In my younger says I traded individual shares and options  quiet extensively and to be honest my results were generally disappointing. It was a rare year where I would greatly over perform the main indexes despite subscribing to umpteen tip sheets and market research reports. Often exceptional gains made in one year were given back in the next or subsequent years. This is the experience of most private investors.

There are many reasons why profitably trading individual shares with any consistency is much more difficult than one would think. High among these reasons would be the regular bear markets that we encounter. A bear market is generally described as a fall of at least 20%  and we have had one such fall on average every 4 or 5 years since the 1930’s. Most private investors get crucified in these markets and at that stage become aware of the unadvertised shortcomings  of  the “Buy and Hold” approach.

However I do not want to dwell on Buy and Hold horror stories but rather to identify some additional risks that we expose ourselves to when trading individual shares compared to for instance day trading emini contracts or even  swing trading the emini  indexes.

There are of course  risks in all types of trading and we can never eliminate them all. However one of our first goals must be to try and minimise or eliminate those  that we are not otherwise  able to control, quantify or anticipate  through our research.

Trading individual shares carries additional unnecessary risks  and limitations that we do not have when trading emini indexes.

Market risk:

You may do all of your research and correctly pick a genuinely great individual company that should perform well in the future.  However if  the market suffers an external shock, or just a big sell off ,all of that research almost certainly will come to nothing as everything gets marked down. As that stock market saying says a rising tide carries all ships – trouble is a receding tide beaches all ships !

Two other apposite sayings are “never confuse genius with a Bull market” and “There is nothing like a Bear market to disabuse an investor of the notion that he is an investment genius”

Sector Risk:

Again you have diligently carried out all of your research and alighted on a great company with great management and prospects. However  If that sector falls out of favour (and for instance price earning ratios for that sector are marked down as is often the case) then again chances are high that your selection will also under perform. This could also be against a backdrop of an otherwise rising market. Ie individual sectors can fall in a rising market and generally all or most  ships in that sector will  rise or fall with it.

Individual company risk:

Even if an investor is right on overall market direction and on sector selection he may still choose stocks that have particular problems of their own. Problems  that are impossible to anticipate, research  or plan for.

You cannot, for instance, anticipate bad management decisions taken within a company or fraud or  manipulation of the accounts figures (Tesco ?)  or just bad systems or product  control or even bad luck (BP ?).

When we trade the emini S&P futures we are trading an index comprising 500 individual US companies. This means that whilst we cannot  eliminate market risk we have effectively minimised  both sector risk and individual company risk. If BP has another “accident”  or Tesco adds its numbers up wrongly again whilst the individual share price may well drop by 30%  the index of which it is a small component may drop by less than a few percent. The same applies to suddenly out of favour sectors. Sector valuations may drop substantially but the main index will suffer a much smaller move.

Also with emini trading market falls and Bear markets can far more easily be profitably traded than one can with stocks and shares so to the emini daytrader they actually present another great trading opportunity rather than the hazzard they present to stockmarket investors.

The Protrader emini trading course teaches you how to profitably trade these instruments whilst still minimising risk but maximising leverage.

Why is it that so many traders eventually move up to Emini day trading and is it just coincidence that those are often the people making the biggest returns on capital ?

I think not !  because emini daytrading allows us to control and speed up time – (well sort of anyway ). It is all to do with the compounding.

Generally compounding is used against us in the guise of HP interest or Credit Card charges etc and it is what keeps us poor.

House prices are probably the best example of compounding  working in our favour – you pay $100,000 for a house and 20 years later it is worth $1,000,000 – or whatever. This is how many of us have become wealthy  –  but –  the problem is you have to wait 20 years to become  a millionaire!  It is difficult if not impossible to speed this  process up  because it is the effect of  compounding  relatively small annual returns over time that actually creates the great wealth.  So one might  say it is easy to get rich slowly with property but far more difficult to get rich quickly in property.

What makes trading different and thrilling is that we can effectively speed time up. We can, in effect, make it run just as fast as we want  – because in trading time does not have to equate to just days, weeks and years but also to the other variable, namely,  trade frequency.

Emini Daytrading is the absolute perfect vehicle to facilitate this type of rapid and often very  rapid account compounding.

With house prices we are getting a fixed % return every day or week or year and we cannot change that whereas with trading our returns are not earned by the passage of time they are earned on each trade irrespective of whether it lasts for 20 minutes or 20 days or 20 months. If we take more trades our % return per day or week rises and hence we earn more money (assuming of course we are trading a system with a positive expectation).

By way of example let us take a simple system which has a 50% win rate but when it wins it wins 150% of what it loses. Great system with a clear positive expectancy. If you started with $500 and put on 1 trade per day risking  5% on each trade you would have around $800 at the end of Month 1 (after 20 trades)  and around $40,000 after 10 months (200 trades)

Fantastic results but what if instead of taking 1 trade every day we now took 5 trades each day. We would then have traded 200 times not in 10 months as above but in just 2 months. If the trades were sequential (allowing us to  adjust our bet size after each trade) all the other figures in the table (posted earlier) would remain the same. This means that we have now turned $500 into $40,000 not in 10 months but in just 2 months !

This is one of the ways that people  can and do “get rich quick” in trading. In a  way that I do not think  you can  replicate as easily in any other business.  First harnessing the magic of compounding and then turbo charge it by adjusting trade frequency (subject of course to portfolio heat and other money management considerations).

The effect trade frequency has on results is truly immense and its importance is extremely difficult  to overstate.

In order to take full advantage of the effect trade frequency has on the speed of compounding we need to be able to take shorter term trades  (Emini daytrades for instance)  and then lots of them. Emini trading and more specifically  Emini day trading allows us to do exactly that.

Swing trading and worse still long term trend following restrict our frequency of trade and make the road we need to travel feel a lot longer than perhaps it needs to be.

The Professional Trader automated trading course and automated mechanical trading systems are premised on using   Emini day trading and to a lesser Emini swing trading and  forex day  trading systems to enable us to harness trade frequency and use it to maximise the power of compounding.

When we then add in the more aggressive position sizing formulas taught on the course results can be  compounded at an almost unbelievable rate  – even over very short periods of time such as a matter of weeks.

This type of training is very big in the USA and it is not at all unusual for traders to charge $10,000 per day for this sort of training.

The idea is that you sit down with a successful proven trader and watch him trade for a day or even a week. Over that time you will learn his techniques and be able to replicate the way he trades.

AS you practice he can also look over your shoulder and  correct you when you do something wrong. Over that training period you will gradually morph into that successful trader.

It certainly is a very beguiling concept and sounds eminently sensible and the correct thing to do.

As with most things in trading what feels right is often wrong and what feels wrong is often right.

