Growing Accounts

Growing accounts is a skill in trading that involves a number of different factors, and its important you understand all of them. Forex trading is considered high risk short term investing. Specially if we are scalping the markets on the intra day time frames. Society tends to portray all kinds of trading as a form of highly sophisticated gambling. Unfortunately for us, this false concept is justified by the countless number of reckless traders who approach the markets hoping to get rich quick, but who fail to risk manage responsibly. The truth is that a brokerage platform can be used as an online casino. The ability to trade huge amounts of leverage grants traders the power to make a lot of money in a very short period of time. With great power comes great responsibility, however, like in a casino, the thrill of huge profits has a tendency to dwarf all rational and responsible behaviour.  A profitable trader understands that although a good strategy will provide a profitable edge over time, each and every individual trade has an uncertain outcome. It is not 100% guaranteed to win.

Gamblers on the other hand have a hard time trying to swallow this notion, so they try to make sure they win every single trade. If their strategy signals an entry that they don’t “think” will win, they won’t take the trade. This kind of emotionally fuelled, discretionary approach will destroy the probability model of their strategy, and will generally yield results that are in sync with their emotional state toward the market at the time of trading. Trading is a negative sum game on your emotions, so approaching the market like this will, at best, ensure a slow decline of your trading account. There seems to be a socially accepted grey area around what constitutes gambling. What some people regard as gambling, others may see as simply a way of life. Your opinion on the
subject is generally linked to your risk tolerance. For example, someone who is extremely risk averse may consider flying in a plane a gamble. On the other end of the scale, there are people who jump out of planes with no shirt, no parachute and no fear who clearly have a much higher tolerance to risk, and therefore a different understanding of “gambling”. I believe it is important in your development as a trader to understand that you are about to enter a professional and very well respected business, and that you are not just wasting your time “gambling”. To do this we need to take a black and white, mathematical approach and remove personal opinions and bias- this is why I have developed my own definition of gambling.

Gambling is the undertaking of any activity involving chance, in which the odds have either not been calculated, or are unfavourable.

To illustrate this definition, consider your insurance company. If you drive a car it is likely that each year you pay a premium to have your car insured, and in return the insurance company bares the risk of covering the cost of repair, in the event that you crash. The reason these companies aren’t considered “gamblers” however, is because they have calculated the odds of you having a crash, and they understand that during the course of a year, not all of their clients are going to make claims. Although they don’t know which clients they will lose money on, they know that when their odds play out over time, they will have paid out all their claims and still have a large profit remaining. Sound like a familiar concept? The idea of “uncertain outcome, consistent results” is the underlying business model of some of the biggest companies on earth. As traders, our odds are completely dependent on the strategies we trade. If you trade a strategy with positive odds, you will be profitable over time. Gambling only occurs in trading when your odds have either not been calculated, or are not favourable.

Trading can potentially be the wildest emotional rollercoaster you will ever ride. If you allow yourself to become excited over profits, and disappointed over losses, trading will be an unenjoyable process and you will most likely lose money and eventually quit. Trading is a negative sum game on your emotions. Your account balance can rise while your emotional state remains bleak. I have personally taught many good traders who are not consistent, and its not their lack of skills trading that’s holding them back, but in fact their lack of trading discipline. Professional traders realise that becoming emotional about trading is a sure way to lose money. Extreme emotional states are capable of making anyone do things they would never do under normal circumstances. The most efficient way to approach the markets is like a robot, emotionless and mechanical. This will ensure you are trading your strategy with military grade precision without the bias of exhilaration or crippling fear. One of your first goals as a trader should be to master the ability to control your emotions under extreme conditions. If you learn this skill from the outset, you will be leagues ahead of most market participants.

Below is a graph of the emotional rollercoaster that a new trader will likely confront

Professional traders control their emotions in such a way that even a higher than average period of profit will not give them a thrill in any way. After all, a period of high profits is the same as taking “3 steps forward”, and professional traders understand that the very next phase is most often taking “2 steps backwards”. Likewise, they do not wallow in regret and disappointment after a lower than average period of profits because they realise that the next phase is most often taking “3 steps forward”. After years of studying the emotional repercussions of trading, on beginners and professionals all over the world, I have discovered a very significant behaviour pattern that is worth mentioning. I found that the negative emotional impact on traders after losing a certain percentage of their account was greater than the positive emotional impact on the trader after that loss was regained. In other words, you might take a 4% drawdown and feel a little discomfort, however when you regain that loss and return to breakeven, the discomfort won’t have eased 100% and you will likely feel as if you have “wasted time and gone nowhere”. Often traders can even recover more than their initial loss, resulting in a net profit, yet still feel disgruntled and discomforted by the recent fluctuations. It is this very phenomenon that makes trading such a challenging venture. Finding a profitable strategy is easy, but if you feel disgruntled, even after making money, how will you be able to continue applying that strategy consistently? My discovery of this trading habit has helped me form the following statement which is almost never discussed in regular trading education.

