Author Archives: JLTrader

The Meaning of Being Right or Wrong in Trading

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” – George Soros


When did you turn from a loser to a winner?
When I was able to separate my ego needs from making money. When I was able to accept being wrong. Before, admitting I was wrong was more upsetting than losing the money. I used to try to will things to happen. I figured it out, therefore it can’t be wrong. When I became a winner, I said: “I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.” By living the philosophy that my winners are always in front of me, it is not so painful to take a loss. If I make a mistake, so what! – Marty Schwartz in Market Wizards


A loss never bothers me after I take it. I forget it. Overnight. But being wrong not taking the loss that is what does the damage to the pocketbook and to the soul. – Jesse Livermore


Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead. – Larry Hite in Market Wizards

I could list many more such quotes, but I believe you can see the point that I want to emphasize: admitting of being wrong on a trade idea and cutting the loss short is one of the things that great traders have in common. Conversely, a desire to (almost) always be right in the markets is generally a sign of a beginning or failed trader.

Why is it such a difficult thing for the majority of traders to acknowledge being wrong ?  How do I know this for a fact ? Easy ! Just browse around forums or websites selling EAs. Look at the gurus peddling  everything from price action courses to ‘powerful’ indicators. You’ll see that (almost) everyone is claiming or looking for to be right at least 7/10 times. As to the ‘why’: because people approach trading with the ‘normal’ mindset of everyday life: being right means that you’re good at X, and the more times you are right, the higher your proficiency at X is. For instance, can you imagine a doctor who only arrives at the correct diagnostic in 5 out of 10 patients ? He’d be struck off from the medical register pretty fast. Or an accountant who only gets the tax affairs right for 6 out of 10 clients ? How long do you think he’d last ?

Even when we consider general day to day activities and social interactions, how many people admit easily to not getting it right about one thing or another ? Very few, because it hurts one’s ego and repeatedly being wrong most probably indicates lack of expertise in a particular field.

And this is where the distinguishing feature of trading lies. Winning (being right) or losing (being wrong) on a trade has no connection (it could even be argued that it has an inverse relationship) with how good you are as a trader. There are systems which have 100% winning rate during a period of low volatility, with markets in a defined range, and which soon blow up after a trend forms. And then there are trend followers who have a less than 50% win rate but have been beating the markets for decades.  The only way to measure a trader’s competence is by looking at his risk adjusted performance over a meaningful period of time.


Three Trading Questions Answered

This is an email I received yesterday. I thought it might be helpful to others too if I made an article out of the answers.


Question 1: How do we actually determine if it will be trending or just whipsaw?

Let me start by saying that there’s no way to know for sure at any time where the price is going and how exactly it will get there (whether it will be a straight 400 pips UP day or an entire month of back and forth movement to cover the same distance). If there was a way, then there would be no need for risk management. Traders would just wait for the ‘sure thing’ to come and then put their whole account into that long or short position. It is very important to understand that no matter what sophisticated statistics or analyses we use, we can’t predict the future. All we can do is to take calculated risks. If one can’t handle uncertainty, trading might not be the best option for him.

Hopefully having succeeded in getting readers in the right frame of mind – probabilities, not certainties – we will now revisit the question. I can only speak for myself on how I go about determining whether a trend is more likely to occur than a whipsaw. Please bear in mind that these are just general guidelines:

  • On what time-frame does the setup appear  ? The best chance for success is when a setup is visible on several time-frames (let’s say 15min, 1h, 4h) and is congruent with the price trend on higher time frames – in other words, if there’s a double-bottom on the 5min chart, but on the higher time-frames all you see are big red bars, I wouldn’t try to catch the falling knife.
  • The more complex the setup is – for instance, a significant chart pattern comprised of several small ones that failed to materialize – the higher the chance the breakout will have a follow through.
  • When does the breakout occur ? All things being equal, I prefer them to happen during the London session, or early Tokyo for yen pairs,  when the liquidity is the deepest. If it takes much more money to move the price, then  there’s a higher probability the move is authentic and not just noise.
  • Are there any big news scheduled after the breakout ? (like NFP, Central Bank Rate statements) These events can really speed up a trend, and not only on a short-term basis.

Question 2: What would you suggest a part time trader do to become better at trading?

You mean besides reading my site :) ? Check out the books and videos  I mentioned. I would suggest anyone to take trading seriously and don’t view it as a get-rich-quick scheme. Treat it like a business not a hobby – businesses pay you money, hobbies cost you money.

Question 3: How do you set your stops and take profits? Is it by looking at recent support and resistance?

I set a stop-loss in such a place that if the price gets there, it means the idea behind the trade is no longer valid. For instance, if I buy at support, and then the price smashes through it, I get out. See here, here or here for examples. I don’t set take profits. Why impose artificial limits on upside potential ?  Every profitable trade closes either by hitting a trailing stop loss or when I consider that the risk/reward picture is no longer favorable.

