INTERVIEW CENTRAL: Forex Traders, Part I
November 18, 2005
This week we have interviews with two of our top Forex traders/instructors Ross Beck and Jimmy Young. Ross Beck has actively traded the capital markets for more than 10 years. Ross specializes in technical analysis with a focus on pattern recognition and Fibonacci ratio analysis.
Prior to joining FXTE, Ross Beck worked with some of the biggest derivatives brokerages in Canada and the US. Ross has been with FXTE from its inception and you’ll recognize his passion for the Forex market at his seminars and on the FXTE DVD set!
Jimmy Young has been working in the foreign exchange markets since 1979. He was a Bank FX trader for 20 years; filling the shoes of chief FX dealer, head of currency arbitrage, options trader, market maker, liquidity provider, proprietary trader, and emerging markets trader along the way.
His interest in probability analysis and risk management was piqued at an unusually young age. Although Jimmy hasn’t been to a racetrack in many years, he believes his ability to “read between the lines” and find hidden value in currency trades is a skill his father taught him when handicapping race horses.
I really enjoyed listening to the responses from both of these professional Forex traders and educators. Ross and Jimmy both provide some terrific insights into the world of Forex trading. This is the first part of our two-part conversation.
Optionetics: What do you think is crucial when developing a Forex trading approach and what do you look for when evaluating if a new approach is worthy of actually trading with real money?
Ross: When developing a Forex trading approach it is crucial to have conviction that your approach works. This becomes a factor when you have a drawdown. The conviction will allow you to trade consistently and pull you out of the hole. However if you don’t have conviction that your approach works, then when you have a drawdown, you will drop your approach in a drawdown, try something else until that approach has a drawdown, and on and on it goes in a vicious cycle, locking in consistent losses. It’s also crucial to initially determine if a system has proven it’s worth from backtesting with historical data or a track record from real trading. Backtesting doesn’t carry as much weight as a real time track record, however it is better than nothing.
Jimmy: My approach is to look for trades that make sense from a practical point of view; for example, buying a currency if the economic news comes out much better than the market was expecting. Whatever approach you take be absolutely certain that the drawdowns are reasonable when compared to the expected net profit. So for example if you have a system that makes 100% a year but the drawdowns are 100% that’s no good; a couple of maximum drawdowns and your wiped out.
I have been trading FOREX for a living for 25 years and I know it’s possible to make excellent consistent profits, provided you think ahead and don’t jump in until you have a comprehensive workable trading plan.
Optionetics: When it comes to the foreign exchange markets do you prefer long-term strategies or short-term strategies?
Ross: This comes to personal preferences. I’ve actively traded short-term strategies for years, however at this point in my life, I prefer to trade intermediate style strategies as it allows me to have more freedom and not be enslaved to the screen.
Jimmy: I prefer short-term strategies to enter a trade and set my stop loss and medium term strategies to exit if my trade survives the initial period when my stop loss is tight and vulnerable. Oftentimes I will enter on news or a short term moving average signal. I leave my stop at the original level until the trade has decent profits then I move it to breakeven.
A lot of times I take profit just before a news release because that’s gambling not speculating (unless of course I have a strong opinion on what the news will be).
Currencies trend extremely well over the medium to long-term and there are excellent profit opportunities out there. The trick is to find good entry points using both technical and fundamental (news) analysis.
Optionetics: What are some of the key rules that you feel are most important for a Forex trader to keep in mind when evaluating any potential trading opportunity?
Ross: One of my favorite sayings is “Losers focus on how much they can win and winners focus on how much they can lose.” When evaluating any trading opportunity, focus on how much you can lose.
Jimmy: In a nutshell, is the potential reward worth the risk? I would also ask the question is there a way of getting into the trade without taking a lot of risk. I try not to risk more than 35 points on any trade in any currency. I should specify I mean in terms of the number of points from entry; if I do multiple lots I never risk more than 35 points per lot. The good profits will come with patience and having the foresight and guts to stay with your winners as long as they are performing well.
Optionetics: Do you ever employ option strategies in the Forex market and if so what are your favorite strategies?
Ross: Yes, I have employed option strategies in the past. My favorites are the strategies that benefit from time decay like credit spreads.
Jimmy: I think options slightly out of the money for the money is the best value. If you’re right about direction intrinsic value will build up and you’re assured a real profit. Options that are way out of the money are lottery tickets. But having said that they can be interesting when key economic fundamentals are experiencing a long-term change. The trick is if you think it will happen in a month buy a three-month option to be sure your timing is not premature. But clearly, good money can be made trading Forex options.
Optionetics: How do you treat losses and how do you go about establishing your risk tolerance before a Forex trade is ever entered?
Ross: I treat losses as the cost of operating a business. I try not to let a single loss affect my ego. In the big picture, the losing trade is just one of many trades. It’s not about if you lose; it’s about what you do when you lose.
Jimmy: I don’t risk a lot of money on a single position so generally my losses don’t bother me. My philosophy in general is “no sense getting mad it doesn’t bring the money back.” One good thing I do is quit trading for the day if I reach my daily stop loss limit. Everyone should have a daily stop loss limit and never exceed that amount no matter what.
If you have a set daily loss limit it allows you to focus on the more important task of generating meaningful profits. I view my daily stop loss limit as a tool for making profits; I focus on how I can make my daily loss limit work for me by generating profits. I think in general traders are too focused on controlling losses and “locking in” unrealized profits and as a result oftentimes miss trade opportunities completely or take profits much too soon. Bottom line is set your daily stop loss limit as a small percentage of your account balance and set out to risk that small piece to make money whenever opportunities arise.
Optionetics: With all the different technical analysis tools out there how does the new Forex trader avoid information overload or "analysis paralysis"?
Ross: It’s important to check out different methods and analysis techniques. But at some point make a decision as to which methods appeal to you the most and stick to them and get good at a few techniques. Don’t become a jack-of-all-trades, master of none.
Jimmy: First thing to remember is that technicals are a lagging indicator. Unless you know what’s going on with interest rates, economic data, and statements by key Government officials it’s very difficult to time the turns in the market, especially short term.
Personally, from a technical perspective I look at moving averages, Fibonacci retracements, trading channels, some Gann bar chart techniques, and prior highs and lows. I don’t consider most momentum-based indicators in my trading analysis or decision process, especially the ones that “call the turn or reversal.” I go with the flow or I don’t go at all.
Optionetics: What do you think are the greatest misconceptions beginning traders have about trading the Forex market?
Ross: I believe the greatest misconception is that it is easy. No one becomes an expert at anything in one day. However by modeling successful traders and investing in objective education, the learning curve can be dramatically reduced and consistently making money will become a reality.
Jimmy: They try to trade 100% technical and capture tiny profits, while paying proportionately large spreads. For example they take a 5 or 10-point profit on a trade with a 3 or 4 point spread. It’s a near mathematical certainty they will lose over time.
Optionetics: Thanks Ross and Jimmy for sharing how you approach the Forex trading business. Look for Part 2 of this interview to be posted next week.
For more information on how you can learn how to trade this fabulous market, go to www.fxte.com and see just how our educational package can turn you into a well-armed and profitable Forex trader.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
Visit Jeff’s Forum
Listen to Jeff at www.ProfitStrategiesRadio.com
Email This Article
View Full HTML
Digg This
Delicious
Subscribe© Copyright 1995-2010 Optionetics. All rights reserved. This material is for personal use only. Republication and re-dissemination, including posting to newsgroups, is expressly prohibited without the prior written consent of Optionetics. Optionetics is a registered trademark of Optionetics, Inc.