My son asked me last week why he saw so many signs in people’s windows and gardens for ‘Brexit’ but almost none for ‘Remain’.

It might be something to do about where we live …

But I expect it’s more to do with general complacency from people who are happy with the status quo.

Get too comfortable, and you’ll wake up to find that that those people who DO care will have taken you out of Europe … and voted in Jeremy Corbyn / Donald Trump (delete as appropriate) … and have stolen your sun lounger.

The most dangerous time for your position is the moment you breathe a sigh of relief that you’ve ‘made it’.

I can remember my wife and I sitting back on the morning our youngest went off to school, relieved that we’d made it through those chaotic pre-school years … only for my sister-in-law to point out that ‘now is the time you’re statistically most likely to get divorced’.

So, if you’re feeling a bit pleased with yourself … you should be worried.

And if you’re worried – great, you’ve got just the mind-set you need to progress …

Brexit volatility is heating up – what you need to know

Take a look at this VIX chart …

Remember that the VIX is a measure of ‘market fear’ – i.e. a high VIX is a fearful market; a low VIX is a complacent one.

And now bear in mind that this is a market approaching a Fed decision on a rate hike (15^th June) … the Brexit referendum (23^rd June) … and a US election (8^th Nov) which could see an overtly protectionist President voted in.

You don’t have to be a market analyst to see that something is amiss.

Why is no one worried?

Have traders not noticed the big market-changing events that are ahead of us?

A quick crib on the VIX

If you’re not up on the VIX, here’s a brief catch-up …

VIX is the ticker symbol for the CBOE Market Volatility Index, often referred to as the ‘fear index’.

The VIX was first established in 1993, and it is calculated on a weighted blend of prices for a range of options on the S&P calls and puts. The method of calculation is a little complex, but we don’t usually worry about that – we simply need to understand that, in essence, it is a gauge of investors’ confidence in the market.

The VIX, in general, moves in the opposite direction to the market. The VIX goes up as stocks decline, and the VIX declines as stocks go up. A low VIX means that traders are confident about market conditions. A high VIX means that they are fearful.

The reasoning behind this is that a rising market is inherently viewed as less risky, while declining stocks tend to go hand in hand with volatility.

What makes the VIX special – and why so many traders value it – is that it does claim to have predictive powers, measuring expected volatility over the coming 30 days …

Because of the close association of volatility with falling markets, the VIX is often used to predict tops and bottoms on the S&P. So, if the VIX is rising, we expect to see the S&P falling. And if the VIX is falling, we expect to see the S&P rising.

This chart (showing prices for the last 6 months) clearly demonstrates how the two instruments correlate to each other …

VIX highs = market bottoms … VIX lows = market tops.

A ‘normal’ VIX reading is in the low to mid 20s. So current levels are considered low.

And low levels on the VIX lead to cries of ‘complacency’ in the market … and predictions that a serious market drop is on the cards.

So, why is the VIX so low?

The US economy has been slowly but surely growing … the series of shocks from the second half of last year, into the beginning of this year are passed … oil has picked up from its lows …

These are all great reasons to be complacent.

And what about the upcoming referendum, and the US elections?

Traders are statisticians. What they do may look like gambling, but they are people who look at the possibilities, weigh up the odds, and go with the likeliest course of action. They aren’t the kind of people who’ll bet on an outsider in a race because they like the colours of the jockey, so they won’t back Donald Trump when the polls say he’s less likely to win … and they won’t trade a Brexit, if the polls say that remain is more likely …

So, here we come to it …

How are the markets reacting to the upcoming referendum?

This isn’t a complex equation like most economic data that comes at investors … this isn’t a “well, the numbers look good, but we were expecting a little better, so we’re not as optimistic as we were expecting to be …”

There’s no nuance here. This is a binary result: in or out.

So investors are picking the most likely side, and going with that.

Which is why the markets have been so subdued on the referendum so far.

But we can expect that to change as the date gets closer …

Brokers are increasing their margin requirements, because they are expecting increased volatility in the run-up to the referendum.

I’d urge extreme caution in the coming weeks. And if the result is a win for ‘leave’ … then the volatility will continue as the fear of parliament standing in the way of a departure unfolds.

Caution vs complacency

Complacency isn’t just something we need to guard against in the run up to the referendum … or the US elections …

It’s something that can happen on a small scale within our individual trades … and to our short- and medium-term trading results …

This is when your trade is charging ahead, and you’re so busy counting the profits that you forget about the potential risk you’re sitting on.

And in your trading results, when we’re in the midst of a winning run, and blindly up our risk so we can make more money … faster …

I’m not suggesting that you should be living in constant fear … or unable to get a winks sleep … if that’s the case, you’re staking too high. But a little bit of anxiety about our positions keeps us on our toes …

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Whether it’s backcombing your hair, wearing espadrilles or employing the services of a bum bag … trends are fraught with potential disaster. And what feels right for one glorious summer … can cause wince-inducing pain when we look back on the mistakes we made.

The lure of the trend is undeniable – and I’m not talking about the decision of whether it’s time to shave off my ‘hipster’ beard … I’m talking about trend-following trading strategies.

When you’re in a trend, it feels great.

At the moment, with the new system I’m developing, I’m short 4 European indices and USDJPY – a total of over 600 points up.

But one of the key characteristics of trend-following trading is that, for every glorious run, there are a string of failed trades. Trend-following systems suffer from low win rates. Personally, I like to be right more often than I’m wrong – so I’ve long struggled to overcome my blind-spot to this style of trading.

So let’s look at what goes wrong with trend-following systems, and how it can be remedied …

The most basic trend-following system is the moving average strategy

Here’s a moving-average crossover signal, telling us where to buy into an up trend, and sell a down trend …

It’s likely that the first three trades will have struggled to make any money, while the fourth trade could bring in a substantial return.

And this is the reality of trend trading – lose, lose, lose, win …

But these strategies are a great training ground for working on your trade management – i.e. how will you get out of those first three trades with, either a modest profit, or minimal losses?

And how that trading method won’t restrict the spectacular return that trade number 4 could bring you?

The first answer many traders will come up with is … Let’s add another indicator!

And it may be possible to add an indicator that will filter out some of the duff trades. But, in a trading method with a low percentage of winners, we mustn’t risk cutting out any of of those rare profit-taking trades.

So this won’t be the full answer.

Let’s take a closer look at the difficulties we have to overcome, and how we can approach them …

• Don’t force a trend on a non-trending market

There’s no trading fun to be had from sitting on your hands, and that’s exactly why so many of us love to spot trades where there are none. And it inevitably costs us money.

Be patient and don’t try to anticipate a trend that hasn’t happened yet. If it’s a good trend, it’ll have profit enough for us in it.

• Getting into a trend too late

I know, I just said don’t get in too early … but trends by their nature tend to kick off with some momentum, and if we miss these moves, we’ll struggle to make a profit.

The impossible task of perfectly timing our trend trading – not too early, not too late – is why we’re bound to have losing trades … and often. Which brings me neatly to my next point …

• Living with a low win rate

Psychologically it’s tough trading a system where you lose more often than you win, which is why for many years I’ve struggled to find a trend-following system that I’m happy to put money into.

You have to be more disciplined than traders who have high win rates – you can’t afford to miss a winner because you were making a cup of tea!

But as I’ve long stressed, profitable trading isn’t about risk-reward ratios or win rates … it’s about the combination of the two, and whether or not they give you a long-term positive expectancy.

While high-probability trades – ones which are likely to win, can afford to take small profits …

Those with a low win rate must have big winners and small losers. And this task means getting a little hands-on with your trade management …

• A low win rate means we need seriously good risk-reward rates

Here’s where trend-following strategies are made … or fail.

If we trade with tight stops, we don’t give our trends space to run.

But if we trade with wide stops, we’ll struggle to make the necessary returns, compared to risks taken.

And in this dilemma lie the corpses of many a trend-trading system.

Trend-following systems require a ruthless system of cutting losses and letting profits run – something that doesn’t come naturally to most of us. Most traders are desperate to take our profits off the table, and reluctant to admit our mistakes by closing out losing trades promptly.

As soon as it looks like our trend isn’t running … the successful trend-following trader jumps ship. These are the small losses along the way that our big winners will dwarf.

And when the trend is running … the trend trader must hold their nerve – yes, you can take profits along the way, but avoid tightening in stops too close. Big trends need room to breathe.

These tasks take strict trading rules and firm discipline to follow them. (I’m currently fighting the urge to cash in my 600+ points profit!)

It’s taken me a long time to build a trend-following system that I believe is workable – both in terms of risk-reward and with rules that are easy to stick to (practically and emotionally!) So far, the results of what I’ve created are keeping me very happy – I hope to reveal a lot more about this trading method over the summer.

And a final warning (from the man who’s short across 4 European indices at the same time!) – beware of doubling up on risk in correlated markets. Markets are more highly correlated than ever before, and big trends will tend to run across global markets (indices and any currency pair including the US Dollar), so be aware that if you’re trading the same trend across a number of markets, you’re increasing your risk level with every trade you open.

And fear not – there’ll be lots more details of the system I’m developing coming over the summer … watch this space.

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Back in January, George Soros predicted that this economy was due for a ‘hard landing’, that would take down its currency.

If this happens, it will have repercussions across global economies.

And events this month suggest this looming disaster is fast approaching.

No, I’m not talking about the UK referendum …

Soros is betting against the Chinese economy, and the value of the Yuan (or Renminbi, as it’s also called). The currency has fallen around 6% against the dollar since this time last year …

And all the fears that rose back in January haven’t gone away – markets have just been looking the other way.

