My knowledge about trading is apparently rather narrow-band
 

Hi,

I stand by my earlier message, but after reading Elizabeth's well-reasoned article I now realize that what I wrote may only be true when applied to the kind of trading I did: daytrading the stock index futures.

Not bragging, but I'm an expert chart reader, using the techniques of Joe Ross and Linda B. Raschke.

best,

-Boyd

The most reliable signal I've ever seen
 

Hi,

You wrote:
> many traders rely soley on indicators, be it
> technical analysis, astronomy, elliott wave
> etc..these tools work well except when they
> don't!!

When a usually reliable signal doesn't work, it's a sign that something has changed in the markets, and that it's a pretty big change.

The best way I've ever seen to trade is to paper-trade, and watch for perfect signals that totally don't work. Then watch the chart and take the next setup, applying every chart reading technique you know.

Anyone want to write a book with me about this idea?

best,

-Boyd

Here are more details on how FX Futures work....
 

Trading foreign exchange futures can be very exciting, but remember it is also VERY HIGH RISK....

Here's how it works....

First, what are FUTURES?

Futures refers to buying and selling items at a fixed price in the FUTURE.... Two types of people trade in futures - hedgers, and speculators....

First, the HEDGERS.... These are those who use futures as a protection in their business....

For example, a wheat farmer might be spending the money to produce wheat NOW, but he's worried that when the time comes to sell the wheat, its price will drop ....

In order to protect himself against that possibility, he might take out a CONTRACT to sell the wheat in the future, but at today's price. That way, if the price drops in the future, he has a guaranteed profit margin....

However, if the price of wheat goes up, then he has to PAY the shortfall on the futures contract, so while he still makes a profit, he makes less than what he otherwise would....

However, the farmer reduces his risk, in that he is still guaranteed of locking in a profit either way....

A SPECULATOR does the opposite, and takes on more risk. This is someone who, like the farmer, may take a contract to buy or sell some commodity in the future at a fixed price. Then, if the price goes the way he thinks, he makes money, but if it goes the opposite way, he loses money....

But the key is, all it is is a contract in the future, at a fixed future price, between a price on one hand, and some sort of product on the other hand....

FX (foreign exchange) Futures, or currency futures, works exactly the same way. The only difference is that instead of fixing the price of wheat, you'd be fixing the exchange rate between two currencies (like between the US dollar and the Japanese yen, for example).

If the price goes the way you think it will, you make money. If it goes the other way, you lose money.

Because it is just a contract, you can spend very little money to do this. The company which presented the seminar I attended - Tricom ( www.tricom.com.au ) said you only need a 3% margin. That means, to have a contract to buy or sell $1 million in FX futures only requires $30,000 !

Or, in smaller terms, with just $3,000, you can buy or sell FX futures for $100,000.

Here's how it works to make (or lose) money....

Let's say I believe the Mexican peso will go down compared to the US dollar....

Then I might take a contract to sell 1 million Mexican pesos for the current rate, which (let's say) is 10 US cents per peso, but 6 months in the future.... (That comes to a $100,000 contract.... )

Now, let's say that the exchange rate changes so that 1 Mexican peso is now only worth 9 cents in US currency....

Although the current rate is only 9 cents per peso, I have a fixed contract to sell them at 10 cents per peso. That means, I can buy Mexican pesos for 9 cents each on the open market, and sell them for 10 cents each.

My contract is now worth some money, since I could make a direct profit of 1 cent per peso. It sounds small, but with this 1 million peso contract, I could directly make $10,000 just from my contract.

However, let's say that the peso instead goes to 11 cents per peso. Now, I lose money, because I'm forced (by the contract) to buy pesos on the open market for 11 cents each, and sell them for 10 cents each. That means I lose 1 cent per peso, or I lose $10,000.

Now, here's how so much money is made.... For a $100,000 contract, you only need $3,000 or so. But, as we saw, just a 10% change in price (from 10 cents to 9 cents per peso), means that $3,000 could become worth $10,000 - or more than a 300% win or loss. You can MAKE, and also LOSE, a lot of money.

That's the essence of how futures works....

In practice, you generally don't make the contracts, but other people do, and these contracts are bought and sold.

And you have to keep your 3% margin, which means that if your $100,000 contract becomes worth less money, you would have to put in more money so that you always have at least the minimum 3% of the worth of the contract.

So if you don't keep that 3% margin, your broker will automatically sell the contract. That means you wouldn't lose more money than you put in - however, you could lose it all, or make some great gains.

It is fast-paced, high-stakes, high risk speculation.

Currency futures is also a 24-hour thing - currencies are being traded for 24 hours a day around the world, so the market never closes (except for about a day on the weekends).

