setting the right trading mindset for success with forex trading

Trading Mindset

Simon Coulter

Head of Development and Risk Management

MahiFX

About MahiFX

MahiFX is an online retail trading platform offering clients exceptionally competitive spreads and great customisable charting functionality.

Simon Coulter, is the Head of Development and Risk Management at MahiFX and will be discussing how one of the key factors to success in Forex Trading is getting into the right mindset. This webinar, will explain how to achieve this and how it can make all the difference between success and failure.

What Approach and Attributes Do I

Need To Adopt To Succeed?

What should I leave behind?

1. Unrealistic expectations – insufficient capital

2. Unwarranted arrogance

3. Poor discipline

4. Attention deficit problems/impatience

5. Inability to regulate your emotions

6. Are you in it for the right reasons?

7. Stubborness and lack of flexibility

8. Adversity to risk

• What is money management?

• How does an individual trader who is unlikely to

be exposed to the benefits of a broadly

diversified currency portfolio put it into practise in

their world?

Money Management

• Position sizing

• Exit and stop-loss strategies

• Execution methods

Key Areas of Money Managment

Position Sizing

Geometric vs. arithmetic mean

The first goal of money management is to

ensure survival

• The key to this is not losing too much on one

trade

• Losers violate this rule especially during

losing streaks

Key Areas of Money Management

Position Sizing

• Losing 50% of your original investmentrequires

a 100% win to get back to where youstarted

Exit at the first sign of trouble

Key Areas of Money Management

Theory of runs

Assume two systems; system (1) with a losing % of

45% and system (2) witha losing % of 49%

• P (1, five losses in a row) = (0.45)^5 = 1.8%

• P (2, five losses in a row) = (0.49)^5 = 2.8%

Position Sizing

Theory of runs

• System with lower loss rate has lower probability

of a run of consecutive losses

• Even marginal systems such as system (2) have a

low probability of a large run of consecutive losses

Position Sizing

Theory of runs

Conclusion: By avoiding large losses and knowing

runs of losses are infrequent in winning systems,

we give the market every opportunity to work in

our favour

Position Sizing

Theory of ruin

• P(infinite wealth) = 1-(1-probability of

winning)/(probability of winning)^ number of unit

of initial margin

• Assume losing % of 45%, and loss payoff = win

payoff (1:1 payoff ratio)

Position Sizing

Theory of ruin

• Assume margin = payoff (i.e. margin = 1 unit)

• P(infinite wealth) = 18.18%

• Increasing the margin to 10 units, P (infinite

wealth) = 86.56%

• Increasing the margin to 50 units, P (infinite

wealth) = 99.996%

Position Sizing

Position Sizing

Theory of ruin

• Larger capital base relative to our loss

dramatically increases chances of success

• Increasing bet size relative to margin will

decrease the probability of success. Increasing

the bet size from 1/50th of our margin to equal our

margin in this scenario would reduce the chance

of success from 99.996% back to 18.18%

Optimal % of capital to allocate to trades

• Optimal % = ([(A+1)*p]-1)/A, where A is the average payoff ratio, and p the win %

• Lets look at the prior system which had a 51% winning %, and 1:1 payoff ratio

• Optimal % = ([(1+1)*0.51]-1)/1 = 2%

• Equals % to risk on a single trade as suggested by extensive testing and the number offered by many practitioners in the industry

Position Sizing

Avoid the temptation of betting large on single

trades!

Position Sizing

Martingale System

System developed for gambling whereby larger amounts are betted after a loss

• Player in a casino bets $1 as long as he wins, if a loss is incurred the player doubles up betting $2

• If he wins a $1 profit is gained (-$1+$2) and the player reverts to betting $1

• If he loses he doubles up again and bets $4, if he wins he gets a $1 profit (-$1,-$2,+$4)

• If he loses he doubles up again and bets $8

Position Sizing

Position Sizing

As long as the gambler keeps doubling up, his

very first win will cover all thelosses and return a

profit equal to his original bet

Martingale System

• System has great emotional appeal to a loser as it appears like a no lose proposition, unfortunately a run of bad trades will wipe out every gambler

• A gambler starting with a $1 bet that has 46 losses in a row has to bet$70 trillion on his 47thbet

Never take on the market

Avoid continually averaging your position to recoup losses

Position Sizing

Position Scaling

• Concept where a trader places many orders

around the area of interest to avoidmissing the

trade

• Do not kid yourself into believing you are

scaling into a position when anobjective person

knowing your original plan would say you are

not!