The accusations being thrown at China by Donald Trump and his like are that they are manipulating their currency to boost trade. And currency manipulation is a trick that few countries don’t play (take a look at the Fed decisions on interest rates) …

As the UK is just waking up to discover … the cheaper your currency is in relation to others, the cheaper your exports will be to them. And the more expensive imports from abroad will be. The result is that your export market is boosted … your population is more likely to choose domestic products over imports … domestic job market is boosted.

A devalued currency looks like a great idea all round – or does it?

Japan have been trying to devalue their currency for years. Their justification is that the Yen is overvalued due to its status as a ‘safe haven’ – and events overnight have seem money flooding into the Yen again, with the 100 level broken, which means the Japanese economy is at an unfair disadvantage when competing abroad.

So an overvalued currency is a bad thing.

But does that mean that an undervalued one is necessarily a good thing?

Let’s look at the evidence in China …

The Chinese government has recognized that an isolationist policy may give them cheap currency, but isn’t the route to a strong, internationally stable economy. And, after significant international pressure, the Chinese central bank has allowed its currency to massively appreciate since 2005, when its exchange rate was fixed at 8.27 yuan to a dollar …

To most Chinese economists, the 36% appreciation from 2005 to 2015 would seem like proof that are releasing the reins on their currency manipulation.

Many Chinese exporters have had to shut down in China and relocate to Vietnam or Bangladesh, resulting in lost jobs in China.

Dollar strength means that the yuan has appreciated even more against other currency, meaning that customers in other markets could be paying even more to import from China.

Is the yuan still undervalued? Maybe.

But China has a bigger problem, which really highlights how a devalued currency isn’t the golden ticket some believe it to be …

China is hemorrhaging money. It’s estimated that in 2015, China had capital out flows of $1 trillion. And in the first quarter of 2016, another $175 billion left China. No body – including Chinese savers – want to be holding yuan.

To halt this flow, the central bank has tried to restrict capital outflows, and has been using up its massive foreign exchange reserves to help stabilize the currency – nearly half a trillion dollars so far.

But the problems that spooked investors in January haven’t gone away.

And the evidence lies in a way that Chinese savers can anonymously get their money out of yuan: the bitcoin …

This month has seen the bitcoin hit two-year highs, and many credit this to rising Chinese demand for the digital currency.

Demand for the bitcoin has increased in line with Chinese government restrictions on moving yuan out of the country. And this presents a serious problem for China – anyone can anonymously transfer their savings into another currency, making traditional currency manipulation tools redundant.

The People’s Bank still have more than $3 trillion of foreign currency to spend in boosting the yuan – so we can expect this story to rumble on for a while. And, unless your pockets are as deep as George Soros, I wouldn’t bet against the power of the Chinese Republic just yet.

So, with turmoil in Europe and an impending crash in Asia, we’ll have plenty to keep us busy for the future. The only change is that instead of blaming it on Brussels, we’ll blame it on Bejing.

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Want to predict the market? Well, this single scientific formula predicted every market drop in the past 200 years, and will tell you exactly what’ll happen next …

The following 4 symptoms could mean that you have a serious case of something called physics envy … a particularly nasty condition which can have a very negative effect on your wealth …

1. You were attracted by the heading of this post.

2. You want a Holy Grail technical indicator, which will always make money …

3. You want to know what’ll happen to the UK/global economy when we leave the EU …

4. You thought that anyone actually ‘knew’ (despite what they may have claimed since) what would happen in the markets when the Brexit result came out last week.

Certainty, and simple causes and effects are attractive things – they allow us to take a course of action, and be confident in the outcome.

Whether that course of action is putting a cross in the ‘leave’ box in a ballot paper, or placing a trade on the Forex market … it would be great to know ahead of time how it’ll play out.

So economists and investors spend good deal of time looking at patterns of behavior, building models, drawing lines on charts, and mapping ‘predictions’.

So what are we trying to do with our indicators and predictions?

During the Second World War, islands of Papa New Guinea where used by Japanese, then Allied forces, who brought with them a great deal of food, clothing and medicines, which transformed the lives of the inhabitants, many of whom had had no previous contact with Westerners.

After the war, the troops – and their supplies – left. In the vacuum left behind, cults emerged, in which islanders would mimic the behviour of the US soldiers. They performed parade ground drills, built control towers where they’d sit a man wearing a wooden replica of headphones, while on a fabricated runway, another man waved landing signals. They recreated the conditions exactly as they’d seen them … but no planes, nor the cargo they carried, appeared from the sky.

And there’s an argument that market analysis is a type of ‘cargo cult science’ … building grass control towers (technical indicators) and expecting real planes (profits!) to land.

As a technical trader, my first response is to dismiss this argument as nonsense. Thing is, it’s easy to accuse someone or something of being a ‘cargo cult’ if you don’t agree with their logic. The builders of HS2 (railways brought prosperity in the past, so a new train line will too) … Brexit (Britain was ‘great’ before it joined the EU, so it will be again).

But maybe there is some truth in the ‘cargo cult’ accusations …

We often do expect too much from our models and systems. Having the right trading strategy in place, won’t ensure that the markets bring us profits. The markets will do what they bloody well want.

I’m not suggesting that we’re wasting our time with technical analysis … but it’s important to remember that we’re looking at the interactions of unpredictable systems: financial, political, cultural … it all comes down to people.

As anyone who’s ever bought a house will know, financial interactions – even relatively straightforward ones, where an asset has been independently valued – have a very human and emotional element, which can cause unpredictable outcomes.

Multiply that by the scale of the Forex market … and we’re looking at a very messy ‘science’.

There was a lot of criticism in the last financial crisis of economists who claimed to be practising a precise science. Back then, the central governor of India’s central bank said:

“I cannot change the mass of an electron no matter how I behave but I can change the price of a derivative by my behavior.”

And in recent weeks, there’s been criticism of economists’ predictions over Brexit … and then plenty of ‘I told you so’ recriminations over what actually played out. Yes, these predictions were based on models and calculations … but they can’t take into account exactly how panicked investors will feel … or how bitter negotiations will be. These things can’t be measured.

If there’s one area of trading where we can apply concrete mathematical principles, its in our risk management – how much risk we take on trades, how we balance our risk-reward, and our expectancy. We can’t predict which way the markets will twist and turn, but we can prepare and know for sure what we’ll do when the expected … and the unexpected happen.

Trading may have a lot of numbers in it … but don’t think for a minute that it makes you a scientist.

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Wimbledon this year, I was watching Canadian Milos Raonic in his size 14 trainers hitting balls at 140 mph.

I wouldn’t want to be on the receiving end of that.

In the course of that match the stats showed that Raonic made just 16 unforced errors.

The habit for defining errors as ‘forced’ and ‘unforced’ is unusual in the world of sport. But tennis statisticians love to look at the game this way.

A forced error is one caused by an opponent’s good play, while an unforced error can’t be attributed to any factor other than poor judgment and execution by the player – hitting a service into the net, returning wide, etc.

But I believe the ‘forced’ and ‘unforced’ classification can be a powerful tool in planning for success – not just in tennis.

How to win the long game

At Trader’s Bulletin Towers, we don’t run to tennis courts, but we do love table tennis. And with three sons, it gets pretty competitive.

My middle son is just tall enough to peer over the net, and has a killer low-flying forehand that he fires off at Raonic speed. By contrast, his big brother has no showy shots – he just focuses on getting the ball over the net. To watch the two of them play, you’d put your money on the little one.

Yet, again and again, the big brother wins. He doesn’t try to force errors in his opponent. He just keeps hitting it back, and letting his opponent make his own errors. (And because he’s always trying for the killer shot – he makes quite a lot of those errors.)

Almost every time, hitting the ball back beats the fancy shots.

Yes, the fancy shots give some spectacular points, but over the course of a game, steady plugging away wins out.

When it comes to investing, we say it over and over … boring wins.

Consider who you’re up against in the markets … it’s not some bloke in his back bedroom. The big money comes from opponents with more experience, fancier algorithms and deeper pockets than you have. Do you really think that your fancy volley at the net will catch them out?

Don’t kid yourself.

We need to just keep hitting it back, nice and safe … stay in the game as long as we can.

Meir Statman, professor of behavioural science tells us that investing: “is not like playing tennis against a practice wall, where you can watch the ball hit the wall and place yourself at just the right spot to hit it back when it bounces. It is like playing tennis against an opponent you’ve never met before. Are you faster than your opponent? Will your opponent fool you by pretending to hit the ball to the left side, only to hit it to the right?”

So, how do we just keep ‘hitting it back’ in the trading realm?

When it comes to the principle of ‘hitting it back’ …

a. Don’t try anything fancy
b. Manage your risk tightly
c. Position yourself where you’ve the best chance of survival

Imagine you’re playing tennis against a professional – you’re not going to try to ace them, but if you hit it back, you’d be pleased with yourself. And if you hit it back enough times, eventually, even a pro will make an unforced error.

You might not win Wimbledon this way … but you can make a decent return on your money, as long as your risk management and positioning is good enough, so you don’t need to make unforced errors.

Eliminating unforced error

Taking away unforced errors is actually simpler than you might think. It involves doing less, rather than doing more.

Errors come in when we have complicated price-action entries … where trading rules are subjective …where we ask ourselves questions about ‘how the markets will react if …’

Ironically, these are all things that that traders tend to do more of as our experience grows – as we start to think that we ‘know what we’re doing’ … that we can outsmart the market …

Instead, we should do less …

– Keep the rules simple.

