Your Guide to Successful Forex Trading

Does Failure Motivate You?

2010-03-15T06:33:00.000-07:00

I'm going to write the next few tips on topics that might press your buttons. They'll help you find your hotspots and help you discover how you sabotage yourself. I've been reading a wonderful little book by Jerry Stalking entitled, Laughing with God. In that book the following dilemma is brought up, and here I'm going to rewrite the conversation to make it pertinent to trading/investing.

God: Do you want to win without losing?

Trader: Of course.

God: If you win, you must lose as well. But you lied to me. You said that you'd like to just win. If that were the case, you'd win much more often. The possibility of failure motivates you much more than the possibility of success. Your whole culture, with few exceptions, is dependent upon failure or at least the fear of failure. If there were not the possibility of failure, you could not take any credit for success. You wouldn't feel so good about winning.

Think about it. How many times would you watch a football game if you knew the outcome? It is the uncertainty of the outcome that keeps your attention.

What if you always knew what was going to happen before it does? As a matter of fact, you already have that ability, but you do not use it because everything you presently call fun in your life would be lost. You would lose the uncertainty that you thrive on, feed on, and yet attempt to diminish.

The last statement may "get to" some of you. But what if it's true? Ed Seykota said in Market Wizards that people get what they want out of the market - excitement, punishment, and a justification for their emotions. I've certainly seen plenty of evidence to suggest that his observation is true. But the conversation gets even more interesting:

God: I am saying that you already can know the future. Remember that future and past are both illusions. The fact that you ignore this ability makes it more obvious that you do not want to know the future or that you love wanting to know the future while believing that you cannot know it.

There is no time - just present. You use the uncertainty (mock uncertainty) of the past and the uncertainty (mock uncertainty) of the future to keep yourself suspended in the illusion of time while calling the whole process life.

Just to make this conversation more meaningful, imagine that you are 100% accurate on every trade. You know every top and every bottom on every stock. You are never wrong about a trade. Suppose you just entered the market and made $10 billion in a year. Would you keep going if it were that easy? Would ten billion be enough? Would you honestly keep trading?

Perhaps your response is, "Sure I would! I'd get all the money in the world." Well, would that be interesting? I tend to doubt it. Trading is only interesting because of the possibility of losing. You are now in a position where you can buy anything; do anything, etc., because you will never lose money on a trade. Would you still trade? Why or why not?

Everything in this tip may be made up. Nothing may be true, but I'd like you to assume (act as if) it is true. Just pretend that it's true. When you do so, what happens to you inside? How do you feel about trading? Would you keep on trading? If so, how often? If not, why not? What does that tell you about yourself? Is it the uncertainty that keeps you in the game? Would you keep trading if you had all the money in the world? Why? What do your answers tell you about yourself?

I would encourage you to do this exercise and notice what comes up for you. How many trades would you take if you had no uncertainty in the outcome? What do your answers tell you about yourself?

A note for your consideration:

There are many books that claim that the text "came from God" and I simply don't know whether such books come from God or not, but if they give me new ideas to ponder then I find them very exciting. If it stretches your beliefs to think it came from God, then just assume that someone made it up. But at the same time imagine that it might be true. This one gave me a lot of new ideas, and if you open yourself enough to do the same, you might find the ideas quite expansive.

happy trading.
Make Pips, Keep It, Repeat It!
hemant.

The Dow Theory-The Simplest Trading Method

2010-01-28T19:37:00.000-08:00

"The public, as a whole, buys at the wrong time and sells at the wrong time. The average operator, when he sees two or three points profit, takes it; but, if a stock goes against him two or three points, he holds on waiting for the price to recover, with oftentimes, the result of seeing a loss of two or three points run into a loss of ten points." ~Charles Dow

Charles Dow transformed the world of investing more than just about anyone in history. His ideas on market trend have been taught in millions of classrooms, forums, seminars, and trading floors all over the world.

Dow was born in 1851 on a rural farm. From the age of six he started working odd jobs to help support his family after his farther died. He wasn’t “learned” in Harvard and had no outstanding formal education. What he did have, which survives him today, was the ability to see trends in what was considered a sea of financial confusion.

Shortly after moving to New York in 1882 and starting Dow Jones & Co., Dow created the Dow Jones Industrial Average. An averaging of 11 major stocks listed on the exchange. Later, he also created the 20 stock Railroad Average (now the Transport Average). Dow never referred to his theories as the Dow Theory, and in fact, never took credit for it.

Dow’s theories of trend movement apply to nearly every market on Earth where traders respond to any type of movement with emotion.

The Dow Theory defines the (stock) market as moving within three movements. Each movement is defined as a time frame in which the market fluctuates in major and minor trends.

Dow stated these movements as being the Major Movements (trends), Secondary Movements, and the Intra-day Cycles. Within these movements are known as the Bull Markets, Bear Markets, and Ranging Markets.

We won’t cover all the particulars, just the points you need to know.

Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.

From the above below, we can see clear defined paths indicating Bullish and Bearish market conditions. At the same time, we also see an excellent example of “Trending” market conditions. The market is moving in a defined upward or downward movement.

Periods between major trends are referred to as the “Bottom” and typically define “Ranging” market conditions. Prices move within a narrow band and “whipsaw” back and forth. Ranging market conditions are normally followed by a break out in either direction.

Within the Major Trends can be several Minor Trends referred to as Secondary Trends or Secondary Movements.

Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement

Often if a Secondary Trend is severe in nature, it’s referred to as a “Correction”.

To help identify trends, here are the basic rules of the market:

A Bull Market is defined as having Higher Highs and Higher Lows.

A Bear Market is defined as having Lower Highs and Lower Lows.

Defining the exact start and ending of market conditions is normally irrelevant to daily trading, but you’re gonna find out anyway.

The start of an up trend is signaled when price makes a higher low, followed by a rally above the previous high:

Start = higher Low + break above previous High

The end is signaled by a lower high, followed by a decline below the previous low:

End = lower High + break below previous Low

There are those that argue that a major correction in the opposite direction of the trend indicates an end to the trend. But again, it’s irrelevant to daily trading. We just need to identify the major trend.

By definition, the Bullish trend cycle ends when the next two closes result in Lower Highs and Lower Lows. This is referred to as the “Reversal”

For practical purposes, only accept large corrections as trend changes in the primary trend.

Okay, I’ve covered the Dow Theory and now you can identify Major and Minor trends within a time frame.

Happy trading.
Make Pips, Keep It, Repeat It!
Hemant.

Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

2009-12-18T06:26:00.000-08:00

Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

In the early part of the 20th century, Jesse Livermore was the most successful (and most feared) stock trader on Wall Street. He called the stock market crash of 1907 and once made $3 million in a single day. In 1929, Livermore went short several stocks and made $100 million. He was blamed for the stock market crash that year, and solidified his nickname, "The Boy Plunger." Livermore was also a successful commodities trader.

I think the most valuable knowledge one can gain regarding trading and markets comes from studying market history, and studying the methods of successful traders of the past. Jesse Livermore and Richard Wyckoff are two of the most famous and successful traders of the first half of the 20th century. Many of the most successful traders of today have patterned their trading styles after those of the great traders of the past.

Here are some valuable nuggets I have gleaned from the book, "How to Trade Stocks," by Jesse Livermore, with added material from Richard Smitten. It's published by Traders Press and is available at Amazon.com. Most of the nuggets below are direct quotes from Livermore, himself.

* "All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis."

* "The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor."

* Don't take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don't be an impatient trader.

* Livermore's money made in speculation came from "commitments in a stock or commodity showing a profit right from the start." Don't hang on to a losing position for very long."It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind."

* "Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes."

* "When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day."

* Livermore coined what he called "Pivotal Points" in a market or a stock. Basically, they were: (1) Price levels at which the stock or market reversed course previously--in other words, previous major tops or bottoms; and (2) psychological price levels such as 50 or 100, 200, etc. He would buy a stock or commodity that saw a price breakout above the Pivotal Point, and sell a stock or commodity that saw a price breakout below a Pivotal Point.

* "Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend."

* A prudent speculator never argues with the tape. Markets are never wrong-- opinions often are.

* Few people succeed in the market because they have no patience. They have a strong desire to get rich quickly.

* "I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans -- and human nature never changes."

* When you make a trade, "you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade."

* "I am fully aware that of the millions of people who speculate in the markets, few people spend full time involved in the art of speculation. Yet, as far as I'm concerned it is a full-time job -- perhaps even more than a job. Perhaps it is a vocation, where many are called but few are singled out for success."

* "The big money is made by the sittin' and the waitin' -- not the thinking. Wait until all the factors are in your favor before making the trade."

An important point I want to make is that Jesse Livermore's trading success came not because of any "inside" information or some huge store of knowledge he had about each and every stock or commodities market he traded. Livermore's trading success was derived from his understanding of human behavior. He realized early on that markets and stocks can and do change -- but people and their behaviors do not. Therein lay his formula for trading success. That formula for trading success has not changed since Livermore's hey day in the stock and commodities markets almost a century ago.

A final note: Jesse Livermore may have been called the greatest stock market trader of the 20th century, but I question that notion. Certainly, no one can disagree that his profits were immense and his trading prowess was unmatched. But his life was not in balance. He was a "workaholic" who paid too little attention to his family. Livermore put a gun to his head and pulled the trigger in 1940. He"crashed and burned." You must have balance in your life to achieve lasting success at any endeavor. Trading markets is no exception.

happy trading.
Make Pips, Keep It, Repeat It!
hemant.

Bob Prechter: Bear Market Rally Is Over, Stocks Headed For New Lows

2009-11-06T21:44:00.000-08:00

Bob Prechter: Bear Market Rally Is Over, Stocks Headed For New Lows

With the Dow Jones Industrial Average once again marching closer to 10,000, many investors, especially those who missed the rally since March, must be asking themselves: Is now the time to finally pull the trigger?

Robert Prechter, founder of Elliott Wave International, implores retail investors stay away… for now. Prechter, who was bullish near the lows in March, now says the stock market "is in a topping area."

Why?

Several factors:

- Slowdown in upside momentum. Recent intraday rallies are petering out before the close.
- Bullish Sentiment. Investors who were bearish near the lows, are now just as bullish after a 60% run in the S&P 500. To Prechter, "that's a dangerous place to be."
- General overvaluation of stocks.

