BENEFITS OF SYSTEMS WITH A HIGH WINNING PERCENTAGE

By Chuck LeBeau

If you have reviewed the systems that we offer for sale you will find that these systems tend to have a high percentage of winning trades. This is no accident. Although it is not essential for a system to have a high winning percentage in order to make money, there are many advantages for those systems where the frequency of profitable trades exceeds the losers. Here are a few of our observations on this important subject.

1. Systems with a high winning percentage are much more rewarding psychologically. No one enjoys losing. Everyone enjoys winning. Systems that encounter frequent losers and rely on occasional big winners to make money are not enjoyable to trade. Unfortunately the moral of the trader is not a performance measurement that typically appears on a historical performance summary but perhaps it should be. Strings of losses are demoralizing regardless of your attitude or experience. Strings of profits are always fun and build confidence and self-esteem as well as building your bankroll.We often hear about excellent systems that are abandoned by their operators in spite of a long-term record of profitability. These tend to be trend following type systems with a low winning percentage. It would take the faith and patience of Gandhi to trade some of these systems in spite of their appealing long-term track records. It should not be surprising that most traders fail.
2. Systems with a high winning percentage are likely to have lower drawdowns. Assuming that the worst case loss on a per trade basis is strictly limited, as it should be, abnormal drawdowns are most likely to be caused by a long string of trades wherein there are very few winners. Large drawdowns are rarely the result of a long string of consecutive losses. Drawdowns are most likely to be caused by the absence of regular profits. Perhaps I am saying the same thing two different ways but I think there is a difference. For example six losses in a row followed by a winner and another six losses in a row is likely to produce a larger drawdown than ten losses in a row. Obviously the higher the winning percentage the less likelihood of stringing together a long series of trades with only occasional winners. Of all the historical performance factors that we can evaluate, the winning percentage is most likely to be predictive of the possibility of large drawdowns. If we can design a system that has a low average loss and a high winning percentage we are looking at a system that should be very drawdown resistant.
3. Systems with a high winning percentage reinforce discipline. How often have we heard stories of traders who are following a system and after a series of losses decide to skip a trade only to have that skipped trade turn out to be a big winner? This is not the trader's version of an urban legend horror story. It actually happens very frequently. If we are trading a system with a low percentage of winners, it becomes increasingly tempting to start skipping trades. Lets assume we are trading a system that only has 30% winning trades. Since the odds appear to favor our skipping trades we will tend to be rewarded for our lapses in discipline. For a while we will benefit from skipping trades until we inevitably skip the big winner. That is usually when the system is abandoned because, having skipped the winner, we aren't about to jump back in to experience the next string of losses.On the other hand, if our system has a high percentage of winning trades, we shouldn't be tempted to start second-guessing the system. We know up front that if we skip a trade the odds are that we will be skipping a winner. The favorable odds of the system will help us to maintain the necessary discipline to operate the system exactly as it was designed.
4. Systems with a high winning percentage require less diversification. The typical trend following system is extremely dependent on finding markets where a very large trend will occur. These large trends are relatively rare and to make certain that we are in the right market at the right time we must diversify our trading among many markets because we can't afford to miss one of those big trends. By diversifying as much as possible we are more likely to catch the big trend that makes back all of our losses and rewards us with a profit. However, in spite of what some portfolio strategists would have us believe diversifying a low percentage system actually increases the likelihood of a major drawdown rather than decreasing it.However if we are trading a system with a high winning percentage we have much less need for diversification. And if by careful design our high percentage system is also capable of catching big trends, we have the best possible scenario. After all, there is no logical reason that a system with a high winning percentage can't also have big winning trades now and then. It all depends on the effectiveness of our exit strategy. Of course, diversification will still benefit our high percentage strategy but it will be an optional enhancement rather than a necessity.
5. Systems with a high winning percentage require less capital to operate. If we need less capital to survive drawdowns and less capital for diversification, it follows that we need less capital to start trading the system. Also, with a high winning percentage we can be more optimistic about starting with less capital and using our profits to build up our capital prior to any major drawdown.
6. Systems with a high winning percentage are easier to troubleshoot. Imagine a low percentage system where long strings of losses are the norm. How many losses will it take to get your undivided attention and tell you that something is seriously wrong? Too many, I suspect.

Now imagine a system with a very high percentage of winners. Almost any series of losses is going to be out of the ordinary and will quickly attract our attention. Hopefully we will be able to perform a prompt review of the system and correct any faults while we still have some capital left. Unfortunately if we are trading a low percentage system we could run out of capital before we realize that our low percentage system has deteriorated even further.