Your Safety Net

One of the best ways to control your emotions and build account growth, is to treat trading like a business. Setting up a business has learning curves, expenses and hiccups on the way. This is the same with trading. Losses in trading is part of the game, and you need to control and accept them. A risk management trading plan will help you with this huddle. A bulletproof risk management regime is paramount to any successful trading methodology. Even the best trading strategy in the world will destroy your account if it is not coupled with strict money management principles. I have met many traders who are talented at predicting market direction, but who still lose money due to the lack of risk management. When most beginners look to enter a trade, their first thought is “how much money can I make from this trade?” Although thoughts of potential profits are appealing, the first question a professional trader will ask themselves is always “how much money can I afford to lose on this trade”. Protecting your capital is far more important than making money. Market behaviour is not always in our favour and there are times when choppy price action can result in a string of losing trades. If your priority is to protect the money in your account during choppy market conditions, your account will still be strong enough to rebound from these small losses, and make new equity highs once the markets begin trending again.

Beginners often make the mistake of funding their trading account with (for example) £2,000 then take on trades with a risk of £200, because after all, £200 isn’t that much to lose, right?
Wrong! In this situation a £200 loss would represent 10% of the traders account. Now if this trader was to lose 5 trades in a row, they would be down £1,000, which represents 50% of their initial balance! The trader now has to DOUBLE their money just to get back to where they started. Although a £200 loss does not seem overly risky, no trader can justify risking 10% per trade and expect to make money in the long term.

I can almost 100% guarantee if I was to ask any beginner, how many trades it would take for them to blow their account, they would not have a clue! The answer to that question is actually very simple. If you risk 1% per trade and you loose all 100 trades. You have a 100 trade safety net before your account is gone. That means you have to get it wrong 100 times in a row to blow your account without making a single profit. What is the secret to becoming a successful forex trader? If I had to condense all of my trading knowledge and advice into one simple rule, it would be this:

Never risk more than 1% of your trading account per trade.

By capping the risk on each trade to 1% of your account, you ensure your survival during choppy market conditions. Even if you manage to lose 10 trades in a row, you still have 90% of your initial balance, which means the small loss can be made up quickly and new account highs can be achieved once the market begins trending again!

Consider a submarine that has had all of the internal rooms hollowed out to form one giant hollow floating tube. If the sub was attacked by a missile from an enemy ship, a single blow would cause it to fill up and sink immediately. Now take that same submarine and have it retrofitted with strong dividers so that it now contains 100 water tight compartments, all equal in size. If the sub was attacked again by an enemy ship, just one of the compartments would fill up, leaving the other 99 in tact to keep the vessel afloat. The submarine could take hit after hit before sinking, giving it enough time to escape enemy fire and return to safety. Think of your trading account like this submarine. By capping the risk to 1% on each trade, you are essentially dividing your account into 100 equal partitions, and are only accepting a maximum loss of one compartment at a time. This survival technique is critical in keeping your account alive long enough to enjoy the calm blue waters of profitable trending conditions. Not only does a 1% risk model preserve your capital, but during a string of losses, the risk on each trade becomes progressively smaller and smaller, forming a reverse compounding effect. The inverse is also true- during periods of losing trades, your losses will progressively get smaller. The simple act of risking 1% per trade ensures that your account harnesses the power of compounding on the way up, whilst also taking advantage of the reverse compounding effect during periods of losing trades.

Now luckily for you we are in the 21st century, so we do not need to be mathematicians to work out a 1% risk. Most platforms will have these calculators built into them. If you are on Meta trader 4 or 5, then there are trading managers that you can get which will do this for you.

Imagine above: Ctrader Plaform

Keep a Journal

Keeping a journal is crucial in any goal oriented task as it allows you to track performance, stay focused, and measure and compare your results. Keeping accurate trading records helps you take responsibility for your trading results and remain disciplined. You may see this as a pointless task whilst trading a demo account; however it is during this time that I believe journaling to be the most important. Journaling during your demo period allows you to gain confidence, as you can see a break down of your profit and loss and review your trades to make sure your decisions are in line with your strategy. With a detailed breakdown of your past, present and forecasted profits calculated in front of you, you’re setting yourself up to feel 100% confident in your ability to trade a live account.

