I received the following email from a trader struggling with trading for a living.

Ho John,

If possible I would like you ask you for a few questions. I’m sitting on futures USD/GBP. Trying to trade for living. The main problem now is that I have again big drawdown during that week. The same I had during first week of March contract. All the week I had very bad results, which caused me to think that my strategy is not working. Well I took 1 month to re-shape strategy and make it better. Then I’ve returned to trading step by step I had small profits and again gained trust to new updated strategy. Now again the whole week during which I can not understand anything. It seems that that first week of new contract is not “tradable”. Is it correct ?

The second question can you advise what software could be used to test strategy ? apart from manual testing. Unfortunately now I can afford to myself only free software if you know such and can advise.

Sorry for writing that message, but I have not a lot of time left to start trade normally as all my financial recourses are coming to the end and I do not have another way other, but to trade.

Thank you in advance for your kind support, Kind regards, Andrew

To answer Andrew’s first question, I know of nothing in regards to the first week of a new futures contract which would make it any more or less tradable than any other time. There is, of course, the mechanics of folks rolling over from one contract to the next, but that’s a minor thing.

As for the second question, I don’t know of any free system testing packages. I personally use a combination of MetaStock and Excel. If you have the skills, system testing in a spreadsheet is a good way to go as it can be extremely flexibile and you can easily drill down into the results. Readers of this post are welcome to make suggestions if they have any.

Now for addressing the larger issue I think Andrew has here. My guess is that he is under-capitalized to trade for a living. If he cannot aford to pay for a good software package for system testing he’s almost certainly doesn’t have enough money to trade for a living with any likelihood of success.

At the same time, the lack of a solid system is a major problem for Andrew. He should have had one well tested both backwards and forwards before even considering trading for a living. You absolutely do not want to start trading for a living without one.

As a last suggestion, I would strongly advise Andrew to get a job and make a living that way for a while. Being an inexperienced trader – as he clearly is – and having to produce profits to live on is a recipe for disaster. The stress is enormous and tends to lead to very bad things happening. I realize this is probably no what Andrew and others in his situation want to hear, but I would be remiss if I didn’t point out that their chances for success in such a situation are extremely low.

What is the front futures contract?

Trading for a Living vs Trading for Wealth Building

Should I quit my job to start trading for a living?

What is your take on this trading software?

What forex charting packages are there?

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The question of whether someone really should not be a trader is one that’s not often brought up in discussions between market participants. It’s almost as if the baseline assumption is that the sole criteria is that you want to trade. While I’m a believer in the view that just about anyone can learn, there are limits to that. Ignoring the obviously physical and mental disabilities, here are the ones I think are most important.

Lack of Impulse Control
If you cannot keep yourself from acting on impulse – meaning making snap decisions without a plan – then you’re likely not going to do well in trading. Successful trading means applying a consistent edge. That, in turn, requires a plan that is being followed, not making random trades when the mood hits.

 There is probably some confusion here when the subject of gut instinct comes into play. Here’s the deal, though. If you’ve only just started trading, you have no gut instict. That comes from long experience. If you’re a rookie making gut trades, for your own good you should stop now. Any success you’ve had to this point is almost certainly a function of luck, not skill.

A Troubled Emotional State
We all go through periods when we’re in a mixed up emotional state. It could be relationship issues, family difficulties, the death of a loved one, stress at work, or any number of other things that put you off your game. These are not good times to trade. Granted, trading can be an escape from the emotional strains in some cases, but that’s only if the trader can consistently execute their normal work and strategy without it being impacted by what’s going on in the rest of their life.

Trading has a way of really exposing emotional problems, even among the most stable of individuals. If you’ve already got some mental strains going on, trading is likely to either make it worse, or to see you feed on that emtion in destructive ways – like trading angry. It is best to stay clear of the markets when these sorts of things happen if there’s any chance of spill-over or distraction.

Looking for a Quick Buck
Trading is not a get rich quick program. Any systems or broker ads that lead you believe otherwise are being deceptive. As any trader who’s been around more than a year will tell you, trading is a marathon, not a sprint. If you come into the market looking to make a fast killing you are almost certainly going to blow your trading account up because you’ll end up taking much too much risk. Basically, you’ll be a gambler rather than a trader.

I could probably toss in “those who think trading is going to be easy”, but that might rule out almost every new trader.

