Another bull fight with Europe's dirty debt could be inevitable.

The International Monetary Fund says European bank losses will hit $1.3 trillion by the end of 2010, which is 35% more than the USA. Europe’s banks have been just as reckless as the US banks in racking up the dirty debt that caused the Global Financial Crisis, and potentially could cause a double dip recession in the later part of 2010. The IMF isn’t immune to its own mistakes, it didn’t see or forecast the GFC to begin with so the numbers and forecasts they provide should be taken with caution. The bottom line is you should not be exposing yourself and over committing in any stock, CFD or long term Forex position for the balance of 2010. Markets are still volatile and there are many long term traders that are currently holding no stock whatsoever and sitting on the sidelines to see the balance of this year come to a close.

Back to Europe’s woes. Banks in Europe have poured $2.5 trillion dollars into Greece, Ireland, Belgium, Portugal and Spain. If these countries fail in the next 18 months (and I see no way out for Portugal and Greece)  you can be assured it will have massive ramifications for the rest of the world, not to mention the complete failure of the Euro dollar. Ask any German what they want and most will tell you they want the Mark back. Ask most French people what they want and the story is the same. They say “bring back the Frank’. And ask any Brit and they will tell you that they are very glad they didn’t enter the Euro.

It could be argued that in good times the Germans and French love being part of the Euro Zone and Mr Cozy (my nick name for the French President) still personally supports the Euro Zone, but for how much longer only time will tell.  French banks are reported to be the most reckless of all lending money to Greece, Portugal and Spain at alarming rates. Europe is an incredible complex group of nations, many corrupt, many bordering one another like a tight knit neighbourhood and many of the nations people struggling to make ends meat.

Today many believe the debt surrounding European banks is currently being hidden, and attitudes are that they may be able to sweep the debt under the carpet until things improve. Germany is also largely to blame as they continue to run a stealth like operation in covering bank debt, nobody really knows the size of their dirty debt.

The bottom line is this. Unless the European banks get fair dinkum and open up and show how much real debt they have and commit to genuine reform the chances of the Euro recovering from this current crisis is slim in my view. One of the biggest problems facing the Euro is simply trust. It seems nobody trusts one another enough to open up and come clean and certainly nobody wants to be the first to declare their hand.

As I have continued to trumpet in this blog, Asia is the new powerhouse in the Global Economy. Wall St, the UK and Europe is sadly in serious denial. Obama is trying hard but government debt keeps soaring and soaring and he has little control. The trouble maker who is in such denial Alan Greenspan is long gone. His policies mostly lead to the cause of much of the USA’s woes.  In the UK treasury is now wanting to tighten government spending 40% or more. How do you think the Brits like that?  Their standard of living has been on the decline for the past 20 years and now budget spending is set to tighten like a hangman’s noose.

One thing is for sure, the government and banks in the USA and Europe are not going to help you if you are hanging around thinking they will come to the rescue. It sadly is every man for himself for the next few years if you live in the USA and Europe.

Trading is a funny game and often goes against the grain of human thinking. Generally speaking if you study something long enough and research it using the latest techniques and professional tools available you have a good chance of being right. This is the very type of mindset thinking that people bring into the trading arena and lose.

A few years ago I knew a trader who lost over $50,000 in 3 hours trading futures and dinted his confidence in a big way.  He  employed a friend  who he’d worked with who is an incredibly bright guy. He had previously designed extremely sophisticated town planning systems throughout the world. A very bright guy indeed. The trader that had lost the money said to me one day that his opinion was that his mate had the perfect skills and technical ability to develop a system to get all the money back he’d lost. It was at a relatively early stage in my trading career and I didn’t know much better but all I kept thinking was, I hope he shares it with me if it works.   Needless to say it didn’t, but the talent assembled to research and put together a trading system that showed incredible returns when back tested never materialised when traded live.  Their opinion was wrong.

I have also had countless computer programmers approach me and tell me that they can automate the way I trade and have such strong opinions on their ability to make fortunes if I would only show them how I trade exactly. Their opinion is that it’s able to be automated. You can’t automate human intuition and experience and this is why banks use humans to make decisions and not computers.

The bottom line is when you are a trader your opinion about the market does not matter, what matters is the opinions of millions of others and the opinions of the large institutional investors and banks who will buy or sell after you. You may have an opinion but what really matters  is do the major players have the same opinion as you. You have to be prepared to be wrong a lot when you first learn to trade and accepting losses as part of the learning curve can be tuff, especially if you are not managing your money well, which 90%  of amateur traders don’t.