– Ensure they’re not open to interpretation.

Add to this some serious risk management …

I’ve talked in recent weeks about how RRRs (risk-reward ratios) aren’t static – they are always on the move, as your trade moves into and out of profit.

The more profit you’re sitting on … the bigger your risk becomes on that trade, because you can lose your initial risk PLUS that nice, healthy profit.

And yet, in my experience, traders who stick on a 2:1 ratio on their trades, with their profit targets blindly 2x their stop distance, hoping to win twice as much as they risk … tend to find they do anything but that.

The market doesn’t often give out 2:1 profit opportunities. It’s just not that kind to us.

And yet, since January this year, I’ve managed to trade a new strategy and maintain a risk-reward ratio of 12:5 … so, for every £5 risked, £12 has been made.

I’ve surprised myself!

And the way I’ve achieved this is … after years of battling unsuccessfully with trailing stops … I’ve finally developing a workable, simple way to reduce risk and lock in profits.

I’m still testing this system, but I’ll be bringing you lots of details on it in the coming weeks. But what’s key is that for all that time I’m sitting open in the market (doing nothing – because I’m trading less!), my risk-reward management IS working.

In tennis terms, my trade is standing at the baseline, alert and ready, whether the ball comes to the forehand or the backhand!

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It’s easy to get carried away when something’s working well.

So I’ve been very guarded about the success I’ve had with a new trading system this year.

I began using this live back at the end of January. And I’ve set myself a challenge to find a market that it’s not working in.

Indices … forex … commodities …

Every market I trade it in is showing a profit.

Here’s a screenshot that a colleague emailed me last week showing her open positions in a test account …

 

So now I’d like to put this to the ultimate test …

And that’s putting it out to beta testers, to see how it fares with everyday traders and non-traders – experienced and newbie – people with busy lives, who need a profit-generating system that won’t take up too much time or capital …

Update: PLEASE NOTE THAT ALL BETA TESTERS HAVE NOW BEEN SELECTED.

But you can still subscribe to my Priority List …

And ALL Priority List members will get first dibs on a very special launch offer when this system does become available (assuming that I’m 100% happy with the results of the testers).

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I’ve written quite recently about testing systems – but that was from the view of testing an out-of-the-box strategy, to see if it’s a good fit for you, and whether it really works as well as the creator claims.

Today I want to look at a different type of testing …

This is the kind of testing you do when you’ve created your own trading system, and you want to know if it’ll be profitable going forward … if you need to make tweaks … and if it’s practical to use …

These are exactly the kind of paces I’ll put any trading system through before I’d consider sending it out for beta testing.

1. The rules

Even if you’re still adapting your trading rules, you need to have fixed rules to know what works and what doesn’t.

However simple they are, I’d insist on writing them down. It’s not until you lay out your rules as a list that you start to spot any inconsistencies.

Even better, try explaining the rules to someone else – it’s the best way to find any holes in your plan.

Rules should cover:

• What markets you trade
• What times you trade
• What timeframe you use
• Your entry signal
• Your trade parameters
• Your exit signal
• Any anomalies – like dealing with overnight prices, or economic announcements

2. Recording results

Unless you have a ledger and an ink quill, your first port of call will be an Excel spreadsheet.

Get your spreadsheet set up to record all the necessary results. If you don’t have one you can use – just download mine HERE.

If you want to test multiple scenarios for your trades (i.e. different exit strategies), then you’ll need to add extra columns so you can compare the results easily.

3. Finding the best broker

It could be that your trading strategy has to use a particular broker because of the charting methods their platform has, or because they’re the only ones who offer this market … but shop around if you can.

A few points saved on the spread will make a difference to your bottom line. And if you’re managing multiple positions, then look at margin requirements for different brokers.

Of course, for testing, you’ll want a demo account, and not all brokers offer those.

4. The slog

A new trading system will often require a slight change to your daily routine, and you have to commit to following it. It might require you to get out of bed 15 minutes earlier … or to check your charts once an hour … or to place trades every Sunday night …

Whatever the routine is, you’ll need to stick to it for a number of weeks or months.

5. Reading the results

Hopefully, your spreadsheet will now be showing a spectacular profit, and your demo trading account will be bursting with play money!

So, how do you judge how successful your trial has been?

A. Profitability. This doesn’t require any explanation – but there’s much more to whether a system works that just the bottom line …

B. How many trades have you placed? It’s all very well running a trial for 6 months, and only placing 10 trades in that time. Yes, it might be profitable, but it’s just not a big enough sample. If your strategy trades that rarely, you’ll need to test it over a longer period.

A test with a higher number of trades will have more weight. So the more trades you get in there, the better.

C. How long are your trades open? And how many are open at a time? This will be eating into your margin, so may affect how much you can stake, and then your overall profitability. (Demo accounts will often have £10,000 play money in them – you may not have that much sitting in your normal trading account.)

D. What’s your maximum drawdown? A drawdown is the difference between a peak and a trough on your trading graph, so it’s important to have an idea of the kind of losing run you could hit. There’s a trading truism that always give me a cold shiver: your worst drawdown is still ahead of you. What it means is that the longer you trade, the greater your risk of a bad losing run becomes. So, whatever drawdown you’ve suffered during your trial period is only a taster of what’s to come, rather than a ‘worst case scenario’.

Be honest with yourself – what kind of fund would you need to suffer these kinds of losses. Are these kinds of losses worth suffering in return for the rewards the strategy has to offer?

6. Ditching what doesn’t work

This is a really contentious part of testing, and where most strategy testing falls down.

When I’m testing someone else’s systems, I find it quite easy to be ruthless, but when it’s my own system, there’s always a temptation to bend the rules because ‘that’s what I’d have actually done if I’d been live trading’ …

What you can end up with is a process of selecting out the losing trades, and holding on to the good ones.

The result is that we have a profit figure that looks fantastic, but a testing method that’s deeply flawed.

Once you’ve filtered out what’s not working, you need to keep FORWARD testing according to your fixed rules – only then can you be confident that you’re not being selective with your results.

7. Practicalities

This is about whether it really works for your lifestyle, the level of financial commitment you’re prepared to make, the amount of time you’ve got to spare, and the kind of risks you’re comfortable with.

If the strategy has been taking up 8 hours a day, and has produced profits of £100 … is it really worth your time and effort?

8. Going live

Only once you’re happy with all the points above you should start risking your money on a trading system.

Trading live is always subtly different from demo trading – the data feed to your broker is not the same, so you may find your entries and exit executed at unexpected levels. Psychologically it feels different too, knowing that your hard-earned is on the line.

For those reasons, I’d recommend starting out with a small fund at first, and building on that slowly.

As I said above, these are the steps I’ll put a system through as part of the development process – and this will all happen before beta testing. But testing doesn’t stop … it’s an ongoing process of adapting to changing market conditions and looking for improvements and better profits …

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American economist, Theodore Levitt is attributed with the quote: ‘People don’t want to buy a quarter-inch drill, they want a quarter-inch hole.’

Which is why I expect most of us don’t care what the tools we have look like – we just want them to achieve the task we ask of them with minimum fuss. And yet, again and again, fancy trading tools are thrust on us, that just don’t do the job.

So here, I’ve distilled down the tools and techniques that you’ll need to succeed in the markets – they’re basic, they get the job done … and not one of them needs to cost you a penny!

1. The right broker

Just as most of us are pretty lazy about switching utility suppliers or banks … we also get too comfortable with our brokers.

Brokers know it – and they’ll make you pay for it.

That’s why it’s so important to shop around. No broker is all things to all people – they’ll each have strengths and weaknesses. But the best thing about spread-bet brokers is that you’re not stuck to one of them. Open several accounts, take advantage of all the ‘bonuses’ and offers … and trade in the one that gives the best prices for the market you’re using.

Bear in mind – if you’re trading with a 20-point target, and your broker is charging you half a point in spread more than the next broker … that’s costing you up to 2.5% of your profits. However great a trader you are – you can’t afford to give back profits that easily, unless you’re only trading for the benefit of your broker!

2. A kick-ass spreadsheet

I realize it makes me a huge geek – but, when my trading is on track, there’s nothing more satisfying that gazing lovingly as my spreadsheet of profits!

And when a losing run is making me question getting up in the morning – the same spreadsheet will show me long-term profits, so I have a ‘life line’ to hold on to.

Either way – a spreadsheet recording your results is a vital tool in your armoury. Without it, you might as well be gambling. If you’re serious about making money, you MUST keep track of your trades.

If you don’t have a trading spreadsheet that you’re using, you can download mine here.

3. A glance to the left

At traders, we’re always wondering what’s coming at us from the right of our screens, and those candles on our charts tick by. And for all the technical indicators we can pile onto our charts, the simplest and most reliable way to predict price behavior is to look left … what did price do before?

Past areas of support and resistance are hands-down the best way to judge how prices will behave at these levels next time – these are the areas we get congestion on our charts, and where we can watch for breakouts …

Whether you’re specifically using support and resistance in your trading strategy, it’s still a smart move to draw a few of the most important areas of support and resistance onto your chart – that way when they crop up in the middle of one of your trades, it’ll flash warning lights at you.

4. Compounding

Don’t get me wrong, I like spending my winnings as much as the next person, but if you’re going to build real wealth, you’ve GOT to reinvest.

And the great thing about compounding is that it works just as well for the little guy as for the big hitter – with the same trading strategy, you can double your money in the same time, whether you’ve £500 to invest or £50,000.

