Traders' Delusions

Unrealistic Returns and Benchmarks

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-09-20 10:10.
Unrealistic returns and benchmarking in your trading

I was watching local Australian TV the other day and I cringed when I heard saw an advertisement for investment properties and this voice over stated:

xxx returned 109% over three years for their investors – try to match that with a bank.

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Quality versus Quantity Forex Trading

Posted in Traders' Delusions, Submitted by Marco on Wed, 2006-09-13 10:01.
A different perspective on Risking a little or risking a lot: Quantity vs Quality trading

Just a similar thought to last week's post with the forex trading case study discussing the issues of risking a little or risking the lot. Similar concept, just a different perspective or twist.

Risking a little translates to a "Quality trade". You've put a little out, you're holding on for a large pip movement on the forex market. Armed with your trading system, which you've backtested and set your stops, you're ready for the large returns.

You have a large capital base. You want to risk the lot. (When I say "risk the lot" it isn't meant to be literal, I'm referring to large contract trades) Risking the lot is a quantity trade in two dimensions. One refers to the large contract size but secondly, this style of trading demands a larger number of trades. (Well, it's up to you how many trades you take, and perhaps "demand" is too strong a word for this context) [n.b. you must read the previous post so this article makes sense!] Actually it’s a lie, you don't have to take every possible trade, so if you're patient enough you don't have to take every possible trade. But since you are risking a lot you are only looking for a small pip movement to make a profit of the same magnitude compared to trading a little. And because it's only a small movement, this (may) allows you to take advantage of more volatile movements in the currency price. It's a matter of choice and it's up to you if you want to take the risk. However following this path may lead to another trading folly: overtrading.

Won't it be great if you can always have a good quality forex trade? Those are the trades I prefer... But the markets are dynamic, sometimes you've got to change your game play. But that's another story.

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Trading: Risk Little, Risk the Lot

Posted in Forex Trading | Traders' Delusions, Submitted by Trading Critic on Wed, 2006-09-06 13:41.
Forex trading: do you risk the lot or risk a little when you trade the foreign exchange markets

Traders are risk takers. We accept the market risks in the hope of making a killing making a living from trading the markets. Here I will discuss a case study on the consequences of leverage and the critical decision whether to "risk little or to risk the lot." I will use the forex markets for this case study. Similar concepts apply across other markets, but this particular concept works well with the foreign exchange markets due to their volatility. You may not agree with me with this case study and I reserve the right to change my position on this at anytime. Also, this is written for people with some experience in trading forex.

After trading the forex markets for a few years and a little reflection I came up with this thought: I can risk a little or risk a lot. You've got two choices and four outcomes. First you have the choice of either risking a little money or risking the lot. The secondary outcome for both cases is not your choice: it is up to the market to decide whether it shall go up or down.

Yes, so aren't you stating the obvious? What's the point? The point is, your initial choice of the amount of leverage is critical in determining your success in trading the forex market. But Marco? How did you arrive to that conclusion? Bear with me and you'll see. In this case study we will use the AUD/USD (Australian and US Dollar) currency pair, assume we are trading a standard contract size where each contract is worth $100,000 and so 1 pip equates to US$10. So in this case we will assume that we have a profit target of US$1000 for this particular trade. How we make that amount of profit, and the amount of risk you take on board depends on your fundamental choice (of risking a little or a lot) as well as the volatility of the particular equity. For the Aussie and US currency pair, it is quite rare to see 100 pip movements per day, unlike currency pairs such as EUR/USD (Euro/US Dollar). Typically the Aussie moves around 20 to 50 pips a day. That is the amount of volatility we are playing with. So to be realistic about your profit , assuming you are day trading and perfect "market conditions" (the market is going the way you set your trade), you should only expect to make 20 to 40 pips a day (that is in optimal circumstances - remember this is only a case study after all).

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Examples of Greed

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-30 12:09.
Trading Critic looks at an example of greed; Greed runs through the markets

Greed. The desire for more money. More money! Greed is one of the main drivers for our equity markets. The greed for more money. I'll have a look at a few examples of greed from the simplest - a case that we can all hopefully relate to, to something that may apply to some of us (forex traders and stock traders) and an example at a professional level.

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Stock Trading Insurance Policy

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-16 15:20.
Trading Stocks or Forex is a risky venture. Don't you wish there was an insurance policy for Stock Trading?

I recently went on a trip overseas, and as part of my preparation of going I bought travel insurance. Why did I buy travel insurance? Of course, to reduce my risk of financial loss as a result of any loss, sickness or misadventure. As a trader there are avenues to reducing your trading risk. There are many ways to reduce your risk when you trade. The simplest method is by limiting the amount of capital at stake. The next simplest is by utilising a stop loss, or better yet a guaranteed stop loss. If you want to hedge your position in some currency you can either use forwards or options. If you like to get your hands dirty, options can provide you with an advanced strategy to reduce your trading risk.

