"Foreign Exchange is a very psychological market"
currency market has evolved greatly since 1992. Dealing and prop trading desks
at banks have been reduced to shadows of their former selves.
markets have gone full bore electronic and now even the smallest retail trader
can participate with close to institutional execution speed and spreads.
might think these changes make the Bill Lipschutz interview published in The
New Market Wizards somewhat
outdated, but you would be wrong.
interview is a testament not only to the timeless nature of markets and human
psychology, but also to his great depth of his understanding and insight. You
need to remember this was a new thing when he began. There was no veteran for
him to learn from, no website for him to join, or market
wizards book for him
to read (at least not one featuring a Forex trader).
day when I trade, Lipschutz's advice is in my mind. And it works. Time and time
again. In fact, until I re-read the interview again (in preparation for this
article), I did not realize quite how much my trading approach has been
influenced by him.
summarize the key insights here.
"What is important is to assess what the market is focussing on at the
quote sums up market sentiment in a nutshell. The Forex market is highly
psychological. It is often not the variant perception that drives market - it is the current
what the market is focusing on, and you will go a long way. Think about the
bear trend in the Japanese Yen in 2012 - that was because the market was
focussed on the Bank of Japan and Abenomics. The bear trend in the EUR in
2014 was because the markets were focussed on the Greek Debt Crisis. In 2016
the GBP sold off for months, as the focus on was BREXIT.
is not always big picture either. If you are a day trader,
understand what the market is focusing on for that day or week. As Lipschutz
says, "one day the market might be focussing on interest rate differentials;
the next the market may be looking for capital appreciation, the exact
trade on your "gut"
"For myself, any trade idea must
be well thought out and grounded in reason before I take the position"
trades should be carefully planned.
need to consider the best way to implement the trade to produce the best
scenario planning should be conducted. We know based on Lipschutz that good
traders spend a lot of time thinking about what could possibly happen, what it
means for their position(s) and what the correct response would be. They
"develop scenarios, re-evaluate scenarios, collect information, and re-evaluate
strategies both maximize profits and eliminate mistakes in the fires of battle.
does not preclude any trades based on "instinct". Sometimes you need to act
quickly, but as a general rule, detailed planning is better than gut feel.
about each situation, not a boiled down set of rules
"Many people think that trading can be reduced to a few rules. Always do
this or always do that. To me Trading isn't about always at all; it's about
I appreciate a rules-based approach to trading, rules can cause the trader to
take the wrong actions for the current situation. Perhaps your rule tells you
to take profit, but you can clearly see that the trend is likely to continue.
I prefer a process-driven approach to trading. In a process-driven approach you
look to understand what is happening right now, and then apply the correct
approach based on your model of how the market works and your toolbox of
provides the flexibly to adapt to a changing market while remaining within a
strict risk-management framework.
your risk inside out
"Always know exactly where you stand"
lists some of the main elements to controlling risk.
Know exactly your
position size and exposureDon't concentrate too
much of your money in one big trade or group of highly correlated tradesAlways understand the
risk/reward of the trade as it standsnow- not only when you put the trade
risk management rules are all just as relevant today as they were then. Good
traders know exactly what risk they have on, they know which trades are
correlated, and they take steps to ensure that their positions remain within
their established risk limits.
a losing streak?
"Work very hard to restore...confidence"
things are not going well, your judgement is likely to be impaired due to the
lack of confidence that tends to accompany any losing streak.
key is not to trade more to
try and win back your losses. The key is simply to regain your confidence.
can be done by cutting back on your trade size - get some small wins under your
belt, and your judgement will reassert itself.
rely on being exactly right in your timing
"You have to trade at a size that if you're not exactly right in your
timing, you won't be blown out of your position"
employing a scale-in and scale-out approach to trading, you eliminate the
common mistake of "all or nothing trading".
would add to his position as it went in his favoured direction, then once the
currency was near his intended target (or when circumstances dictated), he
would lighten the position piece by piece.
means he does not have to be exactly right in his timing to be profitable. In
particular, it has enabled him to stay with his winners a lot longer than other
traders, who exit in one go.
benefit of this is an improved risk/reward ratio. Lipschutz believes it's
important to "figure out how to make money being right only 20 to 30% of the
when the fundamentals change
"You don't want to hold a position when you don't understand what's
you are in a position based on a fundamental reason or story, and the
fundamentals change, then it's time to get out of your position. (At least for
if a trade is going for you, once you perceive that the fundamentals have
shifted, then it's best to get out and re-evaluate.
you don't know what's happening, then any profit you are currently making is
based entirely on luck, and that is not a good thing. )
arises from hard work and courage
"The best traders I know are quite brilliant, and they all work very
hard - much harder than anyone else"
is firm in his belief that the best traders don't think twice about how many
hours they work - "there is no substitute for that level of commitment".
"What am I doing right? What am I doing wrong? How can I do what I am
doing better? How can I get more information? It's obsessive"
traders need to fight through the pain. This takes courage.
you need to be quite different from the crowd, and have the gumption to act on
your views and stay the course.
on the process not the money
"The money never had a major effect on me"
was not bothered by the money he had on the table. Rather, his focus is simply
on trading well.
was apparent at one particular point, when he was stuck with a large losing
position that was moving against him. Rather than panicking and selling at the
first available opportunity, he followed his processes and let the market
dictate when he was to get out, resulting in a much smaller loss.
as a game
"I can't believe I'm making all this money to essentially play an
trades not for the money, but for the challenge.
suggested that even without the money, he would still trade as he enjoys it so
much. To him, trading is a game - and an easy one to keep score of.
a number of top traders have a similar mindset. By thinking of trading as a
game, you divorce yourself from the paralyzing stress of worrying about money,
and focus simply on making good decisions from a relaxed state of mind.
timeless nature of trading
words are still as relevant today as they were 24 years ago. While the
markets and techniques change, the principles of good trading don't.
this is where you should spend your time. If you can truly integrate this level
of thinking in your trading, then you will be able to achieve your trading
up to you.
If you need support, you can get the Advanced Forex Course for Smart Traders for free.
About the Author
Sam Eder is a currency trader and
author of the Definitive Guide to Developing a Winning Forex Trading System and
the Advanced Forex
Course for Smart Traders (get
free access). He is the owner of FX Renew, a provider of Forex signals
from ex-bank and hedge fund traders (get a free