Another thing to note about compounding is the huge profit difference that can be achieved by just increasing your returns by 1%. The chart here shows the effects of compounding on trades earning 2%, 3% and 4% …

The 4% trade has the power to turn $100,000 into $300,000 in the space of 30 trades, while the trade with a 2% return has become $180,000 (still, not bad, but worth bearing in mind that extra 1% you could be making by switching brokers!)

5. Time and patience

Obviously time and patience will go a long way when you’ve a successful system, and you’ve unleashed the power of compounding on it.

But time and patience are also important in the day-to-day practicalities of trading. It’s about waiting for the right moment to trade, rather than rushing into a trade, or forcing a signal that just isn’t there.

6. Focused price action

If you’re interested in using price action in your trading, you could read up volumes and volumes on the different candlestick patterns, and the probability of each of them to bring you success …

Or you could focus in on the key areas, and use them to spot the very best opportunities.

There are two vital candlesticks for traders, and if you can spot these two, then I believe you have 90% of the price action knowledge that really makes a difference:

A: The Doji Candle

A doji is a candle with a small body and long wicks. The message is one of indecision – it doesn’t tell us that the market will go up, or go down, but when it appears at a key level, it will give us warning of a reversal.

The two key shapes we’re looking for are hammers and shooting stars …

And we want to find these candlesticks at key turning points in the market, where the hammer will give us a bullish signal, and the shooting star will give us a bearish signal …

In the example shown above, the hammer forms right on the level of support – giving us a big hint that the price is ready to make a reversal.

And in the example below, we have a shooting star touching up a historic resistance level – this is a bearish signal that the price isn’t ready to move through.

B: The Engulfing Candle

An engulfing pattern consists of two candles, where the second candle has a different colour to the first, and is larger, engulfing the entire body of the first candle. For it to be bullish, the first (small) candle is red, and the second (large) candle is green. And vice-versa for a bearish engulfing pattern.

This candlestick pattern is a strong indicator of bullish or bearishness in the market, so can give a great clue as to where to get into a trend because it’s about to accelerate away.

7. Moving averages

When we’re in the throws of looking for signals on our charts, it’s easy to lose track of the overall, longer term trends. Without these, we can start trading against the trend, which means the task of money-making is significantly tougher.

If you’re trading with the trend, you’re riding market moves. If you’re trading against the trend – it’s like swimming upstream

To ensure you always know which way the market is moving, all we need to do is find a suitable moving average.

In the chart above, I have a 50-period moving average on an hourly chart. If we say that we’ll only take buy trades when the price is above the MA, and sell trades when it’s below – it’s easy to see how this can make us privy to the best trade opportunities on that chart.

8. Risk management

If I got a pound for every time a trader tells me “I just put on the trade at £1 a point” …

Sensible position sizing isn’t tough to do – it takes seconds out of your day. Without it – you can make losses that are way too big for your fund size AND you’ll make profits too small for your fund size.

Unless you’re working out the right stake for your trades, you can’t take advantage of compounding, so your wealth won’t grow as fast as it can.

If you’re not sure how to do it, you can download the Trader’s Bulletin position size calculator HERE.

9. Rules

The financial markets are not a place to ‘wing it’ or ‘fly by the seat of your pants’ – unless you want a very short career as a trader.

Human beings are naturally rubbish at evaluating financial risk. We make irrational decisions and they have no clear system for picking out what works from what doesn’t work, and become very emotional in their trading.

I’ve written before about how dreadful humans are at evaluating risk. Our brains simply weren’t designed for trading – which is why they need all the help they can get!

And that help should come in the form of clear trading rules which we can follow.

So, if you’re trading without a plan, please don’t waste any more time setting one in place.

Systematic trading follows mechanical rules. These strategies do not need to be complex, and shouldn’t be a daunting prospect.

Instead, they can be a few simple rules that enable you to monitor your trading … avoid emotional decision-making … and to stay on the straight and narrow, through the euphoria of winning runs, and the gut-wrenching losing runs.

One of the important things to bear in mind when you’re choosing or developing a strategy is that you’ll need to be able to apply it consistently.

If your strategy involves hours of technical analysis … or checking stats on dozens of markets – are you really going to be able to maintain that level of work?

If you’re in any doubt about it – keep it as simple as possible.

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A study of 60,000 traders by the University of California found that one group outperformed the rest by 5–10% per year.

They weren’t the most experienced group, or the hardest working group …

They were the traders who traded the least.

The 20% who traded most actively underperformed the 20% who traded least actively by up to 10% per year.

It’s been shown again and again – the less you trade, the more money you can make. While those of us who can’t resist dipping into and out of the markets (sometimes several times a day), are paying a price for it.

Timeframes explained

The traders who trade the most are those who are scalping – looking for small moves, many times a day, even many times an hour.

It’s hard work … it’s risky … and you end up giving most of your profits back to your broker in trade charges.

While those who take positions and sit in them for days, weeks or even months, pay negligible broker charges, and are more likely to catch substantial market moves.

In terms of finding signals, our long-term trader may be looking at weekly charts, daily charts, or even 4-hourlies and hourlies.

Meanwhile, our short-term trader will be probably be looking at trades on charts of 30 minutes or less.

Why the long-term trader has a better chance of success

If you take a look at the chart below, it shows the equity curve for a market index …

If our long term investor had bought this market, just about anywhere, and held on until the current level, he or she should have done very nicely.

But what about our short-term investor, who likes to nip in and out of the market? If this investor had perfect timing, he or she could catch all those green ups, and skipped all the red down periods. But this investor would need to have good timing to succeed – he or she could just as easily get in during one of the red patches, and miss an all-important green patch.

They’ve made their job much more difficult, and riskier than that of the long term investor.

The lure of day trading

I used to think that day trading was so tempting because I wanted excitement and believed I could make more money, faster that way.

These days, I’m less interested in getting excitement from my trading … and I’m all too aware that this isn’t the optimum way to trade.

So why am I still tempted by shorter term trades? Is it plain stupidity?

What I’ve realized is that it’s a great place to learn – if I’d only ever taken trades on weekly charts, I’d have a fraction of the experiences that I’ve learned from in my trading career. For this reason, I believe that shorter term trading has value – but it’s not the place to make our income.

Switching timeframes

There’s no shortage of opportunities on daily charts – but if you’re used to spending hours in front of your screen watching ticks, you may find you’re twiddling your thumbs.

But patience is another important skill for traders to learn.

Higher timeframes will give you less market noise, stronger signals, and more time to plan your trades. Plus, they mean you get to keep a greater chunk of your profits, rather than making your broker rich.

What’s not to love about that?

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My kids could no doubt give you a long list of reasons why their dad is a loser … my music taste … my dad dancing … my witty anecdotes ….

And I’ll insist there’s no shame in being a loser.

With the Olympics on the telly, there’s no shortage of valiant tales of athletes who’ve come back from incredible set backs, battling adversity and loss.

As traders, we’re often told about the need to be stoic in the face of loss … we need to ‘roll with the punches’ … ‘keep the faith’ … not ‘lose our nerve’ …. And there are plenty of times when this kind of resolve is needed.

But that’s not what I want to talk about today. I’m not talking about how to have a stiff upper lip when we hit a loss. Instead, I want to look at being so accomplished at losing, that we can walk away from the carnage almost unscathed, a bit like a stuntman who’s learned how to roll across the bonnet of a moving car.

Let’s be blunt here … all trading methods will have losses – even the best ones. And many (even the best ones) can have a lot of losses (I’m talking 50% of trades, or more).

Yet most of us put a huge amount of effort into finding the best trading signals, to have the best chance of winning, to make the most money from those winners … And what we fail to focus on is: how to lose.

And seeing as losses will often account for about 50% of our trades, don’t you think it’s time we got a whole lot better at losing?

The standard ‘wisdom’ is to risk 2% of your fund per trade, so we pop our stop loss on, calculate our stake, and wait to see what happens …. But that 2% is your maximum – you don’t have to lose that! You could get smart and cut your losses on the go …

As a ‘prize loser’, I want to learn how to spot a losing trade fast, so I can get out of it for a minimal loss. But at what key moment does a winning trade turn into a losing one? When it hits our stop loss? Hopefully, we can do better than that … So, let’s examine where our losing trade goes wrong …

1. The gut feeling

No trade starts out as a loser, but more usually in a blaze of optimism. Yet, sometimes there can be a hint that something’s not quite right. You know those times … you’re following the rules of your system to the letter, but you just don’t like the look of this signal … the market seems too indecisive … there’s a piece of data coming out that’s got you on edge … or you just have a hunch ….

When this happens, make a note of it in your trade journal, it could be important data in spotting a pattern forming.

2. The cold, hard facts

Okay, so you’ve established your entry signal … what is it assuming the market will do? Think really hard about what the price could do that would negate that signal. Yes, hitting your stop loss should be one of those things, but there are probably others.

Let’s say you’re buying because you’ve spotted a momentum signal … then the market does nothing, or moves in the wrong direction … it would suggest that the momentum just wasn’t there and you should get out.

We’re often reluctant to admit our signals can be wrong, but – as we know – all signals get it wrong a fair bit of the time. How we handle those losses can make all the difference. Yes, we can handle them with gritty steel and stoicism, but how much better would it be to have a trading signal that comes with a built-in safety mechanism – something that rapidly spots when a signal was flawed, so you don’t have to suffer the pain of watching the market move against you?

So, how do we build this kind of safety valve into our trades, so you can cut your losses like a pro?

