Tuesday, November 22, 2011

A Serious Moment

I gave a seminar last night on “The Vegas BFSG Algorithm” to a group of new traders. I want to spend today’s post discussing a serious issue that always arises in trading. I’m going to dispense with the usual humor that accompanies pretty much all of my posts, and stay on issue as I drive home a point to those of you that want to make money.

It makes no difference to me where you are coming from or what you have done in the past. The question is, and always will be, can you follow the algorithm and NOT THE MARKET.

One of the reasons I like the MT4 trading platform is the ability to scroll back and look at past signals. With about 15,000 bars in the usual history, you can go back a long way to see what the algorithm has done. In summary, you’re going to get many OMG moments when you see what it has done.

This is the discipline part of trading where you have to put aside your feelings about the market and look at it from a technical and/or mathematical standpoint. Remember, whatever you are thinking about the market, it only exists in your brain, not in the market. This is where many people go wrong and lose big amounts of money.

There is no doubt after you have spent several hours with me that you are going to walk away with at least one very big impression: you must first alleviate risk, and then and only then, look at the market for gain. We can’t get rid of risk entirely when we trade, but we can put a lot of the risk behind us when we enter a trade correctly.

The discipline you need to make money is a direct result of entering trades correctly and being in a position to profit from that. When you enter with a bad price, or when momentum is against you, you have to place your stops far away from where you ordinarily would place them, and this results in wider and bigger losses.

Discipline is the key to making money. If you follow the algorithm, and trade during the busiest market hours [ Midnight – 1:30 PM Chicago time], you will make money.

I’m going to present to you the following numbers in the hope you will study and think about them seriously.

If you started trading at HotForex with USD $ 300, and made $ 1.50 / oz. on average each day [yeah, a buck fifty – a measly buck fifty per ounce – not $5 / oz .– or $10 / oz.] and maintained leverage throughout your trading of 10:1, in 2 years and 5 months your account balance would be approximately USD $ 1,300,000 !!

Yes, you read this right. The miracle of leverage, maintaining constant gains, and avoiding debilitating losses. Given the fact that in the last 2 weeks the algorithm made $ 86 and $ 49 per ounce, respectively, for the week, making $ 1.50 / oz per day seems downright measly.

So, my question is do you remember June of 2009? Because if you do, between then and now you would be up about a mil three. How many of you have that kind of money right now? No?

My message to this group of traders last night was this: 1) follow the algorithm, NOT THE MARKET, and 2) start small and build NOW! Not next week, or next month, but NOW! Anybody can do this, whether you are a student, grandmother, businessman, whatever [Note: Please exempt doctors and lawyers, because as a group they seem to exhibit the God complex and have problems following directions.].

You don’t have any valid excuses, except of course you are happy with your current money status. I’m guessing NOT!

Today's Action & Wrap Up

We got 2 sell signals today, the first producing a loss of about $ 3 / oz, and the second producing a gain of about $ 4 / oz. Since they are so close to each other in producing a wash, I'm going to assume the day was a scratch. Meaning, of course, the net was $ 0. Really nothing of significance.

The algorithm is in sell mode, so we missed the rally today from the overnight lows. Any time the market exhibits this kind of V-shaped rebound, we will miss it. Why? Because I am more concerned about losses than gains. Given the right side of the market, a chimp could make money. So, I deliberately constructed the algorithm to first prevent losses, and then go for gains. Again, an opportunity cost, not a real loss; there's a big, big difference.

Have a good day everyone,


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