"If I could just pick the right market, I would be a better trader."
"If I could just predict where the market is going, I would make money."
"If I could just be disciplined enough,... "
"If I... "
You fill in the blank. In search of the holy grail, would-be speculators are constantly telling themselves little lies that they think will somehow soothe their egos and will potentially boost their bank accounts. There are two secrets to trading futures and forex. The first secret is that you will have losing trades.
That's it.
No matter what you do, no matter how many books you read, no matter how many seminars you attend, you will have losing trades.
If you spend $2,000, $10,000, or $50 on the next great book, the next automated trading system, the best piece of software that shows you red and green arrows, you will have losing trades. Accept that you will have losing trades, and your life begins to change from would-be speculator to a true speculator.
The second part of the secret is that when you properly prepare for losses, the profits will take care of themselves. You will never need to force a trade. When the trade is properly set up, you can expect to enjoy the fruits of your labor, whether that's reduced losses or increased profits.
There is a bonus secret that we have talked about before, but we will reiterate it: Don't leave anything to "chance." Chance is the realm of the gambler, the realm of the 80 percenters. They plan for nothing, they prepare for nothing, and they expect everything. Leaving the wrongs things to chance is what stops would-be speculators from ever becoming traders.
It is no secret that the forex market trades trillions of dollars daily. The futures market trades trillions of dollars monthly. No matter how much money you have to invest, it will never be enough to affect the markets. Ask Barings Bank or Amaranth if you don't believe me. Since we know that we cannot control the markets through sheer force of will or with capital, we turn our attention inward.
By focusing on ourselves, we begin to apply the right pressure in the right areas. Deciding when to get into markets is the easy part. Our success comes from the ability to integrate three aspects of trading together seamlessly:
1. Money management
2. Technical analysis
3. Risk management
The three steps to trading success revolve around how you are able to plan in advance on how you will react when you win, lose, or draw in each one of these areas. By mastering your reactions in each of these areas, you elevate yourself from speculator to trader. The goal is to be constantly in control of your actions and to diminish the amount of surprise that you may experience from the market or to at least be prepared by what the market throws your way. Having a good trading psychology is not enough, because when our will power begins to fail us, it is good to have a set of rules to operate by.
Money Management
Money management and risk management are two different things. Money management involves what you do with your money in your account, how much money you will risk in a trade, how much money you hope to gain, how your account will earn you interest, commission rate, and so on. Anything that has to do with specific numbers or percentages involving the capital in your account that is what money management involves.
Technical Analysis
There are two schools of thought. One believes the market can be predicted, and another believes it's random. While both schools of thought have their place, in order to be fair, there is a cause and effect in the marketplace. Chance plays a small role in how the market moves from one tick to the next.
Yet when it comes to technical analysis, many investors go overboard. They will have dozens of indicators, many of them redundant, which only adds to their confusion. There is a way to get the maximum benefit from it. You have to divide your technical indicators up into three parts:
1. Where is the market going?
2. How fast is it getting there?
3. When will it arrive?
One or two indicators that are capable of answering each of these three questions will improve how you trade overnight.
What about fundamental analysis? There are so many factors involved with fundamental analysis that the average speculator doesn't have the time to stay abreast of the information. Not to mention the fact that when the market news is distributed, many of the key players have already acted on it, whether because of foreknowledge or based on their own projections. So, for all intents and purposes, fundamental analysis is not as useful as one would hope.
Risk Management
When you purchase a car, there are a few key risks, for example, theft, damage, or car accident. You purchase insurance to protect you from the risk. When you purchase life insurance, you are protecting yourself against one risk-death. When you purchase an electronic product, you may get the extended warranty, which protects you from a myriad of potential problems/risks that could damage it.
Insurance and risk go hand in hand. When you trade futures and forex, you risk losing your money. When it comes to risk management, all you should be focused on is how not to lose money. The second thing you should be thinking of is insurance. Just when you are paid back or rewarded on protecting yourself from everyday risk, so should you be paid back or rewarded when you insure your trading. That's why, when it comes to risk management, using "stop losses" is not enough.
Stop losses are necessary, but they fail to reward you. They stop the pain but do nothing to counterbalance it. So when you get the initial position right, you are on cloud nine, but when you get it wrong, you are forced to make two decisions. The first decision is whether your stop was too close but your position was right. The second decision is whether you should now reverse your position and commit the cardinal sin of chasing the market.