As you can see we are strong advocates of systems with high winning percentages. In our opinion there is no excuse for designing a system with a low percentage of winners. We contend that it's not really difficult to design a system with a solid winning percentage if you focus on that statistic and make it a requirement. Too often system designers tend to focus entirely on total profitability. Many times this emphasis tends to result in letting profits run too long (curve fitted profit exits) and perhaps using stops that are too close. Both of these preferences will hurt the winning percentage and degrade the system. On the other hand, if we set out to have a high winning percentage we can obtain it without sacrificing much, if anything, in the way of profits and we will create a system that is extremely "user friendly" and reliable.

Long Trades vs. Short Trades

by Chuck LeBeau
Perhaps because we offer several long-only systems we have often been asked if there is a difference in trading the long side of a market vs. trading the short side. I think most experienced futures traders would quickly agree that there are inherent differences between trading long versus trading short. These differences might be well worth considering when developing the logic for a trading system. Listed below are just a few of the many differences that I have observed over many years of trading. Please keep in mind that these differences are simply my personal observations and not the result of any academic study.

1. Uptrends generally tend to be longer in duration than downtrends. Specifically, many technicians have observed that a typical uptrend seems to last about twice as long as a typical downtrend. We can only theorize about logical explanations of why this might be the case. Perhaps the most significant reason for the persistence of uptrends is that on a long-term historical basis we have been doing the majority of our trading in an inflationary environment. It is true that the rate of inflation has been reduced over recent years thanks to Federal Reserve monetary policies that presume that any inflation is bad but, in spite of the Fed.'s best efforts, inflation still persists. The debate, if any, is merely over the current rate. Even though we now have less inflation rather than more inflation, over any extended period of time it would be a safe bet that prices are likely to be higher rather than lower. There will always be occasional periods of declining prices but the lows will probably be getting steadily higher over the long run.

2. Uptrends generally tend to be more orderly and less volatile than downtrends. We would surmise that this orderliness is because traders are typically more comfortable and optimistic when trading the long side of a market. The public's preference for the long side isn't as illogical as it may seem at first glance. After all, the price of a physical commodity can rise almost infinitely while the price on the down side is obviously limited at something above zero. I can remember stories many years ago about the onion futures market where prices actually appeared to be going to zero. Eventually someone figured out that the price was so cheap that they could take delivery of the onions and then throw them away in order to sell the empty bags at a profit. Short side profits in the physical commodity markets are definitely limited even though they may be very substantial at times. However, because the profits on the long side appear to have unlimited potential, long-side traders are more likely than short-side traders to employ pyramiding strategies that use open profits to fund more buying. Contrary to what most of us were taught in Economics 101; rising prices serve to increase demand and perpetuate the existing uptrend. On the other hand, because short side profits are limited, pyramiding as prices decline would be less attractive.

3. Uptrends tend to end in spikes with high volatility while downtrends tend to end in flat areas with low volatility. Because there is no limit to how far prices can become extended on the upside and the previously mentioned pyramided positions can become very large, there are likely to be huge long liquidations once prices have peaked. On the downside positions are seldom pyramided and the taking of limited profits is done more steadily throughout the decline. As a result there are rarely huge positions remaining to be liquidated as the market reaches bottom. Bull markets tend to attract traders and the liquidity increases as the prices rise. On the down side the low prices and lack of volatility tend to make traders look for rising markets with more opportunity and more liquidity.

Keep in mind that these are very general observations relating specifically to physical (non-financial) futures markets and the same logic does not necessarily apply to securities or financial markets. For example if you go long in Yen futures you are also short dollars and if you go long in Eurodollar interest rates you know that if they go up to 100 it means that interest rates are at zero. However many financial markets, like the stock indexes, do have an obvious upside bias.

Once we have a general idea of some of the basic difference between rising and falling markets we need to use that knowledge to improve the design of our trading systems. Here are a few of the accommodations to market direction that purchasers of our systems may have observed.

1. We sometimes design systems that trade only from the long side. Because we are using a multiple systems approach we don't need every system to trade in both directions. The long side is usually easier and more profitable. In fact, who says the short side is necessary at all? As long as our long-only system stays out of trouble when prices are declining (easily done) we can wait for the uptrends. There are plenty of markets to trade; why not trade the easy ones.

2. When designing a system that trades in both directions we sometimes make our long-side entries easier to trigger which results in more long trades than shorts. We are intentionally building in a long side bias. Many traders will not agree with this built-in bias but we think it makes sense because we have many good reasons to prefer the long side.

3. When designing exit strategies in a system that trades in both directions we often let profits run further on the long side. Since we expect the short side profits to be limited we are quicker to take a profit once our short position has adequately rewarded us for the risk we took. On the long side we prefer to try and let the profits run. Systems do not have to be symmetrical (same parameters long and short) and it can be logical to have different rules and parameters for the short side.

