Trading strategies

In a previous article we introduced the SIX steps to improving your trading discipline and offered some guidance on developing “awareness” with a downloadable ‘checklist’ for you to complete. Before we start, If you haven’t seen this article, it is perhaps prudent to go now and complete the checklist as this will inform you for this second step. Click Here The second step has two sub-steps that are critical. 1.

From those areas you have identified in the checklist as requiring work which are the most important to work on. 2. Once you have nailed down your priority area, explore the reason why this may be, to provide you with a focus on what it is you must work on. Prioritise your discipline areas One of the challenges we often face is that if there are several different areas to work on in our development (both in and out of trading), then this can seem very “big” and sometimes overwhelming.

For new or inexperienced traders this feeling of overwhelm may often be a barrier to take any action. So, it seems logical to focus on one issue at a time to make things seem more manageable and achievable. Additionally, and looking forward to later steps, one of the other benefits of this approach is that success in one area will often provide a confidence and the motivation to tackle other areas.

In terms of what we should choose, with the list of areas you will have already identified, there will be some which may potentially have a more easily defined impact than others. An example of this may be that, if you have a trading plan and yet you are consistently failing in executing exits as you should, this would have a major impact on results. So, to the practical aspect once again, with your list, allocate a score between 1-5 re. potential impact you think addressing this area of ill-discipline may have on your results.

This should help you choose the “one”. Identifying the cause. Potential causes of ill-discipline, although sometimes dependent on the situation, can be many.

Here are some of the most common causes (you can get clues from what your internal voice is telling you). 1. A choice that trading is not of enough importance to invest the time/effort needed. (So, “I haven’t got the time”) We all allocate time to trading activities. Such time may be effectively invested in things that could make a difference or otherwise.

Additionally, although we are not suggesting that trading should take over your life, there is a need to ringfence some time (rather than watching reruns of “Law and Order’ to put some hard yards in at the front end to have the right things in place). So, you have two choices to make. a. Do I choose to ensure I have ringfenced the time to do the things I need to become a “committed” trader? b.

Do I choose to ensure that the time I do allocate to trading activities is invested in the right things, e.g. Recording my trades in a trading journal or unfocussed skipping between “interesting” news, or often useless trading forum chatter? 2. Don’t know what to do (or perhaps, “it’s too hard”) OK, so there may be a ‘knowledge gap’ in terms of the “how-to” make something happen.

For example, you may believe that there is merit in making your trading plan statements specific enough to facilitate consistency and measurement, but you are not quite sure where to start. Two key points here... Firstly, as with any part of your trading development planning, you need to refine the question you are asking, then seek out appropriate resources and of course finally to follow through on asking for what you need.

GO Markets has platform support and educational support to help you on your journey. Perhaps you are not asking as you feel you should already know the answer or maybe even that you think your question may be “stupid”. Remember there is no such thing as a stupid question, and surely it is far less wise not to ask if the support is there.

Secondly, sometimes when faced with multiple issues to resolve it may seem overwhelming or perhaps taking on new knowledge is something that does not come easy. Think about your journey so far. I am sure there are things which you didn’t know at one stage that now come easy.

Why shouldn’t additional learning be the same? Quite simply, you must step up to the plate and find the answers you need. 3. You have not been specific about what you should do and when you should do it Ambiguity in a trading plan or system is one of the potentially most damaging issues on an on-going basis.

We frequently extol the virtues of having enough specificity in all your trading plan statement to facilitate consistency in action and the ability to measure your trading actions accurately and meaningfully (so as to make adjustments if needed). To remain in a state of uncertainty in action as you have not got sufficient and specific individual guidelines to use in the “heat of the action”, clearly does not serve you well from a discipline perspective. Additionally, it may be that your trading plan is incomplete.

Perhaps it does not cover all market scenarios or may have enough detail regarding trade entry but lacks the same rigor relating to exits. The solution here is obvious. Work need to be put in to make your trading plan as robust and specific as it needs to be.

