Forex Trader Mentor
Newsletter # 3
16th January 2005
I hope, like me, you have the greatest sympathy to the victims of the floods in Asia. If you are a successful trader, I urge you to send some of the results of your good fortune to those who have not only lost their “trading money” (as if they were ever going to trade!), but their whole existence, livelihoods and families.
Sometimes, we suffer Tsunamis (tidal waves) in the market. Actually, the oceans and the forex markets is a pretty good analogy: They both move in waves, currents, flows and they are adversely affected by seemingly unrelated events. They can be calm (range-bound) or stormy (volatile). Occasionally, something happens that completely disrupts both. In the markets, this can be a sudden loss of liquidity in the markets and a huge movement. In the late nineties, there was a day where the USD/JPY dived 18 big figures (1800 points). You only needed a small position to make a fortune. Mind you, if you were long, there was practically no way out: Forget all about ‘guaranteed stops’ and ‘no slippage’.
My point is this : Always use stops to protect positions. Adjust you leverage according to the volatility - that is, the higher the volatility, the smaller the leverage. The risk profile will remain constant and you will make the same magnitude of profits.
Would I make a good forex trader?
One of the most frequent questions I am asked is “Would I make a good forex trader”. Without knowing who you are, that is a bit difficult for me to answer. The question is: Do you know who you are?
What is the attraction of trading forex? The dreams of financial independence? The lifestyle you will be able to enjoy? The thrill of the risk?
Let us take the lifestyle. Now, you are probably thinking right now of being on a beach somewhere enjoying the sun while your positions just roll the profits up. Let us hope that you find a beach on the same longitude as London, because that is where most of the action takes place and so it is most wise to be around during the European session. In other words, if you are on the west coast of the U.S., you had better get used to becoming a nighthawk. Can you handle that? Can you sleep while you have positions running or do you need to be in front of the screen continuously?
What about your psychological and emotional makeup? Most people I interview claim they are not emotional. Have you ever lost a large denomination bank note or bill? How did that feel? Did you just say “Oh well, that’s the risk of carrying cash around, easy come, easy go”? I don’t think so. Can you control fear and greed, because the great majority cannot and it is fear and greed that move the markets.
Can you afford to trade? Again, many believe that they can earn $100,000 per annum consistently with $5,000 start capital. Not impossible, but highly improbable. In a future newsletter, I will explain how you can make it big even if you do not have the initial capital. If losing this $5,000 will change your life style adversely, then you really ought to leave trading alone. People have been known to do drastic things after losing their wealth!
If you have the money, the emotional coolness and can handle the lifestyle, there is a very important ingredient: skill and to a large degree, a good education. Math and probability are the friends of a good trader and even if you trade technically, you will still need to take the macroeconomic view into account.
Some (very few) people are ‘lucky’ and can make money without any apparent skill. I doubt that they can do this consistently, year in, year out. You have to understand the market you are trading.
So (and here is the commercial plug, folks!), you can get most of the answers by seeking guidance. There is so much information out there on how to trade, that you need to be able to cut it down to the essentials. You also need to be able to look into a mirror and say ‘I know who I am’. You need discipline to trade, and self-discipline is the hardest of all. Therefore, you need someone to hold you to your rules. I hope that you get the picture!
Are the Chinese supporting the dollar?
After hitting some lows recently, the U.S. Dollar seems to have come back a little in the opening days of 2005. Is it because the Chinese are ready to support the Greenback if the Fed doesn’t? And Why?
The reason why is quite simple: The Chinese have tied their own currency, the renminbi, to the Dollar, so by supporting the Dollar, they are holding their own currency up. A little perversely perhaps, they’re doing this because they don’t want to REVALUE the Renmimbi. A stronger Renmimbi will badly affect economic growth in China, which they require to be over 8% per annum to be able to find jobs for the 25-30 million people that annually move from the country to the towns to find employment.
China, through the Bank of China have bought three times the amount of Dollars in 2004 compared to previous years. China’s reserves are 80% in USD, and in October they bought $22.4 billion (Heaven knows where the Dollar would be without that!!!)