The currency market is the biggest market in the world, outstripping the share market in its sheer size.

I wouldn't go into currency futures (or any other kind of futures) without a good advisor at the absolute minimum!

And at the seminar I attended, they recommended putting NO MORE than 10% of your assets into FX futures, because of the high risk involved....

Dien Rice

Day trading vs. long term investing....
 

Hi Carol,

Yes, I agree it is easy to lose a lot in the market if you're not careful....

I have a good friend, we have a kind of weekly "ritual".... every week we meet in a kebab place, and over dinner we talk about our mutual interest in shares, business, academia, physics (he's also a physicist too)....

We are both stock market investors, but our styles are opposites. I'm much more conservative, trying to follow a "Buffett"-style approach (I look for long term growth stocks)....

My friend's a day-trader. I used to dismiss day-trading, but now I think there may be some skill in doing it....

I thought I'd try day-trading once. I bought a stock (One-Tel, listed on the ASX, the Australian Stock Exchange) at $1.12 per share, on my friend's recommendation. A few days later, it started dropping, and I started to worry. I just felt really uncomfortable about it, so I sold it a few days afterwards at $1.08 per share (so I lost about 3.5 %)....

But within about 2 weeks, One-Tel had dropped to around 80 cents! Well....

That's my one experience with trying a day-trading approach.... :) I think it's generally not for me, though it may be for others.... :)

As for FX Futures, I'll probably go into it with some of my money, but only with a good advisor who I trust, and who has good contacts so that s/he has a feel for the "pulse" regarding what's going on in the world regarding currencies....!

But I wouldn't do anything high risk (like futures of any kind, for example) unless I felt willing to possibly lose the money I put into it, since that could happen!

Great message, thanks Carol... :)

Dien Rice

Re: I've been trading Futures since 1995
 

Jim, I couldn't agree with you more on

> Options are a much safer way of trading
> futures. Especially when you don't have
> enough cash to re-enter the market after
> you're "stopped out."

I've always wanted to learn more about options trading on commodities. I trade stock options so understand how options work. But because my discount broker doesn't handle commodities, I never bothered finding one that does. Also, I don't think many DISCOUNT brokers handle commodities, certainly not in Canada?? I'll have to ask around.

Can you refer me to some site where I can learn more? I guess you subscribe to a newsletter or news service? And where do you get the symbols for the commodities? Is it the CBOE? Perhaps we can chat offline on this. I'd be interested in learning more.

Thanks.

Eliz.

Boyd, now we know how you earn a living
 

I always knew the Trick Report was not your only business. (smiles) And now that I know you're an expert at charting, I'll keep this in mind when I've got questions on the subejct matter.

I wish there was a forum where I could share some of my successes and frustrations on stock options, futures, stock indexes, etc.

Boyd, any chance you'd like to start one with others who might be interested. It's such a fascinating topic when you get into it.

We subscribe to The Option Investor Newsletter. There are several options groups in the US, Canada and I 'think' other countries, that meet monthly to discuss their trading. The group that meets in Toronto meet every third Saturday of every month, but there is no real structure and I really don't have the time to give up my Saturday afternoons to meet. So, I've been suggesting a forum for some time, but noone wants to get it started.

It appears there is a lot of interest here. Think about it.

Eliz.

Why paper trading might not work... (here's my guess)....
 

Boyd, those are interesting thoughts regarding paper-trading....

> I hope your article won't mention
> "paper trading" as a way of
> testing oneself as a trader or as a way of
> testing a trading system.

> I can make simulated millions paper trading,
> but I have yet to make a profit as a real
> trader of some years experience and a track
> record that consists of at least 1500 real
> money S&P 500 futures trades.

> The only relation paper trading has to real
> trading is a misleading one.

For the record, I've never done "paper trading" (only trading for real).... But I'm not a day-trader really, I'm more of a growth investor....

Anyhow, why would something work with paper-trading, but not with real money? Here's my guess -- EMOTION.

With paper-trading, there's no emotion there.... What you do won't affect your life positively or negatively....

But with real money, suddenly it's emotional. You're talking about what you're doing affecting your life.... Possibly big gains or losses.... Greed and fear come much more into play, and these emotions can affect our decisions and clarity of thought....

I think it's important to be unemotional, and completely logical, when it comes to stock market investment. At least that's my approach.... :)

When you can make it less emotional, and more logical, I think your chance of succeeding in the stock market is much better....

Well, that's my guess at an answer, for what it's worth!

Dien Rice

Trader's Syndrome
 

Hi,

I agree, when you're paper trading and you paper trade three losses in a row you don't then do what you'd do if you'd taken three real-money losses in a row. The paper trader just keeps paper trading his system, and eventually the wins outweigh the losses. The real trader (in some cases) gets emotionally mind-blown and stops taking signals right before the wins start happening.

