Why most people lose money in the forex market

A friend of mine volunteers on a regular basis to rid his



neighborhood of rodents and animal riff-raff: the woodchucks,


groundhogs, and possums that eat up gardens, attack family pets,


and so on. He sets a trap with ripe fruit or tuna fish. The animal


enters the trap for the food. If the animal can’t find its way out,


it is eventually shot and buried.


In the forex market, sometimes you get the fruit.


Sometimes you get trapped and shot. Why?
Possums are relatively easy to catch. They



go for the fruit, they get caught, and then,


when the trapper approaches the trap, the


possum simply plays dead. It plays dead


because that’s the best defense mechanism


that it has.


A woodchuck is tougher to trap. A big


one might enter the trap, eat the fruit, and


then rip the trap apart, exit, and wander off


looking for more food. Or it might roll the


trap along the ground, set it off, and then


eat the fruit from the outside.


There is a fundamental characteristic of


unsuccessful forex traders: they trade forex


because it’s exciting, cool, or for its sex


appeal. The mystery behind the charts, the


notion that profits (although elusive) do


really exist, and that money can be made


quickly (but not predictably) all add up to


create a romantic fantasy that is too


appealing to avoid. When they start to lose


money, they leave their positions open,


close their eyes, and hope that the trap is


miraculously opened so they can be free


again.


This group – the Possums – is the largest


block of forex traders.


There is also a fundamental characteristic


of successful forex traders. They trade


forex because it makes them rich. They


trade because they know how to do it. They


do not trade for fun. Many of them are


unimpressed by their own success.


Most of them never share their secrets


with anyone. They take a methodical,


almost boring, approach to forex trading.


They painstakingly build systems that,


although simple, may have taken years to


perfect. In the end, their lives are actually


quite boring – reduced to waiting for


predictable signals that are obeyed without


question.


This group – the Woodchucks – is the


smaller of the two groups. The Possums


outnumber the Woodchucks by a ratio of at


least 500:1. For every Woodchuck, there


are 500 Possums.


Are you a Woodchuck or a Possum?


Possums don’t want to learn the


intricacies of the forex market – the charts,


the signals, the nuts and bolts – because


they are afraid that once known, all these


details will ruin the romanticism of the


entire adventure. The mystery, the elusive


profits, the unknown, all contribute to


create an excitement that would be lost if


too much were discovered. Searching for


King Tut or the Titanic was big news.


Finding both was big news. When’s the last


time you heard about either? Once found,


the mystery was solved and the public went


on to other mysteries.
Woodchucks want to learn the market.



They want to know what signals are most


predictive. They want to know everything


they can not only about spot trading, but


about their broker, their broker’s practices,


the governments involved in currency


movement, interest rate changes, and the list


goes on and on. Woodchucks want to know


as much as they can. It might destroy the


mystery, but they’re not in the forex market


for adventure. They’re in it for profit.


There is a myth in American culture, and


it’s spreading around the world: your job


should be fun. You should enjoy what you


do for a living. “Do what you love and the


money will follow.” And so on. Perhaps


we’ve had too strong of a dose of this


doctrine. The truth is that although we are


better off choosing a career that interests us,


we’re going to be bored at work if we learn


our job really well. The promise is simple: if


you become a world-class forex trader, at


some point your job will be ho-hum. Not


all the time, but it’s not going to be an


adventure every day of the week. Sorry.


On the other hand, consider that


successful forex traders are some of the


most highly paid professionals in the


world. If you pay them by the hour, they


make thousands and thousands of dollars


for every 60 minute period they spend


working. Some of them only trade for a


half day. Some trade for 20 hours a day.


Their jobs aren’t always fun, but they do


make a lot of money.


Why be a Woodchuck?


Simply put, if you want to survive, then you


need to start thinking like a Woodchuck. If


you want to make money, you need to


commit yourself to freeing yourself from


the trap and getting the fruit. Or, more


importantly, finding a way to eat the fruit


without ever entering the trap in the first


place. And therein lies the secret. We’re all


going to get trapped from time to time, but


we have a choice of whether to free


ourselves or lay down and let the trapper


shoot us.


