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
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:
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’.
I was on YouTube watching some trading videos when I stumbled upon Astro FX channel. So here are these two guys (Shaun Powell and Aman Natt), in their early twenties, dressed up to the nines, very expensive looking watches, driving luxury autos with personalized number plates like F13REX, giving forex trading seminars and selling courses. Instantly my bullshit meter went through the roof. I had to find out what this scam is all about.
After doing some research, the following facts came up:
- the Myfxbook verified results they boast actually prove they have a complete lack of understanding what trading is about and what purpose track records serve. Firstly, losing around 50% of the account in one day and draw-downs of +80% would make any person with a minimum sense of ridicule to refrain from giving paid trading advice. Secondly, track-records with a length of a few months can’t really showcase trading ability (because they are too short) but they can and did in this case reveal trading amateurism.
- the luxury cars come from Platinum Executive Travel Rental Cars in Birmingham, where the owner’s son apparently is a friend of Aman Natt
So we have two guys who not only don’t know what forex trading is, but they take their ignorance as a sign of virtue and expertise. There’s no other explanation for posting and continuing advertising of those dismal results on Myfxbook. Furthermore, by uploading videos on YouTube where they draw lines and put indicators on charts and call it technical analysis or showing off their supposed wealth made through trading, they try to pass themselves for professionals. Don’t be fooled by the appearances and pay them to teach you forex trading – the only thing you’ll learn is how to lose money.
I was informed that a class action lawsuit against Exential is being prepared by the Giambrone law firm. All people interested should visit this page.
More than a year since this article was written, authorities have finally shut down the fraudulent operations of Exential Group. From Leaprate.com: Exential Group in Dubai Media City was ordered to cease trading on Sunday as the Department of Economic Development (DED) investigates complaints by clients that due payments had dried up.
Our managed forex accounts use short-term trends following methodologies to deliver exceptional profitability. Our specialised trading technology achieves average annual returns in excess of 100%with drawdown never exceeding 0.5% per transaction since inception in 2011. – Exential Group Advantage
If this sounds appealing and you have at least $20.000 – their minimum – to ‘invest’ with Exential Group, then you should read on before parting with your money. This company ticks off all the boxes of a classic managed accounts scam:
- it’s a faceless, nameless entity. Who is the owner ? Who are the traders, what credentials and experience do they have ? Who authorizes them to trade other people’s money ? No legitimate company would hide this kind of information
- the returns they supposedly achieve don’t resemble the distribution you’d normally expect from a trading account with 4 years history. For each month since January 2011 the returns advertised vary between a low of +7% and a high of 11.4%. This easily makes the traders capable of achieving such lofty and consistent results the best in the world. Why haven’t we heard from them ? Why aren’t their names splashed on the front covers of magazines ? Because these are just numbers pulled out of thin air which couldn’t withstand any kind of scrutiny.
- third party verified results are in stark contrast to those advertised, with losses around ~50% in just a few days. The period covered is under one year, as opposed to the unverified four years of excellent results advertised.
- the strategy used, booking small profits and letting losing positions open in the hope they’ll come back is a recipe for disaster and a clear sign of their lack of expertise in trading
- they work with an unknown, opaque, offshore registered broker, FCI Markets, which raises doubts that the same persons are behind both these entities.
When presented with the above information, there are two things a person initially convinced by Exential Group’s advertising could do: 1. realize that it’s a scam and run in the opposite direction
2. say something like: ‘you can’t be right, I know or read of so and so who have been with them for some time and they made money’. This was the usual answer too when victims of Bernie Madoff were warned before his Ponzi scheme collapsed. It’s just the typical way a scam operates: some people have to make money in order to spread the word and allay fears of those who are a little bit more skeptic.
To conclude: don’t spend your money just because you like what you see and hear. Talk is cheap. Watch The Wolf of Wall Street movie if you need a reminder of that. Thoroughly check the facts before parting with your hard earned cash.
The original author of this article is unknown. I’ve first seen it posted many years ago on a forum I think, and I saved it because it made a lot of sense. As I read it again today, I still think it carries a lot of wisdom, and that’s why I want to share it.