4. There may be price levels where it does not make sense to go short. For example, sugar has traded as high as 63 cents per pound and as low as about 1.5 cents per pound. Would we really want to go short at 2 cents per pound? The risk is obviously much greater than the potential reward. Minimum price levels for shorting can easily be built into any system.

In addition to the technical observations we have passed along there are also fundamental (supply/demand) considerations that influence the trading characteristics of longs and shorts. Perhaps we will discuss these fundamental issues in another Bulletin.

In summary we think there is a good case for treating the long side of markets differently than the short side. Entries and exits do not have to be symmetrical and we do not have to trade both long and short. I obviously favor the long side but I know traders who specialize in trading only the short side because they believe the moves on the downside produced quicker profits. Although these traders disagree on which side is best, they agree that the characteristics are different.

Moving Average Crossovers May Not Be The Best Entry Signals

by Chuck LeBeau
There are many ways of using moving averages to trade but by far the most common method is to trade when a short-term moving average crosses over a longer term moving average. For example, if the 10-day MA crosses above the 30-day MA we typically assume that we have a new buy signal.

Let's stop for a minute and think about what exactly is occurring at the point of a crossover. When the 10-day MA and the 30-day MA are at the same price, the trend is not nearly as clear as it should be. What we are really observing at the crossover point is that the average of the last 30 prices is exactly the same as the average of the last 10 prices. If we are looking for trends to trade, this equal relationship of the two moving averages is not a reliable or logical indication of a trend. In an upward trending market the average prices over the last 10 days should be much higher than the average of the last 30 days. By implementing new trades at crossover points we are limiting our trading to points that may not clearly reflect what we should be doing. For best results in a trend-following system we want to be trading when the trend is clear and reliable; not when the trend is confused and questionable.

Instead of trading at crossovers we should be implementing our trades when the moving averages are parallel or when the short-term moving average is moving farther away from the longer-term moving average. Perhaps the short term MA should remain a minimum of some units of Average True Range above the longer term MA for several days. I believe that this procedure would give us more reliable and more frequent entry signals in the direction of the prevailing trend, which is exactly what we want. To identify the most reliable trends we want to see the slopes of various moving averages all moving steadily in the same direction and not crossing back and forth.

Take a look at a chart of any market with a strong trend. You will see that the moving averages are not crossing back and forth repeatedly. They will be moving in the same general direction in a more or less parallel fashion. Now look at a chart of a non-trending market. As this market moves sideways the moving averages will be crossing back and forth very frequently. Look at the implications of this simple examination of the charts. If we are trading the crossovers we will be trading most frequently in non-trending markets and trading most infrequently in strongly trending markets. Is that what we want? No, it's obviously not what we want. We want just the opposite. We want frequent entry opportunities in trending markets and we want to avoid as many trades as possible in non-trending markets.

The error in the logic of trading moving average crossovers also extends to some interpretations of MACD (Moving Average Convergence and Divergence) and DMI (Directional Movement Indicator). If we are looking at MACD we want to see both lines (each line reflects a moving average relationship) moving in the same direction. We don't want to see them crossing. When looking at DMI we want to see the Plus DI lines and the Minus DI lines moving in opposite directions and definitely not crossing. Remember, when the Plus DI and the Minus DI lines intersect it is telling us that the market is in balance and has no direction; the amount of upward and downward directional movement are exactly equal. What makes our favorite indicator, the ADX, so effective is that it rises only when the Plus DI and the Minus DI are moving in opposite directions and the distance between the two indicators is widening.

With a little thought and effort I'm sure we can design some reliable entry signals that are based on moving averages but avoid the typical crossover signals. For example we could measure the slope of several moving averages and when all the averages slope upward we would have a buy signal.

We could also measure the distance between several moving averages and implement our trades when the averages are all headed in the same direction but start getting farther apart. This procedure would give us a series of entry signals within the same original trend. This should provide an excellent entry and re-entry strategy.

THE ESSENTIALS OF WINNING PSYCHOLOGY

By Ray Barros
It is my belief that successful trading is a function of:

• A written trading plan with an edge
• Effective Money Management and
• Winning Psychology

In this essay I shall:

1. Identify the essential element of winning psychology.
2. Identify the personal attributes required.
3. Show the belief structure necessary to achieve and maintain essential element.
4. Identify the blocks to winning psychology, and
5. Mention some tools I found useful in this context.

There are two concepts I should like to explore before beginning the article. The first has to do with the way I believe humans acquire knowledge.