Every trader records different information about the trades they take. Although there is no hard and fast rule about what you must record, we advise our students that when it comes to recording information, the more the merrier! Below we’ve listed the most important trade characteristics to record.

• Currency pair traded
• Amount of currency traded
• Long or short (Trade direction)
• Entry Price
• Exit Price
• Date of entry and exit
• Time of entry and exit
• Time frame the trade was taken on
• Profit/Loss
• Account size before and after
• Strategy (Reason for entry)
• Management (Trailing stop? Profit target?)
• Notes (Any notes you may wish to add)
• Emotions (Did you feel confident? Reluctant to trade?)
• Screenshot of the trade

From these records, the data can be analysed giving traders the ability to assess many facts of their trading business such as: best performing strategies, best performing currency pairs, average profit per trade, average trade duration, win/loss ratios, account equity curves and much more. Professional journaling software can be very expensive, so while you’re in the early stages of your trading career we would advise keeping your costs as low as possible by either carrying a physical pen-and-paper journal, or if you’re more tech-savvy, start an excel spreadsheet.

The journal produces a lot of figures! So which ones should you be concentrating on? Most beginners will focus on their overall profit and account balance. One of the first things I learnt in trading is that in the short term you should completely forget about your account balance. This feels very unnatural and borderline uncomfortable, but taking this advice will dramatically improve your consistency. The issue with concentrating on your account balance is it shifts your priority towards making money instead of sticking to your strategy. Remember that adhering to your strategies is always priority number one – profits are merely a side affect. Often, i’ll even minimize my account balance within my brokerage platform and trading journal so I can’t see it! This helps to avoid overconfidence during huge weeks, and fear during drawdown.

The next common mistake is to focus completely on your overall profit cell. Naturally you want to see your account balance growing, but without putting things into perspective, this can often lead to either disappointment or euphoria. Some time ago I was training a good friend of mine who had averaged £98 profit per week in his first 4 months. He was extremely disappointed that he was making so little and was frustrated because he had been following all the rules yet knew there was no way he could quit his job on that kind of income. The highlight of this story is that he was only trading a £4,000 account! Essentially he was making close to 10% per month which puts him in the top 1% of professional traders on the planet – and he was still learning! At this point I need to mention that this is not a typical result from everyone I teach so early in the piece.

If you can find an investment paying 10% per month, i’d love to know about it! and so would just about every investor in the world. I gave him a few contacts of investors I knew, and before long he was managing a small amount of money and had completely replaced his income. What we should take away from this example is that dollar profit is completely subject to the size of your account. On the other hand, your percentage return is subject to your trading strategies and performance. Provided your strategies and performance remain consistent, we can call your percentage returns a “constant” and your dollar profit a “variable”. As in any scientific experiment, you should focus on keeping your constant as consistent as possible and simply adjust the variable to get different results. Beginners often start with $2,000 and say to themselves “This is what I have, this is my constant. I need to make $1,000 per week so as long as I can return 50% per week then I can quit work.” This simply doesn’t happen, and you’re lying to yourself if you think you can maintain those returns.

Professionals on the other hand start with $2,000 and say “This is what I have, however it is just a variable”. I need to make $1,000 per week and I am currently returning 2.5% per week which is my constant. This means I need to make these returns on a $40,000 account then I can quit work. This allows the trader to maintain steady returns and replace their income provided they keep doing what they’re doing. If you think it’s hard to raise $40,000 – think again. If you can prove you’re making 10% return per month, make some print outs of your account report and start your own “portfolio of results”. Be sure to include a print out of your brokers summary screen to help you explain how you were able to make these returns. Most investors would be happy to make 10% per year let alone 10% per month. So if you can come to an arrangement like this, essentially you can pay off their interest in the first month, leaving you with 11 months of trading their capital – which is pure profit to you. A hot tip: Try the bank. They don’t even want 10% per year. Usually they will give you money for 5% and even less! A word of warning – managing money that is not yours increases the risks involved with trading, and it is NOT for everyone. I ‘m certainly not suggesting this is a necessity, or that you should do it to make more money. I’m merely letting you know that in my experience, most successful traders will go down this path at some stage in their journey. Be sure to consult your financial advisor and ensure you are compliant with all the licensing regulations in your country before you start something like this.

We’ve discussed the dynamics of your perception and how it can interfere with your ability to place trades accurately, but how do you really know if you’re trading correctly? We do this by
back testing. Back testing is simply the act of reviewing all past trading opportunities within a given strategy, and comparing them to the trades you actually placed. We always take a little time out to do some back testing each week, to ensure we are on track and following our rules accurately.