Prechter, the author of Conquer the Crash, says this is akin to the market in 1966-74 or 1929-32, where massive bear rallies gave way to another "big leg down."

He's predicting another crash in 2010 that will bring stocks below this year's low. His word to the wise, "be patient, don't rush it" keep your money in cash and cash equivalents for now and wait out this bear market.

He thinks it'll be another 5 or so years before we turn the corner but the good news is when we do, it'll be the buying opportunity of a lifetime.

The November Month Issue of Currency Trader Magazine

2009-11-06T21:15:00.000-08:00

Hello Fellow Traders,

The November Month Issue of Currency Trader Magazine is now available.. Click here to download.

happy trading.
Make Pips, Keep It, Repeat It!
hemant.

The October Month Issue of Currency Trader Magazine

2009-10-06T07:23:00.001-07:00

Hello Fellow Traders,

The October Month Issue of Currency Trader Magazine is now available.. you can download it by clicking here .

happy trading.
Make Pips, Keep It, Repeat It!
hemant.

What kind of stop-loss order should a trader use?

2009-10-06T07:23:00.000-07:00

Hi all,

In this article we will discuss the various ways to implement a stop loss order. Every trader who has had dealings in any of the financial markets is familiar with placing and executing a stop loss order, but many are mistaken that a stop loss order is always numerical. On the contrary, there are many traders (even professional hedge fund managers) who use what is colloquially termed a “mental stop” which stop is a stop loss point determined by factors other than the price, such as events, volatility, volume, option positioning, or any other comparable data. Such a stop is no less valid than a numerical one, and certainly no less effective, but one does need a lot more discipline to execute it successfully.

The great advantage of a non-numerical stop-loss order is its partial immunity to price swings. If the trader has confidence in his analysis, and is satisfied that standing firm in the face of market volatility is sensible and acceptable given the major dynamics and currents in the market, maintaining positions with non-numerical stop loss orders can be advisable and lucrative. In order to manage the inevitable large swings in account value, professional managers will implement hedging strategies in addition to money management methods, to control and minimize the volatility of the portfolio. Thus, even if the mental stop triggers a large drawndown in our position, we can minimize the effect on the portfolio through diversifying and distributing the risk among various currency pairs.

Let us examine the various ways of implementing a stop-loss order now.

Equity Stop

An equity stop is one where the position will be closed in case the total equity in an account falls below a certain value. A stop loss at 2 percent of total equity is generally regarded as a conservative strategy, while the maximum is 5 percent for most money management methods. Thus, to give an example, a 1000 USD account would have the stop loss for an open position at the point where to the total equity would fall below 980 USD.

Both the disadvantage, and the advantage of the equity stop is its inflexibility. The equity stop provides a very solid criterion for deciding on the success or failure of a single trade, as there’s no way of being mistaken about an account in the red. On the other hand, the same inflexibility may prevent the trade from functioning as expected. The markets are volatile, and a trade that has a perfectly valid cause behind it may yet be invalidated by the random fluctuations that are not predictable.

Another important problem with the equity stop is its inability to prevent a string of losses. For instance, when the trader closes a position at a two percent loss, there’s nothing that will prevent him from opening another position in the same direction (buy or sell) a short while later, if the causes that justified the first trade are still in place. For instance, if the trader enters a sell order when the RSI is above 80, and consequently the stop loss is triggered, and the position closed, there’s little that will prevent the same events from being repeated if the price action repeats the same movements. In order to avoid this pitfall, the trader can tie the stop loss point to a non-price factor, and the rest of this article discusses such scenarios.

Chart Stop

In a chart stop, the trader will place the stop loss order not at a price point, but at a chart point which may be static or dynamic. For instance, a stop loss order may be placed at a fibonacci level, which would be a static value. On the other hand, the trader may use an API (an automated trading system), or mentally prepare himself to close the position if a technical event, such as a crossover, a breakout, or divergence occurs, which would constitute a dynamic stop-loss point. In all these cases, technical analysis generates the triggers and determines the price where the position must be closed.

The chart stop is more flexible and reliable than a direct equity stop, because it adjusts to price action and volatility, and is therefore somewhat independent of the random movements of the price. The problem with the chart stop is twofold. First, the technical indicator used to generate the signals may fail to capture the change of the market trend, resulting in large losses. The other, and obvious problem is related to the indirect character of the stop-loss mechanism. Because the order is independent of the price, it may not be able to cut losses as effectively as a direct equity stop, and larger than expected losses may materialize as a result.

Volatility Stop

A volatility stop depends on volatility indicators, such as the VIX for determining the exit point for the trade. As such, market panics and shocks will cause the order to be executed, but mere price fluctuations in the currency market which lack their counterpart in other asset classes will be ignored for the most part. The trader who utilizes a volatility stop expresses the opinion that unless a major, unexpected shock hits the market, his position should be held regardless of the behavior of the markets. This is a more risky strategy than the equity stop, but can be profitable and valid depending on market conditions and the economic environment. In general, it is doubtful that a volatility stop can be very useful in a very nervous and volatile market. But it could be very helpful in maintaining a long-term position where risk perception is low.

The volatility stop is sensitive to prices, but only in an indirect manner, and its nature is similar to the chart stop. It is useful for eliminating very short term distortions from our analysis, and allows us greater resilience in the face of noise in the data.

Volatility may fail to react to market swings. Sometimes a large fall in the market has no equivalent rise in the various volatility gauges. Similarly, volatility can at times rise without any obvious corresponding price action. Consequently, a volatility stop (and similar stops based on non-price data) can be triggered even before a trade is in the red. All these must be kept in mind if the trader decides to use this type of stop order.

Volume Stop

When the trader expects an ongoing trend to be reversed or invalidated subsequent to a change in volume, a volume stop maybe appropriate. While volume statistics are not available for the forex market, positioning as depicted by the COT report can be used for establishing this type of stop. For utilizing the order, the trader determines a percentage value on futures positioning above or below which the position must be liquidated, depending on market conditions and the nature of the order. In the same context, other types of data can also be used to generate a stop loss trigger point. A particular put/call ratio, or option risk reversal value may all be chosen to provide the equivalent of a volume stop in the stock market.

In example, let’s consider a trader who opens a short position in a carry trader pair, confirming his trade by developments in the stock market. His expectation is that the recent rise in the stock market indexes (and the corresponding rise in the carry pairs) occurred on low volume, and will soon be reversed in the absence of new money flows. Consequently, he places his stop-loss at a volume level which, if reached in a rising market, will invalidate the starting premise, and cause the position to be liquidated. When this occurs, and volume rises above the preconceived level, the trader will close his short position in the carry trade pair.

Margin Stop

The margin stop is not really a stop loss order, but the absence of it. In this case the trader will let his account absorb the unrealized losses until a margin call is triggered, and a large part of the account is gone. The margin stop is a sign of indiscipline and lack of insight, because a diligent trader will always predetermine the conditions that will lead to the closing and liquidation of a position. Since not even the brightest analyst is capable of predicting the future with any certainty, lack of a stop loss order is an indefensible practice.

Notwithstanding the previous, the margin stop is a popular choice among many traders who are unable to remain calm in the face of the great emotional pressures of trading. It is only viable under really low leverage such as 2:1, and even then a margin stop would not be the best choice. At much higher leverage, the margin stop is completely indefensible, and should be avoided altogether

Event Stop

Fundamental analysts do make use of technical tools, if only for determining the trigger points for a trade. Take profit, and stop loss orders are used by almost every trader in the world, and its is unthinkable that a serious analyst will not have a condition, at least in mind, for closing an open position, however convinced he may be of its ultimate validity.

But fundamental analysts are not limited to technical tools and the price action for determining when to exit a trade. The event stop that we would like to discuss here is a tool that the trader can use to determine a trade’s exit point.

When using the event stop, the trader will ignore the price action for the most part (and will use low leverage), and will only close a position in the red when the scenario he had pictured in his mind becomes contradicted by events. For instance, a trader is anticipating that Bank A will be nationalized by the authorities of Nation X, and he expects that this will lead to X’s currency depreciating against its counterparts. In consequence, he shorts it. He will refuse to close the position until authorities confirm and clarify, in a solid and unmistakable fashion, that they will refuse to nationalize Bank A. In the meantime, he will be willing to put up with all the rumors, extreme swings, and short term fluctuations in the market without worrying about the unrealized profit or loss in his account.

As we mentioned at the beginning, the event stop is for those traders who know what they do, and who possess the track record, the intellectual background, and the confidence to use it. But do not take our word in order to evaluate your own skills; you should know yourself better than anybody else, and if you believe that you understand the economic dynamics of the era, and can defend your claim in your trading activities, you will be perfectly capable of using the event stop.
Conclusion

The best choice for the beginner is the equity stop. During the learning process, the trader can concentrate on bettering his understanding of the markets without worrying about excessive losses. Once the trader gains a good understanding of market dynamics, and is able to form and implement his trading plans, the equity stop will quickly lose its attractiveness.

The best method for using the non-price stop orders is combining them with a wide equity stop which will serve as a final safety precaution in case the price action becomes too dangerous. For instance, a trader can long the EUR/JPY pair and hold it indefinitely until the VIX registers a value above 35, where a v9olatility stop would be placed. At the same time he will protect himself from extreme, and unexpected swings by placing an equity stop at 5-7 percent of total equity. Thus, unless a very large price swing completely overruns the main criterion for the stop loss order, and triggers the equity stop, the trade would be maintained indefinitely.

Needless to say, every trader will have his own choices on stop loss orders. And we would like to conclude this section by noting that the key to a successful stop-loss order is a disciplined risk management strategy, and everything else is just detail.

Happy trading.
Make Pips, Keep It, Repeat It!
hemant.

The Man Who Broke Bank Of England : George Soros

2009-09-05T18:35:00.000-07:00

Fundamental analysis examines the reasons behind the price action. The analyst uses economic indicators and news flows to decide on the causes behind price movements. Since one cannot determine the cause of something which has not yet happened, the causal relationships demonstrated by fundamental analysis are always about present market behavior. Nonetheless, economic events move slower than market developments, and this is the real cause of the great predictive and interpretative power of fundamental analysis.