Of course, markets like nothing more than teasing us with a pullback, making us sweat, before moving towards our profit targets … so how is it possible to protect ourselves from duff signals, without jumping ship too soon?

It’s a tough one, but here are some tips …

• Get in after the pullback (You can find advice on this type of trade here.

• Trade on momentum, and get out when momentum falls away. (More on momentum signals coming soon!)

• Don’t be afraid to close for a small loss, but to get back in if the signal regains strength.

• Remember, most traders are guilty of leaving losses to run too long, and taking profits too soon. We’re at battle against the devil on our shoulder, telling us that our trade will ‘come good’. Set yourself strict rules for when to close a loss – and stick to them.

Every pound you can save on a losing trade is a notch in the right direction on your risk-reward profile. By accepting our failed signals fast, we’ll release capital, reduce risk, and ultimately become more profitable.

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Traders talk a lot about momentum … and there is a huge arsenal of tools they can use to measure it. There are momentum indicators that measure the price relative to the previous close … the price relative to the range … the price relative to the moving average … relative to the range …

How on earth do we know which are the right momentum indicators to use?

Here I’ll show you my top 4 momentum indicators, along with tips on how to apply each.

But first, a quick briefing on oscillators, and what goes wrong with them (so we won’t be making this basic momentum error) …

The overbought/oversold market pendulum – and the wrong way to use momentum indicators

If you’re familiar with a momentum indicator, you’re probably thinking of an oscillator – a line on your chart that wavers between two points. If the line is above the centre line, it implies that there’s momentum building in an upward direction … if it’s below it’s centre line, it implies there’s momentum building in a downward direction.

But when it comes to the top of its range, the reading will be ‘overbought’; if it’s at the bottom of its range, the reading will be ‘oversold’. This is where the market is considered to have moved ‘too far, too fast’, and a correction is due.

Here is a momentum indicator showing momentum increasing, and decreasing in line with price trends, and peaking at overbought and oversold levels …

Using simple overbought/oversold readings is really blunt instrument, because as soon as a trend gets going, we can be stuck in overbought or oversold conditions …

And this is why we need to be a bit smart about choosing the right momentum tool for our trading style, and applying it correctly.

Which brings me to my top four …

1. Stochastic Oscillator

The Stochastic is a favourite oscillator for many traders, and is generally considered to be a good tool for getting into trending markets at the right moment.

Let’s look at a market in a nice trend …

Looks like there should be some profits to be had from this trend … but have we missed the boat? How do we hop into this trend safely?

Cue the Stochastic indicator …

This tells us that NOW is the good moment to buy into this trend. And here’s what happens …

By watching the ebb and flow of momentum during a trend, you can better judge your entries and exits.

2. RSI

The RSI and Stochastics look very similar, and are often used in much the same way by traders. However, the principles behind them are surprisingly different.

The Stochastic indicator is based on closing prices – and works on the assumption that the current closing price is likely to close closer to it’s highs in an uptrend, and closer to lows in a downtrend.

In contrast, the RSI measures the speed of price movements.

There are plenty of traders who’ll argue the merits of one over the other, so here’ my two-cents worth …

For me, the RSI is more suited to finding overbought/oversold or divergence in range-bound markets, while Stochastics are better for pinpointing an entry in trending markets. There’s no hard and fast rule here – they are both great indications, with weaknesses and strengths of their own.

Here’s RSI at work in a clear trading channel … When the price butts up against resistance and we have an overbought signal, then we have an opportunity to profit from a sell trade. When the price meets resistance at the bottom of the channel, combined with an oversold signal, then we have a buying opportunity.

3. MACD

If you’ve ever used moving averages on your charts, you’ll know that sometimes they shoot off with a clear direction, and other times they meander along, failing to give you a clear indication of which way the market is moving.

It’s the frustration of the trend trader – is this trend strong enough, or going nowhere?

This is where a MACD reaches parts that a normal moving average can’t … it measures the rate that the moving average is changing – telling us just how powerful a move is.

The MACD can be used in lots of ways – the most basic being to take crossovers of the two lines as a buy or sell signal …

But I want to show you a slightly less conventional way to use this indicator … It just looks at the histogram, and will only take trades when the histogram size is large enough to indicate clear momentum in a given direction.

To do this, I draw a channel on the histogram, and will buy if the histogram breaks this channel to the upside (taking profits when it comes back within the channel); and I’ll sell when the histogram breaks the channel to the downside (again, taking profits when it comes back within the channel) …

Of course, getting the size of the channel right is what’s tough here – it’ll depend on the volatility of the market you’re trading. But this is a tool it’s well worth having a play around with.

4. Candlesticks

Strictly speaking, maybe candlesticks aren’t an indicator in their own right, but what better way to picture the ‘uppy-downy’ nature (that’s a technical term) of the markets than watching what the candlesticks are doing.

Let’s put it bluntly – if we see a series of massive long green candles, we know there’s some upward momentum in the market. That’s why traders use candlestick charts, rather than line charts – they give us a great picture of momentum and its implied volume.

It’s as simple an indicator of momentum as you can get, and I’m always a fan of keeping things simple.

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I hate to be the voice of doom, but if you’re lucky enough to have a bit of cash to invest … well, that cash could be a poisoned chalice.

Inflation is heading upwards … and interest rates are falling … which means that the cost of living is going up, and returns on our capital can’t keep up.

Bank of England data shows the average easy-access savings rate is at an all-time low of 0.34%, while inflation is at 0.6%, and widely expected to be at 2% within a year.

What it means is that – if you do nothing – you’re going to get poorer.

The good news is, that as a reader of Trader’s Bulletin, you’ve already moved ahead of the crowd, as it means you’re interested in finding better ways to put your money to work. And I’ve important information on exactly that …

Beware thin ice

This month, Tobias Rötheli, of the University of Erfurt in Germany published a paper about fishing on a frozen lake.

His subjects play a computer game where they can choose where to fish on the frozen lake. The further they are from the shore, the more fish they catch, but the greater the chance of the ice breaking – which will cause everyone to lose their fish.

It’s easy to see the parallel with trading – the greater the risk, the greater the potential reward, but also the greater the risk of losing it all.

But what Rötheli then did was change the ‘interest rates’ on his fish … he made the returns on safer fishing spots smaller – increasing the steepness of the risk-reward profile.

The result was that his virtual fishermen went further and further out on the ice, seeking better returns and taking bigger risks. And, as the returns on ‘safe’ fishing dwindled, more and more fishermen crashed through the ice, losing their whole catch.

The lesson for us?

Low interest rates put us at direct threat of taking risky investments that will lead us to crash and burn.

So now is a moment to act – because doing nothing will leave us worse off. But it’s also a time to avoid being drawn into high-risk investments.

If you want to earn more than the paltry 0.34% that a savings fund might offer you, there’s no shortage of investments offering you returns of 10 times, 100 times, or even 1,000 times better than that. But before you let your head be turned by a returns figure, look really hard at the risk.

Reading between the profit and loss lines

A high return on investment is always going to be tempting, but if the risks on that investment are too great, you’re unlikely to get to enjoy those returns because you’ll have burned up your funds on the way.

Of course, it’s easy to find the ‘bottom line’ on a trading method – what kind of return it’s produced in the last month, the last year … but how do we measure the risks it’s taken to achieve that? Risk is tough to measure, which is why it’s easy to overlook or gloss over.

But here are 4 key factors to look at that will give you a picture of risk on any trading method …

• Risk-reward

I’m always banging on about risk-reward profiles – and how they tell us nothing about profitability. The risk-reward of a trading strategy just tells us how much we risk on average, and how much we win on average – it doesn’t tell us how often we make those wins, or how often we take losses.

There is no ‘bad’ risk-reward profile. You could be risking £100 to make £10 – provided you win often enough, it can be profitable. However, I would warn against any extremes of risk-reward, as they tend to go hand-in-hand with volatile returns.

• Success rate

Just as a risk-reward profiles on their own don’t tell us anything about profitability, neither does the success rate. This figure tell us how often we can expect to win, and how often we can expect to lose – but give no information about the size of those wins or losses.

Again, it’s extremes that take us into danger territory here. If you’re only winning a small percentage of your trades, you’ll have to suffer very long losing runs. Take a system with a win rate of just 30% – you could expect to get a run of 13 losing trades in a row in every 100 trades.

Likewise, a very high success rate will likely have large losses offset by lots of small winners. And – as losses don’t tend to fall in nice even patterns – if a few of these come together in a run, you’ll be looking at a very nasty drawdown.

• Drawdowns and volatile returns

Some of the most profitable trading methods on the planet have the kind of drawdowns that would make your eyes water and your nose bleed. They might make 500% one year, and then give back 80% of it the next year.

Most of us don’t have the resources or the nerve for those kinds of drawdowns. They can easily wipe out a trading fund before it’s had a chance to build up any profits.

Look for a trading system that doesn’t have large drawdowns – no profit curves move in perfect straight lines, but we want as smooth a curve as possible, rather than one that bumps up and down.

• Length of testing

None of the factors above will count for much without a decent period of testing. Between 100 and 200 trades will give you a picture of what your average risk-reward and success rate look like.

The longer you test, the more periods of drawdown you’ll experience, so this will give you a better picture of what kind of losses you’ll be up against. It’ll also show you the system performing across different market conditions – how has it fared in periods of high/low volatility? In trends? In range-bound markets?

Knowing these things about a system will mean you’re prepared for the ups and downs – how big they’ll be and how often you can expect them (of course, markets will never perfectly match our probability stats!)

