Why do 90% of forex traders lose money then? Well, the answer to that is poor risk management which leads to poor mind set and vice versa. Numerous books have been written about trading psychology and many consultants exist. Psychology is an extremely important point to focus on when trading.
Books on trading often talk about the mental problems encountered and Mark Douglas’ book Trading In The Zone. But the problem with some of these books is that they often tell you don’t think like this, or sit there and take losses during whipsaw periods. If a person was brought up thinking one thing it will be very difficult, even with coaching, to change the person’s inherent reactions. And on top of this, trading is extremely counter intuitive. It basically goes against what most people consider common sense. A phrase that a lot of trading experts use is “do the oppositeâ€. A good analogy would be the advice given “when approached by a bear do not run.†It is the right thing to do and most people are taught to do it, however I can imagine there would be a very strong impulse to run if one has an encounter.
In the next section we will go through a common list of problems, describe how they occur, proceed and follow one another and then provide practical approaches that do not involve mind manipulation to avoid these problems. You should read books on this topic and seek counselling with experts about trader’s psychology. However, since it’s a long process to change your cognitive mindset we will discuss some practical ways to avoid the issues so you can trade meanwhile.
The Vicious CycleThe major part of this book instructs the readers on what to do. This section will talk about what not to do so that the reader can see the key psychological elements of trading and what patterns not to get caught on.The vicious cycle begins with a new trader studying the market for a bit, learning technical and fundamental analysis and getting excited about it since it does indeed work a lot of the time and in hindsight even looks easy. The trader may realize that all that is needed is an edge that will be right 51% of the time on trades that win and lose the same amount of money. That cannot be very hard he may think, some patterns out there are effective 60%-80% of the time. Finally the trader will see the edge that they like and begin to trade it live.Most of the time because of enthusiasm and an unbiased eye to the market the trader will have success in the beginning. Initial perception of the market is undistorted by negative emotions because there have been no losing trades. The trader will begin to experience a so-called state of euphoria and will feel like they are on top of the world, financial problems of the future are solved and they will start to act arrogant. The big mistake most will make is to start increasing position size. The attitude may be “I will not lose so I should increase my profits by taking bigger positions.†At some point the trader will take a devastating loss. There is no question about it because no pattern or edge works 100% of the time. The pain will be immense and now the trader is going to try to win back the money that was lost on the trade to get back to even so he can feel like the trade never happened. The primary motive for this usually will not be for profit but for peace of mind. He will not be as selective as before on finding the right trade and may enter on an even bigger position size to wipe out the loss. Now if the trader wins he will get even more confident and eventually lose on a second trade. After he loses big twice in a row he may consider making and even bigger trade to catch up. He will be so eager to wipe out the feeling of the negative trades and get his ego back that he will consider taking an even bigger position size. The trader will rationalize every wrong move made to make it right, justify his actions and never take responsibility for his losses. A classic example of this is poker players complaining about bad bets and others playing dumb. If surrounded by bad players a great poker player should adjust his style and take into account that the player will play bad cards, not cry about it after they lose. The losses and negative emotions will start piling on like a snow ball until the trader realizes that they have to stop. They will probably be down a substantial portion of the account, if not flat busted by this point. Now the trader will be more than humbled. He will feel like he can do no right in the market and will start saying that you can not make money trading or that his platform is rigged, someone manipulated his stop, the spread is too high and on and on. The trader may either walk away from trading all together or do an over extensive amount of education. Both approaches are bad since, even if he reads up a lot and comes back, the trader’s mindset will be drastically distorted by negative emotions.
Practical Ways to Deal with Negative EmotionsYou may have noticed that the above description contained many of the key negative emotions that come into play when trading. These include: Greed, Fear, Hope, Rationalization, and Cockiness. In this section we discuss how we can decrease these negative emotions during trading by taking practical steps.
GreedGreed occurs on many occasions during trading. Some examples and practical solutions include:1) When you are in a trade and you hold it for too long when you know you should exit.Solutions:i) Have set exit points that you back-tested your system with that you will follow.ii) Take partial profit on positions. Possibly place this in your systems rules.
2) When you start trading too big because of positive performancei) Determine the set maximum % of account that you will lose on any trade and do not exceed it under any circumstances.ii) Count the amount of losing trades that your system had when back-tested and understand that they may come in the future.
ConfidenceCockiness is the feeling of euphoria that you have after making numerous successful trades. This feeling can cause recklessness if not handled properly.1) You may start trading too big for your own good:i) Determine the set maximum % of account that you will lose on any trade and do not exceed it under any circumstances.ii) Count the amount of losing trades that your system had when back-tested and understand that they may come in the future.
