Currency Secrets

There are many things in this world that I observe and never fully appreciate.

Take for example embroidery and architecture. I have seen buildings created over a process of time and know the basic elements that go into creating such structures, but if I was ever to create such a thing myself I know I wouldn’t have the slightest clue. The same goes for embroidery: I admire the finished product, but as for creating a piece myself I wouldn’t have the slightest clue on what to do or where to start.

This is true for many other things in life: I see them, but I never take the next step in finding out more about it.

So what draws someone to go from a simple observer to taking the next step and becoming more involved in an industry? Especially in reference to the forex market.

Do people focus only on the high returns?

Do people fail to see the high failure rate (around 95%)?

Do people enjoy losing money??

I suppose more importantly we should ask if there even IS a correct “plan of attack” when starting out in the forex market?

Well I believe there is.

See, forex trading should be treated no different to any other business venture and although I personally have never created a physical business I know from the many successful business people I’ve read about a common theme for why they knew they were successful was that they started with the end in mind.

If we apply this same principle to forex trading we start by acknowledging the D in OLIAD first. If you remember D represents Decide - you need to decide whether you wish to stay in the business of forex trading. This may have come as a rather obvious fact for some of you, but many people fail to realise that they actually have the power to make the decision on whether to stay or go in the forex market.

Most generally wait until their account makes that decision for them - and then they have no decision BUT leave!

So how do you know whether you should stay or go?

Well, ask yourself the following questions:

• How much am I prepared to lose in the forex market? With the amount of capital you will be investing in the forex market determine how much you would be prepared to lose before calling it quits - or, at the very least, STOP trading for a lengthy period of time. Not only should this question reflect the amount of capital you originally place into your forex account, but also the amount of capital you gain through profits - yes, that’s right, the profits you make actually IS your money, so treat it like so.
• The other question (which most people overlook) is opportunity cost: How much does the forex market need to return for you to stay? Most people fail to understand that there are many ways to make good money in this day and age and forex trading may not necessarily be the best way for you. Time is something that we can never take back, so we need to ensure that we use our time the best we can. If our forex trading fails to meet our expectations then we can either neglect it completely, or treat it as a hobby (i.e. giving it limited time to other activities).

I would say 99% of forex traders don’t even contemplate those two questions and this could very well be the reason why so many lose money.

I mean just take a look at the average forex beginner’s activity:

1. They observe the forex market and get interested.
2. They learn a few things about how the forex market works and believe they now know it all.
3. They place some funds into an account and begin trading.
4. They lose money, but believe they’ll make it all back.
5. They continue to lose money until they bust.

As you can see the forex beginner FROM THE START is an emotionally charged being. As soon as they hit point 4 they are in a vicious circle of trying to force the market to make back the money they lost, they very rarely succeed and in the end they have no choice but to leave.

So how do smart Currency Secrets readers prevent this from happening to them?

• They start with the end in mind: they know what their account will need to get to before they either give up or, at least, stop for awhile to assess; and
• They understand that their time is a precious commodity and recognise the opportunity cost of their time and capital - if the forex market fails to make expectations within a certain time frame they will consider putting their time and effort into other areas where they can make better returns; and
• They start small - knowing all too well that the biggest drawdowns are likely to occur when starting out.

All of those points will at least ensure the new forex trader has the right non-emotionally charged mindset which will help them stay in the game longer than their peers.

What is the OLIAD principle?

This is something I recently devised that I believe is inherent in any successful endeavour (whether it be trading or something non-trading).

But before I begin let’s look at a chart (fancy me creating a chart!) to help illustrate what the basic elements are of those things that make up the OLIAD principle:

Now allow me to explain the elements individually…

OBSERVE

Whenever we begin anything we start as observers. Like window shoppers we are on the outside looking in.

LEARN

When our interest becomes piqued in our endeavour we start our journey by educating ourselves on the processes, participants, and boundaries (rules) on how we ourselves can become involved.

INTERACT

After observing and learning we take steps to interact in our endeavour. And we know from constant blasting on this site that when trading we know we always need to start small. Why? Well, as we’re likely to make the largest amount of mistakes when we start we minimise the effect of these errors we start small.