That all said, though, the things I’ve noted above can all be viewed as changable. Lives can calm down. People can learn to follow a plan rather than just do whatever occurs to them at a given time. The gambling impulse can be replaced by a more long-run view. That means there’s hope for just about everyone, so long as they do right by their expectations.

Trading is All About You

A breakdown of The Essentials of Trading

Picking apart more trading rules

Transition time

Your Personal Trading Assessment

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I am doing a free webinar this evening on the subject of calendar trading patterns in the forex market. It’s based on my research in that area. Feel free to take part. You can get the specifics at:

www.TraderIntensive.com

I really should have posted this earlier. Sorry if it’s just too late notice. I’m not sure whether it will be recorded or not as I’m not running the show. Hopefully it will for those who cannot attend.

Talking Stocks on the BBC tonight!

An Update on Stuff for You

Forex Market Seasonal Patterns – Really!

Forex Seasonals?

What is the front futures contract?

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I get and have frequently seen on trading discussion sites the question “How much do I need to trade for a living?”, or some variation thereof. Brett Steenbarger recently posted on the subject. His post addresses a couple of key points that I have also commented on in this blog previously (see Trading for a Living vs Trading for Wealth Building, among others).

One of the major points Brett and I both make is how you need to do the math and figure out what kind of returns you will have to make to reach your objectives. When you do that you’ll quickly start to understand the extremely high level of acheivement required to trade for a living with a small starting balance. It’s just not realistic. I’ve said on several occassions that a six-figure account is really required.

Brett also mentions a figure that is often bandied about among traders – the % of new traders who blow up. What you will hear varies. In this case, a broker contact of Brett’s indicated that more than 80% flamed out well within a year of getting started, and that the rate rises as the starting account balance is reduced. In other words, the smaller the initial account the higher the odds of failure are.

Here are the three biggest reasons why small accounts fail at a higher rate:

• Wrong Mindset: Because of the small amount of money involved, they think of it as a hobby or Vegas type of thing where it’s at least as much about entertainment as about generating returns.
• Too Much Risk: They trade too big, often because they are thinking too much in terms of nominal results (dollars earned, etc.) rather than relative results (% return).
• High Transaction Costs: The smaller your account the higher the relative cost of commissions, meaning the higher the required returns to get beyond break-even (this is less an issue in forex).

Of course there are other reasons why traders fail, but these three as the main ones which impact small account traders.

Addendum: Trader Mike has a good post on the subject.

What’s the secret to making a living from internet based forex trading?

Trading for a Living vs Trading for Wealth Building

What are your trading expectations?

Why New Traders Fail

Big Trading Risk On Small Accounts – Bad Idea

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I’ve made a decision to turn my primary blogging focus from this one to my Rhody Trader blog. Not that I’m going to stop posting here, mind you. I do plan on continuing to answer question and write about new developments where they impact trading and trader education, and I’ll keep addressing the issues that matter to new and developing traders. In other words, this isn’t going to suddenly become a static site. I’m just going to focus my regular day-to-day blogging to the Rhody Trader blog (so named because that’s long been my screen name on trading forum sites and the like).

My reason for making this change is to provide me a greater degree of freedom in what I write about and to provide readers with some different perspectives beyond pure educational information. This Essentials blog has always been about trading education, not opinion and or extraneous things. I want to keep it that way because I think it’s become a very useful resource for those looking to learn about trading. I also want to keep the quality high by only writing new posts when there’s a good reason for doing so, not because I feel the need to post something new each day. It’s my plan to actually improve the site’s design to make it even more useful in that regard. Look for some changes in that regard over the next few weeks.

Definitely feel free to keep sending in whatever questions you have. I will keep answering them here.

Meanwhile, if you’re interesting in reading my thoughts about the markets, news and events related to them, and some of what else is on my mind, I definitely encourage you to head over to www.RhodyTrader.com and subscribe to the feed. You’ll see all kinds of interesting stuff coming through.

Do you have a Top 5 list of recommended Trading Psychology books?

A New Trading Blog for You to Check Out

Volatility, Stops, and Other Topics

Don’t be that guy

Brett Steenbarger’s New Book Project

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I have been reading books on Elliott wave principle and trying to figure out how to apply what i learn onto the graphs. I am completely unsure about where to start the wave 1. I am pretty sure that i am missing something super basic here. So if you can help, that would be appreciated.