We have written a previous article on this, so if this resonates with you then perhaps this would help (Insert link). 4. Don’t believe something/you will make a significant difference e.g. your existing system, a new system, a new piece of learning. Clearly if you have little faith that a particular action, be it part of your trading plan or the need to implement a system such as journaling, is going to make a difference to your trading results, then you are far less likely to action.

Adult learning theory is full of references to the need for relevance before learning action is taken and of course much of this is based on having some evidence that something will make a difference. Here is the problem, without evidence of at least some tangible difference you are less likely to act and yet without action you are not going to create the evidence you be sufficiently motivated to do something. We are going to discuss gathering evidence in detail in other articles within this series but for now it is probably sufficient to say, that if the only way to create the evidence that something will work for you then surely it is worth even dipping your toe in the water to find out a little.

This may be enough to give you the will to subsequently try something out for longer. 5. In-built trading ‘heuristics’ (cognitive biases) or a belief that the market is “wrong”. Our final point of the common fives is some of the in-built “wiring” you may have.

People who come to trading have an inbuilt set of belief and value systems that develop through their lives through instruction from others and experience. These inbuilt systems are termed cognitive biases, and in many instances in the ‘heat of the action’ take over from your written and planned ‘trading system’, even if you strongly believe that your system is good, influence on your behaviour in the market. Results that you may produce from your trading can reinforce these inbuilt biases making them more acute, and so have more and more influence on what you may do when in the market, until finally they end up destroying the capital and so confidence of the investor.

There are many such biases documented in an area of study termed behavioural finance. Six of these seem to be commonly described namely: • Loss aversion bias, • Recency bias, • Outcome bias, • Sunk cost effect, • Minimalisation, & • Disposition bias. We will explore these in detail in future articles, but these may be a contributory root cause particularly of execution discipline with direct trading action.

So, with our five root causes covered, onto your missions for this second step (key question…Are you going to push through an exercise the discipline to follow through?): Consider the potential causes (listen to your internal voice) and begin to identify what cause(s) may be relevant for you. Make notes on anything you identify to get more detail “inked” on paper. Watch out for the next article in this series where we will explore starting to gather enough evidence to change potentially ill-disciplined behaviour into actions which may serve you well.

With very rare exceptions every trader must battle with trading discipline at stages in their trading career. Commonly when we explore trading discipline, there is an obvious focus on what we will term “execution discipline”, that is engaging and following through with elements of your trading plan e.g. adhering to a pre-planned exit strategy. However, becoming a better trader is more than simply doing what you say you will do with direct trading actions.

It also involves developing a structured plan for learning trading (fostering improved knowledge and confidence), creating those systems that support the development of that plan you intend to execute, discipline in learning and system development. Quite simply, discipline in learning gives you the tools to develop and creates effective systems (and measure them) without these, and a subsequent belief and confidence that they could work for you when trading, it becomes significantly more difficult to be disciplined in the execution of direct trading actions. So, in reality all these areas are interrelated in terms of potential trading outcomes.

With many traders knowing where to start and what to do to address the challenges of mastering trading discipline is a barrier to moving forward. In a recent ‘Inner Circle’ session (find out more about joining this group here ), we aimed to assist those in this position and outlined a six-step process to facilitate this. These steps are: 1.

Develop awareness and OWN your behaviour. 2. Explore potential cause(s) and prioritise areas for “work”. 3. Create the motivation to consider change through evidence. 4.

Action plan and follow-through 5. Lock in the new change 6. Measure and move on to next issue.

This first article in this series focuses on the first of these steps, with subsequent articles addressing the other steps. Developing awareness of where you are now not only assists in providing a benchmark as to where you are now but allows prioritisation of areas to address that will tighten your trading behaviour. Additionally, of course, through doing an exercise to develop this awareness, this facilitates some “ownership” of where you are now, i.e. being responsible for what you are doing well, and more importantly what areas need improvement.

