How To Handle A String Of Losses

Everybody hates to lose and unfortunately no one is blessed with the
ability of foresight, therefore losses are an unavoidable part of
trading. When we enter a trade we will either be right, or wrong, and
even if we broke-even we'd still be classed as being wrong - as nobody
enters into a trade just to break-even! When unsuccessful traders
encounter a string of losses they begin to engage in self-destructive
patterns that help them escape the pain they are experiencing.

In
this article we bring to light these self-destructive actions that can
help you realize what you are doing before it takes hold of your
physical health. If you find yourself already engaged in these patterns
hopefully this article can help you to get you back on track as quickly
as possible.

The Destructive Patterns

If you find yourself
caught in a string of losses or a bad performing week/month be sure to
monitor your behavior. It is during this time that you will be at your
most vulnerable. You will begin to indulge in activities that at first
seem harmless, but upon excessive use (or in time), begin to cause
physical damage to your health.

Ask yourself the following question: during during drawdown periods do I
find myself over-indulging in these activities:

> Food (especially junk food - eg. chocolate, ice-cream, chips)?

> Sex (includes viewing pornography)?

> Alcohol?

> Drugs (includes excessive smoking)?

> Laziness (find it difficult to wake up in the morning)?

> Entertainment?

All of the above taken in excessive doses can be detrimental to your own
physical health (some even in small doses!).

These
activities above during your losing period are only covering up the
pain of confronting the true issue, and your body tries to rid the
emotional pain by trying to "fix" it with physical pleasures.
Unfortunately it is going about it in the wrong way, so what should you
do?

Firstly... REALIZE WHAT YOU ARE DOING AND STOP IT!

You
need to realize what you're doing and you need to STOP doing it
immediately! You can either decide to stop, or you'll be forced to stop
when your body eventually
breaks down and prevents you from any form of movement. It will be much
more beneficial to you in the long-term if you can decide to stop *NOW*.

Once
you have stopped you now need to figure out a way to solve the pain -
not by cutting out or neglecting it, but by staring it in the face.
Bring your problems out into the light, be honest with yourself. There
can be no growth without pain, you are experiencing the emotional pain,
now it is time to find the error and therefore your growth.

Begin Your Review

The
review process begins in two separate areas: You & Your System.
Here are some checklists for you to go through to find out where the
problem could lie:

"YOUR SYSTEM" CHECKLIST

> Was your
system thoroughly tested prior to trading it (or paper traded if you do
not have the capacity to programme your system into backtesting
software)?

> Did you test with out-of-sample data?

> Do you even have a system???? If you do not, how do you even know if the
> method that you are trading is even profitable??

> Is your system's code correct?

> Did you over-optimize your system? (what have we discussed about
> over-indulging?)

> Did you paper trade your system prior to placing capital on it?

> Did you trade with a small amount of capital prior to placing the rest
> of your funds on it?

> Do you know the system's limitations?

> Did you properly drill your system? (see our blog article on why I am
> the system designer from hell)

"YOU" CHECKLIST

> Is the current drawdown you are exhibiting with your system normal?

> Are you comfortable with your system's historical drawdown performance?

> Are you fully aware of the risks involved with your system and the
> instrument(s) you are trading?

> Are you trading with funds that you are comfortable risking?

> Are you relying too heavily on your performance?

> Have you set realistic goals?

As
you can see there are generally two areas that you need to explore: the
mechanical aspect - your system - and the emotional aspect - you. Both
can be responsible for making the way you feel the way you do. It will
either be an error on the system's side with how the system was tested
and/or programmed, or it can be your own psychological profile not
being comfortable with the system's performance.

Your Answers = Change = Your Growth

What
steps should we now take? Now that we have begun a corrective process
where we have stopped the evil nature of our over-indulging ways to
take control we should continue our "corrective nature" by invoking our
findings and taking ACTION in correcting our errors.