Technical analysis is a relatively new phenomenon. It has been developed mostly in the last century, for the most part by US-based traders, for providing some clarity to short term price actions. Fundamental analysis, on the other hand, has been with us for many centuries. The ancient speculator of the Peloponnesian War in Classical Greece used news flow (hearsay, public meetings) and economic data on supply and demand (starvation, poor harvest) for stockpiling resources and for deciding when to sell them. The ancient Chinese classic Shiji, which records the lives and exploits of important personages two millennia before our time, reports on successful traders and speculators who traded wartime shortages, or the needs of warlords for massive profits. Some of these people were middlemen who exploited the inefficiencies of ancient markets, others were producers themselves with good insight into macro-scale developments, and patience allowed them to successfully utilize their analytical capabilities. But all of them used news and analysis to profit from fundamental developments, without any tool other than common sense to help them.

During the Middle Ages there were the Fugger and the Medici families who took advantage of their good relationships with royalty and governments to stay one step ahead of the markets. The Rotschild family of the 18th-19th centuries also used fundamental imbalances created by warfare to undertake contracts with sovereigns states and for maximizing profits. The twentieth century, of course, has had more than its fair share of traders and speculators capitalizing on market distortions, imbalances and bubbles for very large profits. But at the basic level, the tools of the successful investor, trader or speculator are the same: a good understanding of fundamental data, deaf ears to hyperbole, euphoria and panic, and the strength of will to act when the time is right.

Human life and natural phenomena move on causal relationships. Causality is a major principle of scientific study.

And, given how our brains function, it is not possible to make any meaningful decision, judgment or choice without backing it with sensible causes. This is also where the power of fundamental analysis originates. The charts of the technical analyst may give all kinds of profit alerts, signals and alarms, but there’s little in the charts that tell us why a group of people make the choices that create the price patterns. Ultimately, most transactions in the financial markets have reasons that are independent of technical values in the long-term. If a stock goes down in response to a temporary bout of panic among traders, the price will rebound once the dust settles; or, if a currency pair plummets in value because of a false rumor or a temporary squeeze of capital, the situation will inevitably be corrected once a stream of concrete data establishes the false nature of the fears.

Fundamental analysis allows us to decide on the value of an asset. We are unable to be certain about the future value of an asset, and past value is never a good indicator for future prices. But, by all means, we posses the faculties and resources necessary for deciding if the price of an asset is expensive or not, and that is the basis on which the fundamental analyst bases his choices. We can establish the causes behind a trend, we can establish if they are ongoing, and we can exploit that knowledge to bring us profits.

There are many traders who successfully used fundamental analysis to obtain great wealth, but the exploits of George Soros, and his Quantum Hedge Fund have made them household names in our era, particularly after the notorious Black Wednesday on which Britain was forced to drop out of the European exchange rate mechanism. In the rest of this article we will examine this interesting event to drive home the great power of fundamental analysis and how accurate and profitable its predictions can be.

Most traders today know that the British pound is not a part of the Eurosystem. It is an independent currency managed by its own central bank. While some may attribute this fact to the insular mentality of the British and their typical desire for independence from continental customs and habits, this is not the real cause of the existence of the pound today. The real reasons are to be found in the developments of September 16th 1992, and the events leading up to them.

Before it was launched, the nations which today share the Euro as their national currency had to abide by an agreement known as the European Exchange rate mechanism (ERM) which was the precursor to the eventual unification of currencies. The ERM stipulated a fixed currency exchange rate between each national currency and the ECU (the European currency unit, which would eventually be called the Euro), but bilateral currency values were allowed to float within a margin of 2.25 of the the fixed rate. The ERM was created in 1979, and Britain was one of the later members of the EU to join the mechanism in 1990.

At the time Britain joined, the government of Margaret Thatcher was lost in intrigues and disputes about the benefits and the need for ERM. With inflation at 15 percent, to restrain the expansionism of the previous era, the British government had for a while been mirroring the Bundesbank’s policy rates. The decision to join was partly taken to formalize this policy of copying the central bank rates of Western Germany, and also as a result of an argument between the chancellor of the exchequer (the equivalent of the Treasury secretary), Nigel Lawson and the prime minister’s economic advisor, which resulted in the resignation of Lawson. He was replaced by the future prime minister John Major, who in turn finalized the entry of Britain into the ERM in 1990 at a rate of 2.95DM to the pound, with commitment to intervene at 2.778.

As we just mentioned, at the time of Britain’s entry inflation was quite high, due to the expansionist policies of Nigel Lawson. The easy money policy had created a period of boom at the end of the 80’s, but it had also created a property bubble and high inflation which had to be restrained by higher interest rates and a period of economic downturn. Thus, when the crisis struck two years after UK’s adoption of the ERM, economic conditions were already far from being ideal. Unfortunately for the British, this was also a time when German interest rates were even higher than the British rates, as the Bundesbank tried to control the inflationary impact of reunification-related spending.

Mr. Soros, who enters the scene at about this point, had established his Quantum Fund in the early 1970s in partnership with the equally famous Jim Rogers, his initial capital being provided by a number of wealthy acquaintances including the aforementioned Rotschild family. Before his rise to notoriety through his role in the British debacle, he had already made massive profits in trading the collapse of currency pegs and economic deregulation of the 70s. He and his analysts had impressive skills in analyzing the fundamental factors that drive the international economy. Indeed, apart from being a rich financier, Mr. Soros has books published on philosophy and politics, and he is equally well-known as a philanthropist and for his contributions to liberal movements around the world.

Upon analyzing the fundamental situation of the British economy and the increasing gap between the performance of the British and German economies at the time of Britain’s adoption of the ERM, Mr. Soros was increasingly convinced that the British would drop out of the system regardless of the choices they made. The fundamental health of the UK economy was incapable of coping with the demands of matching Germany at the time. Thus, he began shorting the pound as early as spring 1992, in anticipation that high interest rates would eventually deepen the recession in the UK economy, and the resulting fall of asset prices would prove unpalatable to the government authorities. It is thought that he accumulated short positions reaching 6.5 billion pounds (about 10 billion USD), at a leverage of 1:10.

Meanwhile, the situation of Britain continued to deteriorate as the USD kept depreciating, making British exports less competitive on a global basis. The breaking point came, as it often happens, through political turmoil. When in spring 1992 the Danes refused to join the ERM, and it was decided that France would have a referendum on the issue as well, the resulting nervous atmosphere reached climax in a general distrust of the currency pegs of nations that were suffering the worst of the ERM.

On Wednesday, 16th September 1992, as speculators kept selling the pound, the British cabinet held meeting after meeting on how to defend the nation’s currency. They first raised the main rate to 10, then to 12, eventually promised to raise to 15 percent in order to convince the speculators that they were facing the full determination and might of the UK government. The government also bought billions of pounds to prop up the currency, but all that was in vain. Heedless monetary expansionism of the Lawson Boom had created massive imbalances in the British financial system, and the British economy would never be able to function under such a high interest rate burden. Speculators like George Soros had already made their calculations and had discovered the untenable nature of the British peg a long time ago through fundamental analysis, and they would not be cowed into submission by the frantic, but ultimately futile endeavors of the John Major Government.

By 19:00 it was already clear that the peg couldn’t be defended, and the Chancellor of the Exchequer had to declare that the government would leave the ERM framework, and the main interest rate would remain at 12 percent. The credibility of the British government was destroyed in a few hours, the speculators left for new hunts, and George Soros pocketed an estimated 1 billion USD in the process. As the person who took the largest bet, he was instantly notorious across the globe, and to this day he’s known as "the man who broke the Bank of England".

Later, it was also admitted that the 15 percent promise was just a ruse created to calm the markets, and as many speculators believed, the government had no intention of holding the rates at such a high level given the difficulties the British economy were going through.

It is an exciting story, but the sensational value of the events has no use for our trading practices. What are the lessons that we gain from this disaster for the UK economy?

1. Fundamental analysis is always right. Imbalances will always be corrected. But it takes time and patience to exploit them successfully. Mr. Soros held his position for months before market developments confirmed his expectations.
2. Neither government authorities, nor company heads are immune to the temptation of lying, or “bluffing” as it’s sometimes called. If you’re a speculator, nobody will have any sympathy for you if you lose money, and the only person you can blame is yourself. So be careful about your leverage, your risk and who you believe.
3. Macroeconomic events are often triggered by political developments. Political events rarely cause major economic shocks by themselves alone, but accumulated imbalances are usually balanced as a result of political shocks.
4. The payback time of expansion fueled by monetary expansionism is exceptionally destructive in any economy. If the economic leadership of a nation is constrained by political obstacles when the payback time arrives, the results are doubly disastrous.

If you intend to use fundamental analysis in the way George Soros used it, you will need a good understanding of both politics and economics. Achieving such a skill is not that hard, provided you have the commitment and the patience to complete your task.

September Month Issue of Currency Trader Magazine

2009-09-03T19:23:00.000-07:00

Hello Fellow Traders,

The September Month Issue of Currency Trader Magazine is now available.. you can download it by clicking here.

happy trading.
Make Pips, Keep It, Repeat It!
hemant.

The gambler’s conceit

2009-09-03T02:25:00.000-07:00

That high leverage is dangerous is well-known to most people, but it is not unusual to make spectacular profits with a highly leveraged account, just as it is not unusual throw three heads in a row during a coin-tossing competition. The sad fact is that even those spectacular profits are highly likely to be wiped out if the trader continues to make bets utilizing high leverage, as we examined in the previous articles on gambling strategies in forex. The inability of the trader to get rid of high leverage after a bout of successful trades is related to a concept called the “gambler’s conceit”. The gambler’s conceit is not caused by high leverage only, but we will limit our discussion of this subject to high leverage since it’s so common among traders.

Many of us have that genie beside our ears who whispers to us all the time that risking too much is not a problem because we are wise enough to exit a risky bet while still running profits. High leverage may be wrong, undercapitalization may be dangerous, but our trades have so far been profitable, and as soon as the profits diminish or losses are being registered, we will close our positions, and exit the game, be it gambling with cards or gambling with forex.