Stage One: Unconscious Incompetence
This is the first step you take when starting to look into trading. You know that it is a good way of making money because you’ve heard so many things about it and heard of so many millionaires. Unfortunately, just like when you first desire to drive a car you think it will be easy – after all, how hard can it be? Price either moves up or down – what’s the big secret to that then – let’s get cracking!
Unfortunately, just as when you first take your place in front of a steering wheel you find very quickly that you haven’t got the first damn clue about what you’re trying to do.
You take lots of trades and lots of risks. When you enter a trade, it turns against you, so you reverse and it turns again, and again, and again. You may have initial success and that’s even worse because it tells your brain that this really is simple and you start to risk more money. You try to turn around your losses by doubling up every time you trade. Sometimes you’ll get away with it but more often than not you will come away scathed and bruised. You are totally oblivious to your incompetence at trading.
Stage Two – Conscious Incompetence
Stage two is where you realize that there is more work involved in trading and that you might actually have to work a few things out. You consciously realize that you are an incompetent trader – you don’t have the skills or the insight to turn a regular profit. You now set about buying trading systems and e-books galore, read websites based everywhere from USA to the Ukraine and begin your search for the holy grail. During this time you will be a system nomad – you will flick from method to method day by day and week by week never sticking with one long enough to actually see if it does work. Every time you come upon a new indicator you’ll be ecstatic that this is the one that will make all the difference.
You will test out automated systems, you’ll play with moving averages, Fibonacci lines, support & resistance, pivots, fractals, divergences, DMI, ADX, and a hundred other things all in the vain
hope that your ‘magic system’ starts today. You will also become a top and bottom picker, trying to find the exact point of reversal with your indicators and you’ll find yourself chasing losing trades and even adding to them because you are so sure you are right. You’ll go into the live chat room and see other traders making profits and you want to know why it’s not you. You’ll ask a million questions, some of which are so dumb that looking back you feel a bit silly.
You’ll then reach the point where you think all the ones who say they are making profits are all liars – they can’t be making that amount because you’ve studied and you don’t make that, you know as much as they do and they must be lying. But they’re in there day after day and their account just grows while yours falls. You will be like a teenager – the traders that make money will freely give you advice but you’re stubborn and think that you know best. You take no notice and overtrade your account even though everyone says you are mad to, but you know better. You’ll consider following the calls that others make but even then it won’t work so you try paying for signals from someone else – they don’t work for you either.
You might even approach a guru or someone on a chat board who promises to make you into a trader (usually for a fee of course). Whether the guru is good or not you won’t win because there is no replacement for screen time and you still think you know best. This stage can last ages and ages – in fact in reality talking with other traders as well as personal experience confirms that it can easily last well over a year and more nearer to three years. This is also the stage when you are most likely to give up through sheer frustration. Around 60% of new traders quit in the first 3 months – they give up and this is good – think about it – if trading was easy we would all be millionaires.
Another 20% keep going for a year and then in desperation take risks guaranteed to blow their account which of course it does. What may surprise you is that of the remaining 20% all of them will last around 3 years and they will think they are safe in the water but even at 3 years only a further 5-10% will continue and go on to actually make money consistently. By the way – these are real figures, not just some I’ve picked out of my head – so when you get to 3 years in the game don’t think it is plain sailing from there! I’ve had many people argue with me about these timescales – funny enough none of them have been trading for more than 3 years – if you think you know better – then ask on a board for someone who’s been trading 5 years and ask them how long it takes to become fully 100% proficient.
Sure I guess there will be exceptions to the rule – but I haven’t met any yet. Eventually you do begin to come out of this phase. You’ve probably committed more time and money than you ever thought you would, lost 2 or 3 loaded accounts and all but given up maybe 3 or 4 times but now it is in your blood. One day – in a split second moment you will enter stage 3.
Stage Three – The Eureka Moment
Towards the end of stage two you begin to realize that it’s not the system that is making the difference. You realize that it is actually possible to make money with a simple moving average and nothing else IF you can get your head and money management right. You start to read books on the psychology of trading and identify with the characters portrayed in those books and finally come the eureka moment. This eureka moment causes a new connection to be made in your brain. You suddenly realize that neither you, nor anyone else can accurately predict what the market will do in the next ten seconds, never mind the next 20 minutes.
