eTalkForexeTalk Forex your full guide to forex world

Author: mutant dog

Source: MMG 

The more i read around, the more dishonest practises i see taking place. This taken from wikipedia sums up a lot of it quite well, definately worth a read.

A forex scam is a confidence game played in the context of the foreign exchange market against fairly unsophisticated “retail speculators.” The U.S. Commodity Futures Trading Commission (CFTC) which loosely regulates the foreign exchange market in the United States, has noted an increase in the number of these scams recently [1]. Complaints cited by the CFTC since the beginning of 2004 revolve around managed accounts [2][3], false advertising [4]outright fraud [5] [6] [7], and manipulation [8].

CNN [9] quotes an official of the National Futures Association as saying “Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically.” Between 2001-2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying “Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?”

The highly technical nature of forex scams, the OTC nature of the market, and, the fact that foreign exchange trading is fairly unregulated, also makes exchange rate manipulation or price spiking easy for scammers to commence.

Because of the technical factors mentioned above, the traders on the other side of the trade, or even regulatory authorities, will have an almost impossible task in proving that such manipulation has taken place. Partly because there is no central currency market, but rather a number of more or less interconnected marketplaces, provided by brokers and market makers.

The disadvantages of retail speculators

The foreign exchange market is a zero sum game in which there are many experienced well-capitalized professional traders (e.g. working for banks) who can devote their attentions full time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.

Retail speculators are almost always undercapitalized, so are subject to the problem of Gambler’s Ruin. In a fair game (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. According to the theory, any speculator who plays this strategy is effectively playing against the market as a whole which has nearly infinite capital and he will almost certainly go bankrupt. Any speculator - particularly undercapitalized traders who do not have any informational advantages - should understand why his trading strategy is superior to the above strategy.

The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade must be “resettled” each day, each time costing the full bid/ask spread.

According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) “Even people running the trading shops warn clients against trying to time the market. ‘If 15% of day traders are profitable,’ says Drew Niv, chief executive of FXCM, ‘I’d be surprised.’ ” [10]

Additional disadvantages when dealing with scammers

Forex scammers, posing as customer brokers, use the standard confidence game techniques perfected in bucket shops and boiler rooms.

The spot currency trades placed by retail speculators are made directly with the trader’s own “broker,” that is, the broker takes the other side of the transaction. Thus, many of spot trades never enter the open market and are subject to reorders which are issued to protect the profit margin dealing desk brokers impute in their fixed spreads or to “hedge” unbalanced trades.

When dealing with scammers, retail speculators suffer from at least 5 additional disadvantages:

* They have no competitive prices to trade against, i.e. they must accept their broker’s price or not trade.
* The broker may show them actual prices from the forex market, but only with several minutes delay. Thus the broker has better information to trade on.
* They are sometimes encouraged to over-leverage their trades, thus almost insuring that they will “receive a margin call” allowing the broker to close any open trade immediately, at the broker’s price.
* The brokers work as a team of several people as the forex market trades 24 hours a day. An individual trader will not be able to monitor his trades (and his broker’s actions) for 24 hours a day. In some cases, the brokers may be aided by computer programs, which have near-instant reaction times and never make mistakes or take breaks.
* They look to the brokers for training in the foreign exchange market and may actually buy their trading advice.

The use of high leverage

By offering high leverage, the broker may encourage traders to trade extremely large positions. This increases the trading volume cleared by the broker and increases his profits, but increases the risk that the trader will receive a margin call. While professional currency dealers (banks, hedge funds) never use more than 10:1 leverage, retail clients are offered leverage up to 400:1.

Often traders will have a profitable first trade (as manipulated by the broker) in order to increase his confidence in the broker and encourage the him to “invest” more money. Next, due to the use of too high leverage (often combined with rate spiking) the traders will receive a margin call, telling him that he must deposit more money or his trades will be closed out. The retail FX brokers will do anything to get the customer’s money deposited with them, since eventually all this money becomes theirs.

The use of stop loss orders

Forex scammers will often encourage their clients to trade on margin and set stop loss orders, which allow the broker to close out the trade almost at will during busy markets at prices set by the broker. As the client’s trade never makes it into the open market, the loss generated when a stop loss is triggered becomes the scammer’s gain.

Trade prices are easily skewed one way or the other, depending on the retail trader’s position, which is known by the scammer. Traders can be encouraged to take risky positions just before major economic announcements. If all else fails, the broker can quote extreme prices (known as spiking) to trigger stop loss orders while the client is at work or asleep.

In any case, all of the trader’s money will be transferred to the scammer without any trade being made in the open market, and without any economic risk being created or destroyed.

If you want to be a successful trader, you must make sure you do not deny reality in any phase of your trading. You cannot deny losses, price direction, mistakes you make, being undercapitalized, or a whole host of things you would rather not think about.

Many traders think the best way to deal with unpleasant ideas, events, or personal character flaws is to shut their eyes and pretend they don’t exist.

Let’s face it, trading can be difficult, at times very difficult and it’s essential that you focus on reality. Denial takes your focus away from the very thing you need to be concentrating on—the action of prices—regardless of time frame. Your mind must be clear so that you can look at the market and see what is really there.