It's very convincing. After all, why would one want to risk losing the profits of such a risky practice as high leverage? What is the point of continuing to practice a losing strategy even after your profits have been halved by a string of losses?

Many beginning traders who make a lot of money

randomly in the forex market in a short period of time are convinced that it is their method, style, attitude that makes those large profits possible. On the other hand, the experience and knowledge possessed by a trader at the start of his career is insufficient for practicing self-control or employing money management methods successfully. Thus, in many cases (but not always), the doubling, or tripling of the account of a new trader is just a chance event, regardless of the rationalizations which the trader uses to explain his situation. What is more, even in the case of a highly successful, highly disciplined trader, the occasional very large profits are not at all a sign of increased efficiency or better understanding: There’s nothing extraordinary about the occasional extremes in a trader’s career. Instead of emphasizing them too much, and thinking about what he did right or wrong to deserve such large profits or losses, the seasoned trader will evaluate them for what they are: statistical anomalies on which neither a career, nor a trading strategy can be based.

The Gambler’s conceit prevents such a rational explanation. Instead of understanding the gains after highly-leveraged bets as random developments, the trader ties these results to his own exceptional luck, skill, or insight in evaluating the market action, or to his superior trading strategy, and convinces himself that he will be able to terminate his trading activity due to his controlling power over his trading results. With such false confidence, when the inevitable large losses occur he will ponder on what went wrong with his trade, which indicator, which scheme he needs to revise and refine, instead of accepting and understanding that gains on highly leveraged bets are illusory, and unlikely to remain with him permanently. When a peer confronts him about the unusually high leverage of his trades, and his irrational expectation that he can keep profiting with such high risks, he will protest by mentioning his past successes.

In fact, gains on a highly leveraged account have the potential to be even more destructive than losses. Losses will teach the trader to be humble, and will lead him to revise his methods. Gains, on the other hand, will addict him to his errors. Sadly, such an addiction can only be broken by the pain of a totally wiped-out account sometimes. Fortunately for you, we’re here to warn you about the dangers associated with this risky practice.

The best remedy of the gambler’s conceit is avoidance of the addiction entirely. Instead of consoling yourself that you will give up the practice once the profits are gone, convince yourself to never begin the unhealthy game. Do not aim at exceptional results; aim at consistency. But if you find that you’re already deep into the game of high leverage and risky practices, our advise to you is to cut it off right now, without waiting for the losses to show up. Just close the chapter, quit trading for a while, and a few weeks later, or maybe a month, restart your career by practicing sane and sensible strategies this time. Not only will you find intellectual satisfaction at having overcome a dangerous addiction, you will also have a profitable path before yourself as you improve your skills, recognize your errors.

To repeat, brief periods of enormous profits is never the purpose of a successful trader. Such periods are always temporary, and the false confidence that becomes instilled your psyche is often destructive to your career as a trader: aim at consistent profits, do not aim at high very high profits.

Bill Lipschutz : Hall of Fame : Married to the Market

2009-08-24T22:10:00.000-07:00

After making his name as one of the most famous currency traders ever, you might think Bill Lipschutz would slow down. Think again.

At the very moment you're reading this, regardless of your time zone, Bill Lipschutz is most likely either trading or watching the markets. Should you be reading during the three to four (nonconsecutive) hours a day that his eyes are closed, he admittedly will be doing neither. He will, however, be dreaming about the currency markets.

"I really couldn't be happier with my life," says the 52-year-old former Salomon Brothers legend.

Indeed, although he left the Street some 16 years ago, Lipschutz -- thanks to his $200 million forex vehicle, Hathersage Capital Management -- never really stopped trading. His spacious Manhattan duplex is adorned with nearly a dozen state-of-the-art trading flat-screens, strategically placed throughout the rooms. The currency market never sleeps, which is why Lipschutz himself rarely does, either. And not only doesn't he seem to mind, he embraces the challenge -- always unnervingly focused and with a remarkable purity of purpose.

"You can get compensated really well, and that's fine," he intones. "But it isn't about that for me."

Not to say he hasn't pulled down some gargantuan scores. Back in the day, Lipschutz helped create one of the most powerful trading groups on earth: the Salomon Brothers FX department. Blessed with an uncanny ability to manage risk and read markets, Lipschutz wrote the tickets that made cash registers sing -- he once notched 16 up months in a row -- and left competitors in awe. In his heyday, he did half of the currency-option volume on the Philadelphia Stock Exchange and, at times, a staggering 80 percent of the open interest. Says Lewis Broad, Lipschutz's partner at Hathersage, "Bill understands the options market better than anyone."

For that reason -- for being a giant of the game whose passion never waned -- Bill Lipschutz now becomes the twelfth member of the Trader Hall of Fame. Famously opaque, impossibly low-key, Lipschutz shunned the spotlight despite massive size, helping him garner a reputation as a mysterious figure that lingers to this day. As he settled down for a chat this summer, Lipschutz found it hard to discuss personal accomplishments. "The story of building a money machine is not very exciting," he said, "but I have to tell you . . . John Gutfreund found it pretty exciting."

Lipschutz's own story began ordinarilyin blue-collar Farmingdale, New York. The son of a math teacher, he was an avid tennis player in high school, with standout grades. He attended Cornell, completing its rigorous five-year architecture program before pursuing his MBA there. In 1981, a year before graduating, he interned at Salomon Brothers. It was probably the most powerful trading firm on earth -- and a veritable playground for a hungry young turk.

"When I first came in, there was no FX department," Lipschutz says. "It started with one guy, Gil Leiendecker, who had been the TED spread trader for John Meriwether. Then they populated it with a couple of trainees, of which I was one."

All around him were future trading giants -- Meriwether, Larry Hillenbrand, Paul Mozer. And since he'd spent part of his internship working in the equity-options department, Lipschutz was put in charge of managing FX options. Within six years, thanks to both his moneymaking and team-building skills, he was named head of the FX department. By 1985, he'd turned the desk into a powerhouse within the firm, raking in $300 million–plus a year. From 1987 to 1990, Lipschutz's personal P&L exceeded $100 million -- every year.

Bill Strack, who managed the FX trade support group at Salomon, recalls the time Lipschutz dropped a $750 million ticket without batting an eyelash. "He did it so calmly. The operations guys all had to call and say, 'Are you sure this isn’t a typo?' "

"Underlying fundamentals often didn't matter," Lipschutz says. "It was about who blinked first."

Lipschutz, quite simply, never blinked.

As he emerged as the primary upstairs trader driving currency-options volume at the Philly, competition on the floor grew intense. It turned into a blood feud that came to a head in October 1986, when Lipschutz executed a trade for 30,000 put options, expiring in December, on the British pound -- at that time the largest listed options trade ever. Lipschutz crossed both sides, shutting out the floor completely. As he recalls: "Andy Davis, who was running CRT's operation down there, actually stood up and gave an impassioned speech to the other market makers along the lines of, 'Those bastards from Salomon Brothers are trying to take the food off our table.' Hearing about that only encouraged guys like me."

That trade -- with more than $500 million hanging in the balance if the pound declined even slightly -- made an enormous splash in the financial press, further enhancing Lipschutz's mythic image. Meanwhile, he was performing so much off-premises trading at all hours that Salomon installed a modem in Lipschutz's apartment linked directly into the company mainframe.

Finally, after working virtually 24 hours a day for years, Lipschutz left Salomon Brothers in 1990. He was 36. At first, he says, he tried to take it easy, but it was soon clear that as much as he owned the currency markets, the currency markets also owned him. He eventually stumbled back into business after reconnecting with Broad, an old college buddy, who was running an equity-options market-making firm on the AMEX. The two were joined by Strack and Ron Furlong, a key player in the back office at Salomon. The firm, modeled on the old FX department, became Hathersage Capital Management.

So much for retirement -- indeed, many prize moments were still to come. During the 1998 Asian financial crisis, when panic took hold of the yen market, major players, including Julian Robertson, got creamed. Lipschutz was up 42 percent that year.

Over the past 15 years, Hathersage has racked up an 18.8 percent average annual return. Only once in that period did monthly losses ever exceed 5 percent.

"It's the intricacies of the game itself that drive me," he says. "It's about getting up every day and trying to figure out how to beat the market. That's an ongoing fascination that, in its purest form, never changes.”

Article from :
Trader Daily magazine
By: Andrew Barber
October/November 2006 , Page 50

The Story of Peter Andreas Thiel: From Frankfurt to the World of Global Markets

2009-08-20T20:45:00.000-07:00

If one believes in luck, fate, karma, or even the Universal Law of Attraction, the story of money manager extraordinaire, Peter Andreas Thiel, will only reinforce one’s beliefs. Of equal importance, the traits of courage, belief in one’s self, commitment to one’s opinion, and gut feeling, also play a major role in the story. How else can one explain an almost chance meeting at Hobee’s Coffee Shop, near Stanford University, one early morning in 1998 that eventually resulted, only 3 years later, in a $1.5 Billion payoff?

No one but Peter Thiel knows when he first decided he could out think, out risk and out play the market, but he has been consistent in his philosophy for years. Born in Frankfurt, Germany in 1967, Thiel spent time in no less than seven elementary schools in places from California and Ohio to Namibia and South Africa. A chemical engineer, his father Klaus, had work assignments around the globe. Eventually, some might say mercifully, the family, including mother Susanne, younger brother, Patrick, and Peter, made a home in Foster City, California, just north of Silicon Valley.

While a student at San Mateo High School, Peter developed into both a math genius and a chess prodigy, eventually finishing first in his class. He achieved and has maintained his U.S. Chess Master rating up to the present. After his many travels as a child, he decided to stay close to home when college beckoned. He picked nearby Stanford, deciding to major in philosophy. During his tenure, he became a free-market libertarian, believing that people should be permitted to do as they wished, assuming they did not impinge on the freedoms of others.

French literary critic, Rene Girard, shaped Thiel’s prospective of the behavior of both humans and the financial markets. Girard’s theories maintain that people “borrow” their desires from other people. He believes that one’s desire for a certain object is motivated by the desire of another for an identical object. Girard coined a term for this trait: “mimetic desire.” Girard, professor emeritus at Stanford, believes this propensity also drives financial markets as well. Simply put, “Some people want to buy a stock simply because they see everyone else buying it.” Girard states, “The market is a quintessential mimetic phenomenon.”