This question came in from a member of my mailing list the other day. Alas, I cannot help much in this case. While I have a basic working knowledge of Elliott Wave it is not something I use. Some people I know favor it and seem to do quite well with it, but the methodology was one which never clicked with me. It took me forever to get through the first chapter of Elliott Wave Principle, the book most folks consider the leading one on the subject, and that’s as far as I’ve gone.

Having said that, I did find some of the discussions about flags and other types of chart pattern formations very interesting.

If you’re a user of Elliott Wave and can offer up any suggestions on where folks could learn more about the technique, please feel free to do so via comment.

Trading with Elliott Wave, does it work?

Kondratieff Long Wave Theory

October’s optimal offerings

Speaking at the Los Angeles Traders Expo

Leading Indicators vs. Lagging Indicators

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I’m back in to the swing of things once more after my trip to Los Angeles (Pasadena, actually) for the Traders Expo.  It was an interesting experience. As usual, the cross-country travel wasn’t much fun, and June Gloom kept the weather from being as nice as one might expect, but the expo itself proved and interesting experience. I got to meet several folks I had previously only spoken and/or corresponded with previously, and met a few new folks as well.

Presentations
I actually took part in three seperate presentations. The first was my Inter-Market Analysis and Trading With ETFs talk. That was first thing Friday morning. I had been worried it would be given to an empty room, and it was looking thin to start, but there were a couple dozen attendees in the end, and I was told 80-100 watching on the live webcast (it was recorded and I will provide the link as soon as I get it).

The second presentation was a panel discussion in which I shared the stage with four others and discussed the topic of short-term trading with ETFs on Saturday morning. It was an interesting exchange covering a number of different things, and there was some good-natured disagreement. The standing-room-only crowd definitely seemed to enjoy it.

My final presentation took place Saturday afternoon. In that case I put on my employee hat and discussed the forex analytic product I work on to customers and prospective customers of FXDD (they provide customers the product via their platform). Got lots of questions, and a few suggestions as well.

NFA and Forex Hedging
Representatives of the much reviled NFA were on-hand at the expo. I took the opportunity to speak with them about the recent anti-hedging rule. They admitted that while the negative response was anticipated, the vehemence of it was a bit of a surprise. That doesn’t imply any chance of there being a reversal, however. The CFTC has been given regulatory oversight of spot forex trading and the NFA has been instructed to deal with it. They are going to do that and have a necessarily thick skin, so all of the screaming and yelling and emailing will have no effect. After all, regulators rarely get anything but grief. It comes with the territory when you tell folks what they can and cannot do.

Leveraged Really ETFs Meant Only for Day Trading
One of my fellow panel members on Saturday was from one of the companies which offer 3x ETFs. The really big thing he made a major point of making was that the leveraged ETFs are meant to multiply the daily performance of their underlying market, not necessarily the longer-term one. By that he meant while you can expect a 3x ETF on a market to basically move three times what that market does on a given day, it does not necessarily hold that the ETF will move three times what the market does over a week or some other timeframe.

All of this may sound counter-intuitive, but it’s not once you understand what is going on. You see, in order to match the daily performance of the underlying market, the ETF must be rebalanced each day. Depending on whether the market is trending or chopping, that rebalancing can actually produce over- or under-performance over a period of time exceeding one day. With that in mind, while it could be possible to boost performance in the right market conditions by playing the ETFs over a multi-day (week, etc.) timeframe, using them in expectation of seeing 2x or 3x matching of the market movement is not something you’d want to do.

Los Angeles Traders Expo Reminder

Marvelous Momentos from May

My ETF Presentation is Being Webcast!

Speaking at the Los Angeles Traders Expo

Selecting stocks and ETFs suitable for trading

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It’s hard to believe June is here already. Tomorrow I will be heading out to Los Angeles for the Traders Expo. If you’re going to be there, definitely look for me. I’ll be doing presentations on Friday and Saturday.

But enough looking forward! Time to look back, at the top posts from May, as determined by page views, comments, and stuff like that.

1. What are your favorite trading websites?
2. New NFA Rule Impacts More Than Just Forex Hedging
3. Trading Discipline and Playing to Your Strengths
4. No Evidence of Stop Hunting by Retail Forex Brokers
5. Where does forex leverage come from?
6. Exploring Automated Trading Systems
7. NFA Justifications and Reasoning for Killing Forex Hedging
8. Track Market Sentiment to Understand Price Cause and Effect
9. Futures vs. ETFs Performance Differences
10. My ETF Presentation is Being Webcast!