There are several problems with this method of training. The first one is that it implies that there is indeed a right way of doing things that once learned can be replicated time after time. A bit like if somebody teaches you to change the tyre on your car you can from then on change any tyre on any car.

The problem is that trading outcomes are  somewhat less certain then changing a car tyre. So for instance you could see a particular set up on Monday and trade it in a particular way and make $2000 profit. You can see exactly the same set up on a Tuesday and trade in exactly the same way as you did on Monday and lose $2000. One  key to trading success lies in understanding the irregular and inherently unpredictable nature of the outcomes and making this work for you rather than trying to change it – “it is what it is” – work with it not against it..

People think that trading success is all about getting a list of criteria and then ticking each box and when all boxes are ticked you enter the trade and hey presto make money. There is rather more to it than that so even if  your mentor teaches you great techniques that work on a Monday that does not mean to say those same techniques will work on the Tuesday when you’re sitting in front of the screen on your own.

The second problem is that the implication is that if you watch somebody do something you can then become as expert as them – simply by watching them. This is plainly untrue just ask any of the football fans that watch David Beckham take free kicks each week – how many of them can now kick a ball like Beckham. If you watch Mike Tyson pummel his opponents into the ground enough times does that mean that you can then go out and do the same ?

Successful trading is about understanding the probabilities, quantifying them and having correct techniques to cope with strings of losing trades and indeed strings of winning trades. It may sound counterintuitive but consistent success is much less about picking winners than it is about what you do with those winners and losers as they unfold. It is more about educating novices  in these matters rather than simply let them watch you  put on trades – that is only a very small part of the skill set required to make money consistently in trading.

Those cynics among  you may think that I am saying this because you cannot watch me put on real money trades during our training sessions  ? – quiet the reverse – YOU CAN.  In fact I am the ONLY  tutor in the UK who has his own real money systems trading real time real money as we are training.

I am however saying that it is the additional education that I provide on the day and in the additional resources pack and videos that are provided with both the beginners/intermediates course and auto-trading courses that is truly important and will enable you to achieve every traders goal of consistent repeatable profits.

Position sizing really is one of the most important aspects of trading. Even small changes that you make to your position sizing algorithm or method can change total profits earned over even short periods of time by multiples. The same cannot normally be said for making minor changes to an individual systems entries or exits.

So whilst it could be said that the trading system makes you your money it is also the case that the position sizing method dictates just how much money you actually do make.

So in terms of terminal wealth position sizing is far more important than the trading system. Sadly most traders probably spend 95% of their time on the trading system and just 5% on money management and position sizing issues. This is not a productive allocation of what are finite resources.

Also you will often hear people say “I already know all I need to know about position sizing – I use fixed fractional”. Well yes that is a much  used position sizing method and is certainly better than using no method at all , however,  there are far superior methods that can be used that involve no more additional risk to own capital but which can improve results over relatively short periods of time by factors of 5 or 10  even 50 times.

There is a very big difference from earning say $10,000 from a system to earning $500,000 from that exact same system over exactly the same period of time. This is the sort of scale of improvement that can be achieved.

I post below four graphs showing results obtained from exactly the same individual real money trading system. The system incidentally is RV4 which is a fully automated  E-mini Russell 2000 day trading system that at the time of writing can still be purchased from Pro-trader.

The first chart shows the results obtained trading just a one lot throughout the period from the beginning of 2008. A very acceptable $77,000 profit from trading just a single contract throughout that period. Nothing at all to be unhappy about earning $80,000 on a one lot  – or is there ?

The second graph shows the results using a standard fixed fractional approach. As can be seen this triples profits to around $250,000. It is at this point that most people sit back and assume that this is all that they can achieve with position sizing. It is not – by a long way.

The third graph shows results using a third very simple method  which rockets results to nearly $1 million !

The final graph shows a method similar, but not as good, as the method that I teach on both the beginners intermediates course and the auto trading course. This takes profits to around $3.5 million.

And don’t forget that this is exactly the same number of trades from exactly the same trading system over exactly the same period of time but the results obtained can vary around $80,000 to around $3.5 million.

The actual method that I teach would-be showing profits in excess of $10 million at this stage.

These aggressive position sizing methods work exceptionally well with short term day trading systems such as I trade and Pro-trader sell.

So whilst it is important to concentrate on producing a system that  has a positive expectancy in the longer term your time is far better spent seeking to maximise results through the use of more advanced position sizing algorithms and one or two other little known techniques taught on the course.

RV4 Emini Day trading system – one lot

RV4 Emini Day trading system – Fixed Fractional

RV4 Emini Day trading system – Extra aggessive

RV4 Emini Day trading system – Pro-Trader method

As your trading progresses the emphasis should move away from the trading system into areas such as money management and position sizing. (As well as two or three other very important lesser known areas  that are well covered on both the beginners/intermediates course and auto trading course)

So what is position sizing ?

It is that part of your strategy that tells you how many contracts or dollars per point to bet on the next trade.

The basic rules of position sizing are to start slowly.  Especially so if you are risking your own starting capital rather than previously earned profits. Then  become more aggressive as your profits increase and less aggressive as your profits decrease.

The first rule of trading has to be to preserve one’s capital. The biggest crime in trading is to blow your trading account up.  Remember the old adage  “The market will always give you plenty of new trading opportunities but will never give you any more trading capital”.

So three simple rules of position sizing are:

Keep it small when risking your own starting capital

One of the problems traders often have when they start trading a new method or system is excessive optimism. We tend to be so sure that this is THE system that we throw caution to the winds and “bet the farm” or at least a big portion of the farm right from the off. This almost invariably ends badly and consequently must be avoided at all costs. There are a lot of lessons to be learned in trading a new method and those lessons are always better learned with small risks than with large risks. The initial goal always has to be to survive and learn those lessons in as pain-free way as possible.  Once the lessons have been learned we can start scaling up our trading with the markets money not with our own. So there is a very big difference between how much of your own starting capital you risk (which  you always want to keep to a minimum) and how much of the markets money, i.e. profits, that you are prepared to risk . Be aggressive with the markets money and cautious with your own.

Use a proven position sizing method

This essentially means using an anti-martingale betting strategy.

The martingale betting strategy is basically to increase position size after a losing trade and to reduce position size after a winning trade. This technique is often used on the roulette tables.  The logic in support of this technique is what is known as the gambler’s fallacy. This is the belief that after a series of losing bets somehow the odds change for the next bet and make it more likely that it will be a winner. Clearly on a roulette wheel each spin is entirely independent of the previous spin, and this is most certainly not the case, hence the term gambler’s fallacy.

In trading this is still generally the case (ignoring for the purposes of this article sequential correlation and non-correlation).

