Author: SYLVIA MUCHAI

One of the hardest obstacles for people new into trading in the financial markets is in strategy development. Most people struggle for years trying to find the “perfect strategy” that can guarantee them consistent profits into the future. The harsh reality is that there is no perfect system, and what may work for some may not work for others.

A trading strategy is a set of decision making rules that a trader follows in order to justify executing, managing, and closing orders in an account. These sets of decision making rules are what provide logical interpretation of market data and ensure a disciplined and less emotional approach towards trading. A trading strategy is the process or methodology behind achieving trading objectives. By virtue of this, it then means that a trading strategy must have the capability of achieving the laid out objectives, and this is where the main obstacle lies for most traders

In order to formulate a strategy, a trader would first begin an idea based upon pattern recognition. Trading is both an art and a science in which we try to predict and profit from future price movements in the market. Predicting future price moves requires having an understanding of the market factors and phenomena that influence price. These phenomena when studied over a period of time can give insight into repetitive patterns that can be exploited for profit.

The journey of a strategy begins as an idea, an idea that would need to be tested further to find out whether it is capable of predicting future price movement in manner that is consistent enough to generate a positive return on investment. Our would-be strategy would encompass a few major elements such as the market instrument we would like to trade, the time-frame we would observe price movements, our entry criteria for both long and short positions, our risk tolerance per transaction, and our exit criteria for each trade. Structuring our ideas in this manner would make it easier to test out each element in our trading idea to find out which areas we would need to make changes to.

SIMULATED TRADING

The fastest procedure to verifying the accuracy of the logic behind a trading idea, is through back-testing. This is also known as simulated trading. In simulated trading we play back historical price movements in real-time, and then test out the decision making rules or logic behind our trading strategy, to see how it would have performed in the past. This past performance will give us a basis to formulate a probability model for the strategy’s future performance. We tend to look at past performance – not as a guarantee of future performance – but as a guide. If the logic behind our strategy can work well in the past, then it can have a good probability of working well in the future.

Simulated trading has been shown to reduce the time taken to prove the logic in a strategy, and also give insight to possible modifications all within a short period of time, as compared to the traditional way of testing out strategies which is through forward testing methods such as demo trading and live trading. Forward-testing serves the purpose of confirming that the back-tested logic can work in current market conditions

Through simulated trading, a trader can test out their ideas in the past market conditions and make modifications to the logic to improve on returns. However, one must be careful not to over modify / over optimize the logic to such an extent that it no longer makes any sense in the current market conditions. Through back testing, simple ideas can be born into effective trading strategies.

We just recently concluded seminars and a three day workshop with FXTM in Kenya. Strathmore University students actively participated as well as interested citizens in a bid to explore the opportunities presented by the markets. We saw people from all age groups come to the events, eager to learn. They not only put in the hours in the sessions but also took time to unlearn what they thought they knew regarding trading.

We saw people open trading accounts for the first time in their lifetime and experienced traders who came to increase their knowledge. The most important thing was not the certificates awarded at the end of the workshops but the increase in the skill to trade for beginning and professional traders. Andreas Thalassinos did a great job expounding on technical analysis, its application and use in the financial markets.

While the Capital Markets Authority of Kenya issued a new directive a couple of weeks ago on regulation of brokerage houses seeking to conduct their business in Kenya, it should be known that FXTM is currently in the process of doing so. FXTM blends is very well with the vision and mission of Sylvia’s Traders Lounge, we are both big on education because we know that the skill to trade is just as important as your capital. Those who wish to learn and trade with FXTM can do so by following this link.

//www.forextime.com/?partner_id=4921021

We look forward to having FXTM again in the first quarter of 2019.

I have said this before, brokers can be whores if they want to. One of the things that you should look out for as a trader is your choice of broker. The role of brokers is to provide a trading platform so we can access liquidity in the Forex market. Brokers make money off your trading account in form of spreads and commissions. Before signing up with a brokerage firm, ask yourself these questions;

1. Is my deposit secure? Is the brokerage firm registered and regulated in its country of origin?
2. How affordable are the transaction costs? Will I end up generating profits for the broker due to high spreads and commission rates?
3. Is their customer service available to me 24/5?
4. Does the brokerage firm have a user friendly trading platform such as the MT4?
5. How long does it take for the brokerage firm to execute my orders? Speed is crucial.
6. Can I access my capital, withdrawal and deposits whenever I feel the need to do so?

