FXstreet.com Live Sessions Archives: Trading is not Rocket Science

Expert: Robert Firestone, Broker analyst at Alaron

Who is Robert Firestone?
Robert is a broker with Alaron Trading. As a broker he has spent the last four years working with individual traders to improve their trading skills and strategies. Currently he teaches several classes a week for commoditytradingschool.com & sister site fxtradingschool.com covering topics from the basics to technical analysis and system trading.

Sessión Material:

Just because trading isn't rocket science does not mean you can approach the market with out discipline and get rich quick. Trading is 1 part science, 1 part math and 2 parts psychology.

SCIENCE
Creating a trading plan is really a science experiment. The desired end result is clear and simple: PROFIT. Through the testing ideas from the simple and basic of trend lines, support and resistance to the complicated pattern recognition we come to conclusions about is the concept valid. If it worked in the past there is a chance it will work again in the future. Remember Occam's razor, the simple answer is usually the correct answer. Simple usually holds up much better over the long run and shifting market conditions.

MATH
If you can balance your check book then you can probably do the necessary math to be a FOREX trader. Through some basic math nothing more complex than multiplication and division. Once we have a valid concept to base our trades on through math we attach our money management rules. We calculate out how big of a position should we be trading what % of our account should we be risking at any given moment. On a $10,000 account to return north of 38% a year trading only 16 days a month you need to only be profitable 2 pips a day.

2 pips X $10 per pip X 16 days = $320 month
$320 a month X 12 months = $3840 annual
$3840 / $10,000 = 38.4% annual return

Breaking the numbers down like that makes the entire idea of trading a lot more manageable. And there are a lot more opportunities for 5 - 20 pip wins than 100 pip wins through out the day. If you average 6 pips a day your account will be more than doubled at the end of the year. That is what I call the power of small numbers.

PSYCHOLOGY 1
After putting in the work to find a valid concept to trade from, doing the math to of money management traders still fail to trade profitably! Why? Psychology. A trading plan is only as good as the person using it. Richard Dennis the father of the Turtles put it best in his interview for Market Wizards "I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline." Traders don't follow their own rules for a simple reason they don't want to! Why don't they want to is a much more complicated question. Maybe they have no confidence in the work they had done. Maybe it took the fun and mystery out of the market, and with out the excitement trading loses it's appeal (hint this is trading to trade not be profitable). The first level of psychology is overcoming personal obstacles and following the plan you your self laid out. To achieve this level it may require more testing of your idea, adjusting money management rules to be more in-line with your risk tolerances. Maybe you should stop trading live for a month or two and trade a demo account to become comfortable. You don't need to out run the entire market just enough traders to be profitable.

PSYCHOLOGY 2
The herd mentality is ever present in society. It is everywhere from the markets to mass media. Why do Paris Hilton and Nichole Richie get so much press time? Is it because they are so incredibly talented? Not likely. Is it because the media has figured out it sells and there is a snowball effect the more they sell the more they put out. Eventually this snow ball will run into something and be stopped. The markets move in much the same way. Currencies and economic policies go in and out of favor. This is how trends are formed. Understanding where the herd is in the cycle makes price moves more comprehensible.
Looking at recent history and the current position of the market and key players we can analyze the current situation for the US Dollar. The 1990's temporarily marked the end of deficit spending in the US and an actual budget surplus to pay down the debt. Those policies created a favorable situation for the dollar making it appreciate greatly. A few years later a change in leadership and policy, a return to massive deficit spending and a very clear stance that a weak dollar is good has lead to a substantial weakening of the dollar. Are we near the end of this current cycle? Maybe. With more talk of central banks moving large amounts of reserve holdings out of dollars and in to euro is promising. Personally I have very little faith in central banks being able to do the right thing at the right time. Will the Chinese float their currency soon? Not substantially, they hold the cards in this game of poker. Even if they do the US export price advantage will only last for a short time. A price war is a situation that can not be won. Eventually someone will come in, priced below you and with higher quality. Then you are dead in the water and a shift in policy is forced.