To do this I recommend to use a Forex Trading Simulator. A trading simulator will massively speed up your learning curve, and help you back test your trading efficiently. Fx Learning uses and recommends the Soft4FX simulator which is available on the Meta Trader 4 platform. TradingView and MT5 have their own simulators. The Soft4FX  simulator will allow you to simulate any currency pair at any time in the past. It will even allow you to take trades during that period making it feel like you are trading live.

A link to find out more on the Soft4FX Simulator can be found here – CLICK HERE

The  whole process of simulating will show whether you are perceiving and acting on every opportunity our strategy gives you. If you find there is a discrepancy between the two numbers, you need to reflect on why this could be. Did you simply overlook a trade because you were rushing, were you unable to place the trade because your account was in drawdown and couldn’t bear another loss, or were you trigger happy and placing trades that weren’t signalled by your strategy. If you are unable to discover what caused the inequality, it would be an ideal time to contact your trading coach.

Back testing is also a great way to practice! Try scrolling back, weeks, months and even years and move forward again one bar at a time. Write down any trades that your strategy signals and record the hypothetical results. This is a great way to train your eye to identify set ups when you’re just learning a new strategy. Eventually the set up will be so firmly implanted in your mind you will be identifying trade set ups unconsciously.

When simulating you should record a maximum of 1,000 trades.  This allows traders to create a long term database of their results archived in separate journals, and also provides the perfect opportunity to slowly tweak your strategies over time. Your goal then should be to make every 1,000 trades more profitable/consistent/efficient/faster/smoother than the last. By doing this over time I have used the results of my best and worst performing pairs to slowly refine and reduce my currency list to under 10 pairs! I recommend changing 1 or 2 things maximum about your trading routine each 1,000 trades and monitor the difference that it makes. There is no right or wrong here, but rather, you should focus on tweaks that best suit your particular personality. The reason I chose to refine my list smaller, is that I am a conservative investor. I much prefer sacrificing ‘bigger profits’ for a smoother account equity curve.

Rules Vs Emotions

Have you ever noticed in trading there is no set of rules? Have you also noticed that life is controlled by rules? Everything you do from working a job, driving a car or even learning a new skill, will all have a set of rules linked to it. Unfortunately in trading, there are no rules. Every decisions making and trade you take is decided by you alone. For some people this can be a hard thing to digest and understand as discipline is hard thing to master. Everybody knows eating cake is not good for you, but yet you still do it, and then complain that you are putting on weight. As harse as that may sound, Trading is pretty much the same. If you are not making profits in trading, then you are doing something wrong. When it comes to trading, there are millions of different strategies, and millions of different ways of trading. If you spent every week trying out a new method, I can almost guarantee you would be trying out a new strategy for the rest of your life….. Unfortunately that is the harsh reality of trading and that is why you need to start to control your discipline now.

Before we jump on the charts and start talking about how to make money, we first need to learn to control your mind-set and reprogram your mind to follow a set of rules and trading plan. Trading is a zero sum game. Regardless if we are learning, making profits or loosing profits, we always follow our rules.

Have you ever been down about something to the point where it was all you could think about? Most people have, yet often the reason that they remain down is because their negative thoughts reinforce their sadness. A “break state” is the term given to an abrupt change in your concentration which often leads to a complete shift in your thought process and emotional state. For example, the next time you find yourself in a heated conversation, break the state of your opponent by making a funny face or inappropriate noise. 9 times out of 10 you will soften your adversary and lighten up the situation, which will allow you to discuss the issue at hand in a more civilized manner. Sometimes your own thoughts will lead you down the dark and dismal path of anger, doubt,
uncertainty, hesitation and regret. As professional traders, we must identify these thoughts and immediately break our own state. Use your Mindset Conditioning Bracelet to associate pain with any thoughts that are not conducive to trading mastery. This will have a double effect- It will break your state immediately, and pass on a message to your subconscious mind which will remind it that any non conducive thoughts result in pain.

It does not matter whether you make 3% per annum or 300% per annum. If your trading routine is plagued with doubt, anger, frustration, hesitation and regret – you will not survive as a trader in the long term. I have met a handful of traders who have returned stunning results, yet still feel doubtful and uneasy about trading full time. They may have great results, but their level of success is only as high as they think it is. Shakespeare once said,

“Nothing is either good or bad, but thinking makes it so”

Essentially what this means is that a circumstance cannot be good or bad, it is simply your thoughts about it that deem it to be one of these two. Learn to master your thoughts, less your thoughts will master you. There is no doubt that the quality of your thoughts will directly affect the way you approach the markets and most likely your profitability in trading. While some people will cringe at this idea, I believe it to be a very enlightening statement. Always remember that it is much easier to change something internally than it is to change something externally. Ralph Waldo Emerson summed up the power of thought in his famous quote:

“Sow a thought and you reap an action; sow an action and you reap a habit; sow a habit and you reap a character; sow a character and you reap a destiny.”