Once you address those critical issues, you can be confident that you are dealing with a professional brokerage firm. The last thing you want is to keep blaming the broker for your ignorance and lose of trading capital. In this regard, we have partnered with FXTM to bring you an educational series this October. This is the first time FXTM will be in Kenya. Our goal is to provide you with the right information that’s applicable to your trading skill.

In this regard, we shall conduct two seminars followed closely by a three day workshop. We shall commence this by engaging actively with students at Strathmore University. The seminar is open to all and not restricted to students.

Thereafter, we shall have the second seminar at the Nairobi Safari Club for those of you available on the weekend. This day is special for the business community and will be the official launch of FXTM in Kenya. Those who may wish to know what will be going on but for some reason won’t make it to the venue can watch the event on Ebru T.V business news segment then.

Since we shall only have 300 people at the hotel, early bird FREE registrations are welcome on this link. https://www.forextime.com/education/forex-seminars/the-ultimate-trading-formula-kenya2018/?partner_id=4921021

Workshops will follow the next week from the 16^th-18^th of October at the same Venue, Nairobi Safari Club. While the two seminars are free of charge, the workshops will attract a mandatory attendance fee of $200. Once you register for the seminar on the link, do not care for the fee, it’s optional to attend the workshops.

We hope that by you attending the seminars and or workshops, you shall get the basic knowledge to get started in trading the Forex and other derivative markets. Come and network with professionals who are not only passionate about the game but also resourceful. See you all then!

This article is for the retail trader who wants to be in the game for the long haul, save yourself some bucks and thank me later. You have probably heard it before, there’s not one sure way to trading success. Why is it then that people are willing to pay for signals hoping to increase their profitability? Why would you rely so much on somebody else to tell you where to make a buy or sell and put your stop? Do you not trust your analysis if you have one? Do you have a method and a strategy that has been tested over time? Clearly you don’t. This is why you are willing to pay someone else, short cut your way into trading and then later find someone to blame when things go south.

There’s a reason why on average 90% of traders fail. You’ve got to ask yourself why, what makes you different, what’s your edge? “But the average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think”. Jesse Livermore. If you truly want to be exceptional at trading, you have to treat it with respect. It’s a business, you are the one running the show. The more you continue giving away your power to someone else and relying on their decision on how you execute on your trading account, the sooner the depletion comes, and quite frankly, you have no one to blame but yourself.

“The indicators and measurements that technical analysts use to determine the trend are not crystal balls that perfectly predict the future. Under certain market conditions, these tools might not work”. Kirk Patrick. Why? Because trends change any time, the markets do whatever they want, anything can happen. It does not matter how many indicators you have on. If they don’t help to validate your strategy and confirm your edge, you have no business using them. What works for me might not necessarily work for you, which makes trading intriguing and fascinating all together. Take time to back test and narrow down to only those indicators that increase your odds of success and winning rate. This takes time. I hope this helps those of you trusting “gurus”. Do not give away your power to anyone.

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The year started with a bang after an invitation which was long overdue to speak to Kenyatta University students on what it takes to be a successful Forex trader. It was really great to have the talk in a higher education learning institution, my former school. The focus of my presentation was centered on Trading Psychology and Risk Management as can be seen on the PowerPoint presentation attached.Final STL 2 Forex Presentation

This event was organized by Axi Traders in collaboration with Gamerz Arena following the completion of a Forex Competition that saw two ladies and one gentleman take leading positions. The contestants were awarded for their achievement and shared their brief trading journey with the audience. I was delighted to be part of fresh and new talent and emphasized to the students that what really matters in this game is your level of skill and the time you are willing to put in to learn the ropes prior to execution.

The role of coaching and mentor-ship was brought up by the students who were really curious on how to get started in trading the financial markets. Part of the reason as to why Sylvia’s Traders Lounge was formed was to give a solid foundation to beginning traders as well as struggling traders to achieve consistency in their profitability with a focus on education. As you can see, the venue was packed with students eager to learn.

The conference could not end without a one on one networking interaction with interested and potential clients. The enthusiasm of this crowd was beyond exceptional, totally loved it. One of the students really appreciated the exchange and told me I had addressed one of his main struggles pertaining to draw-downs and trading personality in less than a minute. I look forward to representing Sylvia’s Traders Lounge in such seminars in the near future. Be on the look out, cheers!

Diversification is crucial to building a long-lasting portfolio. Just like in most team-based sports, we must build a solid defense against potential attacks. In this case, diversification can help us stay invested in the market when we otherwise would have cashed out. Diversification also helps us remain disciplined during times when the market seems to be going up every single day.

