Forex trading pyramid.
Кушхов Тимур Олегович,
аспирант кафедры Финансов и банковского дела
Санкт-Петербургского Государственного Инженерно-Экономического Университета.
Each level builds on the next and, indeed, is essential if the next level is going to be put in place. Each trader already has such a structure in place but if trading and losing then the pyramid needs to be re-built along the right. In this article our aim is to introduce the overall concept.
The first level is you. Obviously if you are not in place, do not exist, then it will not be possible to add further levels. But also you determine the overall structure, as you have to build something which suits your overall personality. As such, each individual trader will have a somewhat different structure, although we believe there will always be common features. Because of this, it is vital that traders each plough their own field. One of the major steps they must take is to learn to be disinterested in what we or anyone else says about the market. Because your trading structure is going to be different from our or from anyone else’s you must learn to initiate and manage your own trades, nothing else is going to work. So already we can see how this model becomes useful - it gives us insights into the way trading works.
The next level is commitment. Trading is a tough business, in our view one of the toughest. And that is only right as it is also the highest paid in the world for the high flyers - so you would expect it to be tough. If you are going to battle your way through then you are going to need to be committed.
Next comes discipline, a key factor in trading markets. You have to learn about your own emotions and control them. This takes discipline. You need to develop a methodology that gives you an edge, and if you are going to use that you will need the discipline to do so. This brings in another point, because there are some things we can do and some we cannot. We do not need to make it unduly difficult for ourselves, so our methodology should be one to which we are suited, it should also be one in which we become expert. Once these two conditions are in place the ability to exercise discipline and to follow our systems becomes a lot easier, although the discipline itself remains essential. But this is an example of how the various levels of the pyramid inter-relate.
Also this illustrates how the structure is organic and evolves as our trading skills and experience grows. As we (you) evolve, this creates a feedback loop to our system/methodology which also has an impact on the discipline level, and all other levels. We have so far looked at the first three levels and these levels may be categorized as the «personal» levels; they contain what we bring to the party. For the purposes of these three levels, we may never have looked at markets, may never have taken a trade. The next five levels have to do with developing our methodology. Money management (MM) is the first key feature of any methodology. Without appropriate MM policies nothing is going to work. A system with a 99 per cent success rate (which sadly does not exist other than in the physical sciences, an airplane with that success rate would not be very popular!) would still wipe you out if you risked 100 per cent of your capital on each trade. Similarly risking too little on such a system would produce much less than you might otherwise expect. Getting your risk parameters right is the first step, and this also has to be personalized. Most people fail because they put themselves under too much pressure, this produces excess emotion, and emotional trading is a losing occupation. There are two types of pressure of particular importance. The first is financial pressure; if you risk too much cash then you become «a fugitive from the law of averages», and you will be wiped out, that is guaranteed. The second is psychological pressure, maybe as a subconscious realization of the financial pressure. Both of these must be avoided. Partly this has to do with experience, and partly with your risk parameters for each trade. We think that 1-2 per cent per trade is about right. You can still make lots of money but you need not feel pressurized. One of the «market wizards» said that almost all traders should immediately halve their trading size, that is good advice. Next we have risk control (RC). MM and RC are interlinked. MM is essential, as set out above, but often MM policies include RC. For example using a stop loss point (mental or «in the market») controls risk, but the amount of risk is an MM matter. To be a successful trader you must minimize risk. It is for this reason that we often see sharp moves after a news item, often in the opposite direction to that suggested by the news item itself. This is because the big traders, who got that way by minimizing risk, wait for such risky items as news to be out of the way before taking positions. Higher risk times include around news items, overnight and over the weekend, among others. Unexpected news items are something we can do nothing about except minimize risk at all times. We can never eliminate risk and we don’t really want to because without the risk there would be no reward. Traders have to be like tightrope walkers. Many people think that tightrope walkers learn to balance, but they don’t. Instead they learn to live with imbalance, in the same way a trader must learn to live with risk. This takes us to the three simple rules, which are calling «trading secrets». You see the best place to hide anything is out in the open where everyone can see it. You see such things all the time but do not realize their value. This is completely true of the three simple rules: «cut your losses», «run your profits» and «trade selectivity».
These correspond with the three stages which traders go through, although these stages can be described in different ways. We describes these three stages as «greed-orientated», «fear-orientated» and «risk-orientated». These three stages can be linked to the three simple rules. Another way of describing the trading experience can also be linked to three simple rules. This is «emotional to mechanical to intuitive», but we are getting a little ahead of ourselves. Having said that, some purely mechanical approaches are reputed to do well, but they would perform much better if you get the trade selectivity right. Only now do we get to talk about market analysis, as we must now look at system parameters. But all the key features are already in place, and once they are in place we will have no real difficulty with system parameters because we will better know ourselves, know how we want to trade, know what we need to trade that way, and be able to do so - and this final stage should not be minimized. In our opinion the purpose of analysis is generally misunderstood. It is not for market analysis, it is for putting your system in place. You may decide that you want to trade with the trend and hold trades for between three days and three weeks depending on market conditions. You may decide that some form of trend indicator would be useful within your approach. But whichever style you adopt you need to decide what triggers you into a trade and also how to get out. The point we are making is that there is some flexibility at this stage and the key thing is that the system/methodology follows the principles laid down in all the stages of the pyramid up to this point, that it is in accord with your trading personality and what you are trying to achieve. Once this is the case you have your system and it merely comes down to operation. So many trades are taken because traders become convinced of what might happen, they imagine the riches which would flow from that big fall, or that big rally. Wisdom lies in sticking with what you can see. Some traders develop blocks on their trading. Some of these problems have to do with complex thought processes which need to be unravelled, some to do with confidence which can be built through practice, and some to do with past experiences which need to be properly dealt with. Sometimes a trading psychologist can be helpful.
The top of the pyramid is the result: profits or losses. Sadly most make losses, but this is inevitable. It is one of the conundrums of trading that if everyone was perfect no one would make any money because it is a negative sum game. But this is not going to happen because people are emotional animals and many do not want to change that. They provide the fodder for the winners. Totally: the rules we live by in every day life do not work in the market environment - we need to construct a separate trading «personality» to succeed in the markets; this personality must learn much greater control over the emotions - the trading pyramid provides the necessary framework for this personality; each of us will seek a different trading personality, making the most of our strengths and minimizing our weaknesses - the structure is organic and each level interrelates with each other level; trade what you see, not what you think (Joe Ross).
Поступила в редакцию 21 октября