Forex

Common Classroom Questions – Part 2

rickwright
Rick Wright
Instructor

Hello traders! This week’s Lessons From the Pros article is a continuation of the article from June 11, 2013. Because I’ve received a lot of positive feedback both in emails and in recent classes, I decided to continue the theme.

Question 5: Why don’t you use ____ indicator/oscillator/tool? Another instructor does.

That is one of the great things about trading, you get to find the tools/techniques that make sense and work for you. After sixteen years of trading and seven years of teaching, I’ve seen and tried most indicators that exist. If it doesn’t help me make more money than I was making without the tool, why would I use it? I don’t like things to be more complicated than they need to be! Of course, every instructor at Online Trading Academy uses our high quality supply and demand zones, but some instructors use things like Fibonacci levels or moving averages or Relative Strength or whatever. These other tools are merely odds enhancers for the supply and demand zones that we have chosen. If you have ever played golf before, you will know that there are numerous types of shots that you could take at just about any place on the golf course. Are you trying to lay up before a creek, hit over the creek, draw the ball around the tree, etc. etc. Just like golfers have different choices of shots and clubs, traders have different choices of tools as well. This can actually be frustrating to the new student! Knowing that there are so many possibilities can make choosing different tools very daunting.

One of the reasons that trading can be so profitable is the fact there isn’t one way to do it. If there was only one way to trade, there wouldn’t be any money in trading! The thing that successful traders have in common is the discipline to follow two simple rules: 1. If the trade goes the wrong way, get out. Don’t add to that loser, don’t move your stop loss further out to stay in that trade, get out! 2. If the trade is going your direction, let it keep going! Why take yourself out of a trade if it still working for you? Makes no sense to me!

Question 6: Why do you recommend that we trade so conservatively?

You have to learn how to trade with small position size when  you first begin trading. With small position sizes come small dollar losses. We expect you to lose on some of your trades, everyone does! The most experienced and richest traders on the planet still take losses occasionally; you should follow their lead. If you take small dollar losses while you are learning, you will still have money in your account when trading becomes second nature. A very conservative recommendation that I make in class is to risk ¼ to ½ % of your trading account on any individual trade. With a $10,000 account, that would mean a dollar value risk of $25 to $50. That would be very difficult to make a living with such a small risk of loss, but it will also take a long time to lose a significant percent of your account! By the time trading is easy for you, you should still have enough money to take good trades. If you don’t trade conservatively in the beginning, you could probably add your name to the long list of super-profitable demo traders. Good luck paying your mortgage with your demo account!

Question 7: Why should I trade more than one asset class?

Diversification.  Ask the account holders at Refco, MF Global, or PFG Best if they wish they had been diversified!  When management of a brokerage firm makes decisions that put that firm out of business costing accountholders their hard earned money, there is a huge problem. If all or your accounts were at one firm, or even in one account, this lack of diversification might put you in the poor house. In nearly every class I teach, someone tells me that either they or someone they knew had an account at one of the three previously mentioned firms and lost all or nearly all of their money. ( I myself had  an account at Refco when they went “into crisis”.) By spreading your money around into a couple of accounts and different markets, you should be able to avoid a catastrophic unforeseen event.

In addition, certain asset classes are “better” at some things than others. Options, for example, are great for buying “insurance” on some of your portfolio, but not so great at day-trading for income. Stocks are decent for day-trading income, but they are a bit expensive whereas futures are much cheaper for day-trading purposes. The spot forex market can be good for day-trading, if done properly at a firm that offers very competitive spreads. Forex can also be good for hedging a portfolio that is entirely based in one currency.

Having a bit of knowledge about the forex market also helps you plan vacations. If your local currency is very weak versus another currency,  don’t travel to that country! It will be expensive! If your local currency is very strong versus another currency, perhaps consider going there as your world travelling vacation would be relatively cheap. At the time of this writing, the AUDUSD is at multi-year lows, meaning the USD is strong versus the AUD. So strong in fact, that you would be saving approximately 18% on your vacation going to Australia now instead of eighteen months ago.

If you have any questions that you would like answered in one of these newsletters, please feel free to send me an email at the address below.

Until next time,

Rick Wright

rwright@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.