Consequently we should be using an anti-martingale or reverse martingale betting strategy. This means reducing your position sizes as your account equity declines and increasing position size as your account equity increases. This is also  consistent with the basic concept of being cautious with one’s own capital and aggressive with the markets money. So do not be tempted to double up after a losing trade or try and chase losses. If anything you should be reducing position size after a losing trade.

My own experience in trading hundreds of systems is that on occasion you tend to encounter high sequential correlation between  trades.  in other words you get streaks of winning trades , when the market is in sync with your methodology  and indeed streaks of losing trades, when the market is out of sync with your methodology. Consequently if you use an aggressive reverse martingale betting strategy during those sequences of positively correlated winning trades you can trade your account equity up very very quickly indeed.

Income goals

One of the most common mistakes I have found traders  make is to pursue time based profit goals in the form of daily or weekly profit targets. “I look to earn 20 pips each day and then shut up shop and go and play golf” etc. This is  absolutely the wrong way of approaching trading. Firstly because it implies a degree of consistency that simply cannot be obtained in real life trading. Secondly it ignores the principle of serial correlation between trades. In my own trading I prefer to do the opposite and sometimes use the principle of “three strikes and you’re out” . In other words if a system  give you three losing trades in a day it may well be telling you something. That something is that the system and market are not in sync and maybe you should shut up shop and take the rest of the day off.

Conversely if you have say three winning trades in a row it may indicate that the market is  currently tightly in sync with your system and under those circumstances you absolutely should carry on trading. To pack up your computer at that stage is foolish. You should be cancelling all your appointments and trying to get as much money out of the market as possible whilst it is in such perfect sync with your methodology.

Pursuing income goals also tends to push the trader down the route of asymmetric bet sizing ie  for instance doubling up after losing trades. If you are  down a two hundred Dollars with two hours left in your trading day and you have a goal of earning $100 Dollars per day there is very strong pressure on you to increase your bet size to try and recover your losses and  hit your daily  target. This is the slippery slope to financial oblivion.

Two areas of trading that are often much overlooked by both beginners and quite experienced traders are money management and position sizing. Both of these important areas are covered in detail during the beginners course 1-2-1.

However In this short article I wanted to quickly cover one aspect of money management which is trade expectancy.

Novice traders are especially keen to find out what the win loss ratio is of any system. They tend  to assume that a system with a 90% winning ratio is superior to a system with say a 60%  winning ratio. Certainly the former system will be more psychologically easy to trade but may still not yield any profit.

The correct way of looking at this aspect of performance is expectancy.

Expectancy is essentially the percentage winners times what you win on each trade less the percentage losers times what you lose on each trade.

So a simple example would be a system with 80% winners when each winner averages $10 and each loser averages $6.

The expectancy of the system is therefore (80% * $10) –(20% * $6) = $8-$1.20 = $6.80

So what we are saying is on average every trade you place whether it is a winner or a loser will make you $6.80 profit.

Remember in trading we are only interested in probabilities not in specific individual outcomes. So in the long run it doesn’t matter whether your next individual trade is a winner or loser. What does  matter is that after 100 or 1000 trades you are in profit.

We can check our arithmetic by assuming we have placed 10 trades eight of which would win us $10 and two of which would lose us $6. So over those 10 trades we would win $80 and lose $12 making a net profit of $68. Which when divided by the number of trades gives us the average trade profit of $6.80.

Ii is  therefore easy to see the fallacy of simply asking what the percentage winners are. For instance you could have a system that wins 90% of the time and loses 10% of the time but still has a negative expectancy. Also   the reverse could also apply.

Often in those $99 ads on the Internet you will see claims such as 80% winners or even 90% winners. This is almost always a warning sign because the seller realises, that in isolation , this quoted percentage  is almost meaningless.

It is a bit like saying petrol is a bargain because it only costs $10…… And never completing the sentence to say how much petrol you get for  $10.  I could be $10 for a gallon or $10 for a thimble full. To say a system has 90% winners is an almost equally meaningless statement.

Whilst lack of understanding of expectancy  is the main reason for people obsessing about percentage winners it is also, to some extent, psychologically hard wired into us. The natural bias for people is to go for systems with high winning percentages. Certainly they are psychologically   easier to trade and give us regular rewards and psychological reinforcement that what we are doing is “correct” and “right” . Most of us  have a psychological  need to be right and just hate being wrong so high probability systems play up to this.

The problem is in trading it can be exactly the wrong thing to do. You will often find that good trading systems do not have stunningly high win loss ratios but still produce high positive expectancy. This is the case for  very good reasons that are covered elsewhere.

So forget obsessing about win loss ratios and instead obsessive about expectancy. Understand that the vendor that just quotes the win loss ratio is playing to people’s misunderstandings and is therefore unlikely to be a particularly honest chap.

So how many losers in  a row will you have ?

I think one of the most difficult things to do in trading is to sustain one’s enthusiasm when we are in a period of draw down.

To many traders a period of draw down is something they had not really considered as a possibility so when it arrives it comes as something of a shock. As with most things in life the better prepared we are for any eventuality the more able we are to cope with it when it does materialize.

So it is important in trading to be realistic and be aware of  the probabilities of having quiet long sequences of both winning and losing trades so that we have a feel for what we might expect in real life trading.

If you make the assumption that we have 50% winners and 50% losers then the chance of the next trade being a losing trade is 50% ie 1 in 2.

The chance of having two losing trades in succession is 50% times 50% equals 25% ie 1 in 4

5 losers in a row =  3.125%                                                               say 1 in 30

10 losers in a row =  0.0976%                                                          say 1 in 1,000

20 losers in a row =  9.5367% (E-5)                                                say 1 in 1 million

Clearly if you feel you will be able to sustain 70% winners over the longer term then the probabilities would be less. For instance five losers in a row with the win loss ratio of 70% would only occur about 1 in 500 occurrences

Whilst these ratios may not appear too frightening the real problem is that as traders we are in a continuous game and over a trading career will place thousands of trades.

For instance assume you put on five trades a day which would be around 1000 trades per year. This means that you would expect to incur a string of 10 losers in a row (based on 50% winners and 50% losers ) on average once in every year !

So if you are risking a large portion of your equity on each individual trade be aware that it is only a matter of time before you blow your account up – that losing streak will come – it is ordained  in the arithmetic !

How do we get around this problem ?  well on both of the training courses I give you a couple of techniques that professional traders use to ameliorate the problem of such long losing sequences.

Here are a couple more quotes from two  of the world’s greatest traders. In trading there is always more to learn and we should start by trying to learn from the best there is.