Another trader and I invented and described a concept called "Trader's Syndrome" that relates to this. I wrote an hilarious piece about Trader's Syndrome on Gordon's ABC board some years ago, which Amber and others may remember.

Here's Trader's Syndrome (this has happened to me more times than I care to remember). The real trader (and this may only apply to daytraders) sits down at her/his desk, turns on all the data feeds, readies the phone, and starts looking for setups. A signal happens, but the trader emotionally and psychologically is unable to phone in the trading order; remember, taking a trade may mean taking an extraordinarily painful real-money loss. She/he misses the trade. Then another signal happens. Again the trader for whatever reason is blocked from calling in the order. By this time the trader is mad at herself/himself for missing the two signals, which, if she/he'd taken them, would have been big wins. Another signal happens, and this time the trader says "I will take this signal!" She/he phones in the order, and "Oh crud!" this particular trade turns into a big loss. Plus, the trader realizes, too late, that the signal she/he took was really just a marginal one, and that she/he took it primarily to offset her/his failure to take the two earlier excellent signals. At this point, the trader is in a bad way: she/he's taken a big real-money loss, and emotionally and psychologically she/he's a wreck. She/he doesn't have the Mr. Spock-like stance that a trader needs. In this state of mind, can she/he be expected to see and feel the almost three-dimensional price action for what it's telling her?

Contrast this real trader, who is suffering from a typical case of Trader's Syndrome, to the paper trader. The paper trader, with his Mr. Spock-like paper-trading attitude, took all three signals, and with two wins and one loss is doing fine.

To succeed as a trader, and especially to succeed as a daytrader, you have to make real trading just like paper trading.

And that's the truth.

Best,

-Boyd

> Boyd, those are interesting thoughts
> regarding paper-trading....

> For the record, I've never done "paper
> trading" (only trading for real)....
> But I'm not a day-trader really, I'm more of
> a growth investor....

> Anyhow, why would something work with
> paper-trading, but not with real money?
> Here's my guess -- EMOTION.

> With paper-trading, there's no emotion
> there.... What you do won't affect your life
> positively or negatively....

> But with real money, suddenly it's
> emotional. You're talking about what you're
> doing affecting your life.... Possibly big
> gains or losses.... Greed and fear come much
> more into play, and these emotions can
> affect our decisions and clarity of
> thought....

> I think it's important to be unemotional,
> and completely logical, when it comes to
> stock market investment. At least that's my
> approach.... :)

> When you can make it less emotional, and
> more logical, I think your chance of
> succeeding in the stock market is much
> better....

> Well, that's my guess at an answer, for what
> it's worth!

> Dien Rice

Why paper-trading is like a can of Pepsi
 

Because it's not the Real Thing.

Tunay

The truth is...
 

Hi,

The truth is, I'm not earning a living. My wife, who is in engineering at Motorola, is supporting me (and helping out two kids and seven grand-kids), while I inch my way closer and closer to success in business; once Stone Digital Media LLC (our little startup) acheives success in business, then I'll pay my wife back for what she's done for us. We're now in year six of this experiment. Fortunately, we're both highly stable people with, apparently, infinite patience for our mistakes and the mistakes of others.

Have you seen the Usenet newsgroups devoted to various aspects of trading? They're highly active and populated by people who are willing to share their expertise--and equally willing to cut the numerous trading scamsters to shreds when they show up and try to sell their "magic" tading systems.

If a list of Usenet newsgroups and some other trading bookmarks would help you, I'll transmit them to you or make an instant website to post them.

All I really know how to do is to read a chart and make a decision to Buy, Sell Short or Stand Aside. I'm interested in trading options using chart-reading techniques (a la Joe Ross's "Trading Optures and Futions") but I've never done it.

Hope this info was useful in some way.

Best,

-Boyd

> I always knew the Trick Report was not your
> only business. (smiles) And now that I know
> you're an expert at charting, I'll keep this
> in mind when I've got questions on the
> subejct matter.

> I wish there was a forum where I could share
> some of my successes and frustrations on
> stock options, futures, stock indexes, etc.

> Boyd, any chance you'd like to start one
> with others who might be interested. It's
> such a fascinating topic when you get into
> it.

> We subscribe to The Option Investor
> Newsletter. There are several options groups
> in the US, Canada and I 'think' other
> countries, that meet monthly to discuss
> their trading. The group that meets in
> Toronto meet every third Saturday of every
> month, but there is no real structure and I
> really don't have the time to give up my
> Saturday afternoons to meet. So, I've been
> suggesting a forum for some time, but noone
> wants to get it started.

> It appears there is a lot of interest here.
> Think about it.

> Eliz.