LEARNING, UNLEARNING & RELEARNING TO TRADE

“The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn. ” 

― Alvin Toffler, Author of "The Third Wave" and "Future Shock"

There is the story of John whose wife, Jean, cooked a really delicious roast chicken for dinner. Being a good cook himself, after dinner, he asked her, "Honey, how did you do it?". Jean began, "Well, I season the chicken with ...., then I cut it into half before putting roasting it in the oven." John asked, "Why did you cut the chicken in half?" and she answered, "I don't know, my mum taught me." Being a meticulous person, John phoned his mother-in-law, Sally, and asked whether she could clarify the process of preparing the chicken again and she agreed. So he repeated what Jean had told him and when he got to the part where the chicken is cut into half, he paused and asked Sally why this was necessary. Sally started laughing and said, "I was about to stop you and ask you how big is the oven that you are using, the reason why I had to do that was because my oven back then was a small one.....

This cannot be more true than in trading where many newbie traders depend on indicators, systems and strategies without fully understanding the basis for them. I am not saying that these things don't work or cannot work. However, they will work only if one can understand the market structure and where they can be used. Market timing is everything in both investing and trading and this is where most of the retail traders miss it for various reasons. For some of them, they simply don't have the psychology required to trade and even when they take good entries, they cut winners short and let losers run. Some don't understand the risk involved the system or strategy that they are using for the time frame that they are attempting to trade. Whatever the system, most well-designed systems will usually give a certain amount of profitability when correctly used. However, the caveat is that you take every setup that presents to get the "designed" outcome of profits. Many traders may take some, miss some, etc and end up having a small sample size of trades and thus make an incorrect evaluation of the system that they have invested in. Of course, there are some that simply don't work and have no business being called a proper trading system, these are the ones promoted and  pushed by marketers, not traders. There are also those who because of circumstances such as high unemployment, retrenchment, "unemployable" age etc. are forced to turn to trading for a living as their nest egg is insufficient to generate a sustainable passive income. Some banks even charge for deposits, let alone pay a decent interest. Property, being a large ticket item and relatively illiquid is usually not an option even for those that do have funds perhaps buying low when the market is down may also mean low yields and inability to flip at higher prices. Whatever the reasons, these folks turn to trading courses, usually about 3 to 4 full days costing anywhere from $3,000 - $4000 (here in Singapore) and "graduate" thinking that they are now "educated" and equipped to trade. Many lose money. I know of some that were on these trainers' promotional material ultimate gave back all that they gained from pure luck (Yes, I was a victim of these so-called courses when I started because to be frank, I don't know what I didn't know at the time). There are good honest trainers out there but newbies starting out will likely be like I was when I started, I did not know where to look and what to look for resulting in lost time and money. Still, many newbies get roped in because the marketers are good at selling "hope", whether the "hope" comes in a "course" or a software system or some indicator, it is all "hope".

The Psychology

"You should not trade money that you cannot afford to lose."  - How this affected me when I started, I cannot even begin to describe. Anyway, a lot of the retail crowd may not have the financial resources and given their circumstances don't have money that they can afford to lose. This explains why there are many taking accounts with high leverage of up to 400:1 and also why the moment drawdown occurs, the palms sweat and the heart begins to palpitate. This is further exacerbated by the "I've taken the signal correctly, why is the price not going the way it should?" and "my friend was right, the broker just want to take me out because I have placed a stop loss....." and "I put a stop loss and got stopped out, I didn't put stop loss and got margined out, should I reload another $5,000?" and "Maybe I should try a better system."  The Need (to make a living): Many retail traders need the money so they "just wanna take trades." This is probably one of the biggest reasons they fail and blow their accounts. What they don't realize is that taking a trade is not the same thing as trading which is why they usually find themselves on the wrong side of the trade. 

The Discipline

Every trading system and/or strategy whether it is based on order flow, price-based indicators, price action, etc. all require discipline to do 2 things: manage risk and manage reward. The lack of understanding of market structure will lead to premature closing of profitable positions and/or the failure to close out a losing position with the appropriate risk once the reasons for the trade is negated. The need for profit or maybe greed will cause newbie traders to not take profit and then lose a large chunk of it as the smart money starts to fade the weak hands.

The Risk-Reward

Many newbie traders who need to trade for a living fail to recognize that this is so critical. One of the courses that I attended had a "star" pupil who traded M1 and M5 charts using a combination of indicators. When she shared her H1 setup and said, "set your stop loss at 100 pips and when you reach 30 pips, take out x% and let the balance run until 100pips, then take y% out and leave the rest to run." Something inside me just revolted! My inner man screamed, "This can't be right!" So I asked, "What is the percentage of win using this setup and what is the usual achieved Reward:Risk ratio?" She said, "I don't know, I have never checked." I decided there and then that it was not workable, I could not accept that I had to cover one loss with at least 3 wins or more.  How about scalping? There are people who advocate scalping for 1:1 or better. First and foremost, let's talk about 1:1 If we have a 1.5pip spread, it means that to buy or sell, price need to move at least 1.5pips Therefore, assuming my stop loss is 10pips and my target profit is 10pips That means my stop loss is 10pips + spread (11.5pips) and assuming that I purchased EURUSD at 1.2000, my stop loss would be 1.19895 and price needs to achieve an BID of 1.20115 for me to get 10pips. Effectively, the Reward:Risk is < 0.9XX:1 which means that the win percentage must be >50% to make a profit. Trading this way is also stressful, time consuming and will usually not pay the bills.