“Spend at least as much time researching a trading methodology as you would choosing a refrigerator” – Peter Lynch

I think this is where many novice traders make their first big mistake. They will buy a system on eBay for $99 and be so supremely confident that is going to make them a fortune that they immediately start trading it the very next day. They spend literally no time back testing, evaluating, questioning the systems prior performance or considering its underlying logic I think initially this is because people come into this business thinking that it is easy to make money from trading and therefore assume that all systems and methodologies work just fine. After few months people fairly rapidly realise that there is a little more to trading than simply fronting up  $99. You  certainly do not have to design your own trading methods but you absolutely must critically appraise them before you trade with real money. Time spent researching methodologies is one of the best investments you can make. It will save you thousands of pounds in unnecessary losses and may make you tens of thousands of pounds in profits.

!I measure what is going on, and I adapt to it. I try to get my ego out of the way. The market is smarter than I am, so I bend”  – Marty Zweig

The market is  comprised of  the distillation of all of the thoughts, analysis, hopes and fears of all of the market participants – so it is hardly surprising that it is smarter than you or I.  Whilst it is true there are certainly some suckers participating in the markets it is still truer  that many participants are well funded, extremely smart and hard-working. Consequently it is important to realise that yes the market really is smarter than us.  It is  for instance unwise to assume that a market that is going against you will  see the “error of its ways”   and reverse back in the direction you feel it should be going in. In the end this sort of thinking will wipe you – it is simply a matter of time.  If the market is going up and you are short then you are wrong and should reverse your position and follow the market or at least exit with manageable loss. It has been said by many great traders including George Soros that the sign of a good trader is an individual that can constantly re-evaluate their own position and when necessary they can instantly turn on a  sixpence and reverse positions. Successful traders do not become wedded to positions and have absolutely no problem accepting that they are wrong on occasions. We should not hold strong views and opinions and be more interested in making money than in being “right”,

I think that one of the most effective ways of learning to trade successfully is to pay attention to the words, opinions  and deeds of proven successful traders. Many successful traders have written books about their experiences or participated in detailed interviews which can provide  valuable insights and advice for new traders. Here are a few quotes from the world’s greatest traders.

“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” -Peter Lynch

Admittedly Peter Lynch was quoted as saying this prior to the advent of day trading which tends to have higher win loss ratios  than in the longer term trading that he was referring to. However the quote is still very true. Certainly you cannot hit 9 winners out of 10 with any great consistency whilst using anywhere near acceptable risk reward ratios. The great news is you do not need to to still make good money !

If you can hit even 5 winners out of 10 with the correct position sizing and money management you can still make a lot of money. In the training manual I give an example of somebody starting with $500 who consistently wins only 5  times out of 10 but can still turn that $500 into $40,000 in around 12 months. New traders are obsessed with win loss ratios whereas successful traders are obsessed with expectancy. The win loss ratio is just a part of the expectancy calculation . Expectancy is the percentage winners multiplied by  what you win on each trade  minus the percentage losers multiplied by  what you lose on each trade. This gives you your average expected profit per trade. If you have a positive expectancy then with the correct position sizing you can literally make a fortune irrespective of whether you have 40% winners or 90% winners.

“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower” –  William O’Neil.

Another variation of this quote was by Russell Sands (one of the original Turtle traders) “it is never too high to buy nor too low to sell”.

The point is if a market keeps going higher it is telling you something very important – that it wants to go……. Higher ! And vice versa. If a market is trending either up or down it would be a brave man indeed that would choose not to follow that trend. It really does not matter how high the market is currently the way to bet is that the trend will continue and  the market will move higher still.

Much of trading is counter intuitive -what feels right and sensible to do is often not what makes you money. Looking at overbought and oversold levels and trying to pick those individual turning points is very very difficult. Looking at an established trend and simply saying I think this market will continue moving in that same direction is much easier way of trading.

“Trade what you see not what you feel”  is yet another variation on this advice.

“If you personalise losses, you can’t trade.” – Bruce Kovner

One of the quickest ways to go bankrupt in trading is to try and get your own back on the market.

Whilst  it sometimes does not feel like it at the market is oblivious to you and doesn’t care whether it takes money from you or indeed gives money to you – it is foolish to interpret either action personally.

Those that try and get back at the market by “doubling up”  etc  tend to only dig a deeper hole for themselves that eventually becomes impossible to climb out of. Trading is simply a game of probability management. We are dealing in probabilities – not certainties. So don’t take it personally.

But as we say above you do not need certainty (ie 100% winners) to still make a lot of money. What you do need to do is eliminate all emotions from trading. It is simply a game of statistics. All of the problems start when we add  our own emotions to events.

This is one of the reasons why I far prefer to trade automated algorithmic systems nowadays.

Certainly it’s nice to not have to look at the screen all day long but also with algo trading you do not have that minute by minute stress to cope with. We leave all that tiresome placing of orders exits and profit targets etc  to the computer. The computer is much wiser than us because it does not personalise its losses.

An analogy would be the advice often given to salesmen that it is no good taking a rebuttal personally just make your 100 phone calls per day  and you will “automatically”  make a certain number of sales from those calls. ie it is a numbers game. That is how the roulette wheel in a casino works – the more they spin the wheel the more money they will eventually make and that is also how professional traders work. We concentrate on the numbers and on nothing else.

The following short quiz consists of 4 question and will tell you whether you are qualified to be a professional trader.

Scroll down for each answer. The questions are NOT that difficult.

1. How do you put a bond trader into a refrigerator?

The correct answer is: Open the refrigerator, put in
the bond trader and close the door.

This question tests whether you tend to do simple
things in an overly complicated way.

2. How do you put a stock trader into the refrigerator?

Open the refrigerator, put in the stock trader and close
the refrigerator…… Wrong Answer.

Correct Answer: Open the refrigerator, take out the
bond trader, put in the stock trader and close the door.

This tests your ability to think through the repercussions of your previous actions.

3. Legendary trader Warren Buffet is hosting a professional trader conference. All the pros attend except one. Which one does not attend?

Correct Answer: The stock trader. The stock trader is in the refrigerator. This tests your memory.
OK, even if you did not answer the first three questions correctly, you still have one more chance to show your true abilities.

4. You must sell 500 contracts in a thinly traded market. But thin markets are known for their horrible slippage. How do you manage it?

Correct Answer: You walk onto the exchange floor and sell to the public. All the other traders are attending the Warren Buffet meeting. This tests whether you learn quickly from your mistakes.

According to Anderson Consulting Worldwide, around 90% of the professional traders they tested got all questions wrong. But many preschoolers got several correct answers. Anderson Consulting says this conclusively disproves the theory that most professional traders have the brains of a four year old !

Well I thought after the previous few genuine tests we needed a little light relief !