The way I learned to handle denial was to simply write down and confront all possible ideas I had trouble accepting. Some thoughts I could fix and others I just had to accept. But facing the truth of what and who you are is the only way to deal with denial. You have to realize that for the most part the only things you can change are in yourself. Other things you just have to accept. You have to accept the reality of slippage, for example. You have to realize that indicators often give false signals and that there is no magic moving average nor is there a magical oscillator.

You have to realize that some winning trades are just lucky trades and had nothing to do with your skill as a trader. By the same token, you will also experience the bad luck of having prices make a sudden and unexpected move against you.

Rather than wasting your time in denial, concentrate your mental energies on improving yourself and improving your trading skills. Work at improving your abilities to observe. Realize that you have to survive the markets in order to benefit from the experience of the markets.

There is really only one true problem with your trading—that problem is you! However, the problem manifests in two ways:

1. Market conditions have changed and you haven’t.
2. You are no longer doing what you did when you were winning. You have drifted. You are not consistent.

The first aspect of the problem is due to poor observation. The market has changed and you haven’t changed with it. Poor observation stems from a variety of lesser but very important problems. You have married a market, or a trade. You may have allowed your ego to get the best of you and you are no longer humble. I’ve named just a couple here. I challenge you to think about the many things that can distract you from seeing when market conditions have changed. Make a list of those things and confront them.

The second aspect of the problem stems from inconsistency. Here again, you should make a list of those things that cause you to be inconsistent.

“Perhaps I was a good trader at one time, but the market conditions have changed and I may not be able to keep my reputation up.” This is an issue that all traders face at some point: keeping up their reputation. When one makes big profits trading, it’s tempting to tell neighbors and friends how well you are doing. It’s great when you’re making the big profits, but keeping up appearances is often the downfall of even the most astute trader. Again, denying your need for fame and glory, or pretending that you can maintain an unrealistic reputation, will use up your psychological energy and interfere with your ability to concentrate. Huge profits tend to go to the humble, so try not to build up your reputation. Admit that you will have difficulty keeping up appearances and just quit doing it.

One fact that traders wrestle with continuously is the notion that, “Trading is not a legitimate job.” Many traders struggle with the legitimacy of trading. Some traders find that they can simply remind themselves, “Trading provides liquidity and helps control prices.” Other traders, however, think this isn’t good enough and need to find more meaning in their daily trading activities. For example, they may focus on how trading helps them provide for their family, or may plan to donate some of their profits to charities they view as personally valuable. The point is, don’t deny the possible truth to such ideas. You will be better off acknowledging and working through them, and then just moving on. Denying they exist, on the other hand, will use up time and energy.

Unacceptable beliefs tend to lie in the back of your mind. They remain there, lurking, and when you are vulnerable, they can powerfully influence your outlook. So acknowledge unacceptable ideas, and once you admit the possible validity of such ideas, you will neutralize their potential influence. This will free up limited psychological resources, allowing you to focus all your energy on trading profitably and consistently.

Joe Ross, trader, author, trading educator is one of the most eclectic traders in the business. His 48+ years include position trading of shares, and futures. He daytrades stock indices, currencies, and forex. He trades futures spreads and options on futures, and has written books about it all - 12 to be exact. Joe is the discoverer of The Law of Chartsâ„¢, and is famous for the Ross hookâ„¢ and the Traders Trick Entryâ„¢.

http://www.tradingeducators.com/

by Rob Booker, March 2006

Spock the Trader

Do you remember Spock from the television series Star Trek? I do. I remember him because he was always so calm and collected. This guy never seemed to get frazzled. Nothing bothered him. You could cut out his heart and he would say something like, “That is no logical,” whereas most of us would say, “Stop cutting out my heart.”

After all, this was the guy who said:

“Emotions are alien to me. I’m a scientist.”
–Spock, “This Side of Paradise”, stardate 3417.3

Of course, Spock would make a great trader, would he not? He would be able to take a 500 standard lot trade and sit back and calmly evaluate his options, and have a slice of Targ or Bark or whatever it was that Vulcans ate.

It seems that there is a myth that has been heavily promoted throughout the world of trading – the myth that successful traders lack emotion.

This is a load of crap. Emotions are central to successful trading. Spock will show us why.

Lesson #1:Use Your Fear

Everyone is afraid of something. If you think that you are not afraid of anything, then bully for you. You are dead. Hope you enjoy the afterlife.

For the rest of us humans, there are fears. And traders have some of the most rational fears in the entire world. Most traders, after a significant losing trade, become fearful of putting on more trades. We start to wonder how long it will be before we lose our entire account. We do some math in our head and we realize that if we keep losing, we’re going to have to get a job, or dip back into more savings. This kind of fear is not productive.

But the truth of the matter is that we cannot avoid it. We can’t get rid of the fear entirely.

You can overcome – or deal with – this fear by preparing better.

— Spock, “Space Seed”, stardate 3141.9

How much time are you spending on your preparation every day? Are you waking up, switching on the computer, and taking trades?