Because of this revelation you stop taking any notice of what anyone thinks – what this news item will do, and what that event will do to the markets. You become an individual with your own method of trading. You start to work just one system that you mold to your own way of trading, you’re starting to get happy and you define your risk threshold. You start to take every trade that your ‘edge’ shows has a good probability of winning with. When the trade turns bad you don’t get angry or even because you know in your head that as you couldn’t possibly predict it it isn’t your fault – as soon as you realize that the trade is bad you close it. The next trade or the one after it or the one after that will have higher odds of success because you know your system works. You stop looking at trading results from a trade-to-trade perspective and start to look at weekly figures knowing that one bad trade does not a poor system make.
You have realized in an instant that the trading game is about one thing – consistency of your ‘edge’ and your discipline to take all the trades no matter what as you know the probabilities stack in your favor. You learn about proper money management and leverage – risk of account etc. – and this time it actually soaks in and you think back to those who advised the same thing a year ago with a smile. You weren’t ready then but you are now. The eureka moment came the moment that you truly accepted that you cannot predict the market.
Stage Four – Conscious Competence
You are making trades whenever your system tells you to. You take losses just as easily as you take wins. You now let your winners run to their conclusion fully accepting the risk and knowing that your system makes more money than it loses and when you’re on a loser you close it swiftly with little pain to your account. You are now at a point where at a minimum you break even – day in day out. You will have weeks where you make big money and other weeks where you lose big money – but overall you are breaking even and not losing money anymore. You are now conscious of the fact that you are making calls that are generally good and you are getting respect from other traders as you chat the day away. You still have to work at it and think about your trades but as this continues you begin to make more money than you lose consistently. You’ll start the day on a big win, take a big loss and have no feelings that you’ve given those profits back because you know that it will come back again. You will slowly begin to make consistent profits week in and week out.
Stage Five – Unconscious Competence
Now we’re cooking – just like driving a car, every day you get in your seat and trade. You do everything now on an unconscious level. You are running on autopilot. You start to pick the really big trades and getting big profits in a day doesn’t make you any more excited that getting none. You see the newbies in the forum shouting ‘go market go’ as if they are urging on a horse to win in the grand national and you see yourself – but many years ago now. This is trading utopia – you have mastered your emotions and you are now a trader with a rapidly growing account. You’re a star in the trading chat room and people listen to what you say. You recognize yourself in their questions from about two years ago. You pass on your advice but you know most of it is futile because they’re teenagers – some of them will get to where you are – some will do it fast and others will be slower – literally dozens and dozens will never get past stage two, but a few will.
Trading is no longer exciting – in fact it’s probably boring you to pieces – like everything in life when you get good at it or do it for your job – it gets boring – you’re doing your job and that’s that. Finally you grow out of the chat rooms and find a few choice people who you converse with about the markets without being influenced at all. All the time you are honing your methods to extract the maximum profit from the market without increasing risk. Your method of trading doesn’t change – it just gets better – you now have what women call ‘intuition.’ You can now say with your head held high “I’m a trader” but to be honest you don’t even bother telling anyone – it’s a job like any other.
I hope you’ve enjoyed reading this journey into a traders mind and that hopefully you’ve identified with some points in here. Remember that only 5% will actually make it – but the reason for that isn’t ability, its staying power and the ability to change your perceptions and paradigms as new information comes available. The losers are those who wanted to ‘get rich quick’ but approached the market and within 6 months put on a pair of blinkers so they couldn’t see the obvious – a kind of “this is the way I see it and that’s that” scenario – refusing to assimilate new information that changes that perception.
I’m happy to tell you that the reason I started trading was because of the ‘get rich quick’ mindset. Just that now I see it as ‘get rich slow.’ If you’re thinking about giving up I have one piece of advice for you:
Ask yourself the question “How many years would you go to college if you knew for a fact that there was a million dollars a year job at the end of it?” Signed: Anonymous.
I’ve written before on this site that I think it’s crucial every trader should develop a trading strategy that fits who he or she is. Please note that I chose to use the word ‘develop’ instead of, let’s say, ‘find’. That’s because, as far as I know, and I’ve researched this subject extensively, all great traders and investors have developed their own style which eventually made them rich and famous. They didn’t just stumble on someone else’s trading strategy and copied it exactly.