As many of you will know my personal bête noire is that in order to become a successful trader you must first find somebody that can be proven to make money from trading and simply ask them how they do it. Better still is to ask them to become your Mentor. This is exactly the path I travelled when I first started trading over 30 years ago. If you try and succeed in this business  without any assistance or help from knowledgeable proven traders it can be  such a long hard struggle.

One of the biggest mistakes new traders make is that they fail to differentiate between the marketing men and their paid actors and real life real money traders. If you take advice from a man who is simply pretending to be a trader don’t be surprised if you  fail. The vast majority of courses, seminars and systems are produced and sold by exactly those sorts of people.

Indeed I personally think this is one of the main reasons why the success rate in trading is so low because  so many people are being taught methods that simply do not work by people that cannot trade. Honestly that is the simple truth.

I realise that not everybody can afford a personal trading mentor however we can all afford to read a few books from credible sources.

Consequently I recommend that you read books written by or about proven successful traders as  you will almost always gain something of value from  each experience.

Most of you will have heard of “market wizards” which is a great book of interviews with some of the world’s very best traders. We can all learn much from reading this sort of quality material. Another less well-known book which I like a lot is “market beaters” . It is similar to market wizards in that it contains a series of interviews with real money real-life successful traders – well worth the price.

It is not that they will teach you how to trade but what they will do is show you the thought processes successful traders go through  and also put you right on a few common misconceptions that novice traders have about trading.

What I have found in over 10 years of training traders is that one of the biggest problems is that those that cannot make consistent profits almost invariably  do not have the full picture – yet they believe they do !  A classic case of the dreaded unknown unknowns that I often refer to.

This is often because they make the common mistake of believing that something that this is endlessly repeated from different sources must be correct. This would only be the case if the sources themselves are credible and the problem is the vast majority of sources are not.

How many  people for instance do you know who can prove they actually make money from using RSI or MACD – me neither !   yet it is endlessly repeated that “this is the way to trade” – by people that never prove they make a cent from trading themselves.

An analogy I like to draw is that most unprofitable traders are simply stumbling  around  in a darkened room bumping into and tripping over all the furniture  whilst trying to find the door. If they could call upon somebody to simply turn the light on in the room then everything becomes much much  clearer – once somebody illuminates the room you can then  see the task ahead of  you and confidently and decisively move in the correct direction whilst avoiding all of the obstructions. That is what speaking to or reading words written by real life traders can bring to your  trading – they will illuminate the room for you and in so doing show you where the obstructions to be avoided are and what is the simplest route through the obstacles.

Following on from the earlier test here is another example of the biases that can thwart us in our trading ambitions.

Don’t believe you suffer from any behavioral biases  ??? – well try this test then – just two questions with two choices each

Again give your answers before reading past the questions.

What would you  honestly do if confronted with these choices in real life

(1) Would you prefer to take

1.      A sure gain of £24,000 or

2.      A 25% chance of making £100,000 but with a 75% chance of gaining nothing at all.

(2) Would you  be prepared to swallow

1.      C) A sure loss of £75,000 or prefer

2.      D) A 75% chance of losing £100,000 and a 25% chance of losing nothing

SEE ANSWERS BELOW

Most people choose  A and D.

This combination  is actually illogical  and demonstrates our  tendency to succumb to cognitive biases:

Choosing A over B is consistent with  risk aversion

Whilst  choosing D over C is consistent with  risk seeking

Choosing  A over B  highlights the fact that most people are  risk averse with respect to gains – they  prefer to bank a smaller sure gain than take the  better probability bet albeit with the chance of  possibly coming away with nothing at all – ie in trading we have the overwhelming tendency to grab at small profits when the opportunity presents itself  rather than let them run even if that is probabilistically the best option.

However choosing  D over C indicates that people are prepared to take risks and bet against the probabilities  with respect to trying to avoid  losses – we are  prepared to gamble even larger sums  in the hope of eventually reducing an existing  loss  – ie in trading we tend to  hang on to big  losers in the often forlorn hope that they will “come back”  and “save us” from taking that original  loss.

Again these are bad traits for traders to have.

Psychologists  have ascertained that in general people hate losses  around 2.25 times as much as they enjoy an equivalent gain.

This bias is known as “loss aversion” bias and those that got low scores in the CRT test are more susceptible to it, as well as many other behavioural biases, than those that scored high in the CRT test.

The beginners/intermediates course covers psychological biases in more detail – often where traders are going wrong in trading are not just the entries and exits but these related aspects which need to be brought to their attention before they can ultimately succeed.

Generally in the course of my conversations with aspiring traders the question “Can I become a  successful trader ? comes up in one form or another. I think as with most other things in life almost anybody can succeed if they really want to and are prepared to pursue the goal.

I also  recently came across a short test that has previously been given to professional traders. The answers apparently  correlate  reasonably  well with  the likelihood of the individual suffering from some of the main psychological biases which contribute to  traders failing.  So if you can pass this test you may  well have a head start over many others – give it a try !

There are just three questions: – give your answers before reading past the questions.

1)      A bat and ball together cost £1.10 in total. The bat costs £1.00 more than the ball. How much does the ball cost ?

2)      If it takes five minutes for five machines to make five widgets, how long would  it take for 100 machines to make 100 widgets ?

3)      In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for  the patch to cover the entire lake, how long will  it take  to cover half the lake ?

The answers are at the bottom of the page. If you did not get them all right don’t panic because:

Of 3,500 members of the public who were  set these questions  only 17% managed to get the answers to all three  correct and  33% managed to get all three questions wrong !

Of MIT students in the USA ( The US equivalent of Oxford and Cambridge students)  still only 48% of them managed to get all  3 correct.

Much more surprisingly  of 600 professional investors (fund managers, traders, analysts) only 40% got all 3 correct and amazingly 10% got all three wrong ! (in fact in years gone by I think I have had some of my money under management by one of the ten percenters ! –  it sure would explain a few things !)

So even if you got none correct – don’t give up the goal – your still in the same boat as 10% of professional investors and you now  have the very big advantage of being aware of  your susceptibility to behavioural biases and can take the necessary action to protect yourself.

So  what  are the implications of getting high or  low scores ?

VERY briefly (and with apologies to any psychologists out there !) :

It is known as a cognitive reflection test. A  CRT – measures  the ability of the brains C system to check the output of the brains X system.

The X system is  the emotional part of the brain and makes decisions based primarily on emotional responses to external inputs (ie acting out of anger or fear etc) and is faster acting than the C system.

The C System is the logical part of the brain  and  it therefore  reaches its decisions by logically processing all the information in a step by step non emotional manner and hence is slower to process information  than the X system.

Hence there is a tendency for the X system to beat the C system to decisions – sometimes this is a good thing ie in days gone by when taking the decision to run from a  Sabre Tooth Tiger ! –  but in trading its generally recognised as being a bad thing.