Don’t do that anymore! You need to wake up and instead of going straight to the computer, try some of the following things to help you get into the right frame of mind:

1. Meditate or pray.
2. Read your trading plan (you do have one, right?)
3. Call your mother?
4. Eat a piece of fruit
5. Read a chapter from a book on trading
6. Sit and quietly think about a trade that went very well, something recent, and picture in your mind doing that again.

When you have done that, make sure that you spend time getting familiar with where the market is. Are trades that you planned the night before ready to execute? What if the trades have opened already?

Consider following only one currency pair, especially early on in your career as a trader. If you work full time this is even more important. You can’t follow 5 pairs every day. You don’t need to and it’s not productive. When you focus on one currency pair, and you learn everything there is to know about that pair, you reduce the anxiety associated with trading.

Most of us are frightened by what we don’t understand (trading is full of surprises, too). You can reduce your fear substantially by becoming so familiar with a currency pair that you understand how it moves, when it moves, what economic reports move it most, what moving averages work with it best, and so on.

Don’t skimp on the time that you give yourself to get familiar with a currency pair.

Consider the following situation: you wake up to an alarm that goes off when a trade you planned the night before is trigged. What do you do? Generally, you rush to the computer and you start trading.

But let’s slow things down a bit. Even if the trades you have prepared the night before have already opened, please take just 30 seconds and prepare yourself mentally. Sit quietly for a moment. Take a deep breath. Picture in your mind how you will react to seeing a profitable trade, or a losing trade. Imagine yourself handling the trade with poise and confidence, just like Spock would expect you to do.

Lesson #2: Channel Your Anger

Have you ever been angry after a trading mistake? That’s good. We can use that to your advantage.

“Where there’s no emotion, there’s no motivefor violence.”
–Spock, “Dagger of the Mind”, stardate 2715.1

What, no violence? Trading gives us plenty of motives for violence!

Please get angry when you make a stupid mistake. If you violate your trading rules, get angry. Get angry if you plan to get out with 25 pips of profit and then, for whatever reason, you let the trade go (thinking you can get more) and you then lose 25 instead of making 25. That is not excusable.

Even get angry at a loss. Yes, that’s right – go ahead and get as angry as you want. Stomp around. Yell some. Grit your teeth. You should not be happy about losses, and there is no point to saying, “Oh, well, losing is part of the game, and I need to lose in order to learn. In fact, when I lose, I learn a lot.”

Bull crap.

Go ahead and get angry. But here’s the key: Channel that anger into applying yourself more aggressively to learning how to trade. Ask yourself how you can do better. Write down what you did right in the trade, and what you did wrong. Talk to your trading partner, coach, team member, or dog. Discuss what you need to do to improve NOW.

Losers excuse their losses as learning opportunities. It’s okay to say that you learned from your mistakes. But losers keep making mistakes and then saying that they are learning. That is stupid.

Make better trades. Learn from your profitable trades.

Stop excusing yourself when you do something stupid in a trade.

Take responsibility.

The problem for traders is not that they have emotions (that would be an unsolvable problem). The problem is that most traders succumb to high emotion, and then they toss their trading plan into the toilet and start making terrible trades. You have to use your emotions to boost your dedication to creating and following a profitable trading plan.

Lesson #3: Don’t Trade Alone

You should trade with a team. Trading with a team – whether it’s one person or 5, can help you.

“No one can guarantee the actions of another.”
– Spock, “Day of the Dove”, stardate unknown

That’s another worthless quote from Spock. What the hell is he talking about? I think that trading in a team can help you make sure that you use your emotions properly. When I trade in a team, the others keep me grounded and as stable as possible. I get angry, and they help me channel my anger.

I get cautious after a loss, and they help me plan my way through that emotion.

When you trade as a team, or plan trades as a team, you are accountable to live up to what you promised. If you say you are going to exit at 25 pips, and you don’t, then you have to face the team. If you say you are done trading for the day, and you take more trades, then you are going to have to explain yourself to the team.

As part of my 1 on 1 training, I set forex traders up into teams – and they find that they are able to focus less on the emotions of trading and more on making good trades. In fact, working with a team has enabled some traders to completely avoid some of their biggest emotional weaknesses.

Lesson #4: Greed Kills

– Spock, “Bad Spike”, stardate unknown

Greed will tempt you to make a deadly mistake:

Overtrade

Many traders keep trading because they are addicted. Many keep trading because they want to get revenge on the market. The only good reason to keep trading is because you see that there is an opportunity to make more money. Never trade because you are in the mood to trade.

If you want to have a good time and don’t care about your money, just light your Euros or Pounds or Yen on fire and have a weenie (hot dog) roast. That is much more fun, you can invite friends over, and at the end of the day you will have more to show for it. And you might even save some money.

How do you know the difference between taking lots of good trades and overtrading? In other words, how do you know when you are on a roll vs. getting yourself set up for disaster? Or how do you know when a winning trade is coming soon even after a few losses?

I ask myself a few simple questions:

1. Am I following my tested trading plan? If not, how can I have a reasonable expectation of success? Unless I am testing a new system on a demo account, why would I trade outside of my plan?