Trading is not about doing the extraordinary, rather traders master the ordinary. Doing the same simple things over and over again until they become second nature.

Session Transcript:

FXstreet Moderator (Jan 17, 2007 8:45:38 AM)
Good morning, good afternoon, and good evening to all of you joining us today from different parts of the world. I want to welcome all of you to today's Live Forex Expert Question and Answers session.

FXstreet Moderator (Jan 17, 2007 8:54:42 AM)
Welcome to FXstreet.com Q&A Forex Session. Today’s session will start in 10 minutes.

FXstreet Moderator (Jan 17, 2007 8:59:55 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderator (Jan 17, 2007 9:00:25 AM)
Please prepare any questions you may have for the expert. Thank you for joining today’s Q&A Session.

FXstreet Moderator (Jan 17, 2007 9:01:51 AM)
Welcome to the Session. Today I am delighted to welcome our guest speaker Robert Firestone, Broker analyst at Alaron. Welcome Robert!

Robert Firestone - Alaron (Jan 17, 2007 9:02:15 AM)
Hello everyone

Robert Firestone - Alaron (Jan 17, 2007 9:03:34 AM)
I am going to open this right up for questions. So lets get started!

Robert Firestone - Alaron (Jan 17, 2007 9:05:13 AM)
I am a firm beleiver in the idea that trading is a skill. Like all skills they can be tought and learned.

Robert Firestone - Alaron (Jan 17, 2007 9:06:20 AM)
While a certian amount of natural ability is required the prerequisites are not great.

Robert Firestone - Alaron (Jan 17, 2007 9:07:49 AM)
Unlike sports where being bigger or srtonger is a distinct advantage. Physical abilities have little or no impact on a traders capabilities.

dav (Jan 17, 2007 9:08:38 AM)
5 pips a day is a good system? Is not better don’t limit your profits and let them run?

Robert Firestone - Alaron (Jan 17, 2007 9:09:36 AM)
5 pips a day is more about being relistic of what needs to be done on a day to day basis.

Robert Firestone - Alaron (Jan 17, 2007 9:10:25 AM)
Obviously a 20 pip win is better than a 5 pip win. But a 5 pip win is better than a 50 pip loss.

Guest_rliekens (Jan 17, 2007 9:11:22 AM)
Your calculation on profit suggestion is good, only when you want to be profitable your stops per trade are a lot more pips than the projected profits. This would lead that you must increase more profitable trades because one losing trade gives you versy quick a loss of 15 pips, so you must do 7 or 8 new good trades to cover one loss. What is your opion here?

Robert Firestone - Alaron (Jan 17, 2007 9:11:34 AM)
Most traders have very unreallistic expectations thinking they can make 100 pips on a trade every day and end up taking large losses along the way.

Robert Firestone - Alaron (Jan 17, 2007 9:13:59 AM)
Traders must make choices. what the math is based on is the idea that at the end of the day you average a net profit of 2 pips a day you will show a very healthy return.

Robert Firestone - Alaron (Jan 17, 2007 9:17:20 AM)
What matters over the long run for day traders being profitable frequently.

Robert Firestone - Alaron (Jan 17, 2007 9:19:22 AM)
Part of that is having a way to measure your trading. Some traders evaluate on the daily basis others look at it from a weekly perspective. How many pips did you make today or this week or this month?

Robert Firestone - Alaron (Jan 17, 2007 9:21:41 AM)
The homerun trade does not happen every day so swinging for the fences on every trade does not make sense. 100 pip trades happen and that comes from being in the right place when the market moves.

Adem (Jan 17, 2007 9:23:05 AM)
What do you say about intuition in trading?

Robert Firestone - Alaron (Jan 17, 2007 9:24:48 AM)
Intuition in my opinion is practice in action. What most experienced traders call intuition is actually the application of the skills developed.