In trading ideally we need to be using the C system ie  processing information and making decisions based on logical analyses rather than acting out of pure emotion  (act in haste and regret in leisure !)

So the obvious “quick” answers to the above questions are  incorrect and if you managed to avoid “jumping”  to these  wrong conclusions it may well mean that your  C system is holding the X system in check – which is exactly what needs to happen when  trading.

The  number of questions that you get correct correlates reasonably well with your general vulnerability to a whole plethora of cognitive or  behavioural biases – such as the biases of  loss aversion, conservatism, impatience etc. those that got none right are more prone to suffer from these biases and need to take steps to control them when in the trading environment.

Certainly most would agree that falling foul of our cognitive biases by acting emotionally  rather than logically is high up on the list of reasons why traders fail – both amateur and professional alike.

If you got all three  questions wrong it means that when trading you will need to concentrate  on holding in check the emotional side of your personality (now that you are aware of that tendency) and if you got all three questions correct then you could be off to a flying start.

Answers £0.05 – 5 minutes – 47 days

Can Simple trading systems work in todays market ?

Well this question  or variations of it (such as does anybody really make money in trading)  is one that I am constantly being asked by traders  who have been plugging away  trying to trade  for several years but with no real success.

It is a good question and one that needs to be asked.  For instance In these modern times with high-frequency trading  and so forth is it even possible for a home-based trader using necessarily simple systems to make money in the markets or did that boat sail five or ten years ago  and we are all now wasting our time.

Those that follow me will know I primarily trade fully automated computerised trading systems. The advantage of these systems is that you can program up the system rules and then asked a computer to tell you how much money you would have made over any selected test period. This takes the guesswork out of trading. Rather than have to rely on a vendor saying  “take my word for it governor this is a real sound runner”  you simply ask to see the trading results and can judge for yourself.

Here is a simple forex system that I sell – so it isn’t a hypothetical system that you can never get your hands on – you just ring me up – buy it -and it is yours to trade with.

The reason I selected  it is that it really is one of the simplest systems I have come across. Here is the code for the long entries

The short entries are an exact mirror image and then all we have is some very standard exits and  stops.

You do not really need to understand the code save to notice that it is very short and uncomplicated however  the first blanked out section is saying if value 1 is less than value 2 (value 1 and 2 could for instance refer to yesterdays close or open etc)  we may want to trade and then the second section is saying if value 9 is greater than value9  of three bars ago then we also may want to trade.  When these two conditions are met we buy at the market on the next bar. We sell short using mirror images of the exact same code.

Exits as I say are the standard stop losses, profit targets and trailing stops   that you would expect in any system.

So this is very very simple indeed and you do not have yards and yards of code and all sorts of subjective decisions to make. Each bar the computer calculates the four values and makes a decision for you whether you need to enter the trade or not.

So what sort of results can you get from trading a gloriously simple method like this in today’s modern markets.

AUD/USD – January 2008 to June 2015

Well above are the results for trading the Australian Dollar / US Dollar since around  2008. The graph shows the cumulative profits earned over that approximate seven-year period. Doing that period the system took over 700 trades and made close to $50,000 trading just a one lot !

If we put some very simple position sizing in the graph could easily demonstrate $500,000 profit over the same period. The absolute sums that you make are all down to your position sizing. However before you can do that you need a system with a positive expectancy. A system that makes you money and makes you money in as painless a fashion as possible. This is demonstrated by the smoothness of the graph. If the graph is very smooth then money is being made in a relatively painless way with few substantial draw downs whilst  if the graph is very choppy then it is a different story. This graph is smooth and consistent over the full seven-year period indicating that is consistently been making money day in day out year in year out and that individual losses have been relatively small. This makes it an easy system to trade and a great system for applying more aggressive position sizing techniques.

In the graph below are the results for trading it on the Euro /US dollar. This time it is made nearly $60,000 albeit over a slightly longer period. Again the graph is relatively smooth and consistently moving upwards which is exactly what we want to see.

EUR/USD – June 2006 to June 2015

Incidentally a simple variation of this system also works well on the stock index futures Russell 2000 market. So not only is this system very profitable on  Forex it can also be applied to indexes. This is a very good indication of the reliability and robustness of the method.

The point of the article ? Well you have seen how simple the rules are and you have seen the results it generates and it is a system that you can actually buy today.

So the answer to the original question is yes we can absolutely make money in the markets from trading very simple methods indeed. home-based traders can compete with the institutional traders if they approach trading in the right way.

Whether you buy a system from me or attend one of my training courses you will learn what techniques work, why they work and how they can be applied to the market. All of my courses  include some mechanical trading systems such as the one above which provide absolute proof that the techniques work.

How much time and money are you wasting or have you wasted trying to design your own trading systems or buying in unproven and untested methods only to find that they do not work and more importantly cannot work.

That really is not the way you will achieve trading success you can waste thousands of dollars and hundreds of hours in misdirected efforts.

The key to trading success is to find people that can prove that they make money trading who  also provide you with proven evidence based methods with long-term histories that you can properly verify.

If you do it this way your chances of succeeding in trading are improved by orders of magnitude otherwise novice traders are simply wandering around a darkened room not really knowing what they are doing or why they are doing it and just bumping into one obstacle after another until they run out of energy or money. It does not need to be like that.

If you would like to see short videos on some of my system that are currently for sale then follow these links

http://www.screencast.com/t/YJ0m6mV9                   – 1 system in detail
http://www.screencast.com/t/a6IrK0L2                      – 10 systems overview

One of the areas of Forex trading that I find novices are somewhat confused about is the tax treatment of gains or losses made from trading Forex or futures.

As with all areas of UK tax this can be really quite complex and you should always consult your accountant or financial adviser for the full information. However to keep it simple the rules are more or less as follows:

For individual traders it is close to impossible to have trading gains or losses treated in the same way as self-employed profits and losses are (i.e. under schedule D). The reason for this is that under schedule D people could set off losses from one trade against profits made from another trade. So let us assume you are a dentist making £100,000 a year from pulling teeth and also an unsuccessful  part-time trader. Last year lost £70,000 ! . If  the Inland Revenue allowed you to be taxed under schedule D for your trading profits and losses the £70,000 loss could be set against the £100,000 profit from Dentistry  and you would pay tax on only the net figure of just £30,000. As more people lose money from trading than make money from trading this would not be a good deal for the Inland Revenue – so they don’t allow it !

It does not make any difference if trading is your full-time source of income and is, if you like, your genuine self-employment –  they will still not allow it to be taxed as self-employed or schedule D.

Trading profits  are therefore pretty well always taxed as capital gains.