You just went to a seminar, read a book, joined a trading company and they taught you a strategy that supposedly works. So what happens next? Your start to form an opinion about the trades and that raises your expectation levels.

In reality if you are a buyer the only way price can move higher is if people come in after you and are prepared to buy at a high price. Unless you know who those people are and exactly the time they will buy and how much, it is of little use to you to form an opinion on what is going to happen, because that opinion will raise an expectation and if that expectation is not met, you take it personally and often can’t accept the fact you were wrong. How can I be wrong? It always goes up, they said it did and I saw it with my own two eyes.

What you need to do is learn a to trade a system and forget about forming opinions in the market. Just trade your system and if you have an opinion, leave it at the front door because in most cases when you are learning to trade your opinion is going to be wrong, but if it is a solid system, if you just continue to trade the system the chance of you making money is significantly higher than forming opinions and expectations. These opinions and expectations also cause traders to jump out early for their profit or loss, skip trades or worse remove a stop loss because their opinion says it’s going back up.

GBP JPY Short 06-05-2010

As part of the Trader of the Month Competition we ask for the winners to share their trading journey and advice with their fellow traders. Michael Horneman was 10th on last month’s Trader of the Month Leaderboard and I have no doubt that we will be hearing more from him in the future.

Keep reading to learn about Michael’s Trading Journey and we are also lucky enough to have him share his advice as he offers an insight into his own Trading Plan.

Michael’s Story…

I began trading around 2 1/2 years ago, I first started with learning to trade Eminis. This initial experience is what first got my mindset and phsycology ready for trading financial markets.
I didn’t trade for very long as I had limited capital to begin with, and like most beginner traders lost money, but I learned some great lessons about managing risk and preserving capital. I was also very risky and too willing to trade, I still had in my head a “get rich quick” mentality and was looking to take every trade I could. Looking back this has also been the pattern for the first 6 months I was trading forex with LTG GoldRock.

To make the change from a mindset of working for money and selling my time for money was not easy, and it has taken around 2 years to really begin to understand this in a way that helps you view money differently.

Initially I was unable to change my mind from “get rich quick” to a managable “get rich slow” but over time have been able to, and this made a huge impact on my daily trading habits. I used to be glued to the screen and really beat myself up if I missed a trade, but this was only because I was greedy for profit, and also didn’t grasp the concept of probability, meaning that even though I missed a winning trade, the next trade is just as likely to be a winner, not more likely to be a loser due to the previous winner. The light switched on for me when I cancelled my trading room subscriptions for trade calls, and then took the knowledge I had gained over the last 2 years and looked at my own set of charts and asked myself the question, I know how this trade trade sets up, now why don’t I beleive it is profitable.

I decided to learn 1 trade back to front, back test it myself for 2 years, calculate the best stop to profit targets, and then once I had done this I was able to see clearly why this trade setup worked, how it worked and how I could profit from it. I now have a simple yet workable trading plan that actually suits my lifestyle, and is proven to be profitable.

My trading plan is so simple and uncluttered now, it used to be so long I couldn’t even understand it let alone follow it. Simple really is better, for both trading and discipline, it is easy to follow a few rules all the time than many rules all the time.

My plan basically is:

1. Take all zingo trades that occur on the chosen pairs CHF/JPY, USD/JPY, AUD/JPY, GBP/JPY and EUR/JPY.

2. Once I check the charts I look at the next possible occurance of a signal and then I list this in a desktop file and put a note on my phone and do not look at the charts until this time. This means I check the charts twice a day at most for 10 minutes.(easy as….)

3. Once a trade confirms take it with the stop and loss targets set out from backtesting, most are the same with a couple of small alterations to help maximise profit without complicating the system. I also leave the trades to run, I do not check them I simply wait for the stop or profit target to be hit. I also use the same account % for stop and profit each time regardles of trade pip size.

4. For each trade that confirms take a screen shot and save as a record of all trade, and also to look back on at end of month to see how each trade set up, and also as a record for backtesting.

This plan has helped me be able to approach trading as a business, and from an outside point of view, rather than of frustration and obsession with profits that were never materialising. I hope to add to this plan as I get comfortable with another signal and have backtested it myself I will then add it to my plan.