"If I could just predict where the market is going, I would make money."
"If I could just be disciplined enough,... "
"If I... "
You fill in the blank. In search of the holy grail, would-be speculators are constantly telling themselves little lies that they think will somehow soothe their egos and will potentially boost their bank accounts. There are two secrets to trading futures and forex. The first secret is that you will have losing trades.
That's it.
No matter what you do, no matter how many books you read, no matter how many seminars you attend, you will have losing trades.
If you spend $2,000, $10,000, or $50 on the next great book, the next automated trading system, the best piece of software that shows you red and green arrows, you will have losing trades. Accept that you will have losing trades, and your life begins to change from would-be speculator to a true speculator.
The second part of the secret is that when you properly prepare for losses, the profits will take care of themselves. You will never need to force a trade. When the trade is properly set up, you can expect to enjoy the fruits of your labor, whether that's reduced losses or increased profits.
There is a bonus secret that we have talked about before, but we will reiterate it: Don't leave anything to "chance." Chance is the realm of the gambler, the realm of the 80 percenters. They plan for nothing, they prepare for nothing, and they expect everything. Leaving the wrongs things to chance is what stops would-be speculators from ever becoming traders.
It is no secret that the forex market trades trillions of dollars daily. The futures market trades trillions of dollars monthly. No matter how much money you have to invest, it will never be enough to affect the markets. Ask Barings Bank or Amaranth if you don't believe me. Since we know that we cannot control the markets through sheer force of will or with capital, we turn our attention inward.
By focusing on ourselves, we begin to apply the right pressure in the right areas. Deciding when to get into markets is the easy part. Our success comes from the ability to integrate three aspects of trading together seamlessly:
1. Money management
2. Technical analysis
3. Risk management
The three steps to trading success revolve around how you are able to plan in advance on how you will react when you win, lose, or draw in each one of these areas. By mastering your reactions in each of these areas, you elevate yourself from speculator to trader. The goal is to be constantly in control of your actions and to diminish the amount of surprise that you may experience from the market or to at least be prepared by what the market throws your way. Having a good trading psychology is not enough, because when our will power begins to fail us, it is good to have a set of rules to operate by.
Money Management
Money management and risk management are two different things. Money management involves what you do with your money in your account, how much money you will risk in a trade, how much money you hope to gain, how your account will earn you interest, commission rate, and so on. Anything that has to do with specific numbers or percentages involving the capital in your account that is what money management involves.
Technical Analysis
There are two schools of thought. One believes the market can be predicted, and another believes it's random. While both schools of thought have their place, in order to be fair, there is a cause and effect in the marketplace. Chance plays a small role in how the market moves from one tick to the next.
Yet when it comes to technical analysis, many investors go overboard. They will have dozens of indicators, many of them redundant, which only adds to their confusion. There is a way to get the maximum benefit from it. You have to divide your technical indicators up into three parts:
1. Where is the market going?
2. How fast is it getting there?
3. When will it arrive?
One or two indicators that are capable of answering each of these three questions will improve how you trade overnight.
What about fundamental analysis? There are so many factors involved with fundamental analysis that the average speculator doesn't have the time to stay abreast of the information. Not to mention the fact that when the market news is distributed, many of the key players have already acted on it, whether because of foreknowledge or based on their own projections. So, for all intents and purposes, fundamental analysis is not as useful as one would hope.
Risk Management
When you purchase a car, there are a few key risks, for example, theft, damage, or car accident. You purchase insurance to protect you from the risk. When you purchase life insurance, you are protecting yourself against one risk-death. When you purchase an electronic product, you may get the extended warranty, which protects you from a myriad of potential problems/risks that could damage it.
Insurance and risk go hand in hand. When you trade futures and forex, you risk losing your money. When it comes to risk management, all you should be focused on is how not to lose money. The second thing you should be thinking of is insurance. Just when you are paid back or rewarded on protecting yourself from everyday risk, so should you be paid back or rewarded when you insure your trading. That's why, when it comes to risk management, using "stop losses" is not enough.
Stop losses are necessary, but they fail to reward you. They stop the pain but do nothing to counterbalance it. So when you get the initial position right, you are on cloud nine, but when you get it wrong, you are forced to make two decisions. The first decision is whether your stop was too close but your position was right. The second decision is whether you should now reverse your position and commit the cardinal sin of chasing the market.
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