Remember that risk is a key part of any trading system – it’s the unpredictability of returns that allows us to make money in the markets. Risk doesn’t have to be your enemy. Many investors are nervous of risk and take a ‘head in the sand’ approach – but if you look at the risks hard, you don’t need to over-stretch yourself financially and you can avoid any nasty surprises down the road.

Over the coming weeks I’ve some fantastic opportunities – these are systems where the focus is on risk management, rather than just flashing big numbers at you! Please watch out for more details.

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They say timing is everything, and I believe we’re well-poised to take advantage of the markets going into autumn.

But September trading has a bad reputation – it’s the hell-raiser month in the markets.

In fact, September is the only month of the calendar which has a negative median return going back to 1928.

It’s not called ‘the September effect’ for nothing – so, why on earth would now be a good time to trade the markets?

Well, September may be a bad month for buy & hold investors, but anyone who’s been trying to pick up money by trading the flat August markets will know that it’s tough to make money from a market with no direction …

I don’t know whether markets will go up or down this September, but I am willing to make one prediction … they’re going to do something!

We’ve had an unusually quiet August, and strategists are calling this the calm before the storm, advising us to expect volatility ahead.

As traders, we don’t need to worry whether the market goes up or down – we just need a trend to ride, and that’s exactly the kind of opportunity September is predicted to bring.

Which is why I’m so excited to be launching my new trend-following strategy this month.

September has got off to a great start, with a £400 profit banked by 8.20am on the 1^st, and open positions looking like this yesterday morning …

The prediction of September volatility isn’t based on a hunch, or on the charts above …. You only need a look at the calendar to see that there’s turbulence ahead.

This afternoon we have US non-farm payrolls for August. A strong figure here would push the case for a rate hike when the Fed meet later in the month.

This weekend: G20 summit in China. There’s no big market-changing announcements expected from here, but no doubt the subject of competitive currency devaluations will be raised.

The ECB meets on 8 September, and there’s expectation that low inflation figures will lead Draghi to extend the quantitative easing program to boost the Eurozone’s flagging recovery.

On 15 September we have the next Bank of England meeting – we can expect to find out more about the how Carney’s stimulus package will be unrolled.

It’s the big will-they, won’t-they story of the month – the Fed policy meeting on 20–21 September could see a decision on raising interest rates, and we can expect huge anticipation in the markets ahead of this.

On the same day, the Bank of Japan is expected to unveil a review of it’s controversial interest rate policies.

Towards the end of the month (26-28), there’s a meeting of OPEC and non-OPEC oil producers – a deal to freeze production would help to support falling oil prices.

And of course, the 26th of September sees the first US presidential debate, as the political posturing on that side of the Atlantic really gets into full swing!

With a busy month ahead, please make sure you’ve the right tools to take advantage of the market moves … and watch for my message on Sunday.

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The post Why NOW is the moment to take action appeared first on Traders Bulletin | Free Trading Systems.

Success in trading comes down to one thing – beating the person on the other side of your trade.

You want to be buying from the idiot who’s selling just as prices are about to go up … or, conversely, you want to sell your position to some mug just as prices plummet.

Of course, there isn’t one single person on the other side of our trade … there’s just ‘the money’ – that mysterious entity that suggests a smug City persona who I’ll happily earn a few quid from.

The idea that we’re in this hand-to-hand combat can make us think that we have to go it alone to have the best chance of success. Traders worry that if they share their secrets, they’ll be giving the other guy the edge.

But the truth is that trading in isolation puts us in huge danger of doing some really dumb things …

There’s a true story that has become a legend to psychologists … in 1995, McArthur Wheeler was arrested for holding up two banks in Pittsburgh. He’d walked into the banks, carrying a gun, wearing no mask or disguise. Yet he was astonished to have his identity discovered. Why? Because Wheeler had covered himself in lemon juice before entering the banks, based on the false belief that lemon juice made people invisible to cameras.

I’ll pause while that crazy logic sinks in …

It’s easy to just dismiss McArthur Wheeler as a complete idiot. But there are a couple of really interesting things we can learn from this …

One:

That really bad decisions don’t come from a place of confusion – they are generally made with huge certainty.

And Two:

That if Wheeler had talked to just one person about his plans (admittedly, not a great idea when you’re about to perform a crime), they could have put him straight.

I never thought I’d quote Donald Rumsfeld …

When we trade, we’re not in huge danger from the things we don’t know – the markets are full of uncertainties. As traders, it’s our daily meat-and-potatoes do deal with the unknown!

Instead, we’re in danger of the things we think we know, but don’t know.

And the best way to find out where those shortfalls in our knowledge are … is to share with other traders. By trading as part of a community, where ideas are exchanged – I get loads of useful feedback from traders on how systems can be improved … new trading ideas … and, yes, pointing out errors I’ve made (you know who you are!) ….

Mr Wheeler’s story gave birth to a lot of studies by psychologists on whether people have a good awareness of their strengths and weaknesses.

And it turns out that most of us are blissfully unaware of our weaknesses.

It’s something I find hard to comprehend – probably because my weaknesses are pointed out to me on a daily basis by my loving family members. Without this ‘sharing’, perhaps I would still believe that I was a great dancer … a brilliant cook …

But when it comes to trading, I expect I have weaknesses that even my family haven’t told me about. And it’s those weaknesses – the ones we’re blissfully unaware of – that are the real danger. They could be our ‘lemon juice’ moments.

That’s why, each morning I’m sending out traders who are testing my new strategy a screenshot of my account. That way, they can check the trades they’ve opened against mine – and (sometimes) drop me a line to tell me what mistakes I’ve made with my trades!

Whatever your trading weaknesses are – yes, we all have them – by trading together, we’re a lot more likely to find success.

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The post You’re underestimating the danger of home trading alone appeared first on Traders Bulletin | Free Trading Systems.

I’ve had a problem with my ears over the last few of weeks. I don’t want to go into too much detail (you might be eating your lunch), but after two lengthy sessions with a lady who stuck a vacuum cleaner down them, I’m now hearing again.

It was irritating to feel like I was underwater, unable to hear. But I work from home … and it was the end of the school holidays … so there was a benefit of not hearing my kids crashing around the house, arguing over the remote control, or kicking a football repeatedly against the back wall.

But yesterday afternoon, as my kids were back from school, and in the office next to me (apparently doing homework on the computer), and the cleaner was hoovering outside the door, I longed to crawl back into my underwater bubble.

I tell you this, not because I think you’ll be interested in the blockages in my ear canals, but because the markets are full of ‘noise’ – some of which we feel we should listen to, and some of which we should block out.

But how do we know what to ignore?

Why news watching & logging into your account are damaging your performance

In case you hadn’t noticed, 2016 has been a crazy year for big, market-rocking news stories.

I’m often asked by traders why I’ve blatantly ignored a major economic announcement and carried on trading regardless.

Usually I’m asked after my stop has been smashed and I’m cursing myself. (People rarely question my decisions when I’ve got it right.)

The only thing that saw me close out positions this year was ahead of the UK referendum – and not because I saw what was coming (I actually believed the very opposite would happen – volatility into the run up, then a correction and relative calm – ha! I certainly didn’t predict the ‘out’ vote, nor the closure of commercial property funds that followed.)

But if you spend your time trying to predict the outcome of global events, and their knock-on effects, I’m afraid you’re wasting your time. If news events can damage you too severely, then it suggests that you’re taking on too much risk. But there’s another trading dead-end that news-watching leads us into: it’s called ‘myopic loss aversion’.

The curse of the short-sighted

Myopic loss aversion is what happens if we check on the state of the markets and our trades too often. And it’s been shown to have a seriously negative effect on our prosperity.

Let’s consider an investment strategy that produces, say, 20% a year … but in a single day has a 50% chance of rising or falling …

Given that investors feel the pain of a loss more acutely than the pleasure of a win, an investor who checks his returns daily will spend more of his time feeling bad about this strategy than good.

It might sound a bit simplistic, but this is a genuine problem that halts traders in their tracks, and makes them reject great investments in favour of piddling returns in their savings accounts!

I’m guilty myself (I’ve already checked the welfare of my Heikin Ashi trades several times this morning, when I don’t need to – they are meant to be ‘set and forget’!) And it’s all too easy to do – I can log onto my account and view its value in real time … I can check the live news stream for events … and I can view reactions to those events on Twitter …

While, ironically, the best thing for my wealth would be to turn the screens off and instead sit on the sofa watching Homes Under the Hammer!

Often the best thing we can do for our wealth is to ignore the markets. Yes, choose your trading strategy wisely – then let it get on with its job. You can evaluate how well its doing its job at intervals (decide how often this will be before you start).

Investment is a long-term game, so don’t try to micro-manage … don’t listen to pundits … and don’t sweat the small stuff.

The post Myopic loss aversion – know what it is, because it’s damaging your wealth! appeared first on Traders Bulletin | Free Trading Systems.

My dad is a farmer.

And I’m … well … I’m the son of a farmer.

I can’t tell my wheat … from my barley … from my rye …

… and I couldn’t drive a tractor, let alone plough a field straight.

My skill set in life is of the impractical type, but I’ve always been quite good at standing next to my dad, passing him tools as he fixes stuff.

Yesterday I found my dad in the farmyard, wrench in hand, looking frustrated.

“I’m adding an extra furrow to my plough, but I’m starting to think it’s just not going to be worth the effort. The time I’ve spent trying to get it set up, I could have been out on the field ploughing.”

And, being a practical, helpful kind of son, my first thought was: “What a great metaphor that is for life!”

I decided not to share that wisdom with my dad (no need to rub in just how unsuited to the family business his son is).