So, I guess this has been a long paragraph, but my simply lesson learned would be to get familiar with a few trade setups, even 1 is enough, backtest it yourself to build your own confidence in your ability to place these trade, and personalise the rules surrounding the trade so that you are following your own plan and not trying to learn something that works for someone else. We are all different and so this should come through in our trading, it is not really the specific approach that counts but simply your faith in your own ability to place a trade, and that trade being tested to be a high probability trade. This, and the discipline to continue to do this over the long term will give you success as a trader. I have also learned to be patient, and look to the long term rather than stress over a missed trade, I now look forward to them, especially when they are not profitable….

Above is a screen shot of one of my favourite recent trades, I am now trying to work out a strategy to take advantage of market moves such as this, the trade is the second red arrow from the right, and you can see the significant move that occurred straight after the entry. Looks great in my trade record folder…

Thanks for you help LTG, and happy trading.

Mike Horneman

Trading can be rollercoaster, but it's important to have the nerve to sit back and enjoy the ride.

The Freak Out Trader can be both a winning and losing trader, but is always a newbie trader as a Freak Out Trader NEVER makes it to professional status with consistent profits.

The Freak Out Traders emotions are let loose to the extent that when they have wins their excitement drives them to freak out and get so excited they think they are bullet proof. The Freak Out Trader also experiences depression and freaks out on the losses too. What is going on subconsciously is that they don’t realise it yet, but the reason why they are freaking out is because they are not in control. The market is in control. They are usually trading too much money, trading too often and don’t really understand the system they are using. These examples usually come down to inexperience and their attachment to money and certainty we all have when we start trading. As a trader you need to have a detachment to the money and learn to trade the probability rather than the expected certainty that humans have when we enter the trading arena.

If a new trader experiences a few winning trades to begin with they are lulled into a false sense of security. They begin to think that “this is too easy” and begin to trade larger sums or over trade and take multiple positions. This false sense of security often happens in simulation as traders rarely lose in simulation. They trade probability well but don’t know they are doing it, they follow the system as there is no fear of loss. They don’t know it yet, but  they have gotten lucky and truthfully have no real idea about what they are doing, especially when they trade real money. Any mistakes are magnified 10 fold with real money. The first few trades a newbie trader makes with real money there is a 90% chance they got out of the trade before the profit target was reached or they altered the stop loss or profit target a number of times. They rarely did this in simulation as they felt comfortable, because there was no fear of loss and they followed the rules.  Now of course if they do get lucky and their trades are successful while they are fiddling, this can be one of the worst things to happen, as it creates a false sense of security. They think they are in control, when the real truth is they are far from it. The Freak Out Trader is steadily growing inside and will shortly explode.

They are about to experience what it is like to be ambushed as a trader from within your own mind. When the short winning streak comes to an end they lose control emotionally and freak out. I have seen this happen time and time again and unless you are prepared to learn to trade probability and learn to manage risk of 0.05% of your trading account and learn to build up your mindset muscle, you will fall victim and likely become A Freak Out Trader.

To test right now if you are a Freak Out Trader ask yourself these questions…

1. Do you get out of trades early whether for the profit or stop?
2. Do you adjust your profit and stop loss levels?
3. When you look at your trading statement are the wins always smaller than the losses?

If each win you have is not bigger than the average loss, if you don’t use a risk calculator, if you don’t learn to trade probability for months first and learn to experience winning streaks and losing streaks and build up your trading mindset muscle, you will fall victim to becoming A Freak Out Trader.

The only way to avoid becoming A Freak Out Trader (who usually lasts less than 6 months trading a live account) is to do the following.

1. Trade 0.5% on each trade and trade with a small account.
2. Learn to master one signal and own it emotionally and understand it’s probability through your own hard work learning the signal.
3. You must feel comfortable with each trade and be totally at ease win or loss, and have faith you know the probability.
4. Trade it consistently each time it presents itself with real money maintaining your risk vs reward and make sure the winners are always bigger than the losses.

If you apply the above 4 points you will put yourself in the class of trader who is not likely to fall victim to the Freak Out Trader mentality.

All the best

One aspect of trading that you must understand and take on board RIGHT NOW is this. The market is only a two horse race. Buyers and Sellers are the only horses in this race and the price is either going up or down. How simple is that. Yeah I know what you are thinking, it has to be more complicated than that, ITS NOT!   Simply looking at a trend and placing a trade with a trend has the probability of continuing in the direction of the trend rather than reverse and go the other way. But why is it humans consistently try and build systems and indicators that over complicate things. The more complicated you make things the less likely you will make money, period.