How does this all relate to Peter Thiel’s coffee shop meeting and subsequent good fortune? A little more background will bring things into better focus.

One warm summer day, as Thiel conducted a finance lecture at Stanford, a young software engineer dreaming about an Internet startup, Max Levchin, walked into his class by chance. What followed would change both men's lives forever. After a pleasant chat, the two men decided to meet for breakfast at Hobee's, in Palo Alto.

During their breakfast, Levchin asked if Thiel would invest in his idea to offer a secure method of allowing handheld computers to communicate. Peter liked the idea and presentation, deciding to buy into the concept and the company. Originally believing he would have a short-term relationship, Thiel eventually froze his fledging hedge fund career, dedicating the next four years to the new company – which eventually grew into PayPal! Peter even joined the new venture as its CEO in December 1998. The rest, as many are wont to say, is history.

However, the amazing success of PayPal was not without problems and serious issues. Shortly after PayPal began fulfilling his dream of its becoming the “new currency for the world economy,” Thiel had to face a number of challenges. Russian hackers managed to pirate millions of dollars from the new venture and credit card processing companies cried foul, claiming that PayPal was in violation of their regulations. At one point, PayPal had enough funding to survive only another two months while still losing around $10 Million a month. Shortly after, because of what was then the dot-com zenith, Thiel tried to raise money for PayPal, then valued at around $500 Million by VC’s even though losing money at a rapid rate. Nasdaq had just broken its own record, hitting 5,048, and the majority of investors thought the dot-com phenomenon would last forever.

Peter, however, privately disagreed, believing that the dot-com era was going to crash spectacularly very soon. He already realized what the market came to know shortly thereafter: There was very little substance to the majority of dot-com “superstars.” Nonetheless, he capitalized on the opportunity presented to him, raising $100 Million to fund these hard times for PayPal, closing this large deal in only three weeks. The closing was March 31, 2000. This was critical as the very next day, the Nasdaq began its famous freefall, crumbling by 67% in less than 18 months! Had he not worked feverishly to locate an interested VC and jumped through numerous obstacles to close the deal so quickly, PayPal would most certainly not exist today. Thiel had, once again, worked his “magic.”

Thiel worked diligently to establish PayPal as the leading company to handle purchase payments over the ‘Net and he was successful at branding his company as the expert in this area. As a result, he began positioning the company for an IPO, which he registered only weeks after the World Trade Center tragedy. As usual, his strategy was successful.

PayPal stock began trading on February 15, 2002, increasing 55% on the very first day. Meanwhile, out in the office parking lot, Peter and his management team celebrated with a free flowing keg party, while Thiel, in between keg visits, played speed chess against ten opponents at once, losing only one match (which still aggravated him to no end). In fact, he exploded at the defeat, smashing all of the chess pieces on that board. Borrowing a famous sports phrase, Thiel told all in range, “Show me a good loser and I’ll show you a loser!”

As all investors and eBay participants know, it was only eight months later that an agreement was in place to sell PayPal to the giant auction site for $1.65 Billion. Thiel had invested $240,000 in the new company after his meeting with Levchin and realized a very attractive payout. Only 34, he rode off into the sunset with $60 Million, thank you. After purchasing a Ferrari Spyder, Peter purchased a lavish condo in the Four Seasons Hotel in San Francisco. The real good life had now begun.

But – it should not be assumed Thiel’s career had been less than successful prior to the PayPal endeavor. When he started his Stanford experience, the era of U.S. “culture wars” was exploding on this campus and many others. Students were spewing venom on many issues, including curriculum items. The age of political correctness was dawning as Stanford students complained that its curriculum shortchanged non-Western cultures, women and minorities of all kinds. Student groups even contemplated the creation of a “speech code” which would prohibit all sexist, racial, religious, and homophobic comments.

Peter Thiel was not amused. This trend toward PC gave him great discomfort. He believed that, in addition to criticizing Shakespeare, Chaucer and Aristotle, these protests were geared to restricting freedom of speech and expression, long treasured in the U.S. As a more consistent response to this atmosphere, Thiel founded the Stanford Review in 1987. Its motto: Fiat Lux (Latin for “Let there be light.”) A number of the Review’s crew ended up at PayPal with Thiel prior to the IPO. The Review not only still exists but is currently the main conservative newspaper on campus.

One of the former editors, David Sacks, proudly states that, “The Stanford Review stood for free speech, no speech code and the keeping of the great scholarly works in the curriculum. Sacks eventually joined Thiel at PayPal and helped bring it to preeminence. Another Stanford student, Rachel Maddow, now a radio show host, describes the Review as “mean spirited with a juvenile approach toward the consequences of their words and actions.” But, she concedes, “They were very good at generating an uproar,” which is exactly what Thiel wanted to do.

After graduating in 1989, Peter decided on law school at his alma mater. Still hanging out with his pal, Sacks, they became fans of Leo Strauss, the philosopher considered to be the father of neo-conservatism. Still annoyed with the changing Stanford curriculum, Thiel and Sacks authored a scalding essay in 1995, published in the Wall Street Journal, ridiculing Stanford’s policies. Stanford President Gerhard Casper and then-provost Condoleezza Rice were not amused. They wrote an angry response to the WSJ calling the piece a “cartoon, not a description, of our freshman curriculum.” Later that same year, the duo made headlines again with the publishing of “The Diversity Myth: Multiculturalism and the Political Intolerance on Campus.”

After earning his JD, Thiel clerked for U.S. Federal Circuit Judge Larry Edmondson in the Atlanta jurisdiction, eventually joining the firm of Sullivan & Cromwell, LLP, in New York City. He lasted all of seven months and three days, at which time he resigned because of total boredom. Thiel needed the excitement and thrill of “the deal” to keep his considerable professional juices flowing.

He decided to polish his, until now, totally theoretical investment skills by joining the firm of CS Financial Products, now part of the Credit Suisse Group. Thiel spent his working hours trading derivatives and currency options for the next year. He quickly decided it was time to follow his own map, not someone else’s. Returning to California, he somehow raised $1 Million from friends and family, beginning his first macro fund, Thiel Capital Management. With no experience, Peter faced daily struggles to raise funds and investors, but by 1998, he did have more than $4 Million in his management portfolio. He also took another major step: He hired his first employee, Ken Howery, who had been managing editor at his beloved Review.

With Internet stocks breaking new records, Thiel convinced real estate developer, Tom Ford, to rent he and Howery an over-sized closet in his office, which, not coincidently, was in the heart of the venture capital community. Because they were really in a closet with no windows, just a couple of desks, Thiel brought in wall hangings of outdoor scenes to “improve the view.” This was about the time Peter Thiel had his fateful meeting with Max Levchin.

Only weeks after the PayPal sale, Thiel decided to see if the magic still existed, founding a hedge fund firm, Clarium Capital Management, LLC, in his Four Seasons apartment. The magic had stayed with him as he has become one of the most honored and successful hedge fund managers in America. How successful? Using the original $10 Million invested to start the firm, Clarium now manages over $2.1 Billion in assets, while having tripled clients’ investments funds. Moving out of his apartment, Clarium now enjoys exquisite all glass walled office space right near the Golden Gate Bridge. More importantly, Thiel and his fund have returned an incredible 230.4%!

Meanwhile, many of his PayPal buddies were also mining new territory. Chad Hurley, Steve Chen and Jawed Karim founded the ever more successful video sharing Web site YouTube, Inc, finally selling it to Google for $1.65 Billion. The now-famous Max Levchin founded Slide, a popular photo sharing website. Reid Hoffman, EVP, started the successful Linked-In Corp. for business networkers, while VP, Jeremy Stoppelman began Yelp, helping people find restaurants, businesses and shops in their local area. A diverse and creative group to say the least.

Thiel has stayed more to his investment expertise, patterning Clarium after the former Quantum Fund, formerly managed by investment guru, George Soros, who had a great run with his macro hedge fund. Using macroeconomic theorems to uncover winning trades, macro funds trade Eurodollars, Asian bonds, crude oil, commodity futures and just about anything else for which there is an viable market.

The hedge fund arena was formerly dominated by super macro managers like Soros and Julian Robertson. In the early 1990’s, over 70% of the $39 Billion in the industry were managed in macro funds. But first the dot-com frenzy, then the high tech bull market caused many investors to forsake hedge funds and move their money to the more glamorous Nasdaq exchange. However, Thiel is still committed to many of the principles that made Soros into a billionaire.

For instance, Soros made millions betting that the British government would devalue the pound back in 1992. Using similar techniques, Thiel buys U.S. Treasury bonds and energy stocks, also betting on deflation accompanied by higher oil prices. With recent annualized returns in the 26% range, Clarium is considered one of the world’s best macro funds as rated by Hedge Fund Research, Inc. in Chicago.

It is ironic that the high tech arena made Thiel rich and did serious damage to the hedge fund industry. For example, Soros lost major dollars when Nasdaq bottomed out, while Robertson lost billions and just stopped managing other people’s money altogether believing he simply didn’t understand market tendencies any longer. Yet, Thiel still believed in the viability and success opportunities in the hedge fund industry, a commitment that has proven to be well founded.

No one knows whether Thiel foresaw the dramatic changes that took place in the hedge fund industry or whether it was just another example of him following his famous hunches. Currently, Wall Street companies and fund managers administrate much more hedge fund money that the giants Soros or Robertson ever imagined. The top 20 manage over $320 Billion, almost 25% of the entire industry. While, macro-style funds now control less than 12% of industry assets.

The hedge fund client base has also shifted rather dramatically. Once the purview of rich individuals, with or without ownership in closely held companies, now pension funds, insurance conglomerates, and private/university endowments are also major players. They apparently believe that a well-managed hedge fund will provide the consistent returns, in both good and bad markets, to allow them to keep the sacred promises they have made to their benefactors. The common denominator always remains consistent: Large institutional investors would rather make a smaller profit while being subject to smaller risk than possibly making a lot along with the inherent higher risk.