This is invaluable as it moves away from the all to common blaming of the markets, or your system for your results. After all, two things are clear and indisputable: a. You have control and responsibility for all trading actions and hence are completely responsible for the results you get from trading.

This includes creation and evaluation of the trading system you are using. Logically, although this fact seems to escape many, you can’t even reasonably begin to “blame” a system for your results until you are following it religiously. As soon as you stray it becomes a “you” issue, rather than a system issue. b.

You are in control of what happens from now. Previous results, and the behaviours that led to these, serve only to give you “feedback” as to what you need to do next, the good news being of course that you CAN, with the ownership of discipline issues, make the changes you need to. So, with the theoretical justification covered now onto the practical.

To assist in your development of this ‘awareness’, crucial to the subsequent five steps, we have a “15-point discipline checklist” for you to download and complete to give you this opportunity to benchmark and consequently begin to prioritise and work upon. Although we previously referenced the interrelated nature of the three critical discipline areas - discipline in learning, discipline in systems, and discipline in execution, we have used these three areas as a framework to make identification of those areas that you need to work on, a little easier. So, your mission is clear for this first step: a.

Download the attached checklist below b. Complete it and then identify the three areas you think could make the most difference to your trading c. Watch out for the next article in this series where will give you additional information to move onto step 2.

Discipline checklist amended 3

The ability to set up phone notifications for trading activity on your MT5 platform has many advantages including of course the opportunity to “Check-in” on the market whist on the move. It could be argued that this ability goes beyond simple convenience and in the case of “pending orders” could be viewed as an important part of risk management of trades that are opened through this method. Pending orders revisited Pending Orders are advanced entry orders that allow you to place an order onto the system that will be filled at a specific price level.

The key potential advantage is that you don’t have to be watching the market continuously for an order to be filled, and it can be filled at any time if the order is still active on the system. An example could be placing a “Buy Stop” order above an identified resistance level, so if the relevant currency pair or CFD moves to this price point then the order will be filled at your chosen price (You can still place a stop loss and profit target associated with the pending order). Although it a potentially attractive function of your Metatrader platform, one of the potential disadvantages is that without notifications set up you may not be aware that a trade has been entered until you are in a position to look at your trading platform on your PC for example.

Without this awareness of an “open” trade, the implications are: You will not be able to adjust a “trail stop” to lock in potential profit if the trade does go in your direction In the event of imminent economic data, you will not know to adjust such open positions to manage risks associated with this. Setting up phone notifications on your phone, is not only relatively simple but mitigates these potential disadvantages. Setting up notifications We will walk you through the set-up process on MT5 but is similar if you are using MT4.

Download the MT5 app on your mobile phone Allow to send “notifications”. Check in phone settings that it is set up. Open the app and go to messages in settings and find your Metaquote ID at the bottom of the screen.

Make a note of this (See diagram below). Open the MT5 platform on your PC In the tools menu, click on options and then the notifications tab. Enter your MetaquoteID in the pop-up box as shown below.

Click on test You should receive a notification on phone that set up is complete and subsequently with any orders you place and that are filled. Of course, feel free to contact the GO Markets team if you need additional support in setting this up at any time.

When we first start to trade, or subsequently (as a more experienced trader) when we trade a new symbol or system we are often “excited” as we see a “hope” for better results. We often forget that the development of expertise in other areas we have in life (think about what you do in work now for example), you must invest time, effort, learning and making mistakes (providing you acknowledge and learn from them) to develop. This is not an overnight transformation, rather it may take several weeks if not months before you feel confident in your knowledge and skills.

It is bizarre therefore that we should expect anything different with trading development. To be clear, we respect and commend those who take the leap and move from demo to live account. After all, a demo platform ( you can trial a MetaTrader 4 or MT 5 demo account here ) will serve you in learning how the platform works, how to add indicators and get used to how markets move.