Maybe you own some bonds, real estate, stocks, cash, or even some crypto currencies as part of your investment mix. There are many ways to diversify within each of these asset classes as well as across them. There are almost endless combinations that can provide for a well-structured diversification strategy. I will not go into all of them because I would bore you to tears. Frankly, there are many books on this subject alone. You can spend months trying to learn all the different diversification strategies out there. I found this article from Fidelity to be a great starting point, https://www.fidelity.com/viewpoints/guide-to-diversification if you like to learn more. Here, we are going to focus on stocks only. I will assume you will work with a financial advisor to set up your asset class diversification.

The most common way to diversify in stocks is by spreading your holdings among different industries and sectors. Fidelity classifies each sector as follows:

Others may use only ten sectors, but I prefer to use twelve instead. It gives us a better view of how the market is categorized. The more you spread your holdings across these sectors and industries, in theory, the greater diversification you will have. Simple right? Not so fast. Some of these sectors trade together. Thus, minimizing your diversification and increasing risk.

The way I prefer to diversify is to look for different industries and sectors that are not correlated to one another. You may visit one of the websites I recommended on my previous post titled “Where can I research stocks?” Yahoo Finance or any other similar service can provide you with historical data to figure out past sector correlations. In there, you can see that certain sectors trade together depending on which part of the economic cycle we find ourselves in. If things are not so good, consumer staples, utilities, and health care stocks may do well during this time. If the economy is doing well, we will see technology, industrials, and consumer discretionary trade up.

If there is no systemic risk, like the latest downturn in 2008, stocks will go through these rotations, adjusting themselves to what works during each season. If you have a portfolio full of tech stocks during a boom period, you will take a huge hit when the market rotates out of technology into utilities and consumer staples. Therefore, it is important that you choose stocks from each sector and rebalance every quarter or a couple of times a year.

Now that we have gone through the way I like to diversify my stock portfolio, we can meet next time to speak about how I go about choosing stocks in each one of these sectors and industries. I want you to do the work for yourself, use this as a simple guide to help you find the right diversification style that fits your risk tolerance.

Finally, this remarkable woman has some interesting stories. Those that keep you glued to your screen, you can’t catch a break. Kathy Lien in her book Millionaire Traders, How Everyday People are Beating Wall Street at its own Game will give you valuable lessons you can employ in your trading journey. This is a very good read for new traders. It emphasizes that there’s no one rule of thumb when it comes to trading. You are the Holy Grail, stop hunting for one. Kathy Lien was featured in a trading documentary, Million Dollar Traders a while back, I suggest you go look out for that. She and her trading partner Borris Schlossberg manage an asset fund management company for several years now. So when she tells you of successful stories of traders she has interacted with over her trading career, listen up. She covers the basics, the art of trading, getting started in trading before she cites real life examples. This book is definitely worth your time. In conclusion, she outlines six real truths in trading that you should be aware of when starting out; be well capitalized, expect to lose for at least six months, test before you try, always use stops, trade to your personality and have the right tools to trade i.e. an analytical mind and the correct platforms.

Another book I can literally read over and over again is Trading For a Living by Alexander Elder. He takes us through what it takes to trade successfully, why psychology is key and why you seriously need to evaluate your broker. Elder says, “The trading industry kills traders with commissions and slippage. Most amateurs cannot believe this, just as medieval peasants could not believe that tiny invisible germs could kill them. If you ignore slippage and deal with a broker who charges high commissions, you are acting like a peasant who drinks from a communal pool during a cholera epidemic. You pay commissions for entering and exiting trades. Slippage is the difference between the price at which you place your order and the price at which it gets filled. When you place a limit order, it is filled at your price or not at all. When you feel eager to enter or exit the market and give a market order, it is often filled at a worse price than prevailed when you placed it. The trading industry keeps draining huge amounts of money from the markets. Exchanges, regulators, brokers, and advisors live off the markets while generations of traders keep washing out. Markets need a fresh supply of losers just as builders of the ancient pyramids of Egypt needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry”. I will have a webinar up before the end of the year on brokers. Be on the lookout.