What you need to do is find a simple system that has the balance of probability on its side and simply play it with great money management. The worst case scenario will likely be that you will not lose money. But if you try and over complicated things, jump from one strategy to the next and don’t work your way through the losing and winning streaks of the simple system, you will never make money trading Forex consistently.

The KISS principle is not taught often enough (keep it simple stupid) and if most traders simply committed to a simple system that trades with the trend, managed their risk to a minimum, ensured their profits are always bigger than their losses (even if it is by only 5%) you chances of making money are significantly improved.

Here in a nut shell are my two opinions and hunches for the next 3 months.

1. The aussie dollar to continue to steadily rise
2. We will also see a steady increase in the price of gold.

As Traders it’s important to stay up to date with the latest Forex News and global market movements. It would be ignorant to be in the business of Trading Currencies and not know what is happening around the world to each of the currency pairs.

” I have been trading forex since May last year with LTG, prior to then I have been watching my husband trade eminis and we have traded options. My involvement has always been in the background but I found Forex to be enjoyable and challenging, so we agreed I would trade Forex and he would continue with Eminis.”

“Previously I was a business owner, after we sold the business I have been working part time but have now taken time off to have the bub. I was planning to return to part time work in August, however if my trading continues as it is I will not be returning to work as the income substitutes my wage.”

Narelle’s Advice for someone starting their trading journey…

For someone just starting out I would advise them to sit back and listen in the trading room first, learn as much as you can from the questions and answers being discussed.Never expect things to happen immediately, patience is a must. Be persistant, don’t give up after one bad month. Find what works for you personally, devise a plan and stick to it. Have someone you are accountable to. I use my husband, I find it easy to lie to myself and justify why I might have made an incorrect decision, but not to him, so I stick to my rules and my plan. Make sure money management is in your plan or rules.

Opening an Account

When you start trading Forex, open an account with no more than $1000 dollars. In fact, you can open an account with as little as $200 if you wish. You can add more money to your account in time with your success and profits but here’s an iron clad guarantee. If you can’t turn $1000 into $2000, there is no hope that with more money such as $20,000 that you will turn  that into $40,000. It rarely ever happens and for those that do, it’s usually luck.

Forex is an unique market where as the price moves from one pip to another pip you as the trader can chose what each point is going to be worth before you enter the trade. For example if we are buying shares on the stock market each share will have a specific value, for example $1.20. You can’t alter it.

When you invest in Forex, the trading platform will ask what you want each pip (or point) to be worth. In other words if the EURUSD is trading at 1.1976 and it moves to 1.1977 that is one pip. You can chose the smallest volume to be 0.01 which is essentially .10c. You could have each point be worth $10,000 if you account could handle it.

That brings me to the point of traders making or losing pips and applying the real return on investment.

Here is an example trader John.

John takes 10 trades in a month and makes a +400 pip result with a 60% success rate of hitting his profit target.  You would assume that John would be pleased with this result. He can hold his head high as a  winner, he made +400 pips and a nice profit.  Or did he?

John took 10 trades and risked 0.5% of his trading account on each of the winning trades. He gets 6 of his trades correct and 4 incorrect. The profit target on each winning trade is +100 pips. A total of +600 pips and a return on investment of 3% (0.5% * 6 = 3%) . The other 4 trades he gets incorrect and each losing trade is only -50 pips however each losing trade he risked 1% of his account not 0.5%. A total of -200 and loss of 1% on each trade which is a total of -4%.

So what is John’s real result.

The result is +400 pips (+600 – 200 = +400)  A positive result…… but hang on a minute!!!

On the 6 winning trades he made 0.5% on each winner which is +3% return on investment. But on the losing trades he risked 1% which is -4%. What is John’s total return on investment?

His real result in return on investment is -1% even though his pip total was a handsome +400.

So my point is that even if a trader says they have lost -400 pips in a month does not mean they made a loss on their account, just as when someone says they made +400 pips does not mean they made a profit. What is the only measure of success in Forex is what their ROI (return on investment) was on the trade, not the pip total.

Later this week I will share with you what a professional risk calculator looks like and how successful traders manage risk in Forex and focus on ROI and not pips.