However, it is only when you start to have some “skin in the game” and are trading YOUR money, albeit with tiny positions to start with that you learn the most important lessons in trading and develop the appropriate mindset to begin to think about trading larger positions. All that been said, we see time and time again new traders or those trading a new system exhibiting three cardinal sins of the developmental trader, and decide to trade: a. With positions that are too big b.

Short cutting learning and system development c. Strategy skipping (i.e. moving from new system to new system) without meaningful measurement as to what works for you (and what doesn’t) or indeed whether the problem is YOU failing to trade a system religiously. These are all symptoms of impatience, of wanting to get massive returns quickly and without putting the hard yards in at the front end.

Remember this... The purpose of your trading when you start trading a live account should not be huge profit, rather it is to develop the confidence in your system, consistency in action and the measure whether what you are doing could be improved. Although it may seem strange to suggest, it is this and not, in the early stage of trading, the money (and level of profit) is most relevant in your potential lifelong career as a trader.

It is through patience, and adhering to that initial purpose that you can gain sufficient confidence and competence to trade larger positions (after all it is just moving a decimal point to go from 1 mini-lot to a standard lot) and put the right foundations in to move forward. Exercising patience to have the right things in place will serve you well for a potential lifetime of trading, to be impatient may mean your trading lasts but a few weeks or months. It is really that simple.

Position sizing is simply the number of contracts that you choose to enter for any specific trade. It is this, combined with the movement in price (either positively or negatively) from entry to exit in your trade, that determines your final dollar result for any specific trade. As this result impacts on your trading capital, position sizing, along with appropriate exit decisions and actions, are THE two key factors in both risk management and taking profit.

It is good trading practice to have a “tolerable risk level”, i.e. what you are prepared to lose on a single trade. This, as we have covered in First Steps, is usually expressed as a percentage of your total trading capital (somewhere between 1-4% are commonly used). For example, If your chosen risk level is 3% and the capital in your account is $5000, this means that you would be prepared to risk $150 on one trade.

Why use formal position sizing? A formal position sizing system aims to answer the question “how many lots do I enter to keep any loss within my tolerable risk level if my stop loss is triggered?”. As we enter a trade, we ALL position size, but we have a choice as to how we action this.

We can: Guess. Use a dollar level i.e. when it hits this we are out (you can retrospectively modify a stop level on a trade chart on your trading platform). Use a technical level as a stop loss and work out how many contracts we can enter based on the Pip movement between entry and stop.

Logically, “3” would seem the most robust AND this should be calculated BEFORE entering a trade. So how do I position size? Accepting that the third of the options above is theoretically the optimum method, the process is: a.

What is my “tolerable risk level” in dollar terms? b. What is the desired technical entry and stop loss price levels? c. What is the dollar difference between entry and stop loss exit? d.

Divide ”a” (your tolerable risk level) by “c” to get an estimated position size. If your account is in Australian dollars the calculation is easier than trading either many index CFDs (except for the ASX200) or Forex as there is no need to add a further calculation to convert a profit/loss back into your account currency. Other position sizing issues to consider: Position sizing can only make a difference to your risk management if you adhere to your pre-planned exit strategy.

Be aware of gapping on market open from previous close price. This is at its potentially most severe subsequent to a company’s earnings report release and so you may want to consider avoiding this situation as part of your risk management plan. Once you have mastered basic position sizing, consider whether different market conditions or situations would merit a different tolerable risk level on which to base your position sizing calculations. e.g. a major economic news release increased general market volatility.

In such situations it may be that you enter a smaller position initially and then accumulate into the position if it goes in your desired direction. There is a FREE DOWNLOAD of an excel-based “indicative CFD position size calculator” you are welcome to use to assist you in this important part of trading entry. Feel free to use, but please pay attention to the notes.