There is an objective reality which humans perceive through the filters of their values, beliefs and rules. This perception can and usually distorts our sense of reality. The extent to which we reduce or eliminate the distortion is the extent to which we will be successful in life. This is especially true for traders.

The second idea I want to introduce is that of the evolution of a trader. For me the natural progression is:

1. The Rule Based Trader: "There is one rule: never break your rules"
2. The Subjective Trader: "There are two rules:
3. The first is never break your rules.
4. The second is know when to break the first".
5. The Intuitive Trader:"There are no rules. Whatever my intuition tells me is the right action on this trade is the correct action in the circumstances.

This belief accords with reality more often than not".

All types of traders can make money as long as they conform to the rules of that stage. e.g. a trader at the Rule Based Stage is more than likely to lose money in the long run if he breaks his rules. Finally, before I begin I should like to briefly explore what I consider the necessary empowering motivation to succeed.

Trading is success is simple to achieve but not easy. It is simple because the roadmap for success has been clearly laid out in all the three areas - written trading plan etc; it is not easy because following that roadmap is not easy.

What motivation is necessary to get us through the rough patches?

At some level we traders are attracted to this game because of the money we can earn. But, I have found that money alone is an insufficient motive. All good traders I know LOVE the game for itself. The fact that we get paid for it is merely a bonus. This love for the game is incorporated into the vision we want to achieve as a result of our trading and that vision is the zing that gets us through the rough patches. It goes without saying that for successful traders, trading is fun.

I. The Essential Element of Winning Psychology

At its core, winning psychology has as its base the "acceptance of the outcome of a trade".

By acceptance I mean the ability of being aware of an emotion without "buying into" its content; some may call this 'mindfulness'. e.g.

Contrast:

Imagine you have just entered a trade and the very next bar is a big range bar against your position:

"My God here I go again! Can't I do anything right! What will my wife say if I take yet another losing trade!

Maybe I should move my stop? No I can't do that - the last time it cost me my bank! But what about the other day when I got stopped out only to have it go my way? This is just too hard!!!!" etc, etc. With:

Imagine you have just entered a trade and the very next bar is a big range bar against your position:

"The market is approaching my stop. I feel uncomfortable with the price action and I can live with the discomfort".

The first trader may think he has accepted the outcome but in fact he has failed to do so at the emotional level; the second trader has accepted the outcome at all levels.

This idea of acceptance applies not only to loses but to profits as well. The trader that "accepts" an outcome realizes that on an individual trade basis a positive outcome on one trade does not translate into a future of unlimited profits.

At its core "acceptance" realizes that trading is based on probabilities, as such every trade is unique. In other words, the past does not equal the future. More on this in the section dealing with beliefs.

II. Identify the Personal Attributes Required

If we are to acquire "Acceptance", then certain personal attributes are essential:

• Awareness - the ability to step outside ourselves and observe. The more effectively we can do this, the easier our progress to "Acceptance".
• Honesty - the ability to seek to perceive reality in spite of our filters.
• Courage - the willingness to bear the pain brought about by our awareness and honesty.
• Commitment - the willingness to do whatever is necessary to achieve our goals.

In the words of Chin-Ning Chu author of "Thick Face, Black Heart":

"Even though most people think they are trying to succeed, they are simply going through the motions. The last thing in the world they want is to get off the familiar treadmill and actually get somewhere".

We cannot succeed in our journey to "Acceptance" unless we acquire these attributes. To the extent that we have them is the extent to which we will experience fulfillment.

III. The Belief Structure Necessary to Achieve and Maintain "Acceptance"

Ultimately to succeed, we, as traders, need to adopt two apparently contradictory beliefs:

"That the market is uncertain and unpredictable and that the market is relatively certain and predictable". The resolution of this apparent conflict is found in the timeframes that we hold the beliefs. At the trade-by-trade level, what Mark Douglas, calls the micro level, we hold the first belief. Because the market can and will probably do anything, we seek first to protect our capital in the execution of our trading plan. In other words, we must always have an exit strategy.

At the level of a "large sample size" (the macro level), we hold the second belief. To the extent our trading plan has an edge, will be the extent to which the market will be predictable and certain. In short we accept that with trading we are dealing with probabilities and not certainties. It is of imperative importance we hold these beliefs not only at an intellectual level but also at every level of our being - especially the emotional level.

As a trading coach I have seen, time and again, lip service acceptance to the idea of probability; but when it comes to actually trading, the traders behave as if each and every trade must be a winner - they have a need for certainty. How else can we explain the popularity of services advertising 90% hit rates? If the ads were not drawing an adequate response, they would disappear.