With capital gains tax the first £11,100  (2015/2016) you are in any tax year is completely free of tax. If you are a couple and trading in both names this figure would double to £22,200. After that gains are taxed at two different rates. Those that pay income tax at the basic rate will be charged capital gains tax at 18% and those that are paying income tax at high rates will pay capital gains at 28%.

These rates are what is known as top sliced. This  means that If you are a basic rate taxpayer by virtue of your income, but have made large enough taxable capital gains to push you over the threshold above which income tax is levied at 40% (£31,765 taxable income in 2015-16, £31,865 in 2014-15), you will pay the higher rate of CGT on the portion of gains that takes you over the threshold .   Ie in effect your capital gains are added to your taxable income to calculate what proportion of your gains are taxed at which of the two rates for capital gains.

If your trading gains for any tax year are in  excess of the £11,100 limit then you should declare the gains on your tax return. If your gains are less than £11,100 then you do not need to.

Although by this stage most people are groaning that they may have to pay tax at all the rates are actually quite good compared to income tax rates especially once you start earning substantial sums of money because your highest rate of capital gains tax is alqys just 28%.

Now the good news: Gains made from betting or lottery winnings are free of all capital gains tax. If you trade through a spread betting company, as the name implies, you are in the eyes of our good friends the Inland Revenue actually betting rather than trading. This means that all profits made through spread betting companies (IG index for instance)  are completely free of any tax. Whereas gains made from exactly the same trades but  put  through a Forex broker (say FXCM) are subject to capital gains tax.

The reason for this difference in treatment is in the way that those companies are taxed themselves.

So why would anybody in the UK put trades through Forex or futures brokers when if they put the same trades through a spread betting company they would pay no tax on the gains.?

There are several reasons for this but suffice it to say  because of the way those companies are taxed themselves this differing tax treatment has to be reflected in the quotes and prices they quote or fill at. So it is the case that you will get better prices from a  real futures broker  than for instance a spread betting company. Notice also that I said  futures broker and not Forex broker. This question of the spreads and fills becomes especially important when trading short-term because  a very large proportion of profits can easily be swallowed up by a bad spread or poor fill.

Normally I recommend people ignore the tax implications until they are lucky enough to be making over £11,100 profit a year then at that stage reconsider whether they want to put some of their trades through a broker rather than for instance a spread betting company or indeed vice versa.

In my own trading I have accounts with both.

It is beyond the  scope of this article but some of you may already be thinking of the possible arbitrage opportunities  between brokers brought about by the differing tax treatments ? And yes you would be right there are such opportunities !

Well this is a fairly common question that I’m sure we have all asked at one time or another  – especially during those occasional bad runs !

The simple answer, which is covered elsewhere, is that in trading if one ignores commissions then it is a zero-sum game. What I lose today somebody else somewhere in the world must have gained and vice versa. What makes trading so exciting and attractive is that this redistribution between parties is asymmetric. I.e. there are far more losers in trading then there are winners. At first sight this does not seem very attractive but what it means is that those that do win in trading are collecting all of the losses made by a majority of the participators. It is for this reason that you can make very substantial sums of money in trading. The losers are financing the winners but there are far more losers out there than winners. So for those of us who can get into the winners enclosure will likely make far larger sums of money than we ever could in most other professions or trades.

Most people are aware of this fact but often ask well where are all the winners then ?

Truthfully the big winners tend to keep themselves to themselves in the same way as a lottery winners generally choose not to publicise the fact for a myriad very good reason.

However an article in one of the papers just recently drew attention to the trader Chris Rokos.  Chris is a 41-year-old UK trader that I am sure most of us have never heard of. I cannot say in all truth that he is just a general everyday Joe because for instance he attended  Eton  and  graduated at Oxford.

However in other respects his background and career progression appear fairly normal. The reason I mention Chris is that he is British and lives and trades in the UK. Oh and one other small point I nearly forgot to mention is that he made US$900 million for his personal account between 2002 and 2012 !  So he apparently started minting it when he was actually under 30 years old.

Unsurprisingly he is now moving into starting his own hedge fund and is looking to raise  around $3 billion in starting capital. Clearly his own $900 million gives him a bit of a head start !

He had previously worked for Credit Suisse earning around $55 million their and then moved on to become  the star trader at Brevan Howard which is one of Europe’s largest Hedge Funds.

As a heads up for us all  both of these funds are known as “macro” funds. Theses funds are generally  trading a mix of currencies, shares, bonds and commodities and look to participate and trade in the large economic driven trends that regularly unfold. (no surprise there then)

Now you and I are never going to be in that class although there are plenty out there that are. However the real point is that once you start looking around you will find individuals earning  significant sums of money (say six figures per year plus ) all around you. those sorts of “small”  winners are all around us – a bit like property millionaires.

Probably a  more important point is that when you feed under the table of giants the scraps that fall from those table can still be pretty large !

Fixed fractional is the standard position sizing method recommended to most traders. With this method the trader risks a fixed percentage of their trading capital on each trade. Typically this percentage would be 2%. The trader would calculate the risk of the trade in pips, convert that to dollars and then divide the figure into 2% of trading capital to get the number of contracts to trade.

This is a good workaday solution however it tends to result in somewhat slower equity growth than can be possible with many other methods. For instance with a small account risking such a small percentage of the account it may take a long time before one can move from  say one contract to two contracts  or even one  dollar per point to two dollars per point. We want equity growth to go geometric as soon as possible so this method is somewhat of a drag on that escalation.

One simple variation on this method that does show dramatic improvements in equity growth is what is known as the profit risk method. This is simply a slightly turbocharged version of fixed fractional. It still remains consistent with one of the undeniable rules in trading which is that you must look after your own capital and treat it as gold dust. This is because  if you lose that capital you’re out of the game. As that old traders saying goes “the markets will always give you more opportunities but they will never give you more trading capital”.

The profit risk method essentially splits your  trading capital into two portions and trades each portion differently. The first portion is your own trading capital that you start with and the second portion is any profits that you make. It then applies two different percentages to those two trading pots to calculate how much to risk on the next trade. You will use a relatively conservative percentage on your own capital but a more aggressive percentage on your trading profits portion of total capital.

Let us say that you started trading with $10,000 and have now built that up to $30,000.  With the profit risk method on each trade you may elect to risk 2% of your starting capital but 6% of your profits on each trade. So in the next trade you would risk $10,000 * 2% + £20,000*6% = £1,400.

Whilst this would appear to be a relatively small change to standard fixed fractional trading it does over time produce  truly dramatic improvement  in equity growth. Using this method  is entirely consistent with good trading practice as you are still being extremely cautious with your own capital but quiet correctly being more aggressive with any profits that you make.

This is just one simple way of improving on the standard fixed fractional position sizing method. There are several other much more aggressive position sizing techniques that one can use that are far superior even to the profit risk method. All of these more aggressive techniques are covered during  the one-to-one private training sessions.