But Thiel still believes, as Soros and Robertson did, that vast fortunes can me made if you’re willing to gamble big stakes on your educated view of the world economy and the techniques you have developed to win large in this arena. For instance, Thiel literally wagered all of his client’s assets that the fallout from the boom of the 1990’s would hurt the U.S. and provide new opportunities. He assumed the housing apex would collapse with rising interest rates while the price of crude oil would skyrocket. To date, his view has been correct.

Thiel believes that not many of the current hedge fund managers are ready for these events but he thinks he has positioned Clarium to maximize returns during these turbulent times. As he so eloquently states, “The hedge fund’s mission is to make sense of an extraordinary moment in time in the world – a time of retail sanity amid wholesale madness.” Time will validate or disprove the accuracy of his assessment.

He has maintained his individualism during his sometimes meteoric rise to success. For instance, he moved Clarium’s offices from San Francisco’s financial district to the Presidio, the former Army fort on the Bay. One important reason: George Lucas constructed his beautiful new headquarters there, complete with a dramatic statue of Yoda, the Jedi Master. He refuses to admit that Yoda had any influence on the move (although he readily states that Star Wars is his favorite movie series), saying that his reasons were really based on his belief that investors, even outwardly savvy ones, still “follow the herd” when making decisions. Their reality becomes that which all others are doing, not on true projected market trends. He freely says that he wanted to keep his investment team away from the other money managers surrounding them at his former Bank of America Center location. Always the contrarian, Thiel is attempting to duplicate the successes George Soros enjoyed in the 1990’s.

Yet Thiel disputes the contrarian and maverick nomenclature. His totally contemporary headquarters (around 22,000 square feet) also include a magnificent library housing an impressive collection of leather-bound books from many of the masters, including Guy de Maupassant, Leo Strauss, and Charles Darwin. Maintaining he is a classicist, he also invites some of the world’s most respected scholars from a wide diversity of disciplines to address his team on a quarterly basis.

The stated goals of Thiel and Clarium are relatively modest on paper. He doesn’t want Clarium to become bloated and risk becoming unmanageable and too stratified. The fund has been temporarily closed to new investors although Chief Operating Officer, Ralph Ho, states that Clarium may at some point manage as much as $10 Billion in the future. So much for modest objectives.

Eschewing normal working hours, Thiel’s team normally arrive at the office between 5:00 and 6:00 a.m., workout or run in late afternoon, then return to their desks around 5:00 pm to put in another 2-3 hours of work. Interestingly, their “work” is almost exclusively involved in research instead of trading client assets. Using small test accounts, they validate the trades and courses of action recommended by the results of their research. While a bit unusual, this regimen follows the lead of Thiel, whose typical business attire involves polo shirts, jeans and sneakers, and who prefers atypical odd hours himself, including answering many e-mails in the middle of the night.

Although his outward professional persona is a bit eccentric, his money management objectives are rather simple and straightforward. Unlike many hedge fund managers, who are constantly moving in and out of markets to hopefully maximize every opportunity while minimizing all expected downturns, Thiel has wagered all on three assumptions and believes his theories will generate positive returns. His theorems:

The price of 30-year U.S. Treasury Bonds will increase as the U.S. economy retreats after the housing boom crashes;
The U.S. dollar will strengthen versus the Euro as many investors reduce investments in riskier emerging markets which are funded by debt;
Energy stocks will not only remain strong, but increase along with crude oil prices as world production maxes out.

An additional idiosyncrasy is explained by head trader, Matthew Kratter, who boasts a Ph.D. in English from the University of California, not a business degree, who states, “We only make one big trade per week.” Using the massive amount of research done by the whole team and after discussing all available options and considering various risk/reward strategies, Clarium then makes its play. Clients must be ready to handle this level of risk as Thiel has literally put all their “eggs in one basket.” In recent history, the strategy has worked. In 2003, for example, Clarium got the investment world’s attention by logging a 65.5% return based, primarily on the theory that the U.S. dollar would weaken. Big risk followed by big reward.

The obvious question: Is Peter Thiel lucky or good? Steven Drobny, a partner in Drobny Global Advisors, which advises macro funds on world markets, has admitted he’s received numerous calls from investors asking this question. He also states, “Whenever you have someone who puts up sensational returns out of the gate, people wonder if he’s rolling the dice or if there is real thought behind it.” 2004 proved that neither Thiel nor Clarium was perfect as the fund delivered a return of only 5.6%. But Thiel’s big bet that the price of crude oil would jump proved correct in 2005 and the fund got back on track, producing a 57.1% gain. “Peak Oil”, a geologic theory that maintains that world oil production is currently at or close to its maximum has held Theil’s attention and support for some time. Regardless of the accuracy of the theory, crude oil prices over the past two years have been the highest in history, helping Clarium’s earnings to be quite impressive.

While the superb gains make investor headlines, Clarium has had some rocky times as well. On at least three occasions, Thiel’s trades have resulted in losses of around 11% in just one month! Recently, as the Dow was again approaching a new all-time high, Thiel believed that the sharp decline in home sales was evidence that his prediction of an equally robust decline in the U.S. economy was imminent. He laid his “bets” on his projection that the Russell 2000 Index would also downturn. He was wrong as the Russell continued to rise. At that point, Clarium was down a disturbing 5.2% for the whole year! As David Philipp, an investor in Clarium and a managing partner of Gyre Capital Management, willingly says, “Thiel can be a scary guy if he’s the only one in your portfolio.”

At the same time, Thiel continues to prove that he is committed to his theories and does not settle for giving mere lip service to his projections, as he has invested his entire liquid net worth in the Clarium fund, putting him at much greater risk than any single investor. He also continues to bet on his ability to generate excellent returns as, unlike most fund managers, he charges his clients no annual management fee. His only income comes from keeping 25% of Clarium’s gains, requiring him to perform better than his competitors in order to generate income.

Along with high-level intestinal fortitude, Thiel exhibits a strong sense of loyalty and investment adventurism. He has invested in a number of his former PayPal team’s start up companies through the Founders Fund, a venture capital firm. While he missed the opportunity to invest in the highly successful YouTube, bought by Google for $1.65 Billion, (Thiel says, “It just kind of fell through the cracks.”), he is very high on Facebook, founded by Mark Zuckerberg in 2004. Thiel backed the start up and advised Zuckerberg to relocate to Silicon Valley. Calling Thiel his mentor, Zuckerberg did just that. He said goodbye to Harvard University, where he was a student, and headed west. Should Facebook, a more sophisticated version of MySpace.com, encounter a deal similar to YouTube, Thiel would add around $100 Million to his bank account.

Both critics and supporters say Thiel runs Clarium as if it were a dot-com entity. Employing 42 people now, he plans to continue his rapid expansion. His recruiting policy is to ask his team to think of the three smartest people they know and ask them if they might be interested in working for him. Ever direct, Thiel says, “They only need to have one good idea a year to more than pay for themselves.” COO, Peter Ho, has his own perspective, saying, “The company is an extension of Peter. It’s a combination of start up, think tank and hedge fund.”

Kevin Harrington, a physicist who formally conducted mathematical research for the Department of Defense, is a close associate of Thiel at Clarium. He agrees with Thiel that the U.S. economy and the stock market are headed for problems. They have collectively termed this coming downturn as the “Petrodollar Illusion.” They believe the record prices for crude oil have permitted OPEC countries to invest huge volumes of dollars in the U.S. economy, which has resulted in an overvaluation of both the stock and housing markets in the United States. In the short term future, they believe that the Petrodollar Illusion will abruptly disappear, which will drive the U.S. economy into a deflationary position. They continue to focus on strategies that might allow Clarium and its clients to profit from this downturn. The future performance of Clarium will greatly depend on the accuracy of their predictions.

While Thiel remains open and accommodating to all questions about his investment and professional life, he has consistently kept his personal life a mystery. Levchin, his cofounder at PayPal who has known him for years, is unable to recall even one instance when Thiel has mentioned his personal life. Although the world is aware of his penchant for having regular dinner parties at one of his homes, his invitees, a wide diversity of prominent business persons, scholars and well known professionals, these gatherings are really business and not personally oriented.

As he enters his forties, Thiel still finds his success, at times, a burden. He has often been asked why he remains single and responds in much the way other very successful people have answered this question in the past. “There is this weird downside to the money thing,” he states, “ the degree to which people will push to meet you is on one hand flattering but it often becomes utterly exhausting and frustrating.” It appears the rest of the world will have to be content with learning more about his professional persona only.

For now his only public display of a life away from the office comes with his monthly dinners at his apartment in New York City or his digs in the Marina district in San Francisco. In a further display of his commitment to the belief that the housing market will crash, he sold his apartment at the Four Seasons and now rents both of these homes. To further the mystery of his apparent detachment from the world of the personal, dinner attendee’s report that, while exquisitely decorated, these homes appear to be “stage sets“ and appear that no one really lives in them. Both homes are totally devoid of any family or friend photos, collectibles or any other personal items whatsoever.

But Clarium’ investors appear unconcerned with his rather eccentric lifestyle. They continue to have faith in this committed libertarian, who has a deep fondness for the classics, and his financial theories, which have earned him millions of dollars and made his clients equally happy over time. Only the future events that transpire in the global financial world will verify the accuracy or disprove the investment theories of one, Peter Andreas Thiel.

August issue of currency trader magazine

2009-08-08T21:15:00.000-07:00

hi all,

August issue of currency trader magazine is available now... click here to download.

happy trading
Make Pips, Keep It, Repeat It!
hemant.

July issue of currency trader magazine

2009-07-24T23:22:00.000-07:00

hi all,

July issue of currency trader magazine is available now... click here to download.

happy trading
Make Pips, Keep It, Repeat It!
hemant.

Say thanks if you like this via comments.

Traders Prayer

2009-07-22T05:58:00.000-07:00

hi everyone,

Today i am posting a traders prayer from Trading in Zone by Mark Douglas. I read this before i start my trading everyday. I have made a wallpaper of it so that i can read it easily. It is highly recommended for every trader.