Robert Firestone - Alaron (Jan 17, 2007 9:26:20 AM)
What to the casual observer may appear to be the trader knowing what the market is going to do the reality is a trader who has developed the skill to the point it appears easy and natural.

strourt (Jan 17, 2007 9:26:39 AM)
when comparing hourly and daily charts for trend direction, i get mixed messages. how can i trade with the trend if i see this?what other indicators do you think i could use to find my direction?

Robert Firestone - Alaron (Jan 17, 2007 9:27:37 AM)
There are many time frames and lengths of time to look at trends.

Robert Firestone - Alaron (Jan 17, 2007 9:28:14 AM)
It really depends on the time frame you trade on.

Robert Firestone - Alaron (Jan 17, 2007 9:29:04 AM)
The longer term trend is going to show up on the daily charts.

Robert Firestone - Alaron (Jan 17, 2007 9:29:51 AM)
Shorter trends will be on the 15 minute or hourly chart.

Robert Firestone - Alaron (Jan 17, 2007 9:30:28 AM)
the shorter the time frame you trade the more you should rely on the shorter term trend

strourt (Jan 17, 2007 9:30:45 AM)
so if i want to trade on an hourly it would be better say to go long if the daily chart is trending up?

Robert Firestone - Alaron (Jan 17, 2007 9:31:44 AM)
The setup may appear more often in the direction of the longer term trend.

Robert Firestone - Alaron (Jan 17, 2007 9:33:18 AM)
The trend is a powerful thing but not a sure thing. Take the time to find if the setup you are looking for is good.

Robert Firestone - Alaron (Jan 17, 2007 9:35:37 AM)
One of the most powerful lessions I have learned from some very accomplished traders is keep it simple and price is king.

ali (Jan 17, 2007 9:37:08 AM)
Hi Robert, what does it mean the price is king'

Robert Firestone - Alaron (Jan 17, 2007 9:39:00 AM)
Thank you ali. Do traders make money from the indicator being set up with x parameters? NO they make money when the price moves in their direction!

Robert Firestone - Alaron (Jan 17, 2007 9:41:14 AM)
Indicators are irrelevant if the price is moving against you. Rather than focusing all of our attention on a manipulation of the price look at the price

Robert Firestone - Alaron (Jan 17, 2007 9:42:04 AM)
Indicators can be helpful but they lack the ability to make you money.

Robert Firestone - Alaron (Jan 17, 2007 9:44:36 AM)
In fact I was emailed a chart by a long term loser that had 12 different indicators on it. The actual price chart was the smallest section of the picture.

Robert Firestone - Alaron (Jan 17, 2007 9:45:55 AM)
He paid no attention to the actual price and lost money on almost every trade. That is not a roadmap to success.

ali (Jan 17, 2007 9:47:56 AM)
why someone can let him lost in such confusing situation? I can not undestand, do you have any idea about?

Robert Firestone - Alaron (Jan 17, 2007 9:49:53 AM)
Often traders are more interested in being right than making money

Robert Firestone - Alaron (Jan 17, 2007 9:50:24 AM)
Ed Seykota says everyone gets what they want out of the market.

Robert Firestone - Alaron (Jan 17, 2007 9:51:48 AM)
Traders who want to think there is a great mystery or magic indicator that will make the effort to find it but will always in the end lose

Robert Firestone - Alaron (Jan 17, 2007 9:54:53 AM)
It looks like we have just another minute or two and time for one last question

Robert Firestone - Alaron (Jan 17, 2007 9:57:00 AM)
Then I think that does it for today. If you have any other questions you can email them to me rfirestone@alaron.com.

Robert Firestone - Alaron (Jan 17, 2007 9:57:42 AM)
Thank you all for being here today.

FXstreet Moderator (Jan 17, 2007 9:58:05 AM)
That’s all we have time for Today .Thank you very much for that Robert.

FXstreet Moderator (Jan 17, 2007 9:58:20 AM)
Thank you all for your participation. See you soon!