2) You may make ineffective decisions because you have a feeling of not being able to lose:i) Have a checklist of everything that needs to be taken into account before entering a trade.ii) Have a checklist and a specific procedure of how your system needs to be followed, when it needs to be reevaluated, and exact entry and exit instructions.iii) Always increase the amount of work you do after you are successful.
Fear1) Fear may arise after you had a few unsuccessful trades and are now afraid to make a trade:i) Have a specific cutoff point before you start trading your system. Know the maximum drawdown you are willing to sustain and the maximum amount of losing trades you can handle prior to beginning to trade a system.ii) Don’t stop trading after a poor performance if your financial situation allows.iii) Start trading small to decrease the emotional level and concentrate on market and system analysis.iv) Create a profile of your trading psychology and determine what type of systems you will be trading. Can you handle a big drawdown? What type of profits are you looking for?
2) Fear may cause traders to get out of trades early and leave profit on the table.i) Have set exit points that you back-tested your system with that you will follow.ii) Take partial profit on positions. Possibly place this in your systems rules.iii) Don’t sit and watch every tick of the trade just follow your signals.
Hope and RationalizationHope and rationalization may cause traders to try to justify their decisions, blame others for their performance, and stay in trades that they should be out of because of hope that the market will move in their direction. This is a dangerous emotion and can turn trading into a gambling problem. It is very important to keep in mind that this emotion exists and make a good effort to control it.1) Hope and Rationalization may cause traders to enter trades that they should not be in because of hope that they will catch a break and make money.i) Control position size so that you are not trading to make or lose money but are trading to make the right decision.ii) Have set entry and exit points that you back-tested your system with that you will follow.iii) Take partial profit on positions. Possibly place this in your systems rules.
2) Hope and rationalization may cause traders to stay in trades longer than they should because of hope that the trade will go their way.i) Control position size so that you are not trading to make or lose money but are trading to make the right decision.ii) Have set exit points that you back-tested your system with that you will follow.iii) Take partial profit on positions. Possibly place this in your systems rules.
Apr 26, 2008
Forex Trading Psychology
Apr 19, 2008
Google's stock soars 20 percent to post record 1-day gain after stellar earnings report
Google had lost favor with investors as Web surfing data and the faltering U.S. economy raised concerns that people aren't clicking as frequently on the Internet advertising links that generate most of the Mountain View-based company's revenue.
The trend threatened to chip away at Google's earnings because the company typically gets paid by the click.
Although there were signs of decelerated clicking in the United States, Google more than offset any negative effects by expanding its foreign business and tweaking its online ad system in a way that helped reap more revenue per click.
The first-quarter performance reinforced the belief that Google is a "must-own stock," American Technology Research analyst Rob Sanderson wrote in a Friday note.
"While (economic) concerns won't be completely dispelled, we believe the growth story remains intact and investors will again fall in love," he wrote.
Dinosaur Securities analyst David Garrity also is convinced that the worst is over for Google's stock, which was down 35 percent in 2008 before the first-quarter earnings changed investor sentiment.
"We think (Google's stock) has seen its 2008 low. Onward and upward," wrote Garrity, who expects the price to hit $750 during the next year.
Friday's rally still left Google shares well below their peak of $747.24 reached less than six months ago. At that point, Google's market value stood at $235 billion, about $66 billion, or nearly 40 percent higher, than at Friday's close.
Whether Google's stock can get back to where it once was will depend largely on how much more the company's earnings and revenue growth tapers off. With the company's annual revenue headed toward $20 billion, it's becoming more difficult to produce the hefty gains that excite investors.
For instance, Google's first-quarter revenue climbed 42 percent. That's impressive, but well below the 63 percent growth in 2007's first quarter.
Google's profits could be squeezed later this year if it has to spend more money to upgrade the data centers that power its search engine and other online services like e-mail, said Collins Stewart analyst Sandeep Aggarwal. He said he thinks additional investments probably will be needed, given some of the data centers are three or four years old.
Microsoft Corp.'s bid to acquire Yahoo Inc. also could create a more formidable competitor to Google. Recognizing the threat, Google is trying to help Yahoo thwart Microsoft's takeover bid by using its lucrative advertising system to place commercial links on Yahoo's Web site. The potential partnership, in the midst of a test scheduled to be completed next week, would likely face intense antitrust scrutiny.
If nothing else, analysts believe Google wants to delay a combination between Microsoft and Yahoo for as long as possible to give it a better chance to widen its lead in the Internet search market, which currently generates the biggest chunk of online advertising.