Probability thinking leads to a host of other states and beliefs:

1. Because we know that we will succeed in the long run and because we know we will protect ourselves no matter what the market does, we acquire the state of "self trust" and the state of being "carefree". In turn these states allow us to remain....
2. Focused, confident and carefree when we are experiencing the inevitable prolonged drawdown.
3. Because at the micro level we know that the market is random, we will not allow euphoria to set in and lead us to reckless trades. Each trade will only be one in a series of probabilities.
4. We will view market information not as a source of pleasure/pain but merely as data providing us with opportunities.

This is not to say trading should not be fun; indeed not only should it be but for most traders it MUST be. However, the fun comes from the flawless execution of the rules appropriate to our stage of evolution and not from trade by trade results.

IV. Identify the Blocks to Winning Psychology

The main enemy to "Acceptance" is Fear.

The universal fears are:

• The fear of being abandoned and
• The fear of losing control.

If we reflect for a moment, we'll see how the fear of being abandoned comes about. As young children, we are totally dependent on our parents. Very quickly we come to realize that if they ever abandon us, we shall be unable to care for ourselves. Most of us fail to confront this fear as we grow into adulthood. As a result we automatically deal with it by attempting to control our environment - the people, conditions and events that surround us.

This tendency to control may or may not be appropriate in other areas of life but as a strategy for trading the markets it is a bust. Most of us are incapable of influencing the market even for the shortest moment, let alone control it.

Mark Douglas's four fears are but an outgrowth of the two universal fears:

1. Fear of loss
2. Fear of being wrong
3. Fear of missing out
4. Fear of leaving money on the table.

These may be more familiar to the trader.

I first gained an insight into effects of fear some years ago. At that time, I was trading futures through Jackson Futures. The company provided a trading room and I met a quiet chap. He came in a few minutes after the US Bonds opened and left just after the close. Given that trading opened (Aussie time) 12:30 am and closed 5:00 am, this was no mean effort. One morning I noticed he looked very distressed and I struck up a conversation with him. He told me he had bet the farm shorting a strong bull market. As his red- rimmed eyes stared off in the distance he said:

"I don't know why I just didn't cut the position earlier; anyone would have seen the strength - why didn't I?

I never saw him again.

That is the effect of fear - it drives out knowledge; it leads to myopia; it immobilizes us and leads to inaction.

The mirror image of fear is euphoria - the feeling that we can do no wrong. As much as fear, euphoria will ultimately lead to trading failure. Since trading is a game of probabilities, we will experience times when we can do no wrong. But these times will come to an end. The trader caught in the euphoric trance will not recognize this and taking one risk too many will eventually get caught in a heavy loss. If he is lucky, the loss will not be a catastrophic loss.

Fear and Euphoria can catch not only newbies but also the most experienced and successful trader. Witness the demise of (Trader) Vic Sperandeo. Vic started trading public funds in 1972 and for over 25 years had a very successful career. His view on trading can best be summarized by the passage below:

"I'm a market professional....and I am very good at what I do.... I never gamble more than I can afford to lose.... I think my unique strength is in my consistency.. I pride myself in my ability to successfully stay in the game..." (Trader Vic - Methods of a Wall Street Master page ix)

This year Vic went bankrupt as a result of one trade.

Euphoria or Fear?

It doesn't matter. Whatever the reason, Vic lost a reputed US$50 million and is now out of the game. Two other factors impact on our fear or euphoria:

* Our expectations. Rather than accept market information in its pure form, we impose our expectations. In turn these expectations impact on our fear and/or euphoria.

* Our own psychosis. Each of us grows into adulthood with our psychosis - what Stephen Wolinsky calls "trances". Thus many times our responses to market information are not a response to present information but to past events. In other words, we are not trading in the NOW or with PRESENT TENSE INFORMATION.

V. Some Tools I Have Found Useful

To achieve "Acceptance", we need to manage "Fear and Euphoria". For me the decisive tool was learning strategies to be aware, acknowledge, and manage the twin emotions of fear and euphoria. This meant starting with small pains and slowly becoming comfortable with my feelings. When I first started trading successfully, I used discipline as my main weapon. But when I started fund management in 1991, I found it inadequate. Dr George Lianos helped me discover the way of managing emotions - not eliminating, MANAGING. George taught me that a step-by-step approach was the best way for me. Learning to manage small fears, I slowly learnt to handle FEAR and EUPHORIA in my trading. I have developed a process based on the works of S. Wolinsky (Tao of Chaos) and C. Andreas (Core Transformation).