But I did think I’d share it with you!

I don’t know about you, but I feel I’m always getting bombarded by new tools, gadgets, regimes, diets … that promise to make my life better, easier, richer, happier …

So I’m constantly trying to filter through the stuff that’s worth using … the stuff that’s not right for me … and the stuff that’s just dross.

The question is: Is this worth the time / effort / money?

Which is why I want to show you something which has minimal investment in all three of those areas. But huge potential rewards …

The thrill of discovery …

On 3 September, 1928, Scottish biologist Alexander Fleming returned from a family holiday to his lab at St Mary’s Hospital in London. He came back ready to clear out a stack of old petri dishes containing bacteria that he left and failed to disinfect before his holiday. But just as he set about throwing out these ruined specimens, he noticed something peculiar in one of the dishes. A little blob of mould – and, importantly, the area surrounding this mould was clear of bacteria. The mould had killed the germs. Completely by accident, Fleming had discovered Penicillin.

Penicillin … the microwave … superglue … Teflon … pacemakers …

Some great things have been discovered completely by accident.

I’m not suggesting this is going to save any lives, but this simple tool seemed so inconsequential when I first saw it … yet it has had a huge impact on the way I approach the markets and investment …

The simple tool I discovered by accident that transformed my trading

I often wonder how brokers decide what technical analysis to offer on their charting platforms. Some of the indicators are so obscure and random – I suspect a computer programmer somewhere was given a directory of technical indicators, and told to get on with it.

Sometimes I like to go and have a little dig about in the indicators on offer (I appreciate that it’s a rather tragic way to spend my downtime!) And if there’s one I’ve not used before (or even heard of), I’ll look it up, see what it does and have a play around with it.

And that’s exactly what I was doing when I decided to click the “heikin ashi’ box on my trading platform, to see what these obscure Japanese candlesticks actually do.

I didn’t think for a moment that this would be the beginning of a completely new way of trading for me …

And hopefully for Trader’s Bulletin readers too.

If you’re not already using my new Heikin Ashi trading method, then you may not yet have clicked this little box on your platform …

(You’ll need a Core Spreads account to get this – if you don’t have one, you can open one very quickly on these links: LIVE account OR  DEMO account.)

A ‘heikin ashi’ chart looks very much like a normal candlestick chart, but each candle carries data from the previous period within it (the formula behind them is at the foot of this page, if you’re interested in looking under the bonnet). The result is a ‘smoothing’ out of the candles, so up trends look like lovely long runs of green candles, and down trends like neat runs of red candles.

It’s a bit like the smoothing effect of a moving average – but it’s the actually candlesticks that are smoothed out, rather than having to read a new indicator on your chart.

I was hooked in straight away by the effect this tool had on my charts – the way trends instantly showed up, and I was able to stick with them to the end, rather than jumping out of market moves too soon.

Over the next few months I built a strategy around them and began forward testing in January this year.

Since then, my Heikin Ashi Mountain system has made over 63% gains. And here’s how my open positions were looking yesterday lunchtime …

You can get all the details of my system HERE.

But what about that time … effort … money … thing? Is this just another furrow on your plough that you really don’t want to be bothered with (you knew I’d get that metaphor in there!)?

And that’s what I want to address …

Time: if you want to develop your own trading system using Heikin Ashi, then yes, it’ll take some time. System development takes lots of testing. But if you use my Heikin Ashi Mountain system, it should take around an hour to read the manual, and then 15 minutes each morning to check your trades.

Effort: this is where Heikin Ashi is so special – this isn’t an indicator you need to learn how to read. It looks just like a normal candlestick chart!

Money: Heikin Ashi candles aren’t some fancy indicator you need to fork out for and upload onto an MT4 platform. They are free to use on your trading platform – with just one click of the mouse. And, if you want to try out my Heikin Ashi Mountain system – it comes with a full 30-day money-back guarantee. So, if you’re not impressed with the results – you won’t have wasted a penny.

Click here to try Heikin Ashi candles for yourself.

How Heikin Ashi candles are built:

The Heikin-Ashi Close is an average of the open, high, low and close for the current period.

The Heikin-Ashi Open is the average of the prior Heikin-Ashi Candle’s open and close.

The Heikin-Ashi High is the maximum of three data points: the current period’s high, the current Heikin-Ashi candlestick open or the current Heikin-Ashi candlestick close.

The Heikin-Ashi Low is the minimum of three data points: the current period’s low, the current Heikin-Ashi candlestick open or the current Heikin-Ashi candlestick close.

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The post What I discovered by accident when fiddling with my account settings appeared first on Traders Bulletin | Free Trading Systems.

We’ve all heard that ‘the trend is your friend’ – and beyond having a nice rhyme to it, it doesn’t come close to explaining the psychological reality that the trend trader is up against.

One of the surest things in the markets is that trend following strategies work. Whether it’s Turtle traders back in the 80s, or the simplest form of trend trading ever invented – buy and hold!

So why do so many people struggle with it?

Because there are some hard truths about trend trading – but once you accept these, then the rewards can be yours for the taking!

9 dirty little secrets of a successful trend trader

1.

No amount of fundamental know-how, news watching or inside knowledge will tell you when a trend will start or finish. The trend trader must learn that what he or she thinks will happen counts for nothing.

The signal is everything.

Markets aren’t entirely rational – which is why we have bubbles and crashes. Pundits and market commentators often stand on the sidelines of a trending market scratching their heads and questioning why the markets are moving the way they are. Don’t try to apply logic to a trend – just follow the signals.

2.

The successful trend trader will have lots of small losses, a few small gains, and a few big winners.

3.

Overbought and oversold indicator readings can last for AGES when the market has got a good strong trend on.

The trend trader knows not to sell on an ‘overbought’ signal, or to buy on an ‘oversold’ signal.

4.

A good trend-following system, might only win 35% of its trades.

All trading methods take losses, and trend-following ones can lose a lot of trades, so trend followers need to be prepared for this and to serious risk-management alongside their opening signals.

5.

Trend following makes perfect rational sense – look at any long-term price chart, and the power of trend-following systems is undeniable – yet psychologically is tough to do (which is why so many traders fail at it).

6.

How far will a trend run? When the market starts trending it will often go much further than anyone expected. Along the way, pundits will be shouting that it’s topped/bottomed out. But the trend trader just sticks to his or her rules regardless.

As a trend trader, you’re looking for big moves – the ones that make all those flat times worthwhile. Every time you take profits early, you’re damaging your risk-reward profile, and could be costing yourself long-term.

7.

Don’t get too bogged down in market correlations. Yes, markets will trend together. But correlations will sometimes be tight, sometimes less so. Be wary of getting too exposed in one market or one direction, but don’t assume that because one dollar pair will profit, any other would do the same. The best way to trend trade is to spread your risk across multiple markets.

8.

Don’t sweat about missing out on moves – there will always be pullbacks that will give you another chance to grab a bite of the cherry. Be patient.

9.

What goes wrong for trend traders is failure to cut losses short, and lack of staying power through the flat times.

Markets will trend some of the time, markets will be range-bound some of the time. Depending on the timeframe you trade, you may find yourself sitting on your hands, or making little progress for extended periods. When the trends come – the profits will be there.

Trend-following systems have proved themselves to be the most reliable earners, and the simplest methods to manage for a rule-based trader. Of course, no trading method is without its challenges (otherwise everyone would be doing it!) – but if you’re prepared for these challenges, you have what it takes to be successful.

You can test out my trend-following Heikin Ashi Mountain strategy for 30 days by clicking here.

The post 9 dirty little secrets of a trend trader appeared first on Traders Bulletin | Free Trading Systems.

Volatile returns are the ups and downs on your profit curve.

We hope that the overall direction of our profit curve is an upward one, but we often get distracted by the percentage gains, and we forget to look at the volatility behind those returns …

On the chart above, the returns with high volatility have earned more money, while the low-volatility returns have made less profit – but have probably allowed their user to get a better night’s sleep.

Volatility is both the friend and the enemy of the trader – so it’s important to understand it’s roll in your actions, and to keep it on a leash.

If market returns had no volatility – we simply wouldn’t get trading opportunities. The markets would chug along, maybe offering the kind of returns you’d get from a bank account.

Volatility is what gives us the incredible ability to do better than this.

But volatility left unchecked will clear out your trading account. The adage goes that ‘your biggest drawdown is still ahead of you’ – so we have to be prepared for those downs as well as the ups.

Plus, if you’re compounding your profits, volatile returns can really eat into your long-term results. If you’re in any doubt about that, just check out the figures in this article.

So, we should be looking for lower volatility – and it’s worth giving up some returns to achieve this. As it’s likely to benefit us in the long term. With this goal in mind, here are some tools you can use to achieve it …

1. Reduce risk

Volatility and risk go hand in hand, so by just lowering your stake sizes, you will cut the volatility of your returns. Yes, it does mean that a system which creates 50% gains p.a. with a 2% risk profile, will only make you 25% p.a. with a 1% risk profile. But you will be protected from drawdowns – and all trading methods suffer from those!

2. Diversify

The larger your trading fund, the greater the ability you have to diversify. If you can spread your risk across multiple markets, that’s a good thing, but you need to be able to reduce your stakes accordingly (otherwise, you’re just doubling up risk).

So, if you’re trading the German DAX with a stake of £5, you could be spreading that risk across the DAX and the French CAC. But there are a couple of issues to bear in mind: first, diversity can be tricky to manage as each instrument has its own nuances, so it’s easy to get out of your depth information-wise; and secondly, many small home traders are limited by minimum stake sizes from opening up multiple trades.