Google ended the first quarter with a 60 percent share of the U.S. search market, up from 58 percent at the end of the fourth quarter, according to comScore Media Metrix. Yahoo was in second at a 21 percent share followed by Microsoft at 9 percent.
Despite the challenges ahead, Google still has ample opportunities to grow as advertisers shift more of their spending to the Internet from other media like newspapers, magazines, radio and television.
The Internet is expected to capture about 7 percent, or $44 billion, of the total worldwide advertising market this year. Analysts say the percentage of Internet advertising lags behind the amount of time consumers are spending online, suggesting that marketers will need to ramp up their spending even more if they want to reach potential customers.
Google also has been adding more advertising vehicles to supplement its search engine. Just last month, the company bought DoubleClick Inc. for $3.2 billion in an effort to sell more graphical advertising. And Google is starting to show more video advertising through its increasingly popular clip-sharing site, YouTube.com.
Finally, the first quarter represented a tipping point in Google's maturation into an international company that's becoming less vulnerable to the ups and downs of the U.S. economy. Google collected most of its first-quarter revenue outside the United States, the first time that has happened in the company's 9 1/2-year history.
Besides diversifying its business, the higher international revenue should also help boost Google's profit because it should keep company's tax rate slightly lower than it has been in past years.
Google Chief Executive Eric Schmidt left little doubt he expects the company to prosper as he hailed the first quarter results.
"It's clear we are well positioned for 2008 and beyond, regardless of the business environment we are surrounded by," Schmidt told analysts.
Mar 12, 2008
EUR/USD Technical Analysis 12 March 2008
EUR/USD 1.5361 - 12 March
The Euro continued climbing yesterday to High 1.5481 till 14:00 GMT when the announcement by FED was to to lend as much as $200 billion in US Treasuries helped the US Dollar recover to 1.5285, which are the first resistance and support levels respectively for today. Next resistance upwards is 1.5530, followed by 1.5600. In downward direction next support is at 1.5215, which is 23.6% Fibonacci correction of the rise 1.4440 - 1.5455, and the lowest rate from 5 March at 1.5150.
Technical resistance levels: 1.5480 1.5530 1.5600
Technical support levels: 1.5285 1.5215 1.5150
Trading range: 1.5350 - 1.5415
Trend: Upward
Buy at 1.5361 SL 1.5331 TP 1.5401
Yesterday we made +50 pips profit on EUR/USD from the following signal:
6:03 GMT Buy EUR/USD at 1.5355 SL 1.5329 TP 1.5405 TP reached at 9:18 GMT
Total yesterday +136, as shown at www.zifx.com/performance.php
Technical analysis for crosses(EUR/GBP)-3/12/2008
The Euro dropped heavily yesterday against the Pound after reaching the major resistance level at 0.7680 which hold the pair from acquiring the 0.77 target, while the support at 0.7630 provided the pair with the strength to incline back again, the short term technical indicators are showing more upside potential, while the point at 0.7630 offers strong demand for the pair.
| |||||
| Support | 0.7640 | 0.7630 | 0.7615 | 0.7600 | 0.7590 |
| Resistance | 0.7650 | 0.7665 | 0.7680 | 0.7690 | 0.7700 |
Recommendation | ... | ||||
Technical analysis for crosses(GBP/JPY)-3/12/2008
Investors' risk appetite was boosted yesterday on the news the Feds will provide more liquidity to the financial system, increasing carry trades as a result which drove the Pound in a bullish wave against the Yen, the short term technical indicators though started showing downside potential in an expected correctional wave, and the point at 205.90 offers strong demand for the pair.
| |||||
| Support | 207.13 | 206.42 | 205.90 | 205.34 | 204.67 |
| Resistance | 207.75 | 208.28 | 208.84 | 209.54 | 210.21 |
Recommendation | ... | ||||
Fed move spurs stocks upwards, oil near record
LONDON (Reuters) - World equity markets rose on Wednesday in reaction to large gains on Wall Street which followed Federal Reserve-led moves to inject billions of dollars of liquidity into cash-starved credit markets.
Oil stayed close to its near-$110 a barrel record high but the dollar eased back after gaining in the previous session, as currency traders became skeptical about whether the measures could solve problems in the economy or the credit market.
Deep concerns among investors about the threat of another round of last year's credit crisis were at least temporarily assuaged when the Fed said on Tuesday it would allow financial firms to swap securities backed by home mortgages for some $200 billion in Treasury bonds.
This was supported by other liquidity-inducing efforts by the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank.