Other tools I have found useful are:

1. Meditation and/or mindfulness. These techniques taught me how to remain unruffled and centered during the hurly-burly of real-time trading. More thanany other tool I use, they teach me that AWARENESS is everything. They re long-term tools.
2. The ideas and distinctions of Mark Douglas. Another long-term technique.
3. Neuro Linguistic (NLP) techniques. Useful for absorbing pain. A medium term technique.
4. Breathe work and Posture. Learning to breathe, stand and/or sit properly are effective short-term tools to remain calm in periods of stress.

VI. SUMMARY

To succeed a trader must have a vision about where he is heading and must internalise that Winning Psychology rests on Acceptance of the trading outcome. This means managing Fear and Euphoria. To do this, we need to ACCEPT, with every fibre of our body the belief that at the micro level the market is uncertain and unpredictable and at the macro level is relatively certain and predictable.

This article was reprinted with permission from the author. More articles and information on Mr. Barros can be found at adest.com.au.

Gold as investors’ instrument.

InstaForex company suggests you to get acquainted with one of the most stable and affective instruments of capital saving. Nowadays almost every interested person can have an access to the world gold market and invest his funds to this precious metal. Moreover gold may be not only as dead weight but also percentage deposit. You may use gold in forward transactions, which gave tangible profit. This is very effective to invest in gold in the period of crises, when other investment instruments can not give the same result.

Gold is the most old and effective measure of capital and wealth dimension. Other precious metals were used for the same purposes. Generations were replacing each other and gold was as measure equivalent and at one and the same time payment facility and commodity for everybody. System of “gold standard” made a great influence on world economy development in XIX-XX centuries. National borders receded in the face of gold and it served as the main world currency system till 70s XX century, due to this operations with precious metals were under strict control. Mostly all transactions were made on the level of states’ monetary authorities and international financial organizations.

However, as a result of contradictions within the system qualitative changes took place and currency rates become floating. As consequence gold’s role was changed, legally it was excluded from the world currency turnover. Liberalization of gold deals began, rights of individuals to physically possession of metals were widen. Market of precious metals was transformed, not only market structure was changed but also its members and spectrum of transactions. Nowadays gold is not more payment facility, however it has not leave the system of economic relationship. Today world gold market constitutes combination of internal and international markets, which are almost not under governments ‘control. All these guarantees 24 hours global trading not only of precious metals but also of their induced instruments.

Demand structure at world market of gold may be nominally divided into 3 sectors: hoarding at all levels, industrial and domestic consumption, speculative operations. Offer consists of precious metals, private and government reserves, processing of secondary raw materials (gold) and illegal traffic.

The main resources of offers are gold producers, main buyers – those who use it for industrial purposes. Both appear at market irregularly due to different factors. However, we will touch upon lifts and recessions in the market of precious metals later.

Gold markets.
International gold markets – located in such cities as Zurich, Hong-Kong, London, New-York, Dubai. High demands are raised to the market participants. They are usually big banks and specialized companies, which have good reputation and credit standing. Spectrum of possible transactions at the international market is rather wide. There are no taxes and customs control. Huge transactions with precious metals are hold 24-hours a day, which give extensive clients’ network. All rules are made by market participants.

Internal gold markets – are markets of one or several countries mostly focused on local investors. They are divided into free and regulated. Free markets are mostly all European markets – for instance, in Milan, Paris, Amsterdam, Frankfurt-on-Main. Regulated – markets mostly of the Third World countries. In internal markets deals are mostly made with small bars and coins, means of payment – native currency.

Black markets – some markets at Asian continent. Their existence is connected with great government limits on transactions with gold. Black markets live in parallel with closed ones. Closed market – the form of internal markets with radical organization, where gold import and export are forbidden and because of taxes precious metals’ trading are not really profitable.

Participants of gold markets.

Gold-workers.
Mostly gold entered market from gold producers. These are small enterprises or big corporations. Companies’ influence on the market depends on the quantity of gold supplies.

Industry.
Industrial and jewellery enterprises, as well as companies which deals with refining (clearing of gold).

Stocks.
In some countries there are special sections at stocks which are busy particularly with precious metals.

Investors.
Investors have different interests at the market and this lead to the investment in different forms. The most popular instrument for investors is CFD.

Banking sector.
National banks are the hugest operators at gold market, they make rules. It should be mentioned, that active sales of reserve gold is not their main goal but demonstrate interest in active usage of reserves. National banks have big influence on the market climate which became especially noticeable in the 90s of XX century.

Intermediary and dealers.
Professional intermediaries and dealers on the gold markets are specialized companies and commercial banks. They are one of the leading hand because almost all the gold firstly goes to their hands.

Physical metal market
The largest amount of operations with physical gold is carrying out in London and Zurich. Firstly predominant part of all gold trading was carrying out in London, which metal delivery from the Commonwealth Nations (mostly Republic of South Africa) promoted to. They were attracted by the skilful organization of precious metals trading. Gold transferred from London to continental Europe and from there forward to the Middle East.