2. How many trades have I taken today? If it’s more than I usually take, then why do I need to take another one?

3. What’s the expected gain or loss from this next trade?

The most important questions there are in #1. Let the market tell you to trade. If your trading system is tested, and the market shows a trade signal, then take the trade. Period. If you are considering a trade outside your plan, then stop yourself and get away from the computer.

Consider also the number of trades you’re taking. Many traders start overtrading and never stop to realize it. Stop every morning or evening while you’re trading and simple add up the number of trades you took – is it way above average? That is probably not a good sign.

(Spock, shown below checking on a long GBPUSD trade)

Lesson #5: Become an Observer

“Who the hell made these glasses? I can’t see a thing in them. This sucks. Does paypal do refunds?”
–Spock, “Bad Ebay Purchase”, stardate unknown

Learn to watch the market without trading. Learn to observe yourself, or at least learn about your own feelings about the market.

First, the market. Watch the market without trading. Get used to following the movement of a currency pair – one currency pair – every day. You will be able to trade a pair more successfully if you know more about it. You will be less anxious about your trades if you are really familiar with what the market has been doing over a longer period of time.

Many traders don’t have enough patience to do this. They want to trade NOW, TODAY, and they have to go to work in 10 minutes. While it’s certainly possible to know enough about the market to trade 10 minutes before you walk out of your house … it’s not recommended. You need to give yourself time each day to get familiar with the past, present, and possible futures that a currency pair has.

Consider the following, especially if you are a beginner. Some of this is review, but it’s important stuff:

1. Never trade live until you have traded on a demo account for at least 2-3 months. Hopefully longer.

3. Consider only following one or two pairs at the most if you trade alone. If you trade in a group, imagine how much you can learn and know about 1 currency pair if it is your main focus.

Next, think about how you can learn more about yourself. Most traders are not going to spend a lot of time thinking about their own emotions. By reading this article, you have taken a step to at least try to learn about yourself and use your emotions to help you trade more successfully. That’s an excellent first step.

But you’re not done yet. For as long as I’ve been trading, I still sit quietly every day before I trade or plan my trades, and I make sure that my mind is as peaceful as possible before I start to risk my money.

Here is an emotional quiz you can take now and as often as possible:

1. Do you trade right after sitting down at your computer?

6. Think of your last excellent trade. What was it like? Why was it successful? What do you have to do in order to set up another trade like that?

You might think it’s weird for me to talk about what you eat or what your relationships are like. The fact of the matter is that if you want to be the best at any career – you need to control your emotions and make sure that you are setting yourself up for success.
Do you want to be the best you can be at trading? Then take an inventory of how you handle your emotions. And do everything you can to use your emotions to your advantage.

One thing that I try to do is to often take the quiz above, or answer a set of questions like it. You can do the same. You don’t have to do it at the same time every day. But here’s a possible strategy for you:

At a different time each day, stop yourself while trading and answer a few questions about your emotions.

If you don’t like the list above, here’s another version:

Here is another way of saying all of this: you can either view yourself as the problem (not good), or you can view your problems as opportunities to improve yourself (good). If your emotions are impeding your trading success, it’s easy to criticize yourself and think and act as if you are the problem. But that’s not the case! You have a problem. You are not the actual problem.

You have control over how you feel. And if you seem to lose control over your feelings, you have the power to do something about it. Make that decision.

When you take a step back and view yourself and your habits, and your challenges, and then you seek to find and implement solutions to your challenges, then you are going to be more successful.

Rob Booker was a child prodigy who grew up to become one of the pre-eminent scientific minds on the planet. The most significant project of his career was the development of a spacecraft for an interstellar exploration program.

Unfortunately, Rob had made a serious miscalculation in the amount of shielding his spacecraft would require travel through Earth’s Van Allen Belt and beyond. As a result of an unexpected solar flare, he was exposed to an unusually high bombardment of cosmic rays.

Having to abort the mission and return to earth, Rob found that his physiology had been mutagenically altered by the cosmic rays, endowing each with incredible powers.

I trade for a living. There is no better way to make a living. Trading is what I love.

I also train others to trade for a living. I have worked with traders on nearly every continent, in nearly every country that we learn about in school.

At my Web site (http://www.robbooker.com) there is a lot of free stuff for traders. If there’s any way that I can help you, from training, to building a system, to just answering questions, let me know. I answer every email I receive. It might take me a few days, but I really try. As much of what I can offer, I offer for free. Some of my services cost money. I hope to hear from you.

Originally published in Stocks & Commodities, February 2006 Issue.

The System Behind The System
by Merlin Jeffries, February 2006

When I was a novice system developer I would get excited by every marble-smooth equity curve I stumbled upon. Incredible backtest result in hand, I would start trading my systems with real money, only to find they were big loser in real-time. What happened?

What happened is that the systems I was finding, while excellent at predicting the past, were deficient when it came to predicting the future. This variety of trading system was almost impossible for me to distinguish from the future-predicting kind; until, that is, I started religiously following a process for developing my systems.

