I did not write this. This comes from a winning entry from  Rick Clark in the Forex Mentor Pro Christmas competition. I believe that it is very pertinent on Forex Trading as well as life in general. It is a brilliant read and a brilliant learning tool.

NEVER LEAVE YOUR WING MAN.

It’s all about support and resistance.

Resistance as you try to stop the market from taking all your account money and support which you need when Mr market finally succeeds.

But it doesn’t have to be this way.

First let me introduce myself. My name is Rick Clark. I am 67 and so I have come to this party quite late in my career. I have been self employed most of my life because after being employed for my younger years I decided if I was ever going to make any money I would never do it by working for other people. I tried many things but never made a major success financially just managed to keep and raise my family. I have always maintained though that working for other people was a waste of time (I think Marc would agree) and made my way eventually to Trading and specifically FX by – would you believe – a course on gambling.

This was a very comprehensive course covering just about all aspects from horses to dogs to cards and every other form of gambling you can think of. But one thing it emphasised, and this applies equally to Trading, is that if you want to make money from gambling then you must approach it professionally and dispassionately. No matter what it was: dogs, horses, football etc you had to study the statistics and ascertain the odds in every particular case – you had to know your probability of winning and bet accordingly. You had to have an edge and play that edge at which point it was no longer gambling it was simply playing the odds (see later example of the casino and Blackjack). Like successful traders there are many successful professional gamblers who make a good living but I emphasise the word professional.

That means they work and study hard to learn everything they need to know about their chosen field and have the discipline and focus carry it out successfully. If you want become a successful medical practitioner you have to spend 5 years at medical college which costs many £1000?s before you start earning money. Trading is no different.

I am presenting this small essay from the point of view of a student of FX Trading and Trading in general and how I have progressed in the year or so and what I have learnt so far.. I have been a member of FMP for a little over a year now and have used it as a learning base. It is not my only source of learning and I have trawled the net for other educational sources, as well as books. For example I have paid for several other courses on FX such as MACD3, and Old Tree Publishing courses as well as books and lots of videos. I have invested a good deal of money in computers and large screens for chart technical analysis and recording software – for example Applian video capture which has enabled me to screen capture (for my own personal use) to record live videos and webinars for my FX learning library.

So what follows is a melange of what I consider the most important lessons I have learned and experiences I have had.

One thing has struck me so far in my journey: there are hundreds of trading strategies out there all designed to give you an edge and often successfully traded by somebody. So why, with all those strategies freely available, do only 1 in 20 potential traders make money? Clearly it can’t be all those wonderful strategies and I pondered this for a long time.

I came to the conclusion that its not the strategies – its how you play them. It’s all in your head. And it starts with the two great emotional drivers GREED and FEAR. To illustrate the power of greed think of the mess all our banks are in: all driven by greed – be it huge bonuses or huge profits.
And these banks are supposed to be run by and employ only professionals who should not succumb to these two emotions. Whoo- what a mess!!!

Let me illustrate with a typical trading scenario: I think most traders have been there.

You’ve learnt the trading strategies, the rules of risk and reward, how to measure them and do the calculations. You’ve got your wingman (risk manager – he (she) who will be with you right through the trade, from placing it, to managing it, to advising you it’s time to take your profits or much more importantly – to ditching the trade. ) flying with you – and as Tom Cruise said in Top Gun: you NEVER NEVER leave your wingman. So it goes like this:

There you are with your hard won $1000 of savings and you’ve learned that you should only risk 2% of your bank. So you dutifully calculate the risk reward numbers. There you have it: a potential gain 100 pips with a stop loss of 50 pips. A nice 2 to 1 reward ratio. So how much per pip for a 2% risk. Multiply $1000 dollars by 2% and you get $20. Divide this by 50 and you get 40cents.

40 cents per pip. you say to yourself if I win I’ll only get $40 back. You make some calculations on the back of your mental envelope and work out that it will take you months to get up to your first $2000 bank. Greed kicks in, patience goes out the window and you decide to up the ante to $2 a pip. Now you can win $200 dollars – that’s more like it – you’ll have your $2000 much more quickly and you will be a millionaire in 6 months.

Your Wingman is screaming down his radio at you (is that Pierre or Marc or Dean?)but you just fly off after your target. NEVER NEVER leave your wingman.

So what happens. The trade goes against you and you find you are not $200 UP but $100 DOWN and about to hit your stop. You did place a stop didn’t you??!! Fear kicks in. It must go back up (you went long). You are now emotionally attached to the trade So you move your stop further down.
Another 50 pips. Now you are liable for $200 (that’s 20% of your bank). Down down it goes till its nearly at your stop. You are sweating and finally you chicken out and close the trade.