An easy way to find out whether a trader follows a well thought out process or is just haphazardly clicking the ‘Sell’ and ‘Buy’ buttons on his platform is to ask him about the logic behind his trades. No matter if he’s using Elliot Wave, Gann angles, chart patterns, Fibonacci numbers, or a chart full of indicators, can he logically communicate the reasons for taking the trades ?
I will present examples of two of my EUR/USD trades, one which resulted in a loss, the other one in a gain, with full rationale for entering and exiting. The goal in doing this is to get people to question more in regard to their trading decisions before risking hard-earned money.
1. The losing trade
Questions: a) What’s the significance of those two lines and the moving average (MA) ?
The MA (set on 200 periods) helps me quickly gauge where the price is in comparison with its recent past. If the price is too far away from the MA it indicates the fact that on the time-frame in question the move is overextended and a period of consolidation or correction is highly probable. The two lines unite the recent higher lows – the support – and lower highs – the resistance – of the price, delimiting what is usually called a continuation triangle.
b) What’s the reason for entering the trade ?
Following a contraction of volatility, the price broke through the resistance in the early London session. Expecting a continuation of the move higher and considering the good risk/reward level – close to the break out point , I entered the trade.
c) What’s the reason for closing the trade ?
The price didn’t follow through, in other words, it didn’t act as it was supposed to act when the trade was opened.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. – Jesse Livermore
2. The winning trade
Questions: a) What’s the reason for entering the trade ?
The trade was entered as the price broke out of a consolidation that lasted a few days. This marked a major higher low in EUR/USD after the multi-year low registered in mid March. The level at which it was entered offered a very favorable risk/reward ratio, with a stop loss placed just below the former resistance, now turned into support line.
b) What’s the reason for closing the trade ?
The trade was opened on Thursday with the belief that if it’s not stopped right away because of a fake break-out, the only expected risk event left would be the NFP on Friday. You could exit a profitable long trade in one of two ways: either selling into strength or wait for the price to come back until it breaks some former resistance turned support. As one of my trading rules is to not keep open positions over weekend, I just closed the trade soon after NFP was released.
To conclude, if you can’t find the logic behind your trading decisions, I think you should ask yourself one question: is it logical to continue to trade in an illogical way ?
Here are four phrases that don’t mean anything but will make you sound like a real professional to the uninitiated:
1. ‘So anything is indeed possible’ used for example in an article/talk about future scenarios for a currency pair, stock index etc. Well of course it is, you don’t need any analysis to realize that.
2.‘The markets hate uncertainty’ used whenever the volatility spikes up. It’s just a false cliche because without uncertainty there wouldn’t be free-floating tradable assets. Think EUR/CHF between September 2011 – January 2015 when the peg was on.
3. ‘Financial instrument X is down on profit taking’ used whenever you’re asked why X is down after a strong run. It makes you sound as if you really are in the know. And moreover, it sounds logical: traders have made a lot of money and now they’re taking profits. It’s a laughable statement because there are dozens of reasons behind every buy and sell order and you have no way of knowing what really happened.
4. ‘I’m cautiously optimistic’ can be used whenever you want to impress with your trading approach. It implies that you’re wise and prudent. However, it’s a meaningless phrase because it’s too general and could be used to explain anything.
I’ve made the case before that trying to provide reasons for why a financial instrument (currency pairs, indices etc) moved the way it did in a short period of time is impossible. It could be argued that in certain cases, at best, it’s an educated guess. But most of the time it’s just an exercise in filling up web pages or TV airtime.
You might know that a couple days ago, on March 30th 2015, the former Federal Reserve chairman, Ben Bernanke, started his own blog. As it happens, on that day we also had a seven year high in Chinese stocks and a rally in US stocks – 1.5% for the Dow and more than 1% for S&P 500 and NASDAQ. There was a very funny tweet in my twitter feed that perfectly mocks this attempt to always find explanations for price moves:
Hovering below the $50 level the price of WTI crude, the American benchmark, has been cut in more than half since the highs of $107 reached in June 2014. It is now in a price range not yet seen since the depths of the 2009 recession, coming after a precipitous fall paralleling that in the second half of 2008 when we had the biggest financial crisis of past generations. Continues here
1. There is no single trading system or philosophy that is right for everyone. There are successful traders out there who mostly use fundamental analysis, while there are others who use only technical analysis or a combination of them both. Continues here