Well the answer you will be pleased to hear is “really quite a lot !”   and pretty quickly as well if you are doing things right. Certainly the earning potential in trading is far more than you could greater than you could earn in any other normal career or profession.

In the course manuals that  attendees on both the beginners/intermediates course and the advanced trading course are provided with there is a very simple example of placing just one trade per day with 50% winners and 50% losers but also applying some very standard position sizing formulas.

If you start with $500 at the end of the first month after placing just 20 trades and having lost on 10 of those trades but having followed the  staking strategy suggested your capital would be standing at around $800.

At the end of the first year you would have placed 240 trades and had 120 winners and 120 loses but amazingly your capital would have increased from $500  to around $40,000.

The table in the manual is designed to illustrate how money in trading is really made. It is not really made by being right all the time in your trades (none of us can do that). It is made by having a small statistical edge and then exploiting it using standard compounding theory plus one or two other techniques.

The position sizing side of trading is a fascinating area for research although often much overlooked by novices. Most of the original position sizing research emanated from gambling theory and has then been modified to suit the trading arena,  It is probably the single most important factor in just how much money people make in a trading career. Most traders will spend hour after hour studying trading systems trying to get the perfect entry or perfect exit to improve  performance by just a few percentage points and almost no time on fully understanding their  position sizing options and opportunities.

This is absolutely the wrong thing to do. Position sizing deserves much more attention than most people are prepared to give it. Both of the courses that I run include a separate manual detailing several very aggressive position sizing techniques that professional traders are using day in day out. This knowledge can mean the difference between making $10,000 and $200,000.

I’m not for a minute suggesting that everybody that trades will achieve these sorts of results and as we all  know the statistics suggest that most people that start trading actually give up within their first year.

The point is not that you absolutely are guaranteed to achieve such  returns but simply that such returns are possible at all.

I am 60 years old now and has seen the inside workings of many businesses and there are virtually none that you can start with just a few hundred dollars that have the genuine potential  to make you hundreds of thousands of dollars in such a short period of time.

One of the problems at novices have is that they have an incomplete picture of how the trading game fits together. There are several critical components that most people are either not aware of or do not pay sufficient attention to. Position sizing is one of these areas.

For those of you that have been trading for a few years and are sitting there quietly confident thinking “well I already know all this I use fixed fractional –  betting a fixed percentage on each trade” so this guy cannot teach me anything new. Well you would be absolutely wrong there are several infinitely better ways of managing your positions than using simple fixed fractional especially when you are trading shorter term.

Well the question on many people’s lips the last year or so is has long-term trend following finally made its long-awaited comeback.

 A typical long term trend following system

Long-term trend following has got one of the longest real-time track records of working in the markets with real money of any of the trading methodologies. Some of the richest traders in the world have made their money using long-term trend following techniques to trade primarily the commodities markets. We all know the Turtles story. But there are many many other traders who have made significant sums of money from long-term trend following.

I started as a long-term trend follower nearly 30 years ago and whilst it most certainly was not instant riches it was a relatively consistent and “safe” way of making money. That all changed around 2010 when the techniques most definitely stopped working. If you were lucky you were trading method that still just about broke even. If you were unlucky you lost a lot of money.  Several of the large trend following funds closed down and as on previous occasions there was much talk in the media of long-term trend following “not working” any more and of “paradigm shifts” taking place in the markets implying that trend following would never work again.

Well I’m nearly 60 years old now and I have heard that three or four times in my trading career. And as usual to mis-quote an old phrase  “rumors of my death have been much exaggerated”. What we do know is that long-term trend following will start working again when sufficient people believe it is finished and switch to other trading methods. This may well now have taken place.

If you look at the attached equity curve going back to 1991 for a pretty standard commodity trading system you can see exactly what I mean. A beautiful 45° curve starting in 1991 and going all the way up to around 2010  and then a sudden flattening off for the next three or four years. At this stage most traders (including myself) would have switched funds into other types of trading. As more and more traders got off the trend following carousel and started to take the opposite side of those trades this then allowed trend following to start working again.

We can see from the equity curve above that since around the start of 2014 we have had good consistent results for trend following and that may well now continue. Trend following is one of the most researched forms of trading ever and these results  are corroborated by many other long-term trend following methods.

Over the coming months I will most definitely be getting back into commodity trading and will add a couple of simple long-term trend following systems to the systems that I already sell for day trading and swing trading.

For those with a little capital commodity trading is well worth looking at not least because it has low correlation to other asset classes and requires very little effort as we may be  trading just a few times a year in each commodity.

Success in trading comes from using a systematic methodology which you then apply to the markets in a consistent, systematic  and disciplined way. If you trade in an emotional way by guesswork you will lose your money.

The money in trading flows from the impatient and disorganised to the patient and organised. So it is critically important to exercise patience not only in waiting for the right trades but also much more importantly in staying with the trades that are winning. We all suffer from the tendency to grab at small profits and often try to avoid small losses by letting them mount into big losses and finally into catastrophic losses.

It follows that you should only trade if you’re adequately financed so that the market action not your financial condition dictates your trading decisions. The weak hands in trading are always shaken from the tree before the big moves before they can participate in the big moves. The markets will decide whether and if they give you any profits and they do not base  that decision on how much you need those profits. Indeed there is much truth in that old saying that a bank will only lend you money if you can first prove that you do not need it !

In trading the well-financed traders tend to become wealthier  whilst the scared money that is overtrading tends to get wiped out.

Overtrading is based on the amount of risk you assume compared to the amount of capital you have. It is important therefore to understand that you can be a millionaire and still be guilty of overtrading. Conversely you can have just a few hundred dollars in your account and not be overtrading. You do not have to have a lot of money to make money in trading what you do need to do is to use it correctly and not take any gambles.

The old saying in trading “never trade with the rent money” is very true – scared money rarely holds  long enough to reap the benefits of the big moves. Scared money almost invariably, when under pressure, makes bad individual trading decisions, loses trading discipline and  does not follow the original plan or pursue the original objectives. Scared money disappears.

On top of the above there are also a few hidden secrets to trading success. One of the most important ones is position sizing. Using the correct position sizing algorithms can absolutely transform your account balance by orders of magnitude compared to using more conventional methods.

Strangely this is not at all well covered in general trading resources or books or on YouTube etc. It is generally relegated to pages of complex mathematical formula that only degree level mathematicians could decipher. In both of my training courses I cover these matters in a much more understandable way and demonstrate the almost unbelievable differences that using these strategies can make to your account balance. Many people who have attended my training courses has said that this small piece of information alone is worth more than the entire course fee. They were right as well it really is !