“I AM A CONSISTENTLY SUCCESSFUL TRADER”
“I AM A CONSISTENT WINNER BECAUSE:
1. I OBJECTIVELY IDENTIFY MY EDGES.
2. I PREDEFINE THE RISK OF EVERY TRADE.
3. I COMPLETELY ACCEPT THE RISK OF OR I AM WILLING TO LET GO OF THE TRADE
4. I ACT UPON MY EDGES WITHOUT RESERVATION OR HESITATION.
5. I PAY MY SELF AS THE MARKET MAKES MONEY AVAILABLE TO ME.
6. I CONTINUALLY MONITOR MY SUSCEPTIBILTY FOR MAKING ERRORS.
7. I UNDERSTAND THE ABSOLUTE NECESSITY OF THESE PRINCIPLES OF CONSISTENT SECCESS AND, THEREFORE, I NEVER VIOLATE THEM”

“FUNDAMENTAL TRUTH OF TRADING”
1. ANYTHING CAN HAPPEN.
2. I DON’T NEED TO KNOW WHAT IS GOING TO HAPPEN NEXT IN ORDER TO MAKE MONEY.
3. THERE IS RANDOM DISTRIBUTION BETWEEN WINS AND LOSSES FOR ANY GIVEN SET OF VARIABLE THAT DEFINE AN EDGE.
4. AN EDGE IS NOTHING MORE THAN AN INDICATION OF A HIGHER PROBABILITY OF ONE THING HAPPENING OVER ANOTHER.
5. EVERY MOMENT IN THE MARKET IS UNIQUE.
“NOW MOMENT OPPORTUNITY FLOW”

Happy trading
Make Pips, Keep It, Repeat It!
hemant

The 10,000 Hour Rule

2009-07-12T07:27:00.000-07:00

The 10,000 Hour Rule

Okay, now I've finished Malcolm Gladwell's "Outliers." One of his chapters that I like is on the "10,000 Hour Rule." I've encountered this rule before and, from both personal and professional experience, I have come to believe it is true. The basic idea is what separates "experts" from novices and moderately skilled people, in whatever endeavor (e.g., chess, musical proficiency, language fluency, programming, math, painting, pottery, golf, martial arts), is practice - a lot of it.

There has been this myth propagated in society that people who achieve great things or who are very successful at something usually have some innate ability or talent that others lack. Research does not bear this out. Basically, people who are "experts" have typically put in lots of practice - approximately 10,000 hours of it. That comes out to 20 hours per week for 10 years. If you pick an area and put that much time into getting good at it, you will become an expert.

Now, this doesn't work out for every situation. We can think of some funny examples in which this would not happen. For instance, if you take up rock climbing at age 75, odds are you won't be one of the world's top rock climbers even after 10,000 hours of practice at age 85 because you are up against father time. He can be a brute. (Well, you might be one of the top 85-year-old rock climbers in the world!). Still, the principle holds true in most cases.

Although our brains are more "plastic" (i.e., malleable) when we are very young, the reason kids and teens can get so good at certain endeavors is because they are able to put in those 10 years of practice. It's very difficult at age 25 to start something like...ping pong or chess, let's say...and put in 20 hours of practice per week for 10 years. Young adults are too busy with finishing college, getting their careers going, and getting married/starting a family.

It is true that people are born with certain aptitudes that might make them a "better" expert than someone with more moderate innate ability, given that they both put in 10,000 hours of practice and all other things are equal (e.g., quality of coaches/teachers, access to equipment/facilities). Still, those differences are likely to be quite small. Let me illustrate this with the following example:

Let's compare a girl with tremendous innate athletic ability at age 5 (let's call her Sarah) with another girl (also age 5) of average innate athletic ability (let's call her Mary). Let's say that Sarah jumps from sport to sport and never really dedicates herself to any one sport. Mary, on the other hand, takes up tennis at age 5 and puts in 10,000 hours of practice over the next 10 years. Now Sarah and Mary are both 15 and they go head-to-head in a tennis match. Who's going to win? Despite Sarah's greater innate athletic ability, Mary's practice is going to totally trump her. Mary will win this tennis match 6-0, 6-0. If we switched out musical ability or mathematical ability for athletic ability, the same results will happen.

So, the moral of this story? As the old saying goes, "practice makes perfect." Well, not perfect - I'm a crusader against perfectionism. But, practice will make you an expert - provided that you do a lot of it.

If you like above post.. please comment or follow this blog. it really helps me to know how much you appreciate my post. it will inspire me to write more. so go on and comment on this post.

Happy trading
Make Pips, Keep It, Repeat It!
hemant

“THE 23 WINNING TRADING HABIT OF TRADER

2009-07-12T06:03:00.000-07:00

“THE 23 WINNING TRADING HABIT OF TRADER ”
1. Act Instantly .
(Pull the Trigger)

2. Hold a Winning Investment Until there is a
pre-determined reason to sell .
(Know when to sell before I buy it)

3. Follow your system Religiously.
(Never have Second Guess Your system)

4. Admit My Mistakes & Correct them immediately .
(Admit my Own mistakes)

5. Turn Mistakes into learning Experience.
(Learn from mistakes)

6. Pay My Dues .
(Wishing won't make it so)

7. Never talk about what I'm doing .
(Keep your mouth Shut)

8. Know how to delegate .
(Phony! Phony! Phony!)

9. Live far below your Means .
(Whatever you have spend less)

10. It is not about the Money.
(We should being pay to do this Job)

11. Love What I do, Not What I own.
(Master his own Craft)

12. Live and Breathe Investing 24 hour a Day.
(This is My life)

13. Put your Own Net Worth on the Line.
(Eat your own Cooking)

14. Preservation of Capital is Always Priority.
(Keep what I Have)

15. Passionately Avoid Risk.
(George Soros Doesn't take Risk?)

16. Develop My Own Unique Investment Philosophy .
(The Market is always Wrong)

17. Develop My Own, Personal system for selecting,
Buying & Selling investment.
(Your are what you measures)

18. Diversification is for the Birds.
(You call that a position?)

19. Focus on After-Tax return.
(A penny save is a dollar to earned)

20. Only invest on what I understand.
(Stick to Knitting)

21. Refuse to make Investment that do Not meet My Criteria.
(If I Don't know when to say "Yes." Always say "No.")

22. Do you Own Research.
(Start with the A's)

23. Have Infinite Patience.
(When there's nothing to do, Do nothing)

Source : The Winning invesment Habit of Warren Buffet & George Soros by Mark Tier

2009-07-07T05:52:00.000-07:00

hi traders,

the July issue of the Currency Trader Magazine is now available. Enjoy!

happy trading
hemant

Things to avoid in Trading

2009-07-01T04:32:00.000-07:00

hi everyone,

Today i will share some of the hard lessons i have learned in my trading career. Please read following and it would save you millions.

Things to avoid:

1. Putting on a counter-trend trade during a news spike
2. Not setting a stop loss to breakeven when profit is +20 pips in the money
3. Holding too much conviction on a long-term move
4. Generalizing beliefs on where price will head
5. Not waiting for the setup
6. Chasing a trade late after a setup has already occurred
7. Sloppy trading (“sure, it’s going up”)
8. Letting a profitable trade turn red

As always your opinions are welcome. If you don't understand above let me know by comments on this post.

See you soon... Happy trading
Hemant

Leverage the Killer

2009-06-24T22:49:00.000-07:00

Leverage the Killer

Most professional traders and money managers trade one standard lot for every $50,000 in their account.

If they traded a mini account, this means they trade one mini lot for every $5,000 in their account.

Let that sink into your head for a couple seconds.

If pros trade like this, why do less experienced traders think they can succeed by trading 100K standard lots with a $2,000 account or 10K mini lots with $250?

No matter what the forex brokers tell you, don’t ever open a “standard account” with just $2,000 or a “mini account” with $250. The number one reason new traders fail is not because they suck, but because they are undercapitalized from the start and don’t understand how leverage really works.

Don’t set yourself up to fail.

We recommend that you have at least have $100,000 of trading capital before opening a “standard account”, $10,000 for a “mini account”, or $1,000 for a “micro account”.

So if you only have $60,000, open a “mini account. If you only have $8,000, open a “micro” account. If you only have $250, open a “demo account” and stick with it until you come up with the additional $750, then open a “micro account”.

If you don’t remember anything else in this lesson, I plead that you at least remember what you just read above.

Okay, please re-read the previous paragraph and ingrain it in your memory. Just because brokers allow you to open an account with only $250 doesn’t mean you should and I’m going to explain why.

I believe most new traders who open a forex trading account with the bare minimum deposit do so because they don’t completely understand what the terms “leverage” and “margin” really are and how it affects their trading.

It’s crucial that you’re fully aware and free of ignorance of the significance of trading with leverage. If you don’t have rock solid understanding of leverage and margin, I guarantee that you will blow your trading account.

The reason why 95% of new traders consistantly lose money

2009-05-17T08:47:00.000-07:00

Hi

I have been trading forex fulltime on and off for more than 6 years. I have bought and completed several forex courses, read books, did online research and even tried out EA robots. The only consistent thing that kept on happening was that I was bleeding money. Sure, I would have one or two profitable months, but I mostly lost money. I have wiped out several trading accounts causing myself terrible heartache during this time.

I would bet that every trader reading this post can and is identifying with me.

Have you ever wondered why 95% of traders lose consistently? What is the most common thing that most traders consistently do? What is the most urgent mantra that is drilled into our brains while learning to trade? Can anyone guess?

It is using stops! CUT YOUR LOSSES AND LET YOUR PROFITS RIDE!

95% of all traders consistently lose money because they use stops. Big stops, small stops, trailing stops, you name it. Who of us can truly know which way the market will go? Even by using every indicator, being a technical or fundamental fundie, no one can predict market movement.
How many fib bounces did exactly work out as you hoped? How many times did the market take out your stops when you least expected it and turn around to go in the original direction you planned?

This is my theory. Traders that lose consistently, use stops. Forex trading is a guessing/ gambling game. The market makers indirectly participate in the forex market by finding traders dumb enough to actually trade and by trading I mean losing their money to the brokers' account. The brokers make money in forex not by trading themselves, but by having noobies trade for them and losing.

The traders who have become successful and that have stuck around long enough knows that no strategy using stops, consistently works and make money. So what have they done? These traders had to start thinking out of the box. Only by turning everything they know onto its head were they able to change their results.