The Means Justify the End

In the world of system development the means justify the end. One can not judge a trading system based upon a backtest result (the end); one must instead consider how the backtest result was achieved (the means). The means, or the system behind the system, is a strategically designed process for developing trading systems, and it’s a trader’s main defense against being fooled into putting real money behind a hindsight based system.

The System Behind the System

Here I will present my system, or process, for developing mechanical trading systems. Hopefully it will give the reader a few ideas for developing their own.

First comes the often undervalued administration work. For each system, I create a “project” to organize my efforts. The project gets a name and identification tag. This comes in handy when I want to look back on my past research.

For each project, I move through the same seven steps:

Step 1 – Conceptualize

The first step is to write down the concept and initial rules for the system. For example, if I am researching a simple breakout system, I may write:

concept:
A break of the 20-day high or low signifies the start of a trend.

rules:
ENTRY LONG: buy when price breaks the highest high of 20 days
ENTRY SHORT: sell when price breaks the lowest low of 20 days
EXIT 1: stoploss
EXIT 2: profit target
EXIT 3: max hold period

Next I will identify my system’s degrees of freedom (DOFs). This will come in handy later. In this example, there are three DOFs to declare:

DOFs:
1. stoploss size
2. profit target size
3. max hold period days

I could also consider the “20 day” breakout point to be a DOF. However, in this example I will assume that 20 days is “hard coded” and can not be changed during the project. If I may want to optimize or change any certain aspect of the system over the life of the project, I will declare it as a DOF.

Step 2 – Gather Data

Here I gather the market data that will be used to code and test the system. Following the example, I may decide that my total data pool will include the following:

EURUSD / 05.1998 – 08.2005
USDJPY / 07.1999 – 08.2005
EURGBP / 05.1998 – 08.2005
AUSUSD / 05.2000 – 08.2005

I like to divide my total data pool into four categories:

1. Build Data
This is the data I will use to program/code the system. I don’t need much data for this, just enough to ensure that my code is executing trades as designed.

2. Test Data
I use this data to find my system’s most robust DOFs through chart study and optimization.

3. Walkforward Data
This data will be used to determine if my system can predict the future.

4. Unseen Data
This data offers one final, “honest” test of the system’s ability to predict the future.

How a trader divides their data is more art than science. General guidelines I use are 5% Build Data, 40% Test Data, 40% Walkforward Data, and 15% Unseen Data. I also like to spread a specific symbol (i.e. EURUSD) among at least three data categories.

Step 3 – Code
(data used: Build Data)

Next I write the programming code for the system, and I use the Build Data to check that the code is executing trades as intend.

More times than I’d like to admit there was a flaw in my early code that squandered my entire project. I’ve learned it’s better to take an hour closely inspecting trades than to waste two days researching and testing the wrong system.

Step 4 – Refine
(data used: Test Data)

Using the Test Data, I optimize my DOFs until I find a set that show desirable results. I don’t worry much about the system becoming over-optimized, because if that happens it will not survive the next three steps.

Some software applications, like TradeStation, allow traders to run automated optimizations for the DOFs. I like to lightly use this feature to get a feel for the range of DOFs that will be profitable. If I try 50 variables for each of my DOFs, and 40 yield positive results, this is a good sign that the system is robust. Traders may want to instead manually plug in variables for the DOFs until they stumble across a set that seems to work. I like to take this approach as well.

The main purpose of this step is to study the system on the Test Data and choose the set of DOFs that are the most robust. Continuing the example, suppose I choose the following set of variables:

DOFs:
1. stoploss size – 30 ticks
2. profit target size – 40 ticks
3. max hold days – 22 days

Step 5 – Test
(data used: Test Data)

This step is simple. Using the DOFs from Step 4, I run a backtest on the Test Data, then save the backtest report for reference. I then carefully study the backtest report to determine if results are good enough to be traded in real-time:

> If I would not be willing to trade the system, I loop back to Step 4 to re-refine the system.

> If I am sure I would trade the system in real-time, based on the backtest results, then it’s on to the next step.

Step 6 – Walkforward
(data used: Walkforward Data)

This is where I find out if the system has promise. Without changing the DOFs used in Step 5, I run a backtest on the Walkforward Data:

> If the resulting backtest result is not profitable, or does not have tradable attributes, I will loop back to Step 4 and come up with another set of DOFs (re-refine).

> If the resulting backtest looks tradable, I cross my fingers and move to the final step.

Step 7 – Unseen Data
(data used: Unseen Data)

The final step is to backtest the system on the Unseen Data. I like to call this step “the moment of truth” because it’s quick yet awfully significant.

> If the backtest result is negative the project is over. All the data has been spoiled and any further efforts will be tainted with hindsight. When I reach this point I usually let out a sigh and mumble something about how the life of a quant isn’t all it’s cracked up to be. Unfortunately this is the way most of my projects end.

> If the backtest result is positive, a group of angels fly in my office and circle my monitor singing “hallelujah!” By passing this step, there is a good chance that the system has the ability to predict the future, and it will most likely end up in my portfolio.

The Importance of Unseen Data

“Unseen” data is nothing more than a second set of Walkforward Data. I added this aspect to my process after becoming frustrated with the notion of having only “one shot” at getting the DOFs on the Walkforward Data right before having to abandon the system.

