I’ve often realised that trading need not be very complex, as long we focus on the things that really matter. I believe the vast majority of traders spend too much mental energy and time looking for trading strategies that supposedly give them high success rates. When you tell them that successful trading is largely about trading psychology and risk control , and that many strategies will be profitable if you take care of these two important elements, they will say something like, “Ya…I know that basic stuff already….isn’t that what everybody is saying?”

The truth is that the majority of them haven’t really grasped the importance of trading psychology and risk control. They know it intellectually, but are far from internalising it to an extent where it naturally guides their trading behavior. In fact, I recently did an experiment by backtesting a “strategy” that uses some form of random entry, but rigidly manages the risk per trade (keeping it at 2% of the account). I realise that such a “strategy” outperforms most people who keep running after sophisticated strategies.

This experiment shows that in order to achieve consistent success in trading, position-sizing and exit rules are more important than entries. A strategy that only tells you about entry points is not a strategy at all. Position-sizing ensures that your trades are not too small, nor too large. Exit rules determine when you should get out of the trade, whether at a profit or a loss. In this way, your risk is always kept to a small percentage of your account balance in every trade that you do.

In addition, the hard part of trading, which most people fail in doing, is to think in terms of probabilities, which work out in the long run. Such a mindset ensures that we are not so short-sighted as to be concerned only about making every trade work. Our psychological tendency to “make every trade work out” naturally makes us very short-sighted and “cut our profits short, and let our losses ride”! We tend to be too conservative with profits; being fearful that the profits will evaporate away, we take them too soon. Also, we tend to be too risk-seeking with losses, because we’re not willing to realise the losses, and somehow “hope” that the losses will turn into profits! Overcoming such a behavioral pattern is arguably the most important mental exercise every trader must undergo.

When we overcome the psychological biases that so often sabotage our trading success, we avoid doing the “most comfortable thing” when facing winning or losing trades. We then realise that it is the long-run distribution of profits and losses (and their relative sizes) that really matter.

This is the second month of my trading adventure, which started with a modest USD10,000 in early April. In April, my return was about 46.6%. In May, my return was about 38.7%. As such, my account value as of the end of May is USD20,333, as seen in the attached screenshot of my May’09 trading statement. Quite good so far. Doubled my account in 2 months….

As stated earlier, I recently started a small account of USD10,000, to give myself the challenge of compounding it over a period of 1 year or so. Attached is my first month’s trading results. I generated a return of about 47% of my starting capital in the month of April.

Having been trading the dynamic currency markets for quite a while, I’m convinced that market action is indeed human nature in action. According to conventional thinking, the Forex market (and any market for that matter) is driven by significant events, whether economic or political. As such, we tend to anticipate a certain outcome in the market as a result of a certain event, only to realise that the outcome could be contrary to conventional logic. For example, the US economic stimulus package could be seen as good news for the US economy, and thus motivate some people to buy the USD. However, the USD could also decline as a result of the same news event. The thing about economic events is that they can be interpreted in different ways to explain opposing outcomes. The financial media often attributes opposing market moves to the same news event!! For example, on a certain day you may read something like “The USD strengthened due to  Economic Event X”. The next day, when the USD weakens, you could read something like, “The USD weakened due to Economic Event X”.

So, is it the news events that drive the markets? I would say that it is the market’s response to the news events that drives the market. What difference does it make? A whole lot of difference!!! The market’s response to news events is very often irrational, and also very often happens before the actual event!! Many traders try to make sense of how a certain event will impact the market, after the event has occurred. This attempt is pretty much like shooting a moving target, because there are always 2 opposite ways the market will respond to the same event.

My trading style focuses primarily on identifying patterns in the ebb and flow of crowd psychology, which is truly the “engine” that drives the market, resulting in the trends (short-term and long-term) that we see on charts. Almost all the time, I realise that trading successfully relies a lot on going against the crowd psychology, which entails making decisions which are contrary to our natural human instincts. This, to me, is the greatest challenge all traders face, regardless of what kind of trading strategies they use.

Whenever I’m asked what I do for a living, I do have a hard time explaining to people that I’m a full-time Forex trader. Some of them ask me, “Which bank do you trade for?”, while others who understand that I “trade for myself only” comment that this is too risky (no CPF contributions, no regular salary, etc…).