I learned my lesson early in my career as a


forex trader. Although I had spent four


months creating a trading strategy and


system, I occasionally really, really wanted the


fruit, so to speak. At those times, when I


should have stayed on the sidelines of the


market, I would enter trades based on


rumor, speculation, or even well-informed


opinions – instead of my tried and tested


strategy. In other words, I would enter the


trap and start eating the fruit, thinking that I


could get out of the trap without setting it


off.
how to discover tru principles
1. Find a system to test. Lots of traders use moving averages – when the



moving averages cross each other, they give off buy/sell signals. The


might read candlestick patterns, Elliot Waves, or Fibonacci Arcs. Find a


system that you like and test it. Get charting software that allows you to


backtest your results. AmiBroker and TradeStation both work well.


2. Play with the variables. If someone’s system says to use the 5 and 13


Exponential Moving Averages, then try the 4 and 9 instead. Then add in the


MACD or the CCI or the RSI and look for candlestick patterns. Backtest these


new variables. Are the new ones more profitable?


3. Keep notes of the results. Keeping notes in a trading journal or notebook is


essential. Are you recognizing any patterns (e.g., Fridays are bad days for


your strategy, or the 5 and 13 work well if you wait for a -.0004 MACD?


4. Draw preliminary conclusions. Once you’ve done your testing, write out the


principles that you’ve discovered. Then test the principles with a demo


account for at least 4 months -- did your system work? If so, set it in stone.
Well, the last time I made this mistake, I



entered a trade that lost 250 pips in 72


hours. I stayed in the trade hoping that the


market would rebound (it never did). I


figured if I just laid down quietly, the


trapper would never come and shoot me.


Well, he did. I lost my usable margin on the


last day. I lost 75% of my account.


I resolved on that day to never again


violate the principles of my trading strategy.


I tell everyone that trades forex the same


thing: you can learn this the hard way, or the


easy way. But you will learn it eventually: in


the world of forex trading, there are only


Woodchucks and Possums. If you’re just


trading on emotion, speculation, or


excitement, then you’re a Possum, and


you’re going to get shot. Either take it from


me, or learn on your own. I hope you take


the time to read the principles below and


learn from my mistakes.


How to Be a Woodchuck


There are five steps to thinking like a


Woodchuck in the forex market.


1: Be hungry and determined


The Woodchuck wants the fruit. He


believes that he has a right to it. He is
willing to do whatever it takes to safely get it



and eat it.


As for you, you’ve got to want profits.


You’ve got to put profits ahead of


everything else. You’ve got to say to


yourself that the most important thing at the


end of the money is not making lots of


trades, or any trades, but rather the most


important thing is to end the money higher


than when you started it. This belief has to


drive you. If you trade because you like to


trade, you’re going to lose money – you will


end up making stupid trades, getting


trapped, and laying down to wait for the


bullet.


The Woodchuck wants to fill his belly –


but not at the expense of his life.


Remember that.


Be hungry for profits, not just for trades.


2: Discover true principles


The Woodchuck, unlike the Possum, can


learn from its own mistakes or the mistakes


of other animals. It understands that if it


enters the trap, it will be caught. It knocks


over the cage, sets it off, and then jumps


back. When it senses the danger has passed,


it might start poking at the cage from the


outside, or try to grab the fruit through the


bars of the cage.


Likewise, you need to become a student


of the forex market if you want to become


successful. The forex market does not


reward lazy people. Plan on spending some


money on books to become familiar with


charting patterns. Read everything you can


online about how the market works. Get


some charting software – there is plenty of


good free charting software to start you out


– and watch the formations. Most


important, start trading on a demo account


immediately. Get involved, take notes.


Keep a trading journal that lists every trade


and the reason you entered and exited.


As you do these things, you will distill


principles of the forex market. From the


jumbled mess of data, patterns will emerge.