The Unseen Data gives considerable flexibility to my process. I’m able to refine, test, and walk the system forward a number of times without contaminating all of my data. I am always left with one final “honest” test of the system.

It’s worth noting that many of my projects never reach Step 7. It’s perfectly normal to loop through Step 4-6 without ever having a tradable result on the Walkforward Data. After five loops through Step 4-6, the Walkforward Data can become extremely contaminated with hindsight, so much so that I can no longer trust the result obtained from the data. When I reach this point I will usually end the project, never officially making it to Step 7 (although I may still run the system on the Unseen Data for kicks).

It’s a Hardnock Life

The hard-to-endure truth is that I may do 30 projects and never find a good result on the Unseen Data. But this only gives me confidence in my process. After all, finding a robust system is truly a rare event for even the smartest system developers; I would have to question any process that allowed me to trade every system I code.

The key to a great development process is that it keeps hindsight out of the final judgment call of whether or not to trade the system in real-time. The better the trader’s process, the more failures the trader will endure. This is just one more tragic condition the trader’s must burden. The brighter side of having a good development process is that the trader knows that when they go to trade a system they have a good chance of making money, and that should trump everything.

FF;_______________

About the Author:

Merlin Jeffries is a professional trader and a moderator at Forex Factory. He can be contacted at support@forexfactory.com.

Originally published in SFO Magazine, July 2005

Maintain Your Mindset: Using the Three R’s & Positive Thinking
by Linda Bradford Raschke, March 2006

I have been a professional trader for 23 years and am quite sure that my experiences in this business parallel those of many, if not most professional traders. I experience both successes and failures and periods of both satisfaction and frustration. Like others, I have had to stretch and grow as markets and products have changed over the years. The markets continually cause me to reaffirm my values and reflect on my own self-identity, and even after all these years, I keep vigil against fear and doubt. Thankfully, I am blessed with the knowledge of how powerful a tool positive thinking can be and with the ability to implement this tool on a daily basis.

When the markets are closed, I divide my time equally between preparation for the next day, market research and working on my own mindset. Part of this includes reading a paragraph from a motivational book each night, by studying sports psychology or working on the physical elements, such as exercise, nutrition and diet that support my ability to concentrate and focus during the day.

I wish I could say there was a point where I felt like I had “arrived.” More often than not, however, I feel as though I am not even close to reaching that point. I have come to accept the fact that this business is nothing more then a continual process to be taken one day at a time like so many other endeavors in life. For me, the term “trader” has become synonymous with “lifestyle.”

I have learned that everything I do with my lifestyle to support the “trader” function equally supports a separate self. Much of it has to do with eliminating stress, anxiety and burnout. I have experienced all three of these many times in my career, and each time it affects my trading performance. My more stressful life experiences are not so different from many people’s…death, divorce and taxes. I juggle many balls at once. I trade, run a business, have a responsibility for ten employees and am a single mom. I shoulder responsibilities as head of my household, and I maintain a large property. In addition, I strive to excel at outside interests and hobbies.

I wish I could say that I was an extremely efficient person, but I am not. I dilly-dally and procrastinate with the best of them. However, I have become a master at beating stress and anxiety and dealing with the mental side of trading. I figure that if I can take care of this one particular area, the numbers will take care of themselves. This has worked for me each year and kept me in the game.

So, allow me to share some of my personal experiences, routines and rituals for handling some of the more challenging psychological aspects of trading. Sometimes traders can feel alone in their experiences – particularly when stupid errors and large losses occur and during long, flat periods. Believe me, I have made every mistake in the book, have suffered through many sleepless nights and have had conversations with the higher powers that be. Through it all, I have never wanted to leave the trading business. I don’t love trading and I don’t hate it; it is just what I do. I love working.

Some people are lucky in knowing their game right away, and I am one of those people. I know the style of trading with which I feel comfortable. I will never be a long-term trend-follower and will never be one of those who will easily interpret fundamentals or long-term major trend changes on a macro level. I would never feel comfortable running a strictly mechanical system. And I do not want to trade in a way that depends totally on my reflexes. Remember that a trader can’t begin to improve his game until he defines exactly which game he is playing. At this stage in my career, I know my abilities, my strengths and weaknesses. I try and exploit my strengths instead of becoming something I am not nor ever will be. This is what you should be trying to develop as well. Know thyself.

OK, knowing my game is helpful, but just because I know my game does not mean that I will be successful at it. There are numerous steps that must be taken outside of market hours in order to do well during the trading day. I can go through the motions of preparation, organization and outside research. But, I still do not think these are the things that guarantee success. The great equalizer for me is that I believe I will succeed. I have brainwashed myself on a daily basis into believing I will succeed, especially during periods when inevitable doubts have crept in. A positive mental attitude is a form of religion to me.

If a trader has a positive attitude, it allows him to believe that by focusing on the process – the results will take care of themselves. This involves an element of trust. Sometimes it is like diving off a high dive and knowing that if we follow correct form, we will hit the water just right and have a beautifully executed dive. What some people find hard to accept is that occasionally our form will be off, and it is going to hurt when hitting the water. If doubt or negative thoughts creep into my mind when I dive off that platform, I am doomed. I have so many tricks for eliminating the negative self-talk that the positive thinking has become purely habit.