In Summary

Whatever system or strategy that a newbie trader wants to use, it should always take into account the financial objective. The questions that should be asked are: What is the Reward:Risk? What is the Amount of Risk in pips for a setup in each time frame? Given the Amount of Risk in pips and Dollar Value based on the equity, can I earn enough profit? How long will it take me to compound the profit? How much profit can I withdraw on a weekly or monthly basis and still keep compounding the equity with the same trading performance? So, instead of just buying a system based on indicators, or as it were in my analogy, instead of just cutting the chicken into half, know why you need to do it. May I suggest that understanding the market structure will enable us to trade it well. Following the smart money requires an understanding of the market structure and order flow, once understood, trades can be taken very early with maximized profits. So my suggestion to struggling traders is unlearn what you already know does not work for you, and relearn the right things. Having said that, I wish everyone, old and new, a good trading year.

Best Regards

Trek Trader aka Vincent

www.vsanalytiks.com

IS TRADING GAMBLING?

As a Christian, I had been asked whether or not trading is gambling. It was a question also posed to me by my sister who is a leader in her church. This is my answer to her question as well as to others who have "discussed" this matter with me.
My answer:
People who trade in physical goods like oil, cocoa, etc buy them at wholesale (lower) prices and then hope to sell them at higher prices. They would hold inventory of these stocks and run the risk of prices falling based on supply/demand dynamics in the market. If they are selling perishables, time also comes into the risk and in the case of other goods, "seasonal"- fashion industry, etc are many other types of risks apart from just price risks. We trade currencies in which we also buy/sell our inventory without those kinds of risks. The trouble with trading of non-physical products is that it is seen as speculative whereas those merchants who trade physicals are perceived differently. If that were the case, all merchants are also gamblers. The truth is that good merchants read the market requirements well and are able profit from it. We read the market structure well and are also able to profit from it. It would be gambling if all we did was trade probabilities like the majority of traders do because they have no idea whether their trade will work out or not because it is not based on reading and understanding what the market wants, similar to merchants. Merchants that are wise identify market demands and meet them. We do exactly the same thing. The difference is the products that we trade.
Allow me to make an analogy. In Singapore, there are no private taxis anymore. In order to drive a taxi to earn a living, a taxi driver must rent the taxi on a daily basis from the taxi company. This rent is non-negotiable and based on the type of vehicle that he wishes to use. It can range from $120 for a Hyundai to $200 for a Mercedes per day. An experienced taxi driver will know the locations at which there would be potentially the most passengers and the times at which these people would be gathered there, waiting for a taxi. The taxi driver would then try to get fares from these places at these times. The newbie taxi driver or a very stupid one would not be cognizant of the locations and the times at which potential fare would be waiting for taxis and instead keep driving anywhere aimlessly, hoping to pick up fares. In trading terms, the demand levels (location/s) and the market timing (times) at which the potential trade (fare/passenger) presents itself in order to take a successful trade is important, it is as much a skill of the trader in that he studied the charts and recognized the levels much like the taxi driver who studied the various locations for number of people as well as the times that they would knock off work to take a taxi home. Is the trader 100% sure that he will be able to get a trade at those levels? Of course not, what if the demand there is so great that price moved off before his order was filled? Is the taxi driver 100% sure that he will get a fare at those times when he gets to the location? Of course not, other taxis may have reached before him and already cleared the passengers or perhaps he may have got caught in bad traffic and arrived too late. Could I also apply the same logic to someone who buys stocks of ingredients for his/her restaurant business waiting for customers to patronize his/her business? The restaurant owner would of course have identified a suitable location (level where he believes that there will be sufficient human traffic (potential customers/demand) for his food (product/instrument) before even signing the lease for the restaurant or purchasing it. He would not be investing thousands, or even millions on renovations without first identifying and satisfying the critical factors for success in his business. The question is, is he then gambling by putting his money (equity capital) into the business? A significant misunderstanding may be caused by the fact that in trading, most people think of "fast money". Here again, the comparison must be apple for apple, and usually are not. There are intraday traders, who may be likened to taxi drivers, they take a trade akin to a taxi driver paying the rent for his taxi for the day and they hope to make a profit from the trade for the day, akin to a taxi driver hoping to have enough profit to cover the rent for the day and some additional profit. There are also swing and position traders who take long term trades akin to a restaurant owner, who will take time to recover his capital but will be taking small profits along the way, these traders will also be taking profits along the way but take a longer term trade to allow it to make more profits. Even the farmer that sells his produce hopes to make a profit. Is he 100% sure that he will? Taking the argument of such religious zealots to the logical extreme, everyone who uses money, works for it, or use are all gambling because absolutely no one can ever say that they are 100% certain of any profit, whether it be profits, pay, etc.
The trouble with many religiously bound people is that their logic and reason seems to evaporate once they wear the mask of religion under the guise of holiness. The reality is that true holiness results in a liberty that is born out of love for Jesus Christ and a desire to please Him out of love for and of Him rather than fear of a big stick from an angry God. It is always the goodness of God that leads man to repentance.
Whilst I acknowledge others' views based on their own beliefs and convictions, I will hold my ground as it is both logical, rational and answers any questions from an entirely rational basis. There is also absolutely no contradiction with the Bible as some of the parables of Jesus encourage good stewardship of money. I will be gambling if I trade based on "systems", "indicators" and probabilities but I don't. Instead, I trade on an understanding of the principles of  supply/demand and the dynamics that form the market structure, no different to a taxi driver or businessman and hence I rest my case.
Shalom