Capital management methods

When trading on Forex, it is necessary to know how to correctly place your capital; how to calculate the amount of funds needed to make a deal in order to obtain sufficient earnings and if it comes to loss, how to not to loose your entire deposit.

To achieve such goals, there are special capital management methods (money management):

• Capital management deficiency. Most traders, when opening a position, don’t calculate the amount of funds that are being used, nor estimate potential earnings, or calculate potential loss. This is one tactic, but if the capital is not very big to begin with, after several unlucky deals, it will completely disappear.
  
  
• Multiple contracts. When opening several positions on the Forex market with different tools, a trader can make great earnings, for example EURUSD and EURGBP, especially if the price goes in the right direction. But the earnings, as well as the losses, can be considerable.
  
  
• Fixed amount. Depending on the amount of funds available, a trader decides how much can be put to risk when opening one or another position. The trader then does not exceed this self-set amount when making deals.
  
  
• Fixed capital interest rate. This method is like the previous one but with one small difference, the trader determines the capital interest rate, but not the amount.
  

• The correspondence between profits and losses. It is necessary to track statistics yourself for all operations (the amount of losses, profits and the relation between them). When you can see the correspondence/correlation between them, you can then apply what you have learned to your trading.
  
  
• Intersection of the capital curve moving average. Most people are acquainted with moving averages, which can act like signals for going into the market or leaving it. According to this method, moving averages (long and short) are used to forecast deal results. If a short curve is above the long one, a position can be opened and will be profitable. If however it is under the long one, it is better to wait a bit.
  
  

Choosing one or another capital management method for trading on Forex can help you correctly use your money on the market and help you earn profit. Capital management methods are used for opening positions.

Risks management methods

When trading, a Forex investor can multiply capital, and the risks to loose not only potential earnings, but the invested money as well. The deviation from an average expected yield determines the investor’s risk on the financial market.

This kind of deviation can bring high profit as well as great loss.

Financial risk management doesn’t offer a successful trading guarantee, but assembles important parts of it. Each currency operation is a risk. That’s why using general management methods decreases potential loss.

1. 1. Stop-order submission;
2. 2. Capital share investment;
3. 3. Trend line trading;
4. 4. Emotion management.

Risk management methods are used after positions are opened. The main risk management method is an order submission that restrains losses.

Stop-loss (literally means to stop losses) – is a point where a trader goes off the market to avoid a disastrous situation. You have to set a stop-loss when opening positions, in order to prevent losses.
There are several types of stop-signals:

• An initial stop signal – determines the deposit amount or interest rate that the trader is ready to lose. When the price moves toward this position and reaches it, the trader’s fixed level position closes, not exceeding the loss preset by the trader.
• A “trailing” stop signal – is when a price move towards a position, and a stop signal is set right after it, according to trader preferences. Should the direction change, if the price reaches that signal, the trader goes off the market, potentially earning profit (depending on when the price started moving).
• Profit dismantling – is when pure profit has been earned, and the position is closed.
• Stop signals at times – is when, in the course of time, the market is not able to earn the necessary profit, then the position closes.

Difference between winners and losers

Simulated results of more than 20 winning and 30 losing traders.

Most of the things that we do well in our lives we have learned from those who do them well. I learned how to throw a football by watching a player named Race Pauere and how to play handball by watching Paul Harber.

In terms of high technologies, this is called simulation: find a good trader and watch the trader’s every move and seek to understand the principles that make the trader earn profit and how the trader works to achieve this. Then record this winning behavior in your own consciousness and body.

I have spent the last 2-3 years recording conversations from both losers and winners, looking at their lives for not only their trading styles, but their beliefs as well. You can read about some of these traders that I have simulated in books and magazines. Some of the winners are more secret. What a discovery! There is a huge difference between the ways winners and losers trade.
Though maybe, the biggest revelation is that these traders have important similar patterns. Let’s talk about these first.

What they have in common…

Both winners and losers are caught up in the idea of trading. It is their life. For both winners and losers – trading is a passion; and they both are extremists. The biggest loser I know trades with the same energy and intention as any winner. Therefore will and motivation, as distinctive features, are not a part of this equation.

Another thing that they have in common is that they don’t have many close friends of the same sex. Men and women alike usually have not more than one close friend of the same sex. Regardless of whether they are winners or losers, a passionate feature of traders is that they are not very sociable.

The extremism, which I mentioned earlier, saturates their lives. Both groups profess extreme ways of living and trust. They see the world in black and white with few halftones. I suppose that is why losers become so disappointed; they indulge in trading, but since they have been doing everything wrong from the very start; their disasters are many and constant.

