An Excellent Interview With a Professional FX Trader
We recently came across an excellent interview with a Canadian whose sole business is trading the currency markets. We've picked out some of the more interesting snippets to highlight and discuss.
The whole interview can be downloaded in PDF format (6 pages long), see the link at the bottom of this page. The interview is taken from a magazine and starts on page 75, hence the page numbers we've highlighted below.
You Have To Be Willing To Go To School
- On page 76 the trader Jeff Hughes remarks that you have to be willing to go to school, ie you need to learn the basics of trading
- Try out your ideas on paper, practise with a demo account, open a mini account and trade with small positions etc
- When you're starting to get comfortable increase the size of your trades but at a slow rate
LearnMoney Comment: What Hughes says is very true, too many traders start by diving in at the deep end and with hindsight wishing they had started at a slower pace with reduced position size. Here's a good rule that will help new traders -
- When you first open a trading account take the money you were going to pay into the account and halve it
- This is why we've always said that spread betting offers the perfect training ground because accounts can be opened with as little as a few hundred pounds (See links of spread bet broker sites)
Watching & Observing
- On page 78 Hughes is asked how he finds his trades
- He states that as the market is an ever evolving creature it requires that the successful trader is both versatile and adaptable
- He also goes on to say that 'You have to be willing to take time and observe' and for him taking detailed notes helps achieve this
LM Comment: Observing is definitely one of the keys to trading success. What works well at present may well be a disaster some time in the future. News and the relation of other markets on the market you're following is a classic example of this. Today for example London stocks might be taking their lead from the German bourses but tomorrow they look at Wall Street for guidance. Figuring out when certain relationships are hot or cold can result in mega profits.
Using Charts
- Too many traders tend to focus on just the one chart, usually the timeframe they're trading in
- But Hughes relies heavily on different timeframe charts, a trait that many successful traders also share
- For example, if you're trading using an hourly chart taking note of the daily, weekly and monthly chart is worthwhile
- Using the longer term charts is useful to see how the market reacts around important levels such as the previous day or week's high etc
LM Comment: Using multiple time frame charts is very important if you're a technical trader. One simple way to incorporate multiple time frame charts is to figure out the main trends on the daily and weekly chart and then only trade the majority of the time in that direction.
Profit & Loss and Risk
- On page 77 Hughes states 'the bulk of your profits in any given month can result in how well you are able to let the winners run'
- He also remarks 'it's the management of losses that determines whether you can make a living trading the markets'
LM Comment: The point about managing losses is very subtle and one which is often missed by new traders. Many a profitable trader is no better than a losing trader in picking winners, it's just that they either pick less losers and/or take smaller losses.
Think about it, if last year a trader made £100k on all his profitable trades and lost £50k on all his losing ones the net outcome would be a profit of £50k. If the following year he again made £100k on his winners but this time only lost £30k on losing trades his net profits would be £70k, an increase of 40%. To the untrained observer it appears that this performance boost would be due to picking more winners, not always true as this example has shown.
The management of losses is the single most dominant factor for an unprofitable trader to realise and address.
Stop Losses
- Hughes risks on average about 5% of his equity per trade, in the range of 2.5%-7.5%
- He also uses hard stops (a stop loss that is at a fixed price) and then trailing stop losses as if/when a trade starts moving in his favour
- But his profit targets generally remain flexible
LM Comment: Personally we think that risking 5% of your equity per trade is a little too much, 2%-3% would be better but then it's not our money!
Of course it all depends on whether a trader has more money to back up his account. For example if you've got £20k in possible trading equity but only have £5k deposited in your trading account then risking a higher percentage on the £5k is not a problem. But if you're using your full capital then better to be in the game for the long run and trade with smaller positions.
Stop losses are vital for any trader especially as most will be trading in leveraged products such as spread betting, CFDs or currencies. There is actually a famous quote by some market veteran which goes 'more money has been lost in the leveraged markets by people not using stop losses than by all the other excuses put together'. Use Stop Losses!
The Psychological Element
- Hughes highlights the point that most if not all traders struggle with 'it's all about the battle with yourself'
- This is why traders strongly believe that the mental part of trading is over 70% of the battle, after all it is one thing to have a winning strategy but another to follow that strategy in the battle of real-time prices and profit & loss
- And this quote sums it all up perfectly - 'Really knowing this (the battle with yourself) is one of the big steps in becoming successful at trading and once you realise this, I mean really realise this, then you learn to step back and not make those hasty, emotional, unplanned trades that inevitably turn into losses
LM Comment: Discount the psychological aspect at your own peril
Summary
The interview with Jeff Hughes is an excellent read but it doesn't break any new ground because there isn't any to break. The interview yet again proves that there are no secrets to trading success, no magical tools that we all like to believe are somewhere out there. No, making money in the markets is down to hard work, experience, preparation and above all coping with the psychological aspects.