Then you watch the currency pair as it turns round just above your new stop and races back up. Up up it goes while you watch stunned till it finally hits 22 pips above your original target. You are down $200 when you should have been up $244 dollars. Now you are angry and a red mist descends. How could the market do this to you. You want revenge. Your wingman is now just a fading whisper. So you dive back for another trade. The pair have turned down slightly (its called a pull back) but you think its got to carry on down so this time you go short. And to get your money back you are going to do $4 a pip. Your wingman has managed to re establish contact but you are simply not listening. You are going to get that target. You hold your breath and push the button. The trade is on. The pull back turns round and the pair carry on up. You watch in horror as the pips mount against you and your account remorselessly turns to dust. Your broker closes your trade for you as you’ve run out of margin and you are out of the game. You decide that trading is not for you and you become another statistic in the 19 out of 20 failed traders.

I have been there – at least on practice accounts. I have lost some money on live accounts but haven’t wiped out yet. The FX market when you first enter it looks like a sweet shop full of goodies just for the taking. Think again, reach out for those sweets without discipline and planning and the proprietor of that shop, Mr Market, will rip your banking arm off.

The market is a very hard mistress and also the toughest psychiatrist that ever existed. If you let her She will take your psyche apart with exquisite care and very painfully. She will also clean your account out faster than a pickpocket in Barcelona taking your wallet.

How do you prevent this? By working your way through the University of Forex gaining all the knowledge and learning all the skills necessary to become a trader plus the most important thing of all – the professional trader’s mindset. And this takes time.

It’s the tortoise and the hare. The hare wll lose his shirt and the tortoise will become a millionaire.
It might take him 2 or 3 years but he will get there. The hare will be several banks down and still scrabbling around in the financial dirt.

The problem I found is where is the University of Trading (FX or otherwise)? There isn’t one. Oh there are some trading schools but they only offer short courses and are often very expensive.
The information and skills you need to learn are spread all over the internet and that’s a minefield.

If you are like me after ploughing your way through the internet for FX stuff you will attract every FX vulture on the planet trying to sell you some get rich quick scheme or other. Your junk box will fill daily and even occasionally find their way into you normal mail.

Sometimes there are some gold nuggets but generally I just tip them into the bin. After a lot of trial and error the one site I found nearest to a university which provided a combination of teaching all the aspects of trading, including mentoring and the companionship of other students was Forex Mentor Pro – and it does not cost an arm or a leg. Here you will find all the study materials, tutoring and advice to advance to become a professional trader. This is provided by the three musketeers (Marc, Dean and Pierre) and their forum of cohorts who between them have walked more trading routes than you could walk in a lifetime, made the mistakes, been there, done that and got enough t-shirts to fill Primark. Go to the forum,talk to them, pick their brains because they between them have the distilled wisdom and trading experience of pretty much all the traders you need to talk to – and they have no axe to grind – they are simply there to help – they love trading – profitably – and have no need to sell you a bum rap. They are (I consider) also the ultimate networking operation in this field.

This has not stopped me from learning from other sources and websites but FMP have been the rock which has formed the basis of my journey.

So having done the plug for FMP – and I only recommend the good guys – back to what I have learnt so far in order to overcome the FEAR and the GREED and become a profitable successful trader.

It’s all in the mind. Discipline and patience (tortoise and hare!), single minded and focused.
It seems to me that you must learn to distance yourself emotionally from the trading because it is the emotion of losing and winning that generates the fear and the greed.
In the search for this holy grail I came across a book by Mark Douglas called Trading in the Zone and this was before I found that Marc had produced a synopsis of same (he always seems to get there first – but then he has been at it a lot longer than me!) and declared it the best book on trading psychology. I would agree, but only so far as my limited experience, as Marc has almost certainly read more books about trading psychology than me!

So what did I learn? Well you should certainly read Marc’s synopsis and then buy the book and work through it several times. And no, I have no financial interest in the publication other than if I follow what it says I am more likely to win at FX and (possibly) make a fortune!

However, apart from this what it said to me was that our mind set generated from an early age is totally at odds with the probabilistic mind set required to trade FX (or other markets). From this it follows that in order to trade these markets successfully we must train ourselves to alter our mindset in a very fundamental way which is far removed from that with which we have been brought up. It requires a complete volte face in our belief system. We must achieve a state of trading without any fear whilst at the same time not become reckless. That takes time and training. The techniques for this rest at the back of the book and what this aims to do is to make you the think differently from the 95% of traders who fail, by practising it to the point where it becomes second nature.

So what sort of things does it say.
Well essentially we are designed to avoid pain both physical and emotional. We suffer emotional pain when we try to control our environment and we fail, or, our environment fails to meet our expectations. In this respect as far as trading is concerned the market is the environment and if we try to control it (by for example using ever more sophisticated analysis in the mistaken belief that this will enable us to predict its movements with greater accuracy) then we will find that the market is not amenable to our attempt at control and we will suffer pain. From the pain comes fear and from the fear comes inability to trade consistently and profitably. It is a downward vicious circle.