It is considered that the Remnimbi is undervalued by 15-25 pct (source: Danske Bank, Denmark). This means that there is a very large import of capital into China (balanced in part by the Chinese buying up companies in the U.S.). Therefore, if the Dollars falls any further, more capital would flow to China causing economic growth to spiral out of control. So China is trying to hold the status quo.
Will a revaluation of the Renmimbi come? Possibly in the second half of 2005, perhaps with 5%.
(One day, the Chinese currency will hopefully become fully convertible and allowed to float against the Dollar. If that day comes, the forex market will explode in terms of volume, mark my words!)
4x Made Easy
I have received many enquiries asking about ”4x Made Easy” and what I think about it. I have no direct experience of the company, but from what I hear, you go to a 2 hour(!!) seminar to hear about forex and then they sell you software for $3,000 that gives you signals to trade off.
Well, I had a look at their glitzy website and this is what I found: An invitation to a seminar, and in 2 hours they will tell you
· What the (spot) FOREX is.
· Why you haven't heard much about the (spot) FOREX until now.
· How much easier the (spot) FOREX is to trade than the stock market.
· How you can get started trading the (spot) FOREX with little money.
· Proper diversification and how the (spot) FOREX can help you achieve your financial goals.
Okay, lets have a look here. They will do this in 2 hours? What forex is: okay, it is the market where currencies are bought and sold. That was 4x made easy! Why you haven’t heard about Forex? Because it is only now that the scam artists have realized there are many willing victims out there. How much easier the market is to trade than the stock market. Okay, why?
How you can get trading with little money (and end with even less money). Leverage, leverage, get rich quick, millions to be made, look a t George Soros, $1 billion dollars in a couple of months. Blah, blah. So, you are going to take on the bank of England, Soros-style with your credit card?
Proper diversification and how forex can help you achieve your financial goals. Tempting isn’t it? And why the emphasis on ‘spot’. They haven’t got to the chapter on forwards or options yet, no doubt.
Have you read the article from fOX31? http://www.fox31news.com/_ezpost/data/6465.shtml
It is anything but easy, according to people who have tried. And this is my point. There are no short cuts to long-term trading success. A 2-hour or 2-day course is not going to teach you how to trade forex. There are so many things you need to know and do before you can start trading. Yes, I do know people who make great returns from trading, but they have done it mainly by spending a lot of time developing a system, testing it extensively and then trading by applying a very strict set of rules.
We often see ads that say “trade like the professionals”. I presume they mean professional fund managers? Well, let us see the evidence:
Bill Lipshutz is featured in Jack Schwager’s book, The New market Wizards. He is considered to be one of the best forex traders around. So, how much did the Hathersage Daily Growth Program make in 2004? 3.4%.
My friend Paul Chappell of C-View did better with his 3XL program. 10.39% and professional money managers are still giving him money to invest.
Appleton Capital Management have a proprietary model which has made good returns in the past. They LOST 4.67% last year on their 25% risk program.
The IFX Capital Management Zenith program, run by Phil Jones and John (“Willow”) Williams made 6.74% last year.
John W. Henry is probably the best known currency fund manager in the U.S. His G-7 currency program ended up –9.75% last year.
One of the best performers were my friends Mario and Daryl at Wallwood, who made 42.8% $2.5 million under management. Mario says that even with these returns people still think they can do better. “We had a client whom we made $2,000 for on $30,000 in 3 months. He thought that he could do better himself, and managed to lose the lot in 2 weeks!”
You can check these numbers out at www.autumngold.com
These guys are the top professionals in the business and as you can gather, they are not making anything like the claims some providers of services are claiming. “Trade like a professional”, “Learn the secrets of the pros”. As you can see, it is not forex made easy.
Impatience and greed is what these people feed off and they are the same reason that the traders lose.
The latest thing I heard the other day was the Introducing Broker who is offering to cover the clients losses. Is this a Ponzi scheme or what? Where do you think the IB gets the money to pay for the losses?
The message here is to be careful. I do not want to give the impression of ‘holier than thou’ – I want to earn money from servicing this market as well. But my hard-earned experience tells me that to become a successful trader takes knowledge, experience, the right attitude and patience and it is these qualities I wish to impart to serious students.