Click on the link below. CFD position size calculator v2 Please feel free to connect with the team with any questions you have about share CFDs and how you can add this to your trading.

M any traders utilise options amongst their investment strategies either for income or capital growth. As with Forex and CFD trading, options offer an opportunity to get into a leveraged position giving exposure to the movement of an underlying instrument. One of the key factors that options traders may consider in their choice of specific markets to trade is liquidity, with a higher trading volume impacting positively on the ability to get in and out of trades at a fair price.For the options trader therefore, the breadth of choice and liquidity of US based options, make this market the preferred market to trade.

Like any type of trading, sustainable results require a depth of knowledge and commitment to trading an individual tried and tested system. This system should include in depth reference to risk management throughout. However, due to the market of choice, a trader can make regular profit and yet lose this (and potentially more) through the currency risks associated with trading in US dollars rather than, for example, their base currency of Australian dollars or GB pounds.

Although directional options traders usually choose to invest relatively small amounts with perhaps a few thousands, if trading US covered calls when options are sold over a portfolio of bought shares the investment can be substantial, often into a tens of thousands investment. So what is the risk? The reality is that profits can be 'used up', or losses can be compounded, by adverse currency movements.

The reason for this is simple. Let’s assume that your currency is AUD and it is transferred into USD for trading purposes. The exchange value when converted back to the original currency at some time in the future will be dependent not only on trading results but on the movement of AUD versus USD.

While your money is in your account in USD, weakness in AUD will mean a greater worth in AUD when converted back, whereas a lesser conversion worth will result if there is AUD strength while your money is sitting is USD. Let's give an example See below a weekly chart of AUD/USD. Note the price from the end of January 2018 at a level of 0.8134.

The price at March 20th 2019 was at 0.7100. So, an investment to fund a trading account of AUD$10,000 would have equalled an original USD value of $8134. With the movement over this period the value of the account when transferred back into AUD would have risen to $11468.98 or in other words a 14.67% increase.

So, in this case the underlying currency movements was of benefit. However, if this is the case when there is USD strength (when your money is in USD), with the same AUDUSD currency movement in the other direction, the loss could be 14.67%. This would mean that you would have had to profit by this 14.67% in your trades simply to breakeven (looking at the same chart this is the movement from the beginning of Jan 2016 to Aug 2017).

More than this of course, if you have lost $1468 on a similar price move in the other direction, broke even on your trades during that period so your equivalent AUD value is $8532 your trading return would have to be now 17% profit to recover the original capital. Just to reinforce a previous point, bear in mind of course we have chosen only a $10,000 example, some of you who are trading strategies such as 'Covered Calls' may have considerably more than this in the market (and so considerably more currency risk) than the example we have given. So what can you do?

So, your choices are twofold. Allow your invested trading capital to be subjected to the risks associated with underlying currency movements or, Hedge the currency risks with a non-expiring, low cost Forex position. If option “b” looks attractive, the reality is you can: Remove this risk completely through opening a very small leveraged forex trade (so akin to an insurance policy or a non-expiring put option) Attempt to optimise your hedge by timing its placement and exit i.e. use technical landmarks, to decide when to get in and out of a hedge.

Learn how to reduce the risk We are happy not only to show you how but guide you step by step in how to set this up. There are a couple of practical issues you would need to have in place to manage this well but again we can go through these to enable you to make the right decision for you. We have a webinar session planned that aims to offer you the information you need to look at removing currency risk in your options trading which you would be very welcome to attend.

To access this free training session on 3rd June go to https://attendee.gotowebinar.com/register/6726730073741725196 This session will give you learning relating to: Explore the advantages of hedging against currency risk and potential risks of not doing so. Offer a step by step guide of to how to work out the amount and process of placing a currency “hedge”. Demonstrate how to action this, and where to get any support you need to make it happen.

Discuss advanced approaches to utilising this in your trading including “timing your hedge”. Either way, we trust that this article has been of interest and welcome any comments.