The moves spurred the S&P 500 index of leading U.S. stocks to its biggest daily gain since October 2005 with a 3.71 percent rise, a mood that continued to spill over into the rest of the world on Wednesday.
"The Fed's decision to get funds for credit markets has soothed investor sentiment," said Hwang Geum-dan, an analyst at Samsung Securities in Seoul, adding that economic fundamentals nonetheless remained grim.
Europe's FTSEurofirst 300 index was up 1.4 percent, having gained the same amount on Tuesday. Earlier, Japanese stocks rose 1.6 percent with the benchmark Nikkei rising 202.85 points to 12,861.13 and the broader TOPIX climbing 19.98 points to 1,255.13.
Despite the immediate euphoria, stressed world credit markets -- where trading in a broad range of securities including some euro zone government bonds and U.S. municipal bonds had seized up over the past week -- remain a concern to investors.
Credit Suisse, for example, said it did not believe the problems would go away. "We expect to see more hedge fund collapses, more forced sales and more extreme price movements in the near term," it said in a note.
DOLLAR, OIL DECLINE
The dollar, which has been battered by the deteriorating U.S. economy and prospects of lower U.S. interest rates, eased back towards record lows versus the euro as a pick-up in risk appetite prompted by the central bank measures petered out.
"It's a bit of a reality check. The Fed's action obviously is welcome but it doesn't really fix the economy," said Martin McMahon, FX strategist at Credit Suisse in Zurich.
The dollar fell 0.3 percent against a basket of six major currencies to 73.039, edging towards a record low of 72.462 set at the end of last week.
It also eased 0.2 percent to 103.16. The euro was up a quarter of a percent on the day at $1.5368.
Oil prices were steady after hitting a record near $110 overnight, doing little to ease concerns about the world economy. U.S. crude for April delivery was up 37 cents at
$109.12 a barrel, just below its record $109.72.
Euro zone government bonds were trying to consolidate at lower levels after a sharp sell-off the previous session.
The June Bund future was 9 ticks lower at 117.37. Two-year yields were 5.6 basis points higher at 3.383 percent, while 10-year yields were flat at 3.800 percent.
Lufthansa sees further profit rise this year
FRANKFURT (Reuters) - Germany's Deutsche Lufthansa (LHAG.DE: Quote, Profile, Research) expects operating profit to rise again this year as air travel continues to grow even as financial markets stutter and fuel prices hover at record levels.
The positive trend was expected to continue in 2009, Lufthansa said in its annual report on Wednesday.
"The perspectives for the aviation industry are full of promise," Chief Executive Wolfgang Mayrhuber said in a statement.
"In spite of the current uncertainty in the financial markets, the economic conditions remain good for Lufthansa. There have been no ground-breaking changes in terms of the fundamental conditions or the need for mobility."
Shares in Lufthansa were 1.7 percent higher at 15.28 euros by 4:32 a.m. EDT, outperforming a 1.4 percent gain on the German blue-chip DAX index .GDAXI.
"The strong outlook is a positive surprise for us," Equinet analyst Jochen Rothenbacher said in a note.
Mayrhuber's optimism for 2008 was echoed on Wednesday by smaller German rival Air Berlin (AB1.DE: Quote, Profile, Research), despite a drop in 2007 operating profit that missed its own expectations.
Lufthansa said a condition for raising the operating result in 2008 from the record 1.38 billion euros ($2.12 billion) -- a 63 percent rise -- achieved last year was being able to continue to compensate for high fuel prices
Fuel costs rose 15 percent to 3.86 billion euros last year, though the weak dollar brought these costs down by 7.3 percent and hedging saved 109 million euros.
Lufthansa said this week it was raising the fuel surcharges it imposes on passengers on European and domestic routes to 17 euros each way. It charges 77 euros each way on long-haul flights. Crude oil has almost reached $110 a barrel.
The company said earnings last year were also helped by the performance at airline Swiss, which contributed cost and revenue synergies of 233 million euros. Swiss has been fully consolidated in Lufthansa's accounts since July.
Lufthansa had reported last month that 2007 revenue rose 13 percent to 22.42 billion euros. Net profit more than doubled to 1.655 billion euros.
The carrier has said it would propose raising the dividend for last year to 1.25 euros a share from 0.70 euros for the previous year.
Air Berlin on Wednesday posted full-year earnings before interest and tax (EBIT) of 21.5 million euros, down from 64.2 million in the previous year.
"Although the preliminary results for 2007 do not meet our expectations, we have cause for optimism for 2008," CEO Joachim Hunold said in a statement. "We are also pleased with the current bookings situation."
Air Berlin stock was down 1 percent at 9.30 euros.