And their differences

Let’s take a look at losers. This is what I have found to be common in them.

Most of them are obsessed with the idea of turning XXX,000 into XXX,000,000 and the quicker, the better. Their goal is – quick and great profits. Each one of them has had an inner conversation about their deals prior to opening position, same as several days later for the closing position!

All losers talked about an annoyance that forced them to deal. They couldn’t resist making a deal…it’s a nightmare for those people to have no opened positions and to sit tight. They are happier when they are trading, regardless of whether they win or lose; they would rather be trading than not. They look as if they have caught the trading fever, and that it has spread throughout their bodies.

Other common points exist that deal with trading solutions and capital management. Losers pay less attention to capital management. One of them told me: “The idea of this game is not about capital management, but whether you are right or not.” I have noticed that few of them pay attention to their assets and account balances. They were very surprised when they found out that some track this daily, because they didn’t understand how it is related to the winning opening position.

And finally they asked me if I knew anyone who made money for a living through trading. They seemed very unsure that this was actually possible. They had a lack of faith, even when confronted with proof they regularly receive from financial managers… that profits can be made on a regular basis.

And now let’s talk about winners

Where do I start? To my surprise, winning traders asked me as many questions as I asked them. The losers didn’t question me all that much. None of the winners traded optionally. They all had one or another capital management form and were all technical traders.

Everyone: both men and women could remember one big loss that stayed imprinted on their minds as something that they didn’t ever want to happen again. That’s why they use stops and didn’t “accept deals blindly.” They listened to their “gut” when making deals.

The biggest difference I found was that winners focused their attention on a small number of “favorite” markets. One winner used to trade only soy and nothing else from 1956 on. Losers seemed to change markets and information bulletins so often, just like when I began slipping. While winners researched or bought, losers seemed to be seeking an identity that would pull them up and make money for them.

All winners believed that they would make money and simply denied anything bad that could. They have an aura of protection around them and they simply don’t act impulsively. They are shocked by the information that most of people don’t know the procedures they use. They understand that this is a fairly intense occupation, but they think that anyone with sufficient intelligence can use the same procedures as they use.

The main secret of short-term trading

The secret is the less you trade, the less you earn.

Sad but true. Think of any investment that you have ever made. Were you able to finish a job in one day? And if you were so lucky, how many times did you do this again? Undoubtedly, very few. That’s because the universal rule of speculation is the same as the universal rule of growth.

We need time to increase profits.

Successful traders know that a one-minute market can move forward a little, in 5 minutes it will move a bit further, and in 60 minutes still more, and who knows how far it will go in one day or in one week. Loosing traders feel like trading only within short periods of time, which automatically narrows their potential profit.

By definition they intentionally limit their profits and go along with unlimited losses. No wonder that so many come up with poor results in short-term trading. They have locked themselves into a hopeless situation, thinking that it is possible to make money during the day just by catching market ups and downs. And this theory seems to be rational, because when you trade within one day and don’t ever leave positions open for a night, you simply don’t rely on news events and major changes, and therefore narrow your risks. And this is incorrect for two reasons.

First of all, your risk is under your control. The only control you have in that business is the control over stop-loss points – the point where positions close. Yes, there is a probability that the next morning market will open with a gap that exceeds your stop (slip past your stop) even though it is a very rare case, but even then you can limit your losses, have stop-loss points and go off of losing deals. Losers stick to losses but not winners.  

As soon as you set positions with stop-loss points, you can lose a fixed amount of money. Without any reference to the time your position opens, since your stop-loss point limits your risk. Your risk is the same whether you buy at the all time high point of market or at the all time low point.

Refusing to set positions overnight limits the amount of time that brings investment growth. Sometimes, although the market may open against us, we are still in the right direction, as the market should open in favor of us in most cases.

And what’s more important, when you end trading at the end of the day, or worse at some made-up moment, let’s say, 5 – or 10-minute intervals, you radically narrow your profit potential. Remember I mentioned a big difference between winners and losers, and that losers stuck to their losses? Well another distinction is that winners hold their winning positions, while losers go off the market way too soon. As for losers, they don’t wait for the winning positions: they are so happy to make any profit that they go off the market way too soon (mostly during the day).

You’ll never make big money, until you learn how to stick to winning positions. And the longer you stick to them, the bigger your potential profit can be. When farmers sow fields, they don’t dig the plants up every few minutes to see how they are growing. They let those plants grow and sprout. Traders can learn from this natural process. Trader success is not any different from successful farming. To cultivate successful deals, traders need time as well.