Self-talk is the way that we speak to ourselves, and sometimes negative thoughts are very subtle. For example, if a trader says to him or herself, “I have to do well” or “I need to make X amount of dollars this month,” this type of thinking automatically creates stress and anxiety. Anxiety causes emotional decision making during the trading day. Emotions invariably lead to losing trades.

Eliminating negative thoughts is a process. First, become aware of when you are thinking negatively, and recognize that you can choose to refocus your thinking pattern. Simply rephrasing “I have to do well” into “I can do well” is a step in the right direction. The first phrase places demands upon performance, while the second phrase empha-sizes confidence in your abilities.

Second, interrupt mental thoughts by changing your physical state. Clap your hands, snap your fingers or stand up out of your chair.

Third, refocus your thoughts on the process at hand in order to replace worry, doubt or anxiety. “I can trust myself to make the right decisions today.” “I can take advantage of the opportunities as they unfold throughout the trading week.”

These processes seem simple enough, maybe even intuitive, yet they are probably not as intuitive as one might believe. Positive thinking is something that takes practice.

I cannot emphasize strongly enough how important the power of positive thinking has been in my own trading career. It has allowed me to take every fiasco that has happened in the market place and convert it into a learning experience. I tell myself that what has happened occurred for a reason; then, I must find a way to convert, just as in a sport. Consider the tennis player who goes on a losing streak during a match and drops six games in a row. Things are looking rather bleak to the spectators. However, the player manages to pull off a winning shot or a killer serve. And sometimes the other player makes an unforced error. Top athletes will seize one small victory and convert that momentum to their favor. This happens in team sports as well, such as football, where a turnover provides a new burst of momentum that carries the formerly losing team to a win.

It is no different in trading. Reframe the negative experiences into positive ones, and find a way to learn from them. For every mistake I make, I tell myself that it is a good thing that it happened now so I could learn from it…instead of when I am trading even larger size in the future. I thank the market for bringing any of my weaknesses to my attention so I can learn and improve. If market conditions change or the environment stops favoring my game, I tell myself that this is a great opportunity to do research and find new techniques. All of my best research has come following a drawdown.

There is a fine line between “working hard” and burnout. I have learned the hard way about setting boundaries and defining my limits. In the past, I chose not to acknowledge that I had any limits, and the result was a major compromise of my immune system. It is better to recognize when it is time to step back a bit, instead of waiting for deteriorating health to take its toll or being faced with a major trading loss. Most traders know when they are making mistakes. But, when a trader is burned out, he or she is not able to react properly to correct mistakes. It is almost as if the subconscious is saying – “This loss is going to get so big that it is going to force you to take a break from the markets.”

Aside from the physical symptoms that can indicate burnout, other signs include increased irritability and anxiety, forgetfulness and inability to concentrate. A trader is more likely to take greater risks when burned out. Procrastination, fatigue, neglecting to do the proper preparation the night before, or basically turning a blind eye towards current position is often the next stage. When someone is burned out, they are likely to increase their consumption of coffee, cola or alcohol. Ultimately, burnout can lead to thoughts of “throwing in the towel” – quitting the business altogether or chronic depression.

The main strategy for avoiding burnout is to lead a healthy and balanced lifestyle. This can include daily exercise, proper nutrition, outside hobbies or activities, periodic vacations or even taking just one day on the weekend to go on a “field trip” and enjoy a change of scenery. Educational strategies include attending workshops or seminars, joining a professional organization, reading trade journals or books on sports psychology or motivational subjects.

Sometimes changes to the work environment – something as simple as rearranging the office – can make a difference. Finally, some type of support system is important – a close friend, fellow trader or counselor in whom you can confide. Each time I have had a particularly challenging period, I feel better after confiding my situation to a friend or fellow trader. After all, we all have similar experiences at one time or another. Losses and errors are part of the game. Talking about them with others helps us put our normal human weaknesses in their proper perspective and allows us to move on.

Let me leave you with the three “R’s” I use as a way of maintaining a mindset and keeping focused: record keeping, rituals and research.

Record keeping is the departure point that carries an endeavor beyond just being a “hobby” to taking the next step towards “professional” status. At the end of each day, I log statistics such as breadth, volume, trin and put/call ratios to name just a few. I have been doing this since the first day I started trading. Once upon a time, I updated charts by hand each night because the charting software we have now did not exist. For the past 15 years, I have logged by hand the closing price of 25 different markets, in addition to momentum readings and a few other notations. If I do not log my numbers at night, I do not trade as well the next day.

During the day, each trade is written down along with the ticket number, times executed and fill prices, along with the name of the executing broker. This is essential for reconciling any outtrades the next day and ultimately can save a great deal of time when an error does occur. I also write down my available trading capital each day along with current open positions.

When using electronic platforms, never take it for granted that the trades will hit up correctly the next day. The platform that I use keeps an accurate log of all trades I make, so I do not actually write these down, but save the log files instead.