Effective trading strategies will become


apparent. Profits will still be elusive, but


you will begin to learn true principles of


trading. Write these principles down as you


learn them. They will serve you well later.


3: Obey true principles


Once you discover a set of true principles,


they’ll do you no good if you disregard


them. I’ve met forex traders that


understood many, many true principles, but


they were still dumb as a bag of hammers
and poor as church mice because they



failed to obey them.


Our culture isn’t much fascinated with


obedience – if you’ve noticed, we’re all


about how free we are, how unrestricted our


behavior can and should be, and so on.


This booklet isn’t a commentary on social


issues, but I do want to advise you that


sticking to your principles may seem odd at


first.


You might determine that although


important, your principles are more


“guidelines” than hard and fast rules. Don’t


fall for that! Don’t spend all your time


discovering true principles just so that you


can violate them – and lose a lot of money


in the process.


Once you discover what works, stick to


the plan!


Mark Twain said that once he learned all


of the intricacies involved in navigating the


Mississippi – the steering of the boat, the


reading of the compass, the charting of the


deep and shallow points – that the river lost


its beauty.


That’s a lesson, a truth, that you’re going


to have to become comfortable with. At


some point, when you develop a profitable


trading system, the system will return profits


if you’re awake, asleep, playing football with


your kids, or if you get hit by a bus. The


system will be tweaked from time to time,


of course, but it will work. Your hard work


will pay off. But the mystery of the forex
all about woodchucks
The woodchuck circles the trap many times, and from all



angles before deciding how he is going to get the fruit.


Sometimes he will wait till another animal is in the trap,


then pick the fruit through the wire cage. Woodchucks


know their capabilities. They pal around with others in


their den and know when one does not come home.


They search for the scent of their own, and hear the cry of


the one that is trapped. The big, old woodchucks learn


from others mistakes and do not make the same mistake


themselves. They are not paralyzed in fear, but


cautiously optimistic, ever searching for the food they


want, but holding onto true principles that have kept them


alive. Big, old woodchucks will at times walk away from a


trap because the lure of the fruit is not worth the work it


will take to get out of the trap before the hunter kills him.


- Terry Larsen, Neigborhood Pest Control Expert
market will disappear for a time, maybe



even forever, and thus your fascination with


it might wear off too.


This is why many forex traders, although


they have learned true principles, are still


losing money as fast as they can trade. They


want to chase the mystery of the market.


They enter the cage to get the fruit because


that’s more exciting. It’s also more


dangerous. Even fatal.


4: Know your limits


One mistake Possums make is that they


never set limits. They’ll waltz into the cage


and go for the fruit with reckless abandon.


You might attribute this to stupidity, and


you may be right. But it also might be due


to their over-exuberance. Their inability to


contain their excitement over finding some


fruit.


You will be tempted to snatch the fruit


as soon as you can see it. You might be


tempted to violate your principles when you


see the market take a big swing, or after


Alan Greenspan says something on


television, or the latest job report comes


out. Sometimes, you’ll be tempted to set


your stop-loss very widely (thus risking the


loss of a lot of money) or to not set a stoploss


at all.


In order to succeed, you must set stops.


You have to be able to tell yourself that it’s


time to get out of the market, that you’ve


tried to get the fruit – but that today it’s just


not going to work. Perhaps your system


works 80% of the time, and this time your


system has simply failed.


Getting out of the market at the right


time is just as important as getting in at the


right time. If your system tends to return 20


pips per trade, then set your stop-loss so


that you don’t lose more than you can


possibly gain.


If you disobey your principles, and you


find that you’re in a big, big losing trade,


then look at your trading system: do you


really see the market coming back to breakeven


anytime soon? If not, then get out. If


so, then stay in – if you have the usable


margin to withstand some heavy losses.