Weekend Forex Gaps – Summer 2015 Edition

Mind the Gap – True both for London’s Underground and Trading

After another weekend episode of what seems to be the never ending Grexit saga, the markets have opened with big gaps. Actually, from a trader’s point of view, it’s less important why it happened. What matters is that as long as positions are left open during the weekend, the trader has surrendered control. He is now at the  market’s mercy and this can have some really nasty consequences. Here’s how the damage looks like at 21:20 GMT on some of the major forex pairs:

EUR/USD – 1.0980 down from Friday’s close at  1.1171 for a gap of 191 pips

EUR/JPY – 134.60 down from Friday’s close at 138.36 for a gap of 376 pips

USD/JPY – 122.58 down from Friday’s close at 123.85 for a gap of 127 pips

GBP/JPY – 192.20 down from Friday’s close at 195.00 for a gap of 280 pips

EUR/GBP – 0.6999 down from Friday’s close at 0.7094 for a gap of 95 pips

Before leaving an open position over the weekend, always ask yourself : will my trading account be able to handle large adverse moves such as the ones above ?

Debunking the Myths of Technical Analysis 1 – Fibonacci

Since I’ve started this site, I’ve received many emails from beginning traders asking what are the best places on the internet to  learn about forex trading. So far, I’ve been directing them to the school over at Babypips, but this will change in the near future as I’m preparing an ‘Education’ section on JLTrader. Looking closer at the curricula on Babypips, I realized that alongside a lot of useful material,  there’s also fluff and mysticism included. I’m referring here to things like Fibonacci, Elliot Wave or harmonic price patterns. To give credit where credit is due though,  they at least didn’t mention Gann. :)

Now, right off, I don’t want to imply that if I personally don’t use something, it automatically means it is ineffective. Far from me this thought. What I want to do is get people to question the rationale behind the technical analysis tools they’re learning about. Just because they come by default with all charting packages and supposed experts mention them day in and day out on TV and on the internet, doesn’t mean they have any value. The fact is that if we’re confronted very often with something that comes from respected sources, we usually stop analyzing it and just take it on good faith.

To give an example, think about horoscopes: you get them on every TV morning show and in most newspapers. But do you really believe that your personality and future events in your life are determined by the position of the sun, moon and other celestial objects ? I mean c’mon, we’re in the year 2015 not 1515.

The most advertised and well known aspect from Fibonacci’s paraphernalia are the retracements, which are used as potential support and resistance areas. Before plotting them on a chart, you first have to find the high and the low of the particular move you’re interested in, like in the picture below:

Fibonacci retracement on USD/JPY

Fibonacci retracement on USD/JPY

As you can see in this example, the starting point of the move corresponds to Fibonacci level 100, and the end point to level 0. Between them there are four levels (some charting packages also have a fifth level, 76.4%): 23.6%, 38.2%, 50.0%, 61.8%.  What they show is how much of the initial move (from level 100 to 0) has been reversed: so for instance, when the price reaches level 50%, half of the original move has been retraced.

So where is the problem ? The concept of price retracement is one that makes sense: every trend will stop at some point and give back some if not all the advance made. But to think you can predict the levels of this back move  by drawing random lines on a chart is laughable. Furthermore, the precision of the numbers, with decimals mind you, is just an illusion that you have any control on the future movement of the price.

Yeah, but they work ! the price just bounced off this or that level, some will say. Well, this is bound to happen when you put four of five lines on a chart. Try it with different lines or leave the default grid on the chart on. The same thing will occur.

The next observation would be: then how are Fibonaccis different from classical support and resistance levels which also don’t work every time.  Well, nothing works all the time in trading – we’re dealing here with probabilities, not certainties. However, resistance and support levels are reactive, being drawn based on past price action. They’re supposed to work in the future because price has ‘memory’ not because of some ‘magical’ Fibonacci numbers.

Support/Resistance in EUR/USD

Support/Resistance in EUR/USD

As you can see in the above picture, the significance of the area around 1.1040 is given by the fact that the price ‘respected’ this level several times. There’s no mysticism or anything strange about it. This is a totally different thing to just drawing a line on the chart and expecting the price to react to it.

To sum up: don’t forget, critical thinking is essential in trading. Always questioning why you do the things you do will not only get you better results, but will also protect you from all the snake-oil salesmen of which the trading world is full.

Thinking of Adding a Forum

fThree of the most commented articles on this site are related to what I consider to be scams or scams in the making : the EA Rev Trader Pro and FxKeys website here and here. There is some valuable information in those comments that I missed in my research before writing the articles. This shows me what harnessing the power of the community can achieve. That’s when a thought hit me: what if we can use this power not only in exposing scams, but to improve in all areas of trading, from technical and fundamental analysis to psychology ?

Online trading communities (forums) have been around for ages, but I pretty fast grew disenchanted with them, some of the reasons I covered in one of my first posts on this site, here. To expand on that, most of the forums out there are not run by traders. As a matter of fact, we don’t even know who is behind them. Check the ‘About’ sections of ForexFactory or BabyPips, two of the biggest forex related online communities. See what I mean ?