Position Management

– Order Placing

Chart 1

Position Management

– Order Placing

Execution

• Tradable rates

• Integrity and platform usability

• Competitive pricing

Consider cost of spread and rolls in relation to your

deposit

Pyramiding trades

• Method where traders increase their position

size to gain leverage when theprice moves

favourably after the initial entry trade

• Necessitates a sound understanding of ‘trend

risk’

Position Management

Chart 2

Position Management

• Match position size with risk through

understanding of the trend and changing nature

of risk as the trend evolves

• Avoid adding risk when the trend is weak and

instable, this period is typically during the start

and end of a trend

Chart 3

Chart 4

Pyramid position management conclusions

• Never add to a position until in profit

• Place stops at break-even as size increases

(ideally adhere to technical levels)

• Ensure position risk is within maximum

acceptable limits

• Position addition should be cognizant of trend

maturity

Position Management

Technical versus money point stop loss

• Stop losses should not be set around arbitrary

levels, but based around levels based on the

technicals and your loss limit

Position Management

– Stop Losses

Chart 5

Position Management

– Stop LossesBreakeven stop losses

• Method which ensures no erosion of capital, is where a trader moves their stop to protect profits; should only been done when their is protection in the market from technical's (or an order) or if a large time interval has elapsed (see below)

Time based stop losses

• Recognises the multidimensional aspect of time and reward versus risk, longer time horizons expose the trader to higher risk

Chart 6

Close to market stop losses

• Typically employed by scalpers to exploit short term moves , during tight ranges and support/resistance breakouts. Must have the utmost confidence in our liquidity provider to ensure fills are fair and not executed out of market

Volatility stop losses

• Stop losses which account for the intrinsic volatility of the currency in question, widening when volatility increases and tightening when volatility decreases, i.e. Chandelier Exits, ATR stops

Position Management

– Stop Losses

Support/Resistance and trend line stop losses

• Are amongst the most highly used by market

traders. It is essential to familiarizeyourself with

how to apply the principles behind them to your

trading

Position Management

– Technical Signal Stop Losses

Position Management

– Technical Signal Stop LossesStrength of support and resistance lines

The strength of every support and resistance zone depends on three factors

• The length and number of hits, the longer the support and resistance zone is the stronger it is (same applies to trend-lines)

• Taller support and resistance zones are stronger, larger zones can provide stern resistance to intermediate and longer term trends

• Higher volumes of trading confer stronger support and resistance due to the higher player participation

Chart 7

Chart 8

Trading rules using support and resistance

1. Tighten protective stop losses as you approach support and resistance. Trends will reveal their health by how they react around support and resistance zones

2. Support and Resistance are more important on longer term charts than shorter term ones

3. Cautious traders can place stops in the middle of congestion zones after breakouts. True breakouts should not be followed by pullbacks well into the range

Position Management

– Technical Signal Stop Losses

Position Management

– Technical Signal Stop Losses (cont.)

4. Breakouts will generally favour a move in the

direction of the trend that preceded prior to

entering the trading range

5. Breakouts accompanied by higher volume have

a significantly higher chance of success

6. False breakouts often occur counter to the

prevailing trend and often occur on light

volume. Be very wary of breakouts during the

Asian time zone

Chart 9

Indicator stop losses

• Stop losses which are based on a trigger

signal to trade from technicalIndicators, i.e.

Moving average crossovers , MACD signal

line crossovers,Directional Movement Index

line crossovers, PSAR signals amongst many

others

Position Management

– Technical Signal Stop Losses

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Questions?