Date: May 17, 2005 14:00 GMT
Expert: Rob Booker, Currency Analyst
Topics:
- What is a Big Picture Trader?
- How to understand the reasons behind price moves
- Learn to understand how and when trends develop
- The 5 Habits of Big Picture Traders
- How to ruin it all and lose all of your money
***Transcript will be available for Session Participants only***
Who is Rob Booker?
Rob Booker trades profitably for his own account and manages money for others. Rob has trained hundreds of fx traders around the world. He has helped them develop their own trading systems, but more importantly, Rob focuses on helping traders deal with the mental, psychological, and discipline issues related to training. For Rob, successful trading is more mental than anything else.
Speech Material:
Getting the Bigger Picture in Forex
1. What is a Big Picture Trader
? A big picture trader has enough experience and knowledge and wisdom to understand what is going on “beneath the charts” or, in other words, behind the scenes, to create price movement. A big picture trader understands the fundamental considerations of a trade on a specific currency pair. A big picture trader knows – immediately, at any given time – the major technical considerations when considering a currency pair.
It might even be easier to help you understand the importance of becoming a big picture trader if I describe to you the opposite: the small fry trader.
A small fry trader is one who loses 50 pips on a trade and says, “I wonder why that happened?” A small fry trader watches the market launch 100 pips in one direction and then says to himself, “I wonder why that happened?” A small fry trader hears that Australian interest rates are going up, and either has no idea what that means, or asks the question, “I wonder what higher AUD rates will mean?” Small fry traders are constantly wondering why a pair stopped where it did, wondering why their stop loss keeps getting hit, wondering why they are unable to get in on the big moves, and wondering why they regularly choose watch the market during hours when there is no activity.
A big picture trader knows how to do that.
In short, a big picture trader is one who understands what is going on in the market, and can profit from that understanding. Most importantly, a big picture trader understands the principles by which a currency pair operates, and then applies those principles to make profits.
Analogy #1
The principles of physics govern the world around us. It is a true principle that if you drop an apple from a tree, it is going to fall. It is a true principle that if you send an object high enough into the earth’s atmosphere, it will orbit around the earth. These principles are true even if you do not understand them, agree with them, know about them. You can fall off a cliff to your death even if you have never heard of Isaac Newton.
Similarly, there are principles by which the currency markets are governed. When price moves up 100 pips, these principles are at work. We’ll call these the Currency Principles.
You can ignore Currency Principles and still make money – we all started on a demo account and made money. We were obeying Currency Principles and often did not even know it. You can’t ignore them for long and still make money – they catch up with you. This is what we learned when we switched from demo to live and started bleeding pips.
When we lost money in that first live account, we switched into a higher gear and we started scrambling to stop the losses (usually these losses are large and that’s why we start to panic more quickly than we ever did when trading for fake money). When we started looking for ways to stop the losses, we began to realize something really important:
WE HAD NO IDEA WHAT WE WERE DOING.
That’s when trading became really difficult, right? We all took a deep breath and realized that live trading was harder than demo trading. We could not explain why, but we knew it was so much more difficult that most of us considered quitting.
A big picture trader does not quit, but rather seeks out Currency Principles. As you learn and apply true principles in the currency markets, you profit. You ignore these same principles at your peril.
2. How hard is it to become a big picture trader, to learn Currency Principles?
Learning how to learn true Currency Principles is more important than learning a set system or a really cool strategy. When you learn how to discover true Currency Principles for yourself, you have a toolbox that can never become outdated.
That’s why this is not a live chat where I am going to list every Currency Principle that I have learned. This brings us to our first truth:
Truth #1
You can learn true Currency Principles from others, but you have to learn how to discover them on your own.
There are two things you need to become a big picture trader and to learn Currency Principles: experience and knowledge. They come in no particular order, and neither is more important than the other, and one is useless without the other. To put it another way:
To become a big picture trader, you need equal parts of experience and knowledge. Let’s talk about two kinds of each.
Knowledge #1: Book Knowledge
You should prioritize a list of books on trading (I’ll help with that below). Then you should read them and become so familiar with them that you can easily talk about the principles those books contain.
Knowledge #2: Mentor Knowledge
You can learn from the mistakes and successes of another trader, and sometimes this type of knowledge can speed up the process of becoming a profitable trader.
Experience #1: Demo Trading
Most traders never demo trade for long enough. Some dealers only allow traders a 1 month demo account. This is ridiculous. We all had the urge to skip from demo to live way too fast. I did it. You probably did it too. This did not make us bad people. It proved that we were a bit dumber than we thought, and it caused us, in the end, to be poorer than we wanted to be. If you want to learn true Currency Principles, you need to spend at least 2-3 months demo trading before you ever risk your first live pip.
Experience #2: Live Trading
The other thing that fascinates me about my own experience as a trader is how fast I was willing to risk my hard-earned money on my own limited trading experience. We all are greedy and hopeful about certain things; unfortunately, we usually end up paying for our foolish impulses. But the fact is that small live trades (read: risking VERY little at first) can teach you a lot about trading. There are many Currency Principles to be learned by trading live. Even with small amounts of money.
Let’s talk about each of these categories. I am going to do them out of order.
3. What Knowledge Your Need
There are four main areas in which you need to acquire as much knowledge as possible:
- Technical Analysis
- Money Management
- Money Markets / Interest Rates
- Economics (both Macro and Micro)
A word about TA: pick one oscillator only and learn as much as you can about it. If you don’t know what an oscillator is, visit this link:
http://www.investopedia.com/articles/technical/070301.asp
Or go to http://www.investopedia.com/ and search for the word “oscillator”.