Learn to watch your mouth. What many people don’t realize is that words and phrases have the ability to arouse all kinds of emotions. Constantly talking about how much money you have lost and how rubbish your strategies are will have an adverse affect on your mindset, confidence and therefore consistency and profitability. As you know, you should be trading 100% emotion free, so any action that could bring emotion into your trading routine should be monitored and avoided. When I first started teaching a good friend of mine how to trade, I noticed that he had a tendency to blame the markets for any losing trades. He would use phrases like, “I can’t seem to win this week” and “I got bombed out of a trade this morning”- both of which imply that the market had some kind of set against him- which is simply not the case. By saying these things he was reinforcing this fallacy to himself and stirring up negative emotions towards the markets and his strategies, instead of promoting an impassive approach. Curving your bad language and replacing negative phrases with more positive ones will have a direct impact on your confidence in the market and make it far easier to follow your trading plan to the letter.

Negative phrases to avoid:

Negative Phrase – This strategy is not working!

Why is it negative? – Are you sure your strategy is not working? Have you back tested and ensured you have taken every true entry, and nothing but every true entry? Have you taken at least
100 entries to ensure your edge has a chance to work through? Have you reviewed your journal and ensured you have risk managed every trade correctly? Have you successfully been able to open and close every position without emotional interference? Have you ensured you are not overexposed in terms of individual currency exposure?

What to replace it with – My strategy is currently going through a temporary period of drawdown, but I have been trading perfectly according to my plan.

Negative Phrase –  Most of my trades were rubbish last night and I got stopped out.

Why is it negative? – There is no such thing as a rubbish trade. This is merely a negative way of describing trades hitting their stop loss. Why did so many trades close? Was there a big market movement, were you overexposed? If you followed your plan, you have nothing to worry about

What to replace it with – There was a big movement last night and a number of positions hit their stop loss order.

Negative Phrase – The market has been sh*t lately!

Why is it negative? – The market is never good, bad or sh*t… your strategies are designed to capture movements during certain market conditions, your
account can and will fall in value during market conditions that are not favoured by your particular strategies.

What to replace it with – My strategies don´t flourish in the current market condition.

Physiology

Physiology in trading refers to your physical traits such as stance, posture, breathing and facial expression. A large part of your mental state depends on how you move your body. To prove this concept, next time you are unhappy, angry or annoyed try taking 3 deep breaths, throwing on the most outrageous smile, then proceed to do 10 star jumps on the spot. I guarantee you will be unable to stay miserable.

“Body motion leads emotion”

Although I am yet to perform star jumps during a trading session, physiology plays a great part in keeping my emotions controlled. If you sit down at your desk hunched over the keyboard, holding your head in your palm, taking shallow breaths while you fight against heavy eye lids and are thinking about going back to bed- you will be in a completely different frame of mind to when you are charged, sitting up straight while taking deep breaths with a confident and cunning look in your eye. A different frame of mind leads to perceiving different opportunities within the market which leads to different results. True consistency means approaching the market the same way, every time. If you need to devise a routine to wake you up and get you into the mood, by all means do it. I have known traders who meditate for 15 minutes before their session begins so they are in the right frame of mind to trade in the zone. I personally listen to an empowering audio track if I feel the need to be perked up before trading.

A trader who approaches the market like this…

will have a completely different attitude than a trader who approaches the market like this:

Here are some of the most important points in successful trading physiology:

• Sit up straight – ensure you are comfortable and your workstation is the correct height.
• Take deep slow breaths instead of short shallow breaths – this promotes oxygen flow to the
  brain, awakens you, calms any nerves, and provides clarity in your thought processes.
• Smile – have fun and embrace the power of being able to make your income in a very
  agreeable way.

If you are prone to maintaining poor physiology, make sure to identify it and rectify the situation immediately, as it is a vicious cycle. Poor physiology causes a bad mental state, and a bad mental state causes poor physiology. Sometimes you don’t know if your bad mood is causing your poor posture, or your poor posture is causing your bad mood, therefore it is important that when trading, you eliminate any physiological barriers, and ensure you are in a position that promotes confidence and awareness.