3. Use a drawdown limit

I’m a huge fan of the drawdown limit as a way to halt losses.

A drawdown limit is a loss limit that you set yourself. It will be a maximum percentage you can lose on a day, week, month, year … at which point you stop trading.

As an example, with one of my day trading methods, which makes either 2% profit or 2% loss per trade, if I find myself 6% down, I’ll stop trading. Therefore, the maximum I can lose in a day is 6%; while the maximum I can gain in a day is unlimited. I’ve naturally swung the odds in my favour.

When you’re in the midst of a losing run, the natural human tendency is that we ‘deserve’ a winner. That the market ‘owes us’ some payback. Of course, this is the psychology of the roulette table (and is why casinos are so rich). The reality is that losing runs often come along because market conditions just aren’t right for our trading style. So, by stemming our losses, and taking a breather – we’re better placed to come back to the table when market conditions have had a chance to change.

4. Reduce time you’re in the market

I’m not suggesting here that you adopt a scalping strategy – far from it.

In fact, it’s a common error made by new traders, keen to reduce risk, they’ll seek out strategies that use the tightest stops. This is a fast-paced sport, and more akin to gambling than investing.

When I talk about reducing your time in the market, I mean ruthlessly cutting losses when trades aren’t pulling their weight, rather than giving in to wishful thinking and hoping that they’ll ‘come good’ in the end.

5. Reduce the number of trades you take

If you feel that every time you make profits, you’re rapidly giving them back, this could be a sign that you’re taking lots of signals, rather than focusing only on the best ones.

Overtrading damages our results with a two-pronged attack: dilution and risk. You’re diluting your winning trades so excessively that your success rate will move lower and lower. And all those weaker trades are exposing you to the same risk levels as the stronger signals, yet aren’t delivering the same rewards.

By keeping a good trading journal, you can monitor your results, and look for filters that can cut out your weaker signals.

Each of these tricks will have the effect of reducing your bottom-line profit figure at the end of the month. Perhaps that something that doesn’t interest you?

But lower volatility also means that:
– You’re less likely to take a serious drawdown to your account
– You’re less likely to give up trading because of the stress it’s causing
– Compounding will work better for you, so you wealth will grow over time

So, if lower volatility pays out with a happier, longer, less-stressful trading experience, it might be worth sacrificing a few percentage points in profit in the short term …

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The post 5 tricks to take the volatility out of your returns appeared first on Traders Bulletin | Free Trading Systems.

Most traders are familiar with adding a moving average to their charts – a line that’ll smooth out price movements, give an idea of trend direction and when a trend may be ending, and a new one beginning.

Less commonly used outside the world of ‘quants’ is linear regression …

The trend-finding indicator that ‘Quants’ love

While moving averages are about adding up previous levels and then plotting their average … linear regression is about drawing a ‘best fit’ straight line through those levels …

And the linear regression indicator then plots the ends of all these imaginary straight lines across our chart. The result is something that looks uncannily like a moving average …

But the linear regression indicator has less lag than a moving average, giving a more accurate picture of price levels, and will respond to changes faster.

If you want to add this feature to your chart, it’s easy to find on the list of indicators …

(I’ve used a setting of 14 periods for a daily chart.)

But before you start applying a linear regression curve like a moving average … a warning – the downside of its sensitivity is that it’s more prone to whipsaws. But it comes with its very own methods of measuring trend strength …

The Linear Regression slope

The slope indicator tells us about how quickly prices are moving by measuring how fast our linear regression indicator is moving – i.e. the angle it’s moving up or down at.

If the slope is in positive territory, then it indicates an uptrend. If the slope is in negative territory, it indicates a downtrend …

But there’s more …

The R-Squared Linear Regression Indicator

The R-squared indicator measures how far the price is away from our linear regression indicator. It’s measured from 0 to 1 – the higher the R-squared figure, the closer the price is matching our linear regression line. So, a R-squared level close to 1 means that the indicator and the price are closely correlated. A level close to 0 means they have deviated.

Don’t worry if the idea of correlation … square roots … and regression … are making your head hurt, because the upshot of all this is really very simple to understand – What’s key here is that a rising R-squared level is a sign that the price is moving into or resuming a trend. A falling R-squared level tells us that the trend is weakening.

Note on the image below that where the R-squared takes a sharp upward turn, we see a really neat trend, hugging the linear regression line.

These short accelerated trend moves are the kind that us traders love to be in, so this is where the linear regression tool gets really interesting to me.

Exactly where you measure this up move on the R-squared from will vary depending on the timeframe you’re trading – we want to catch the acceleration early (but not so early that we’re risking false moves).

I’ve barely scratched the surface of this here – I’ll be coming back to this indicator very soon with some concrete trading ideas for you …

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The post Linear Regression – there’s a new trend-finder in town appeared first on Traders Bulletin | Free Trading Systems.

As a trader, my mental state tends to swing wildly from the smug joy that follows a couple of winners, to the nervous worry that infects my body after a couple of losses … that need to ‘fix’ something.

After years doing this, I’ve developed ways to keep myself in line, so I’m not tempted to suddenly up my stakes after a run of wins, or to throw in the towel after a few losers.

I do this via a two-pronged attack:

• Systems for long-term measureable trading improvements
• And systems to satisfy my need for a knee-jerk response.

By combining these two approaches to boosting my trading performance, I feel safe that I’m not making crazy off-the-cuff trading decisions, but I can also rid myself of that nagging worry that I’m not acting fast enough on current market conditions.

First off, let’s look at a situation we’re trying to ‘fix’ …

We like to look at our equity curves heading always upwards. But even the best, most successful trading strategy has wobbles along the way. There WILL be downs and well as ups. And there’s NO getting away from that fact.

A drawdown is the distance you’ve fallen from an equity peak. So, if your account stood at £12,000 three months ago; and now stands at £10,500 – you’ve had a £1,500 (or a 12.5%) drawdown.

Drawdowns are a fact of life for a trader. We hate them, but because we’re always chasing superior returns – we put ourselves in the line of fire. And the volatility of the market that can give us those incredible returns, will also knock us back at times too.

What many, many traders do is cross their fingers and hope that a serious drawdown won’t hit them until they’ve accrued enough equity to withstand it.

But finger-crossing shouldn’t really be a part of our trading plan …

When we suffer a drawdown, it’s natural to worry that something’s ‘wrong’ with our trading method. I want to add another technical indicator to my strategy … change all the settings … add a rule to not trade if there’s an ‘r’ in the month … anything that would cut out those recent losses …!

Problem is that I know these are the kinds of knee-jerk responses that can be the death of a well-thought-out and rigorously tested trading technique.

Drawdowns are part and parcel of trading – there is no trading method that has all ups, no downs.

So, what’s the solution?

The quick-fix

The purist’s solution would be to stand our ground – confident that the markets will come good. And, mathematically, we can be pretty confident they will.

But, even the most stalwart trader, with the deepest pockets, has their limit.

Which is why a pragmatic solution is to hold onto our fund by setting protections in place during a drawdown.

We do this by having set drawdown levels at which we’ll cut our risk.

The original Turtle Traders used the same method – their instructions were to reduce their risk by 20% any time they had a drawdown of 10%.

You can also set maximum drawdown limits – i.e. if you lose X%, you’ll stop trading for the day … or week … or month.

This goes against a natural impulse to risk more in order to win back those losses. But ‘doubling down’ can get you into serious deep water, while this solution goes the other way – concentrating on preserving funds, and cutting risk.

And there are two reasons why this works so well:

1. it helps deal with the need to ‘do something’ to stem losses;

2. losing runs often happen because market conditions just aren’t quite right for our trading method. By cutting risk or not trading NOW, we’ll be in a better position to trade when conditions are right.

So, there’s our ‘quick fix’ dealt with. But what about the long-term approach …

Ensuring your trading strategy is the best it can be

I mentioned earlier the urge traders have to ‘fix’ trades by adding another indicator or rule to their system.

If we did this every time we took a few losses, our trading rules would quickly become unmanageable, and unworkable.

But that’s not to say that trading methods can’t be improved upon.

Whatever trading method I use, I’m always testing improvements … but these changes need months of data to prove their worth.

The most obvious thing I find traders trying to boost are:

• ways to cut out losing trades
• ways to make more points from existing trades
• ways to reduce risk

But the result may not always be a larger slice of profit at the end of the year – we could be working towards a smoother profit curve, so we can reduce the pain of the drawdown.

So, what to change?

I always have a gut feeling of what will ‘fix’ or improve the performance of my trading strategy.

It might be changing my stop levels … taking profits sooner …

And 9 times out of 10 … the data proves my gut feeling to be wrong.

There is no easy answer – any changes MUST be tested rigorously, and we have to go with what the results tell us.

So, if you want to be working on boosting your trading performance, there are a few pointers to bear in mind:

• use a ‘quick fix’ to protect funds if you’re worried about stemming losses
• rigorously test any changes before applying them to a live account
• it’s easy to be so convinced that you ‘know’ the solution that you become blind to the data – the obvious choice is not always the best one
• avoid switching indicators and settings – often the answer is in trade management instead.

The best traders never rest back on their laurels, safe in the knowledge that they’ve ‘beaten’ the markets – instead, they are constantly striving to keep ahead, and improve performance.

No two days are the same in the markets, so we must be ready to adapt.

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The post Quick fixes & Slow solutions: how to boost trading performance appeared first on Traders Bulletin | Free Trading Systems.