As I’ve said before, the irony is that I think what I’m doing as a full-time trader is less risky and more reliable than depending on a job. The truth of this statement is especially obvious in the light of the recent financial meltdown, which has shaken the very foundations of what most people have taken for granted. This is why I always emphasize in my speeches and training sessions that mastering a recession-proof skill is so important.

In the midst of the current recession, we need to ask ourselves the following questions.

1) Is this going to be the last recession we’ll ever face in our lifetimes?

On average, recessions happen once every 8 years or so. This means that most of us are likely to face a few more recessions in ourl lifetimes. It might be enlightening to realise that many self-made millionaires (and billionaires as well) build their fortunes because of the decisions they make during recessions!

2) Are we going to emerge richer or poorer at the end of the recession?

The reality is that most will emerge poorer! This is simply because most people are conditioned by the belief that recessions should make them poorer, and that this reality is acceptable! Also, most of the things that we depend on financially (stocks, unit trusts, real estate, our jobs and businesses) are correlated with the economic cycles, such that they plummet in value during recessions.

However, there are ways we can remain profitable by depending on income-generating activities that are not correlated to the economic cycles. To me, trading the Forex market has been one activity that helps me achieve that goal!

This is also what drives me to become a trainer conducting a training program in Forex Trading (the Wealth Academy Forex program at Adam Khoo Learning Technologies Group). As a trainer, I often get questions on why I bother to do training if I can make substantial income from my trading. The truth is that I don’t really have to.

I’ve always had a passion for public speaking, although I only started developing this ability in very recent years. It might surprise some of you that I used to suffer intensely from stage fright. Ironically, I always wanted to be able to stand in front of a crowd of people to share passionately about the things I believe in. As such, I trained myself in the skill of public speaking by going through the Toastmasters program a few years ago, and very often “put myself on the line” by agreeing to conduct short talks despite having little preparation or confidence. I’m happy to say that I gradually developed confidence in public speaking, and won some awards in Toastmasters speech contests! Therefore, when the opportunity was presented to me to conduct the Wealth Academy Forex program at AKLTG, I saw this as an avenue to challenge myself in passionately imparting my trading skills and knowledge to aspiring traders, appying my public communication skills to make the training as effective as possible!

Indeed, I have found it most fulfilling to empower people from all walks of life in the area of wealth mastery through the currency markets. Certainly, I look forward to constantly enhancing the training process for many aspiring traders; this process of imparting my trading experience and observing the journeys undertaken by many aspiring traders has undoubtedly brought my trading proficiency to higher levels.

I recently had a new book published, titled “Secrets of Forex Millionaires”.

For the aspiring Forex trader, this book jumpstarts the journey of becoming profitable in this wonderful business. In this book, I outline the most essential principles of successfully engaging the currency markets on a consistent basis. It is hoped that my experience, as distilled in this volume, can shed light on your trading journey in the midst of the economic turmoil. This book is sincerely dedicated to all who are truly serious in mastering their financial destinies.

Once in a while, I like to give myself the challenge of starting a relatively small trading account and growing it over time. I truly believe that such a process of allowing a small account to compound manifold builds mental toughness in a trader.

As such, I’m going to start a small account of USD10,000, and grow it over time. Periodically, I’ll post my trading statements here on this blog.

I’ve often said to my trainees that Forex Trading is one of the very few ways by which one can start with a relatively small capital and achieve financial freedom by maximizing the power of compounding. We’ve all heard of people who mutilply their accounts manifold, and many wonder how these people achieve their million-dollar net worths through the business of currency trading.

In the light of the current financial crisis, many people have lost faith in all forms of investments. So, when you tell them you can generate a consistent monthly return of 10% or more, they think it’s unrealistic.

To me, trading is almost the only way to get this kind of returns regardless of the economic climate. A “10%-per-month” goal does sound hard for some people, but if you break this goal down to trade-by-trade goals, you start to see how realistic it is.

Contrary to popular beliefs, you don’t need to do too many trades. Personally, I find that aiming for about 10 trades a month gives me a comfortable way trading the Forex market. I don’t need to be stressed about doing too many trades. It also means you are more selective about doing trades, which in turn means that your success rate should be higher. A 70% average success rate can make you very rich over time!