If the
problem was mechanical - fix it, if the problem was emotional either go
about setting up new thought patterns, or change your current system.
The answers lie in whether you need to expand your knowledge in system
development, or whether you need to grow emotionally as a person.

Unfortunately
there is no easy road, and even if there was everybody would be doing
it. Hopefully this article has made you ponder over some of your
behaviors during drawdown periods, be sure to keep an eye on yourself
and as always take care of your body, because there's no use in making
all the money in the world when you don't have the physical capacity to
enjoy it.

Ryan Sheehy is the author of http://www.currencysecrets.com
where you will find more free articles and resources on forex trading.
You can also subscribe for free to their monthly newsletter.

5 Questions You Need To Have Answered Before You Back-Test Your Forex System

As 90-95% of new forex traders lose money within the first 3-6
months this article helps to guide new forex traders by asking 5
questions that the forex trader needs to know prior to back-testing
their forex system.

Let us jump right in...

1. What data type are you using (or going to use)?

I
know this sounds strange, especially if you have experience from
another market such as stocks as their generally is only one type of
data source available. However, in the forex market you can have up to
4 different data types: bid, ask, mid and indicative. Each have their
own little nuances.

If you would like to know more about the data types then visit the article
written about the perils of indicative prices. As this will save me from
having to repeat the information again and boring those who've already
read it.

So,
if you know you have indicative prices then you know you're in for some
good results! However, if you have any of the other three you need to
be careful on how stop and limit orders are placed.

As an
example: If we had bid price history and we were looking to place a buy
entry stop at 0830 EST according to the day's high, then we know that
the bid price will not accurately reflect what the actual price of our
order should be. You would have noticed that if you placed a buy entry
stop at the exact same price as that of the day's high you would have
entered prematurely - you would have entered 4 or 5 pips before the
high or the low of the day was touched (the exact same amount as the
spread your broker offers!).

This leads me into the next most important question...

2. What spread is your broker offering on the currencies you are
bask-testing?

You need to know this as this can help you set your slippage settings on
each currency.

As
our example in question 1 pointed out. We found that our buy at the
day's high method did not exactly work because we bought at the BID
PRICE high, not the ASK PRICE high - the price that we need when we
place our order TO BUY.

Therefore, we enter in a slippage setting representing the spread that
would be exhibited by this trade on this currency.

But knowing at what price to buy is only half the problem... how do we
know what quantity to buy?

3. What margin does your broker offer?

If
we know at what price to buy our currency at we need to inform our
broker on what quantity to buy to fulfill the order. We only know what
quantity to buy by the margin that the brokerage firm offers.

Most
brokerage firms offer 100:1 leverage, however, some firms offer mini
accounts with 200:1 leverage, others only 50:1 leverage.

Find out the margin required.

4. What restrictions does your broker impose?

Now,
I don't just mean margin and spread restrictions as I have mentioned
above. These are important in their own right, what you need to find
out are the details.

This is probably the most important question
of all as the fine line between success and failure can be found in the
details. Now you can have this questioned by one of two ways:
1. You can find out through experience (generally the most expensive
way unless done through the demo account!); or
2. You ask your broker (the cheapest and best way).

Why is this
so important? I hear you ask. Well let's say you have a system that
trades any gaps that might form on Sunday at 1700 EST, but your broker
does not open until 1730 EST. You either need to factor this
restriction in to your system, or move onto another system completely.
Or, you may have a system that has 10 pip stops, but you find out that
your broker will only let you place 15 pip stops from your initial
entry price. Once again you will need to change your system to see
whether it still performs well, or throw out your system (or change
your broker)!

In fact one of the most devastating restrictions
imposed by FXCM is that they do not accept stop entry orders if price
never happens to trade at your entry stop price! FXCM will honor and
"take the loss" of your OPEN stop positions, but if the liquidity is
not there and price has shot straight through your stop price then you
will miss out. This can have disastrous effects on your system results
as you are left wondering on trades where you made good returns -
"Would FXCM have got me in?". You may want to read of some of the quirks I
use when placing entry stop orders on FXCM that could be of huge benefit
to you to help you possibly get around this problem.