Since I had this 'awakening' I have not lost a single trade. I have 100% consistent winning track record! No Bull! {Don't worry, I am not selling anything...}

Ok, so how does it work? Lets say instead of using stops to book your losses, you use stops to book your profits... Huh?

It is very simple... As has been said by another famous trader/ mentor, CUT YOUR PROFITS AND LET YOUR LOSSES RUN! If your stops are going to be hit anyway, why don't you allow them to make you money instead of losing you money?

This is exactly the opposite of the mantra every broker/ market maker drills into you. They make you believe that you will be safe if you cut your losses short and use stops to protect yourself. They make you believe that with some cool system you will consistently win more trades than you lose or win more money than you would lose by having the right risk/ reward ratio. These guys fully know that you will lose all your money eventually just like the other 95% of traders out there. You will be just another usual statistic if you trade like everyone else trades.

Now this is where gearing and money management really come in. If you use low gearing {1% of your account per trade} you can let the market swing very wide and very far against your position. If you now use a stop to take profits, it will eventually be triggered just like your stop for loss would have eventually been triggered.

Now look for possible turning points. I am sure you can find an indicator/ price pattern that does that. Only work on longer time frames, 4hr minimum, daily is good. Hedge your position, go long/ short at the same price with the same profit target both ways. You can also make your profit target bigger in the direction of the larger trend. Now your stops will definitely be hit no matter which way the market swings.

But, you might ask, what about open positions that really run away against you? No problem. As your account balance grows, you will still use 1:1 gearing. When your account balance keep growing by booking profits, the percentage drawdown of previous open positions with smaller lot sizes will shrink {in relation to total account size} because the current lot size you use now will grow too and so determine your bigger profits as well.

By using low gearing you consistantly book, say 1-5% profit on every trade. Your equity balance will fluctuate and your free margin balance will also fluctuate but at a relatively constant percentage of your total account balance. If you use larger gearing like say 5:1 and 10:1, your account might be wiped out because your margin will not be able to carry it if you have multiple positions open.

Now you have to think what is the reason for you trading? Is this a longer term investment strategy or are you suicidal? {I recommend you keep your day job, for now} By suicidal I mean, trying to scalp or using any other short term strategy that doesn't work in the long run and under various market conditions. Using longer time frames for this investment strategy is definitely better! It is a fact that when you close your account, using my strategy, in the end, that the negative open positions will then be closed as well and you will then book your first real losses.

This is not a big deal if your available equity has grown much larger than your opening balance when you close your account. I, for example, am currently growing my account by a minimum of 10% a week and this current week on the gbp/usd is up 23% so far. The power of accumulated growth is truly amazing! I have fine tuned this strategy to produce better results and started using it on a new account and I have so far doubled this account since 7 Jan 2008 {15 Feb today}.

I am not writing this to show off how brilliant I am, but to challenge the broker induced/ losing trader mentality that you have been taught that prevents you from becoming successful in forex.

If you can start with $1000 and grow it consistently over time, you will be able to show a spectacular return on your investment when you close your account even after taking the loss in the end from the accumulated losing positions. If you manage to make 10% accumulated growth per week on your capital over a year, your available equity in the end will be many times larger than your opening account balance. Work it out on paper and you will prove it to yourself.

The power of hedging is great. If, however, you only trade in one direction, {say the direction of the weekly trend is up} and you keep buying the dips/ possible turning points on a daily chart in the weekly direction and the market for some reason keeps going against you and you find yourself 1000p down, then you run the risk of wiping out your account because all your open positions will be negative and will grow until your margin collapses. By hedging every new position in this scenario, you keep booking profits on the way down and you can just wait for the market to turn around to go back up again and resume the weekly bull trend.

Now I am not trying to sell you a system and I won't give you my system either. I have suffered too much to just give it away. This is my intellectual capital and my trading edge. I have paid my dues to learn this game the hard way. I am sure you guys understand that. I do not care to prove myself to the skeptics among you so I will not post any of my results. You have to decide if you want to take me at my word or not. I merely want to make you consider what I wrote and to challenge you to start thinking out of the box. If you start working on it, you will find your own market beating strategy and have plenty of free time to enjoy your profits.

I have now become one of the 5% of traders who consistently win, without using stoplosses, and make good money.

Good luck

If you have any views about this post.. you are welcome to comment.

Trend Lines

2009-05-16T01:46:00.000-07:00

Trend Lines

Trend Lines Introduction
Technical analysis is built on the assumption that prices trend. Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.
.... read more

Trend Lines Angles
As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance (or decline) over a brief period of time. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level.
.... read more

Internal Trend Lines
Sometimes there appears to be the possibility for drawing a trend line, but the exact points do not match up cleanly. The highs or lows might be out of whack, the angle might be too steep or the points might be too close together.
.... read more

Spacing of Points
The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together. The most suitable distance apart will depend on the time frame, the degree of price movement, and personal preferences.
.... read more

Scale Setting
High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a large change in price.
.... read more

Trend Lines Validation
It takes two or more points to draw a trend line The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line.
.... read more

Conclusion
Trend lines can offer great insight, but if used improperly, they can also produce false signals. Other items - such as horizontal support and resistance levels or peak-and-trough analysis - should be employed to validate trend line breaks. While trend lines have become a very popular aspect of technical analysis, they are merely one tool for establishing, analyzing, and confirming a trend.
.... read more

Trade Management

2009-05-16T01:43:00.000-07:00

Trade Management

Money Management
Money management is a way traders control their money flow: in or out of pockets... Yes, it's simply the knowledge and skills on managing a personal Forex account.
There are several rules of good money management:
.... read more

Learn to use Stop Loss effectively
Every day hundreds of traders blame themselves for being so naive and trading without protective stops. Hundreds of others lose funds worth weeks, months, years of trading just only in one very unsuccessful trade.
.... read more

Margin and Margin Call
While Forex brokers allow traders to trade money ten times more than what's been actually invested, brokers always know that traders never lose money beyond their real investments. The warranty here is Margin.
.... read more

Forex Trading Tips
Tip 1.
Gamblers go to casino. All unproved, spontaneous actions in Forex trading — are a part of pure gambling.
Any attempt to trade without analysis and studying the market is equal to a game. Game is fun except when you are losing real money...
.... read more

Technical Intoduction

2009-05-16T01:41:00.000-07:00

Technical Intoduction

Price
The Fundamental Principles of Technical Analysis are based on the Dow Theory with the following main thesis:

1. The price is a comprehensive reflection of all the market forces. At any given time, all market information and forces are reflected in the currency prices.
2. Price movements are historically repetitive.
3. Price movements are trend followers.
4. The market has three trends: primary, secondary, and minor.
.... read more

Trend
Are you trading with a TREND?
To be consistantly profitable in Forex, traders should be able to identify market trends.
.... read more

Volume and Open Interest
Volume consists of the total amount of currency traded within a period of time, usually one day. For example, by year 2000, the total foreign currency daily trading volume was $1.4 trillion.
But traders are naturally more interested in the volume of specific instruments for specific trading periods, because large trading volume suggests that there is interest and liquidity in a certain market, and low volume warns the trader to veer away from that market.
.... read more

Gaps
An opening outside the previous day's or other period's range generates a price gap.
Price gaps, as plotted on bar charts, are very common in the currency futures market.
Although currency futures may be traded around the clock, their markets are open for only about a third of the trading day. For instance, the largest currency futures market in the world, the Chicago IMM, is open for business 7:20 am to 2:00 pm CDT. Since the cash market continues to trade around the clock, price gaps may occur between two days' price ranges in the futures market. There are four types of gaps: common, breakaway, runaway, and exhaustion.
.... read more

Pivot Points

2009-05-16T01:37:00.000-07:00

Pivot Points

Pivot Points Introduction
Pivot points are sometimes associated with difficulties for traders, especially for beginners. Today we will try to explain as simple as possible about Pivot point trading so that tomorrow you can confidently apply this knowledge to your Forex trading!
.... read more

Support and Resistance
Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up).
.... read more

How to use Pivot Points ? The Strategy
We are going to show you the way we trade Forex using Pivot points.
We calculate Pivot points on daily basis using daily charts and then use those Pivot levels on 15 minute charts — our main charts — where we will look for entries, stops and exits.
.... read more

Pivot Points Trading
Pivot point trading is a technique widely used among Forex traders, that allows to determine important support/resistance levels for the day which derived from the previous day's trading range.
.... read more

Tricks Pivot Point
Pivot Trick 1 — early bird gets all worms. Early hours are where all support/resistance levels are tested. Later the market usually makes adjustments only. Early hours start from the first minutes of the new day! Sleep in and you've missed it.
.... read more

Placing Support Resistance
Placing support and resistance lines is an art not a science. It will never be a science as long as humans are trading. Support and resistance lines are one of the most basic aspects to trading.
.... read more

Support and Resistance Zones
Because technical analysis is not an exact science, it is useful to create support and resistance zones. This is contrary to the strategy mapped out for Lucent Technologies (LU), but it is sometimes the case. Each security has its own characteristics, and analysis should reflect the intricacies of the security.
.... read more

Trading Range Support Resistance
Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. A trading range is a period of time when prices move within a relatively tight range.
.... read more

Your Guide to Successful Forex Trading

Does Failure Motivate You?

The Dow Theory-The Simplest Trading Method

Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

Bob Prechter: Bear Market Rally Is Over, Stocks Headed For New Lows

The November Month Issue of Currency Trader Magazine

The October Month Issue of Currency Trader Magazine

What kind of stop-loss order should a trader use?

The Man Who Broke Bank Of England : George Soros

September Month Issue of Currency Trader Magazine

The gambler’s conceit

Bill Lipschutz : Hall of Fame : Married to the Market

The Story of Peter Andreas Thiel: From Frankfurt to the World of Global Markets

August issue of currency trader magazine

July issue of currency trader magazine

Traders Prayer

The 10,000 Hour Rule

The 10,000 Hour Rule

“THE 23 WINNING TRADING HABIT OF TRADER

Things to avoid in Trading

Leverage the Killer

Leverage the Killer

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The reason why 95% of new traders consistantly lose money

Trend Lines

Trend Lines

Trade Management

Trade Management

Technical Intoduction

Technical Intoduction

Pivot Points

Pivot Points