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Australian Share Market Game: What You Should Know

Posted in Traders' Delusions, Submitted by Trading Critic on Tue, 2006-08-08 14:18.
The truth behind the Australian Share Market Game: Virtual Stock Trading

The Australian Stock Exchange (ASX) often runs a virtual share market game for schools as well as for charity. Traders / Investors are often given $50,000 of virtual cash to invest on the ASX. The number of shares are often limited to the ASX100 or ASX200 companies. The time horizon is usually a few months, from two to six months.

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Can Mathematicians Beat the Markets?

Posted in Traders' Delusions, Submitted by Trading Critic on Mon, 2006-08-07 15:46.
If all it took to beat the markets was a Ph.D. in mathematics, there'd be a hell of a lot of rich mathematicians out there.

Does it take a genius to beat the markets? Can a mathematician act quickly in the fast moving forex markets or better yet, pick out the best stocks to invest in? The markets are all about numbers, percentages, mathematical valuation modelling and so on... So it should make perfect logical sense that if a mathematician tried their hand at trading the markets, they would find it easy to succeed in consistently beating the markets. But is it true?

Have you heard this quote?

If all it took to beat the markets was a Ph.D. in mathematics, there'd be a hell of a lot of rich mathematicians out there.

The quote is from Bill Dries a commodity trading advisor from "Futures" published on August 1995.

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I Robot, You Human: Mechanised Trading Systems

Posted in Traders' Delusions, Submitted by Trading Critic on Fri, 2006-08-04 22:56.
The Evolution of Man to Machine: I Robot, You Human: Mechanised Trading Systems

Have you ever wondered if a robot would beat you at your own trading game? Yes, you have a trading system. Yes, you trade your system. But you are human. You are open to temptations. These temptations lead you to open or close trades either prematurely or too late. But what if you simply programmed a robot, or traded automatically? (Programming some piece of software with your set of triggers, essentially creating your own black box system – the difference with your black box system and the other systems on the market is that you know what your system uses as triggers) Would your mechanised-robotised system beat your human implementation of your own trading rules?

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Nerves of Steel: Forex Markets

Posted in Forex Trading | Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-02 13:33.
A Chart of the Australian Dollar (AUD/USD) reaction to the 0.25 percent interest rate to 6 percent announced by the RBA 2-8-06

This morning I was looking at the reaction of the Aussie dollar as a result of the Reserve Bank of Australia (RBA) released the outcome of their deliberations yesterday. The interest rate was scheduled to be announced at 0930 Sydney time so I was in front of my laptop by 0920 watching the screen (And putting on a trade). As you can see from the minute chart above leading up to the announcement, trading was thin in the minutes leading up to the announcement. The gold star marks 0930 hours. Everyone was 99 percent sure that the Australian interest rates will rise by 0.25 percent to 6 percent. And the interest rate did rise. So what does a forex traders' mind run through in a trade like this one?

A Quick Forex Overview

If you aren't aware of foreign currency movements and the reasons why they move here is a quick overview. I was looking at the Australian (Aussie) dollar price with respect to the US dollar price: i.e. the AUD/USD currency pair. Now, last week, the RBA announced 4 percent inflation, which is way above the Bank's target rate. The market saw this a sure bet that the interest rate would rise the following week (the event today). So the market priced in the interest rate move and the dollar spiked from around the 0.7500 level all the way to just above 0.7670. Some 170 pips. Which is a huge spike in the dollar if you look at the weekly charts. Anyway, fast forward to today. Yesterday during American trade, the dollar actually hit 0.7600, but by the time the Aussie market opened this morning the dollar recovered from the "profit taking" (the reason the media always gives when the market spikes and then falls the following day/week) to open at around 0.7650. When I previously stated "thin trade" this is shown by the sideways movement of the dollar together with the lack of coloured candles. Finally, a country's currency usually reacts positively to any prospect or actual interest rate increase. And that's what some traders call "trading the news."

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Your Money or Your Health

Posted in Traders' Delusions, Submitted by Trading Critic on Mon, 2006-07-17 14:07.
Be wise: Choose your health over money when you trade the markets.

Traders, stock brokers and investors sometimes fall into the temptation of getting too attached to money. Common sense tells us that money is nothing more than a tool to get from A to B. There are a few far-reaching consequences of getting too attached to money, the most important being your own health.

I was reminded of this when I was watching "Inside Business", Marcus Padley, an Australian market commentator ended his remarks about the market with this:

Meanwhile, I have spent the last four days in a cardiac ward in a Melbourne hospital. Two bits of advice from that experience. Firstly your health is vastly more important than your money. And the second is, don't buy too many small resource stocks.

I'm not going to lie and say I've never have been a victim of this same infirmity. I have and I still do. I've experienced something similar and I expect other traders to have felt the same emotions from their own trading. Sweaty palms. Obsessed with watching your charts. Breaking your trading rules. Dizziness. Fear. Greed. Loss of concentration. Heart beating fast. Headaches. Loss of confidence.

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