The restrictions by your broker are only half your systems' success, you
also need to find out about another more important restriction...
yourself. This leads me to the final point...

5. What restrictions do you have?

This
is a vitally important question. Most people test their systems and
fall in love with the results but find when they trade their system
they have lost their account and that most of the best signals occurred
while they were sound asleep!

As the forex market is a 24 hour
market, you need to put into place restrictions in your system that
will be realisticly conducted by you during the course of a normal
trading day. There is no use operating a trailing stop method that
changes your stop points during times when you are asleep and cannot
possibly do so.

I hope this article has made you aware of some of the important things
that need to be known prior to testing your system.

Article written by Ryan Sheehy from Currency Secrets.com.
Where you will find reviews on forex data vendors, signal providers,
brokers, and popular forex resources, along with more quality
articles... all for f*ree!

Choosing a Forex Third Party Signal Provider

With the growing popularity and easy access to the foreign exchange (ForEx) market, more and more people are drawn to it as their financial vehicle of choice. Along with this popularity come all the extras. This includes all kinds of software, trading systems for sale, books, videos, and third party signal party providers. Today I’m going to touch on a few points when seeking out a third party forex signal provider.

Before we get into choosing a provider we need to have a good understanding of what a third party signal provider is. A signal provider is a trader or analyst that generates trades that in turn get placed on your account. You can have several signal providers trading your forex account or just one.

Like anything else, all third party signal providers are not created equal. At first glance a trader may look like a home run. That same trader may well end up completely torpedoing your entire account in one afternoon. To help make sure this doesn’t happen we’ll set down a few guidelines. These guidelines will give us something to look for when choosing our third party signal provider.

1. The first thing I look at is weather the trader is a winner or a loser. This may seem obvious to nearly everyone, but I often see losing signal providers with 50-100 people trading their signals.

2. The next thing I look at is how long they have been a winner. If a trader has been winning for a week that means nothing to me. I recommend that you don’t trade any signal provider with less than a few months of results to show you. Any one can place a few good trades one week and get lucky. If you are going to be trading this trader’s signals they need to be established.

3. Look at the max draw down. This is the largest peak to trough draw down in equity that the trader has historically had. Some traders refuse to take a loss. This causes them to hold on to losing trades forever or until they turn to a winner. Turning a loser into a winner sounds great, but it will eat up a huge chunk of margin and may never turn around. If it doesn’t turn in your direction, you will have your entire account destroyed by a trader that could have taken a 30 pip loss but held on until it was an 800 pip loss.

4. The first three are easy to look at. They will be displayed right on the main screen of signal providers to choose from. Once you get a few signal providers you are thinking of using, its time to dive a bit deeper into their history.

a. Look at their actual trades. Do they have a good win rate because they have opened a ton of trades all at the same time on the same currency pair? They may have 20 winners in a row. This looks great, but if you look a bit deeper you will see that its really only 1 winning trade places 20 times. Not as impressive is it?
b. Look at their draw down on individual trades. Do they let a trade go 300 pips against them and then close it out when it hits 5 pips of profit? This is a trader who lets their losses run out of control and cuts their winning trades short. It’s not a trader that you want in control of your money.
c. Do they add to losing positions? A trader who constantly adds to losing positions hoping it will turn for them is not someone you want trading your account.

5. Choose a signal provider that suits you. Some traders may provide larger returns over time, but take bigger risks leading to bigger draw downs. This might be OK with you. If you are more conservative and cannot stomach large drops in equity you probably should choose a more conservative trader.

These are just a few things to look for when choosing a third party signal provider to trade your forex account. You should always trade a demo account before opening a live account with real money. Remember it’s your account. In the end you choose the signal providers, and you are responsible for what happens.