ANALYSE

We then analyse our results and find ways of improving our interactions/results.

DECIDE

After participating in our endeavour we need to decide whether to pursue our interest in it at the level we have been or whether to cut back - this might be capital or time. We now look from the inside out.

Ok, so what does all this mean for traders?

Well, I’m going to cover that next. For now, stew over it and see what you think it means for us as traders.

Also think about the circles looping around the Learn -> Interact and Interact -> Analyse areas. What makes these two circles different (besides the colour)?

I convinced a dear trading friend of mine to conduct a self-audit on his trading activity throughout the year of 2005. After much discussion about the benefits such an activity has had on my trading results he was still a little reluctant to do it.

Initially I couldn’t understand why, until yesterday when I received a call from him.

He was depressed.

“Ryan I feel so depressed,” he sobbed.

“Why?” I asked, “Did you end up doing the self-audit on last year’s trades?”

He heaved a sigh and said that he did.

“Well how did it go?” I asked eager to see that a friend had taken me up on such valuable advice.

“I’m crap,” he responded.

“What??” I was a little bewildered by his response, and equally more so by the long pause after my reaction.

“What do you mean you’re crap?”

“When I took you up on doing your self-audit thing I found out just how BAD I am as a trader!” he then timidly laughed.

No one likes to admit they’re crap, or that they’re incompetent, my friend was obviously telling me this with great internal pains.

“Well that’s good!” I said elated that he had now made the discovery I did when I first started on this process many years ago.

“What do you mean it’s good? I don’t even want to trade anymore!”

I could definitely empathise with my dear friend. He had done an analysis on himself and found himself lacking. I continued on…

“It’s good because now you know why you were crap. What were some of the underlying factors with your losses, or winners that were cut short?”

He sighed again, obviously I was opening a recently dressed deep cut.

“I guess to put it simply: I didn’t follow any system at all!”

He had just made a VERY important discovery: a big reason for why traders lose money is that they don’t follow A system - even if their system is staring at them in the face on the wall mounted above their computer!

They just don’t have the disciplinary fortitude to stick to a system ESPECIALLY when it’s in a drawdown.

I know when I started trading whenever I lost money on a method I utilised to get into that trade I threw the method out the window and created a completely different system.

I didn’t refine my method.

I didn’t take into account that losses are a part of trading.

I wanted perfection… and before I knew it chasing perfection saw my account wiped out!

“So what did you learn from this?” I asked, knowing all too well that I had been there and done that and knew the answer.

Immediately his demeanour changed…

“I suppose I’ve got to learn to stick to my system.”

“EXACTLY,” I emphasised. If my friend had of been standing near me I would have slapped him - just to make sure that he remembered that point.

I brought the issue home, “There’s no use creating the best system in the world if you aren’t going to follow it’s signals, right?”

“Yeah,” he sheepishly responded.

“So what are you going to do now?” I asked again knowing the best course of action for him to take.

“I dunno. I’m thinking of giving up trading now.”

It was the best rational response to give, in essence he was saying that as trading was losing him money and nobody likes to lose money he was going to stop trading.

This action is more than acceptable to take, but was there another?

Of course!

“Have you considered creating a trading system?” I asked.

“No,” he responded sounding defeated, spirit broken.

“Well what common element did you see amongst those trades that made money?”

Oddly enough my friend hadn’t considered this!?

“What? You traded that bad???? Well I think I’ve found a perfect system for you… do the exact opposite of whatever it is you’re doing,” I jested, we both laughed.

Sometimes we can get so caught up in the negative things that we fail to see the silver lining and even if we do trade a method and it loses big guess what? You’ve just found a GREAT system: simply reverse the signals of your current system!

Our conversation was nearing an end so I quickly set up an action plan for him to do by the next time we talked…

“Why don’t you go back over the winning trades and formulate a trading plan? You’ve spent hundreds of dollars on a trading education through books and seminars and you’ve now spent thousands in the school of hard knocks, now it’s time to put that hard knock education to use.”

Stay tuned for more valuable insights you’re likely to discover if you too decide to undertake a self-audit… heck, I might have to start selling this info because I believe it’s extremely valuable and yet it’s grossly overlooked.

More soon.