances of getting rich. But the fact is that one would get rich slowly, not quickly. As mentioned in some of my past articles, trying to get rich quickly is very risky. Please consider the wisdom in the statement made by the man mentioned in this article, and lower your expectations.

Conclusion: It’s not likely that hard work would make you a multimillionaire. In trading, it looks great to go for small but consistent profits rather than home runs. The mortals’ mistakes sometimes have far-reaching effects… Occasionally, an incident that lasts several hours or an ‘extraordinary situation’ might bring a trader’s dreams to an abrupt end. Therefore, it makes sense to try to be realistic when managing trades.

The article is concluded with the quote below:

“Being your own referee is just as hard in trading as it is in football. But those in this profession who fail to submit to discipline control can quickly find themselves left out of the game. Most of those affected remain.” – Norman Welz (Source: Tradersonilne-mag.com)

Source: www.tallinex.com

 

Forex trading, daily or intraday is a negative sum game and to make money in it you need to outsmart market makers, something that only very few people know how and can do.

 

you could argue that for every market under the sun.

 

Only if you are trying to trade against the market makers for a few pips. Bring the time frame out and it's anyone's game.