‘Well, who cares who runs them, I’m learning ‘stuff’ there and that’s all I care about’ is a common answer to the point I raised. Leaving aside for the moment the quality of the ‘stuff’, many people have been hurt financially by having this ‘I don’t care’ attitude. I don’t know how many of you were around some +6 years ago to remember guys like Vegas or Jacko from ForexFactory who built large followings and then ran away with the money the naive people entrusted them to ‘manage’. There were countless of red flags raised for what in Jacko’s case was a blatant fraud – he promised guaranteed returns, and he would top up from his own funds if he didn’t manage to achieve the predetermined returns (!!). Think about it, without the full support of  ForexFactory how many people would have listened and trusted him ? There were many red flags raised all along the way, but management heavily censored them (if they were in on the scam or just taking advantage of the traffic these questionable characters created, it’s everybody’s guess).

Having said that, what I intend to create is an online community for serious forex and CFD traders. One where dubious and faceless entities trying to fleece beginners can’t take hold. One where members can feel safe that no one will take advantage of their lack of knowledge. No ‘price action’ threads and then come to my site to buy my $300 course like you see on Babypips. It will take a while until I figure out the technical part of all this, but I’m enthusiastic about the idea of creating something new that will bring value to traders.

Forex Trading and Sports Sponsorship – An Ethical Dilemma

Watching the Champions League final between Barcelona and Juventus the other day, I remembered an article I read last year about how the brokerage company IronFX agreed to pay nearly 3 Million Euros for a sponsorship deal with FC Barcelona. After doing some research to see who among the most recognised retail FX brokers is sponsoring who in the world of sports at the present moment, I came up with the following results (I don’t claim this to be a complete list): Continues here

The +500M Pounds Fall of Plus500

Plus500 is a company which offers online trading services to retail customers. More specifically, you can trade almost anything you can think of: forex, indices, commodities, shares, ETFs. The company was founded in 2008 by six Israeli men, alumni of Technion Institute of Technology, with an initial investment of $400k. It was listed on the Alternative Investment Market of the London stock-exchange in July 2013. Continues here

Why Forecasts Are Pointless In Trading And Investing

Let’s start by defining what a forecast is: an estimate of a future event, specific in time and numerical value. A few examples include: EUR/USD will fall below parity by September 2015; Oil will reach $80 by year-end; Gold will be under $1000 by November 2015. These kinds of forecasts are made all the time by confident-sounding analysts, strategists, fund managers and others. Continues here

Pitfalls in Measuring Risks When Trading the Markets

I think it’s safe to say that more money has been lost through wrong measurement of  risk – which gives one a false sense of security – than by failure to measure risk at all. To provide an analogy,  it would be safer to drive a car without a speedometer than a car with a speedometer which understates the true speed by 25%. Continues here

Trading Educators And The Live Trade Setup Gimmick

I commented recently on a website on a subject that’s dear to me: how can one differentiate between the impostors and those who are the real deal in the trading education sector. While in theory Rayner’s premise – ask for at least a year’s worth of documented track-record – is apparently sound, I believe that the reality is not as simple as that. His suggestion would work for mechanical systems where there’s very little or no input at all from the user. As these usually come advertised as very profitable or/and as having very high win rates, some kind of proof is required.

Extraordinary claims require extraordinary evidence – Carl Sagan

When we’re talking about discretionary strategies though, the picture is very different. The quote above still applies, but in this case a track-record offers much less information and it could very well be misleading. How is that possible, you ask ? Because the results are highly dependent on how the individual traders apply the strategy; even if we have two equally experienced traders using the same strategy, if one misses a few good setups a year – for various reasons (holiday, other arrangements and so on) – their performance will differ markedly. The beginning trader could easily get frustrated and quit, or start jumping from one strategy to another when he doesn’t match the kind of performance he was lead to expect (even if only subconsciously) by seeing the track-record.

This brings us back to where we started: how can we tell apart the real traders from the charlatans ? If you lack any trading experience and you’re unable to assess the logic behind one strategy or another, I think the best way is to check the person out to see how genuine he or she is. The more inconsistencies, shady practices and unsubstantiated claims you find on their website or marketing materials, the higher the chance is that you’re dealing with an impostor.

One shady practice that’s not mentioned very often is what I call ‘the live trade setup gimmick’. You most probably have seen videos with charts that have the Buy or Sell levels marked and now the price is far away from the entry level and the trade is profitable. Below is an example:

Example of Live Trade Setup gimmick

Example of Live Trade Setup gimmick

Purportedly this shows us how well the strategy works in ‘live’ conditions. We’re lead to believe that this is not some textbook example, but a ‘live’ setup with real money. The reality is totally different though. Firstly, it’s all being presented after the fact, so the word ‘live’ used to describe it is a misnomer. Secondly we have no way of knowing if the account used for this trade is a real money or a demo account. For all we know, one could open several random trades on a demo account, and if one of them turns out profitable, it is then used to make a video of a ‘live setup’. This sleight of hand might impress a gullible person, but casts serious doubts on the educator’s character.

To conclude: the track-record might be used as a filter in some cases, but a person’s integrity is the most important thing to watch for in this business. As the old saying goes: ‘An honest man’s word is as good as his bond’.