Which brings me to my next point: don’t


trade huge chunks of your account. If you


have a $1,000 account, then don’t make


trades that require you to put up more than


$100. Also, don’t make trades that can lose


or gain more than $3 per pip. If the market


takes a real nosedive against you, you could


halve your equity before you realize what


you’ve done.
5: Back off when necessary



If you lose a lot of money in one day, or


gain a lot of money in one day, back off


from the market. These are dangerous


times. I talk about Pride, Fear, Greed, and


Revenge in my Strategy:10 booklet (free, on


my site) but it will help to summarize the


main points here too.


Pride is your worst enemy. There is no


such thing as “good pride” in the forex


market. As soon as you become proud of


your success, you’re headed for a fall. When


you’re prideful, you leave yourself open to


Greed and Revenge. You feel that you


deserve more profit, are willing to take more


(unwise) risks, and you strike back at the


market when it beats you. Being prideful in


the forex market is acting the same as the


Possum who believes he can go into the


cage, get the fruit, and still get out. It won’t


work. Keep your pride in check.


Next, watch out for Fear. When you’re


afraid, you make poor choices – you’ll exit a


trade before it becomes profitable or you’ll


enter no trades at all. If you give in to fear,


then back off the market. Backtest your


system again. Review what made you


successful in the past. Take a day off and


reset your bearings. You’ll feel better and


be ready to trade the next day.


Greed is perhaps the second worst


emotion you can ever feel in the forex


market. This emotion will convince you to


set higher limits and wider stops, leaving


you exposed to the wild swings of the


market. Greed is what convinces you to


leave a position open for one more pip of


profit – when the market is about to slide in


the opposite direction and take your entire


profit with it. Don’t give into greed. If you


lose a bunch of money because of greed –


or make a bunch of it – then take the next


day off. Watch the market. Demo trade for


that day. See how you fare. Then get back


in the next day when you’re ready to stick to


your principles.


Revenge is the most dangerous emotion


of all. When you lose money, you will


always feel the temptation to strike back at


the market (out of pride). You’ll say to


yourself that you deserve to get your money


back. This might even work temporarily.


But this will catch up with you, as you seek


out trades for the sake of trading rather than


for the sake of making money safely. If you


feel revenge coming on, get out of the


market. Take a seat. Review your system.


Even if you lose almost all of your money,


you can gain it back systematically. You will


never get it back by seeking revenge on the


market. A Possum in a cage might seek


revenge against the trapper, but we all know


how futile that is.
Conclusion
You can succeed in the forex market.



As a day trader, you can be paid more handsomely than


doctors, lawyers, and just about everyone else. But if you


want to be a member of the elite class of highly successful


forex traders, then you have to put the time in. You can’t


expect profits to come easily.


Successful forex trading will offer you more time, more


money – and more stress – than you have probably ever


experienced. But you can do it. Success is not about your IQ


– it’s about your work ethic and your discipline. It’s about


your ability to stay out of the trap, not set off the land mines,


or just simply get out of the market when it’s time.

READ MORE - Why most people lose money in the forex market

Trading About Trend System Trade System

1. The Secondary level determines the pattern with a possible move to come. At this



level you set your max. stoploss and the profit target with Fib. Extensions 1.61


and 1.20


2. Then move one timeframe up to the Primary level to determine a possible


Projected move also with the Fib 1.61 and 1.20 levels.


3. Then go one timeframe lower then the secondary level to the Tertiary level and


look for a better stoploss level to enhance the risk to reward ratio.


We have studied the MLTS as far as how to enter and determine profit targets etc. but


we have left the overall market condition and rhythm behind. If I should ask you at those


charts we just studied what was the overall state of the EurUsd you wont be able to


answer me as we did not bring that part in with those examples. And that is our next step.


Now that we know how to handle each pattern separately and prepare a specific plan


as to how we are going to trade it according to the MLTS and execute that plan how do


we know if our profit target does not extend to the other side of a MAJOR support and or


resistance level of the EurUsd. That will signify the fact that our profit target might not


be reached. Therefore we have to go to the timeframes higher then the Primary level to


do some analysis to determine if the trade we are about to take is in line with the overall


picture.