No Evidence of Stop Hunting by Retail Forex Brokers

Stop-hunting is NOT the problem some people say

New NFA Rule Impacts More Than Just Forex Hedging

An Amazing April

How do you hedge in the forex market?

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A member of my mailing list – from New Zealand, I believe – wrote in to express his frustration as to the path his trading is taking. I offer it up because I’m sure it is something which others are going through as well.

hi john u once asked if i had any questions about trading—-how do u make money-im just starting my 3rd year, i still have lots to learn-actually im learning maybe i should give up and leave my money in the bank, 2 or 3 % is better than minus 80 % or worse– 2 months ago i joined e toro fx trading– ive already blown my real money a/c, fortunately they have a practice a/c which im also doing a great job of tanking out, i have tried everything but cant beat the system– like a chess computer every move i make has an opposite reaction, yesterday i started hedging the same trade ie buy usd/cad ,hedged with sell usd/cad hoping to catch moves both ways but still things still went haywire, sometimes the whole screen can be red but never all green sometimes i canhave two trades the same, one can be up the other down- how is that- also trades can go to the stop loss in the red but very seldom go past green 30 % and you need every trade to go past 15% to cover spread costs-anyway so much for my dream of dumping my day job– can u help– thanks –allan

My general impression from Allan’s note is that of someone without a clear idea of how to take on the market – no real trading plan.  I say this because he hasn’t presented any information at all about trading timeframes or methods or decision-making aside from evidence that he’s trading forex. I’ve I’m incorrect in that view then I hope Allan will clarify. Until then I will offer up some suggestions based on my current suspicions.

Build the Foundation
When I wrote The Essentials of Trading, and when I developed the introductory trading course by that same name my focus was on helping new traders build a strong, solid foundation from which they could go on with a much better chance of success. The core of the book and course is one’s Trading Plan. That’s the full expression of how one will take on the markets in terms of time frames, and risks, and methods, and all that.

I’m not just talking about trading systems here. I’m talking about everything that goes into your trading – or at least should be going into your trading. If you are just getting into trading, or have been involved for a while but just can’t seem to get a handle on things, I really strongly recommend you read the book and/or go through the course. If you take it seriously and do with the recommended homework exercises along the way, it will help you develop a really solid framework for your trading. You’ll then be much better positioned to know what kind of trading techniques will make sense for you and thus will be way more effective in your ongoing study and research.

Live vs. Demo Trading
Allan mentions losing money not only in his live account, but also in the demo one too. I’ve written on the subject of live trading vs. demo trading a few times before (Live Trading Performance Not Matching Demo Trading Success, Am I Ready to Trade Live?), and I’m all for getting into the live action early on. That said, however, if you’re not making money in your demo trading account, you probably don’t have much business risking real money with the same methodology.

Is trading for me?
Of course there is the question of whether trading really is the right thing for you. Let’s face it. Not everyone is cut out for the demands of trading, in one fashion or another, or at one time or another. There’s a lot involved in successful trading. If you don’t have the time need to trade the way you’re best suited, or are going at it with the wrong mindset (like get rich quick), or have a lot of external distractions, then it’s probably better to steer clear, at least for the timebeing.

Live Trading Performance Not Matching Demo Trading Success

Afraid to Trade? Build Your Trading Confidence

Learning Trading from Scratch and Starting Small

Am I Ready to Trade Live?

Which Forex Broker/Dealer Should I Use?

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I had a question come in overnight regarding volume data and how it can be used for forex in terms of the price distribution methodology I use and teach. The question was:

In connection with your price distribution course, how do you find the volume figures needed for this type of analysis in forex?

I hear some use the futures as proxy but dont COT reports only come once a week?

Of course in forex trading volume is always an issue since there is no one aggregate source for spot trading figures. Futures volume can be employed as a proxy so long as you understand the limitations and can make the price level adjustments to make sure you’ve got the correct reference points. That volume will be available in any commonly available futures price feed service just as it would be for the S&P futures or gold or oil.

As for COT (Commitment of Traders), that won’t help you at all in this regard. As I’ve written before (Commitment of Traders – A Weekly Report Worth Viewing and Do you use the Commitment of Traders report to trade?), it’s got some potentially useful info for the wider perspective, but it won’t help you on a day-to-day basis.

Volume in the Forex Market

Do you use the Commitment of Traders report to trade?

Where can I find this forex data?

Markets and timeframes for price distribution charting

Understanding Open Interest in Futures and Options Trading

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