4. Knowledge: Deep or Wide?
You want to go deep. This means, that you want to study how the four main categories relate to just 1 or 2 currency pairs – not 7. If you are trying to learn about 3 or 5 or 8 currency pairs – from TA, to Money Management, to Interest Rates, to Economics, your head is going to spin until it falls off. You will end up being dumber. It will not help you trade.
You need to go deep into a currency pair from the 4 main angles above.
Ok, now on to the categories of knowledge.
5. Mentor Knowledge
If you are going to hand over money or your time to someone else, for the purpose of learning from their experience, here are some things that you should look for:
a) Your mentor must accept that you must learn to learn, and learn to apply, true Currency Principles for yourself. If a mentor teaches you mechanical or discretionary systems, make sure you understand the underlying concepts about those systems. Mechanical and discretionary systems can break. But if you learn to build your own mechanical and discretionary systems, then you will have the tools necessary to succeed in the long term. Even if your mentor is hit by a bus.
b) In addition to knowledge about the 4 main areas, you should receive access to see all of the decisions your mentor/teacher makes about his trades. He should not make special, on the side trades that he/she does not tell you about. What's the point of that? Traders who have a scarcity mentality – who say “I can’t share my secret system with you” are morons. You are never going to have a secret system that, if you share it with someone else, will break or stop working. Most traders are not willing to share systems because their systems stink.
c) You should know up front from the mentor what their daily planning/strategy regimen is.
d) No expiration date on getting help.
Those are just a few considerations that you should have. I have lots more to say on this topic, but let’s move on.
6. Book Knowledge
You must set aside time every day or every week to read. I cannot emphasize this enough. Whether you buy the books or you read pdf versions online, you need to set aside enough time to AT LEAST read one book every two weeks. I hope you will read much more than that.
Here is a list of books that I have read and that I highly recommend.
MUST READ
Come Into My Trading Room
Trading for a Living
Technical Analysis of the Financial Markets
Technical Analysis Explained
Trading in the Zone
Market Wizards
SHOULD READ
Naked Economics
Secrets of the Temple
Blink
The Master Swing Trader
The Alchemist
The Professional Commodity Trader
There are many, many more books. Read as many as you can. Schedule your reading and make sure that you do it. Take notes on what you read. ]
Here are some links that are fantastic that you should read, which cover the US Federal Reserve. This is a hot topic right now and you need to learn all you can:
http://www.federalreserve.gov/policy.htm
http://en.wikipedia.org/wiki/Federal_Reserve
7. Demo Trading
If you don’t want to demo trade for at least 2 months, then I want you to practice the following exercise:
1. Take your wallet or purse;
2. While holding it, light it on fire.
You are simply too aggressive and impulsive if you dive into live trading too quickly. Use 8 weeks of demo trading, at least, to learn about which trading platform you like the best, how it works, how to use a charting program, how the pair you focus on reacts to news, how it reacts to certain moving averages and oscillators and support and resistance.
Most traders who jump into live trading feel like if they demo trade for too long they will miss out on something. That is like complaining that because you can’t run out into the middle of the highway, you are missing out on the pleasure of getting hit by a bus.
8. Live Trading
When you first switch to live trading, please trade the smallest lot size you are able to trade. If you pick a good dealer, you will be able to trade amounts smaller than $1 per pip. If $1 per pip is a meaningless amount to you, then trade for more. But keep the trade so small that it won’t matter if you win or lose. Use this first live trading time as a chance to test the systems that you developed in demo trading. You should not feel as if you have to get rich in your first few months of live trading. This relieves you of so much pressure.
Keep a detailed journal of your live trades. If you feel this is too much work, please do the following:
1. Stretch out your hands;
2. Pour battery acid on them.
This will keep you from ever trading again. It’s simply not worth trading if you are not going to keep a good record of what you do and why you do it – especially with real money. Record your reasons for getting in the trade, your feelings while you are in the trade, whether you got the high score on NBA Street v.3 while the trade was open, and if you could change anything to make the trade better.
9. The 5 Habits of Big Picture Traders
a) They might be early, but they are rarely late. This means that they work very, very hard to spot and take advantage of trends and reversals early. How do they do this? They learn everything they can about trends (do not buy the book by Michael Covel; it is worthless), about support and resistance, and about oscialltors.
b) They never risk more than they can afford to lose on one trade. Ryan Jones has a good primer on Money Management – his book The Trading Game. Alexander Elder advises traders to never risk more than about 3% of their account on any one trade. Early on in your trading, you should risk as little as possible (as close to nothing as possible).
c) They never stop learning. They read constantly, interview other traders, and stay current with the 4 major areas of knowledge.
d) They backtest. They either test their systems manually by going back through charts candle by candle, or they run their systems through computer models. Every week, you should make it a habit to do a review of last week and a preview of the week to come, and talk about your past trades and what you would change. Even better – replay a past week candle by candle and make trade decisions over again. This helps you learn.
e) They stay on target. Big Picture traders do not change their system every day or every time they experience a loss. They put a lot of time into developing their system in the first place. New traders give up and alter their system over and over again many times, and never learn if the system works.
10. How to ruin it all and lose all of your money
Last of all, there is a really easy to ruin everything and lose all your money:
Believe that you have learned everything you need to know. One of the fundamental Currency Principles is that you are never going to know everything. You are never going to be able to develop one system and put it on auto-pilot and never work on it again. You are never going to become so good that you do not experience losses.
Make the acquisition of knowledge and experience central to your trading career. Keep in touch and let me know how you are doing.
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