I have brought this part in only at this point to show you how easy it is to lose track of


the overall picture while doing analysis in lower timeframes. The correct way is to do


analysis from the monthly down to the daily at least as to trendlines, major possible


turnaround points, major support and or resistance levels etc. If this is marked on the


chart itself in different colors then you can work on a 5min chart knowing that those


important areas are marked and will pop up some time though they might not show on the


screen area that you are working on.


I like to start at the weekly chart marking important points and then on the daily and


then on the 4hour. On the monthly I like to do Fibonacci retracements and extensions.

 

Look how the monthly chart retraced to exactly the 38% Fib.

Look how it moved up to the 200% Fib extension en then stayed there for 4 months finding resistance.

Look at the weekly chart the price action at the 161% Fib extension level. Some consolidation again before the price gets direction again. After the breakout to the top the next level was the 200% extension creating some nice trade opportunities towards that level. No difficult analysis. Pure simple rhythm.

Look at the daily chart how those areas of floating looks like. Can you see the exact spot
where the breakout occur on both those areas. Don’t that ask for some action. Would you be able
to define the direction with some accuracy. If so then that surely creates huge opportunities to

trade All the timeframes shown above was from the same Fib levels as drawn from the

Monthly chart. Here you could see what the price did on a weekly chart when it reached
the 1.61% Weekly Fib level as well as on the daily chart. Some nice Secondary level
setups occurred. If you had those key levels marked on your chart it surely would have meant a lot. I
am sure you would have planned some trades much better. When the price reached the
Fib extension levels the probability was high that it could float around that level for a
time before getting direction again. In those areas of consolidation a lower timeframe must be used to utilize those conditions and make the most of them. Another part of the market rhythm is the fact that after a breakout the price have the tendency to pull back to the breakout level before continuing its path. That also creates some real nice possibilities for trades. Lets look at those Fib extension levels marked on the daily chart in a 4H chart to see if we can spot some nice possible Secondary pattern moves.

The pink area is the Fib level marked with the top of the area the 161%.



As you can see the opportunities are plenty on the 4Hour timeframe as Secondary


level opportunities. When the 161% extension level was reached the daily and weekly


timeframe will give false signals until there is direction again. But a lot of opportunities


will arise on the lower timeframes.


When going to the lower timeframe we need to have those areas of importance


marked on our chart. That is necessary to be able to know the boundaries we will be


trading in.


Metatrader4 give us the tools to determine on one chart what we would like to be


displayed on each timeframe. That illuminates having lots of open charts of the same


currency on different timeframes. We only have to have one chart and when changing the


timeframe the features that is set for that timeframe will be shown. You can do that with


all indicators, moving averages, trendlines etc. Lets see how that is done.


By selecting the properties of the entity (select it first then right click on it and open


the properties dialog) you will see the property Box open. Then click the Visualization


tab, unclick the “All timeframes” and select on which timeframes you would like to see


this particular feature.

As you can see you can set any feature to be visible in any timeframe you like.



That makes it powerful because you can even set the colors of each feature different in


different timeframes. The Fib retracements on a weekly timeframe can be made up of


different colors then the one used on a 4hour chart. That will help you identify it. On the


common and parameter tab you can even type in the Description of the feature you are
using.

When you point your mouse on it, it will display what feature it is.

Now this really gives us some power as to have a whole market analysis from a



monthly to a 1min timeframe right in front of us all on one chart without clocking the


chart with lines and features all over the place because we choose what we want to see


and on what timeframe. That is powerful.


Below are a sample table as to what is displayed where. This is not a full table but


only to give you an idea. You start with the Feature column going down to lets say the


Fib levels on the M(monthly timeframe) and on what timeframes do you want to see that


feature you go to the right side and see that you want it to be displayed on all timeframes.


The Fib weekly levels you don’t want to see on the monthly TF(timeframe) but on all


lower TF. And so on. I always want to see the M,W,D features on all timeframes down.