To overcome this the first step is to understand that the market is uncontrollable by the small trader.
Its movements are driven by a large number of other traders whose decisions within that market at any given moment cannot possibly by known. Note the words at any given moment. The paradox here is that, although the market’s movement at any single point in time, or at any point you as a trader take a trade is un-knowable and unpredictable, statistically, over time (ie over a statistical number of trades) it becomes more predictable. The emphasis is on the word more in the sense that technical analysis of patterns within the market enable you as a trader to recognise certain patterns and make certain predictions (ie gain an edge) such that although any given trade could win or lose, the trader can, over a number of trades (say 20), win.

Mark Douglas in the book cites the example of a casino to illustrate this seeming paradox. Blackjack is a wonderful example and has been the subject of several films.
When the public play normally the casino has about a 4.5% edge and will always win IN THE LONG RUN even though the outcome of any given hand cannot be predicted. The other side of this coin is that if the player(s) card count they turn those odds on their head and suddenly (think Tom Cruise again in Rain Man) they now have about a 2% edge over the casino which means that in the long run they win. This is why the casinos study Blackjack players so carefully and if they suspect card counting the player is marched out of the casino so fast his feet don’t touch the ground.

The market is like a casino where if you get an edge and play your edge consistently (and consistency takes single minded discipline and focus and you only get this by the hard slog of training) you can win for as long as you like: there is nobody there to frog march you to the door and throw you out – unless you pick the wrong broker! Another area where FMP can help out. Is there no end to their talents?!

EVERY trade is just like a hand in black jack or a toss of a coin – you can win or lose- and you CAN NEVER PREDICT. But you win more than you lose over a reasonable number of trades. Any individual loss is irrelevant because you are always trading within your risk parameters so you won’t blow your account. You stay in the game which is absolutely paramount. You do not fear the losses because you are running a professional trading business and the losses are just the overhead which you pay to stay in the game. You are not worried about any individual loss or win (except to learn from it). All you are working towards is a steadily rising equity curve over a statistical number of trades.

Thus the casino controls its winning edge (which guarantees it huge profits in the long run) by controlling its environment VERY STRICTLY. It is focused and disciplined. Woe betide any employee from the manager downwards who does not follow its established rules to the letter.
Any trader must emulate this and learn to control his (her) trading environment.

In order to do this the trader must take full responsibility for his trading environment. He must understand that the market is completely unaware of him or what he does. It does not care if he wins or loses. It simply provides an endless stream of opportunities to either make or lose money. Taking responsibility requires iron discipline. It requires work to develop the necessary mind set and this takes time.

As a corollary to the understanding of the probabilistic nature of trading comes the discipline of calculating the risk reward for every trade.

 

Above is a graph of break evens in pips for different reward ratios over 10 trades. It shows that if you get the risk reward ratio right, and stick to them, you can actually lose a number of trades and still make money.

This is somewhat simplistic so I calculated a scenario on a 2;1 risk reward ratio where the first 5 trades were lost at a 2% stake and the 2% was calculated each time on the reduced bank. That gave 5 losses in a row and reduction of the bank of nearly 10%.. At this point the next 5 trades were wins (ie a 50% strike rate but worst case draw down on equity). By the 10th trade the equity was up nearly 8%. So if you plan the trade, manage risk reward and cut losses you can lose 50% of the individual trades but still win overall!

Once the trader fundamentally understands the probabilistic nature of trading then by managing his environment and applying the disciplines it is possible to overcome the various fears in trading.

Mark Douglas list these fears as follows.

Fear of losing money: you manage your risk so that you can never lose enough to hurt you (1-2% of your bank on any given trade) .

Fear of being wrong: show me somebody who never made a mistake and I’ll show you someone who never did anything. You are not afraid of getting any one trade wrong because you understand at the very core that it is a numbers game, that you have an edge and a strategy and that you will win over time.

Fear of missing out on a trade: You know there’s always another trade coming up behind.

Fear of leaving money on the table: You plan the trade, trade the plan and manage the trade to the plan – for example scale out the trade.

The other big hurdle is control of greed. Trading is not a quick way to get rich. Think tortoise and, if you want to get rich look at the power of compounding which even Einstein called the greatest force on Earth. Go to FMP and look up Marc’s article on:

How to turn $1000 into $2.6 million in 30 months with just 15 pips a day

If you can drive a spread sheet you can do this yourself. But I did a simple compound iteration with £1000 (or $’s). If you can add just £80 per week on average (8%) and compound it back in then by the end of year one you would have about £32,000. By then end of year 2 you would have about £250,000 and by the end of year 3 about £1.3 million. The power of compounding!!
I reckon this beats spending £50,000 on a degree for 3 years and then not finding a job.!!

THINK TORTOISE AND NEVER NEVER LEAVE YOUR WING MAN.