Suppose you do 10 trades a month, and 7 of them are winning trades, and the other 3 are losing ones. If each winning trade gives you a return of 3% of your account size, and each losing trade results in a loss of 3% of your account size, the net result of your 10 trades in the 1-month period is a return of about 12% of your account! Remember, this is assuming a 1:1 risk reward ratio in every trade. In some cases, your profitable trades will lead to a return of more than 3%.

So, you see, it is discipline that allows this process to be repeated over and over again - trade after trade, week after week, month after month, and even year after year. That’s why some traders can multiply their capital manifold with sheer discipline. A monthly return of 10%, when compounded, will triple your capital in 1 year, and mulitply your capital by 10 times in 2 years! Such goals seem far-fetched at first sight, but when you break them down to monthly goals, and even trade-by-trade goals, you start to see how discipline and perseverance will make the small goals snowball into big goals!

I am constantly amazed by the fact that many intelligent and experienced traders, armed with good trading strategies, often overlook, disregard, or belittle the importance of good money management in trading. In recent months, some of them have sustained huge losses because of this oversight.

Good money management is about optimizing the sizes of our trades, so that we can effectively control the risk exposure of our trading accounts. This is how we limit our losses when the trading strategy gives us losing trades (which will happen, sometimes even consecutively!)

In view of this, a myth often quoted among traders who emphasize the importance of money management is that “even a bad trading strategy can make money with good money management”. People who subscribe to this statement essentially downplay the importance of a good trading method and excessively attribute trading success to good money management.

The truth of the matter is that if you don’t have a good trading method that gives you an edge over other market participants, good money management will not make you profitable; all it will do for you is to ensure you lose money more “systematically” and slowly!

Without an edge over the market, you’re just like a gambler visiting a casino, where the house always has an edge (a mathematical advantage) over you. In such a scenario, the longer you stay in the market, the more certain it is that you will lose all your money eventually. In fact, if you don’t have a method that gives you an edge, the only way you could make money is to practise extremely bad money management, i.e. by putting all your stakes on one or a few trades, hoping that “luck” would strike in your favor for a very brief period of time and make you profit big-time, and then leaving the market immediately thereafter! (This is essentially what all gamblers are pinning their futile hopes on!)

The right way to understand the role of good money management is seen in a slight variation of the first statement: “Even a good trading strategy can lose money with bad money management”.

To win consistently in the market, we need

1) A method that gives you an edge (an advantage) over the market
2) Good money management to limit your risk when there are losing trades
3) Discipline and good emotional control to implement the above despite the often unnerving market fluctuations

We naturally don’t like to talk about losses. Let’s face it! Despite all the talk about managing our trading psychology, there’s a part of us that wants to win every single time! Even I, as a seasoned trader, sometimes have to acknowledge this part of me.

The fear of loss tends to manifest itself in two ways.

1) After entering a position, many traders who refuse to lose will move their stop-loss points very far away from their entries. As such they may lose more than they should in the end.. Some traders even go to the extent of not placing a stop, believing that the price will somehow come back and hit their profit targets. The problem with doing this is that the process of waiting for that to happen can be very agonizing. It may take days, weeks, or months! In the meantime, your losses can increase very quickly! It’s certainly detrimental to your trading psychology!

2) Another way in which the fear of loss manifests itself for some people is that the trader becomes overly conservative. Everytime a trade opportunity appears, such a trader becomes very hesitant, and is very worried about whether the trade will turn against him if he enters it. As such, very often he misses many trade opportunities.

Losing trades generally set in motion a series of emotions in us, e.g. denial, anger, depression and finally acceptance. The goal is to get to the last stage, i.e. acceptance, as quickly as possible.

The more emotionally controlled you are, the less likely you are to be overwhelmed by denial, anger and depression. You will not allow yourself to magnify the impact of any particular loss. You’ll know that in the grand scheme of things, this particular loss doesn’t mean much. You’ll know that it’s fine to lose when you followed the rules (On the contrary, if you keep winning by breaking the rules, you should worry instead of congratulate yourself!).