That will give me the opportunity to spot a weekly Fib retracement level , trendline etc


while busy preparing for a MLTS trade on the 5min chart. That is powerful. But I don’t


want to see 1hour Fib levels when I go to the weekly chart as it has no value there. The


same with a 5min trendline when going to the 4H. So I set the Visibility off when going


to timeframes where I don’t want to see that feature.

By now you should have a good idea as to trade with an overall map of the



currency pair you are trading right in front of you.


Now we come to the news aspect as that will also influence our trading. I am not


regarding all news as dangerous if a setup occur during the morning when there is news


to come out the afternoon. What I have found is that price normally have the news


already built into it when the news comes out. The mafia knows the news as they are


walking in those big circles. But when it comes to Non Farm Payrolls and Interest related


news I stay away till after the announcement only because of the severity and speed the


price moves on those announcements. You could be caught in a trade and can not close it


because of the speed of the move.


There are other news that also might have an effect on the markets. That is why I


recommend that you go to www.forexfactory.com and do some backtesting on certain


news and see what the result on the price was. The price normally reacts heavy when the


news is either better or worse then what was forecast.


Don’t ignore setups that occur just because there is some news coming out.


Especially if you are trading on higher timeframes. As I have said price most of the time


have already have the news in it when the announcement is made. When doing your


backtesting on the calendar just see for yourself how many setups occur before the news


that actually supported the news when it was announced. But always have a cautionary


approach. Ready to take action when necessary.


You can preset the news that is still to come with vertical lines and on the


property box you set the Description and on the Parameter tab you set the date and time


of the news that is still to come. After you have set all and close the dialog box the
vertical line will not be on the screen anymore as it is set for a future date and time. The



only problem is that it is still selected and if you press delete it will be deleted. To solve


this press Ctrl B that will take you to the Object menu and unselect it. Then it will stay


there until that date and time is reached. When you see the line appear just point your


mouse on it and the Description that you have added will show what it represents.


It is currently 1st Jan 2010 and I have just mad my trade analysis for the coming


week 4-8 Jan2010. See image below.

The chart on the left are a daily chart showing the Monthly, weekly and daily



Fibonacci levels. Those levels are necessary for possible support and or resistance levels


for the week to come. The chart on the right is a 1hour chart showing the price in a


channel. I have given the amount of pips between all the levels as well. That will help


with the decision making when there is a Secondary setup to see if the risk:reward ratio to


the marked level will be OK to trade.


The channel width is 200 pips and will make some nice ground for lower


timeframe trades. I will watch the 5min and 15min closely within the channel for some


setups. The bottom of the channel might be tested. We might find some support at that


trendline. Should the price break below the bottom trendline we have 70 pips to the daily


Fib which represents the nearby low. Then we have another 100pips to the Weekly 38%


retracement. That will be some strong support. If that is broken we have another +100


pips to our Projected Price Move. If the price should break to the upside during the week


we have 65 pips to the daily 38% retracement level, then 110 pips to the 50% retracement


and then another 110 pips to the 61% retracement all of which might be some resistance


levels. They also make very good target level if you are in an open position.


As you must have spotted our Projected Price Move is between the 38% and just


above the 50% retracement levels. When the price breaks the channel to the upside just


have that in mind.


Lets mark the important news for the week with vertical lines.

There you can see the news I have marked for the coming week. The thick red



line is FOMC interest rate and the purple line the Non Farm Payrolls. Those are the main


ones I will be out of all trades before the announcements come. I have their visualization


set to be seen from the Daily down to the 1min. I don’t have to see them on the weekly


and monthly as they will be clocked together.


Now it is time to wait and see how we will trade all this market analysis.
Here is another example traded on the 13Jan2010. Possible move as determined on the



Secondary level with the triangle pattern. Determine the profit target here.

 

Projected move as determined one levl higher on the Primary level. A better stoploss was obtained from the

Tertiary level making the risk:reward ratio much batter. +70pips for the day.

READ MORE - Trading About Trend System Trade System

breakout pullback

READ MORE - breakout pullback