Compared with many other businesses, trading and markets can seem a somewhat abstract arena. Activities such as record keeping help me feel more productive and in control of my business.

As much record keeping as I do, I do keep statistics on my trading performance, such as win/loss ratios, average-win and average-loss. I find that this will become a source of anxiety or stress to me. Instead, I monitor my equity curve and how I am doing on a month-to-month basis instead of on a day-to-day basis. Why? Sometimes it’s easy to get too excited about looking at the net profit after a large winning day. Large wins can do just as much to tamper with an even mindset as large losses.

Routines and rituals are excellent tools for eliminating emotions – especially those in the doubt, fear and anxiety category. Though I personally do not have any particularly titillating rituals to share, I find that writing things down is particularly helpful for me. I write out my trading plan for the next day after the close each day. During the trading day, I will jot down swing highs and lows as they are made throughout the day. Years ago when I started out on the trading floor, I watched many of the better traders sketch out point-and-figure charts or swing charts by hand during the trading day.

Physical and mental routines are the key to building both confidence and consistency. I can’t say enough about the importance of this area in my own business. It is not just the ability to concentrate, but also the focus of our concentration. It does no good to concentrate on the wrong things. Much of what I am doing during the day is simple observation. But I have a very specific routine and ritual for what and how I observe things during the day.

First, I concentrate on monitoring just a few relationships. Though I have built up my ability to process a large amount of information, I am still subject to “brain-fry” like everyone else. If I try to do too much or trade too many markets at one time, I am asking for trouble. I have specific times of the day when I note certain relationships. I have a limited universe of stocks that I watch. I have three main patterns that I watch for in the cash commodity markets. So, in this regard, I am a classic tape reader, lying in wait for my particular technical conditions or market cues. This is my market routine; you may have another that suits you better.

Outside of market routines, there are personal life routines. For example, I try to wake up at the same time every morning, take my nutritional supplements and eat the same breakfast. This helps me get into the zone or on autopilot before the markets open. These mental and physical routines help me maintain my concentration and keep my mind from wandering. If they are broken during the day, it’s easy to become vulnerable. I continually guard against outside distractions and hat can be handled at the end of the day has to wait until then.

Still, unforeseen things will always happen during the day to any trader, no matter how dedicated he or she is to keeping the “noise” out. One day, a neighbor decided to transplant some huge fica trees in front of his house. A giant digging machine with a claw that had a radius of ten feet sunk deep into the ground and pulled up all the neighborhood phone lines, including our T1s. It took 24 hours to fix. These things are guaranteed to happen whenever you have your largest positions on, and it happens to each of us.

By the way, at the end of each day, I consider my number logging to be just one more essential ritual to help me forget about any unfavorable events that occurred during the day, whether it’s the fica transplant disruption or an unforeseen family emergency.

Research is an integral part of my business, and as a trader it should be an important part of yours, too. Research is a process that never ends. I strongly believe that if I do my own research, I will always have an edge over someone who does not.

Research is important, even if a trader already has a successful method of trading. Anyone who has been in the markets for a while will attest to the fact that market relationships can and very often do change. Thus, research gives me confidence that there is an edge to my approach to trading. I continuously update my research to keep that confidence level high. Research constantly reminds me that trading is a game of probabilities and averages and shows all of the ways that a signal or pattern can fail.

Please remember, research should never be done to validate a personal bias. This type of research too often draws conclusions based on a limited sample size and will usually break down over time. I place very little value on research results generated on a sample size of less than 200 occurrences.

Each day that I trade, I constantly remind myself of how far I have come. It would be so easy for me to pick apart my own performance each day. Instead, I go out of my way to make note of the areas where I have improved.

Yes, old dogs have to learn new tricks. I look at how my skills in using electronic trading platforms have improved. For so many years, I simply picked up the phone and called down to the pits. The first two years that we started using an electronic platform, I simply could not execute profitably with them. My brain would short circuit with the extra steps required for placing an order. The only way I could trade was to have someone else in my office do the execution while I called out the orders. I felt pretty silly not being able to execute my own orders. I tried a number of different trading platforms before I found one with which I felt comfortable. There was definitely an educational process involved in figuring this out.

Trading is really no different than most sports. I just try to stay in the game mentally. I know that my unforced errors decrease as my market preparation and experience level increases. I convert emotions or frustrations into research or better market preparation. I know my game and work on eliminating more marginal trades. I know that focusing on the process will help the outcome take care of itself. In the end, though – no matter if I work 40 hours a week or 70 hours or 100 – I will not be successful unless I believe in my ability to be successful. The power of positive thinking, teamed with hard work and proven routines, will always win out over doubts, fears, self-imposed pressures and marginal disciplines.

Linda Bradford Raschke has been a full-time, professional trader since 1981. She began as a floor trader and later started LBR Group, a professional money management firm.

In addition to running successful programs as a CTA, she has been principal trader for several hedge funds and has run commercial hedging programs. Raschke was recognized in Jack Schwager’s book, “The New Market Wizards”, and is well known for her book, “Street Smarts”.

More of her writings can be found on her website (see link above).