Technical Analysis-The Complete Resource for Financial Market Technicians by Charles Kirkpatrick & Julie is one of the bibles of Technical Analysis actually recommended by a CMT pal of mine. The book has everything you need to know on price, chart patterns, indicators and why you don’t need a million of them to trade right, risk management and taking profits, market cycles, statistics, what investors look for just to name but a few. Especially when you need to recover from a bad trading week or month, treat yourself to this book. It’s a treasure hunt, for real. I like how he elaborates the need to test out a trading system with regard to money management. He says, “There has never been a system that was 100% profitable, that never took a loss on any trade or investment. Although such a system is the ideal, it has never been achieved despite the brilliant minds, sophisticated mathematics and theories, and superfast computer abilities that have addressed methods of investment. It likely never will be achieved. The search for such a perfect strategy can become an obsession but is genuinely futile, and losses are, therefore, inevitable in investing and trading. Ruin is also very likely. Every day some traders and investors are wiped out, largely because they did not utilize a portfolio method that included an assessment and control of risk. The area between perfection and ruin is a compromise between the gains and losses, known more commonly as “rewards and risks,” of a system or portfolio strategy. As can be imagined, the possibilities between perfection and ruin are limitless and have much to do with personal preference for risk. The reward side of a strategy we can fairly well quantify, as was shown in the previous chapter on systems, but the risk side is not so easily understood. The trade-off between the two will affect the ultimate success or failure of a portfolio strategy. That is the essence of money management—to maximize return at minimum risk. No home runs, no Holy Grails, no perpetual money machines—just plain and simple, consistent profits with minimum chance of losing all of one’s capital”.

Going back to the basics because it’s necessary especially with the advent of Bitcoin as a digital currency, you need to read Manias, Panics & Crashes- A History of Financial Crisis by Robert Aliber. Some have called it a bubble, some are calling it mania, there is all sorts of news and entertainment, trading “gurus” commentating on Bitcoin, you’d think they had a sat down with Satoshi Nakamoto. Wherever your stand is, you need to know what leads to crashes before you open your mouth or type something for the world to read. Even though the financial crisis was majorly started in the real estate industry, the derivative is just an asset. The concepts are the same. Some have argued that Bitcoin is not a value producing asset and is thus only a speculative tool digital currency, while some have advocated for its use and foreseeable future even with minimal regulation. Quoting Robert Aliber, “The financial crises that are analyzed in this book are major both in size and in effect and most are international because they involve several different countries either at the same time or in a causal sequential way. The term ‘bubble’ is a generic term for the increases in asset prices in the mania phase of the cycle. Recently, real estate bubbles and stock price bubbles have occurred at more or less the same time in Japan and in some of the Asian countries. The sharp increases in the prices of gold and silver in the late 1970s have been tagged as a bubble, but the increases in the price of crude petroleum in the same years were not; the distinction is that many of the buyers of gold and silver in that tumultuous and inflationary decade anticipated that the prices of both precious metals would continue to increase and that profits could be made from buying and holding these commodities for relatively short periods. Grab a book and enjoy the ride!

Fooled by Randomness by Nassim Taleb one of the guys who made a killing during the 2008 global financial crisis completely takes my mind to a new planet. I like to think of Taleb as a contrarian. What that means is that he has no problem buying while all the talking heads are screaming sell. He is confident about the positions he takes and doesn’t bother to take very key interest on what financial journalists say. Do not believe everything you see on T.V. In fact, if you can avoid taking action on the markets depending on what news and media houses tell you, that’s a sign of maturity. More so if you are a chartist, if you follow price action to the core. Price is king. However, if you’re into macro, a fundamental trader, by all means follow the news closely but do your own research and analysis prior to taking your positions. Taleb taught me how to filter through noise and what to focus on focus. Quoting him he says, “I believe there is a difference between noise and a signal, noise should be ignored, and a signal should be taken seriously”. Taleb usually has CNBC television station on all the time at his office but the volume on mute, simply because it’s one thing to read what’s going on in the markets, it’s another to let a presenter disrupt your thought process with his own opinion while you’re trading. He goes on to explain the place for randomness and probability in trading. That no one is immuned to randomness and you should be prepared mentally for any outcome. My take home crucial lessons from this book would be anything can happen, you don’t need to know what’s going to happen next in order to make money. That every moment in the market is unique. There’s a random distribution between wins and losses for any given variables that define an edge. An edge is an indication that gives you a positive expectation. It gives a higher probability of one thing happening over another.

I mentioned earlier on that price is king. In that regard, John Murphy’s Intermarket Analysis represents another step in the evolution of technical theory. According to Murphy, “With growing recognition that all markets are linked, financial and non-financial, domestic and international, traders will be taking these linkages into consideration more and more in their analysis. Of great emphasis is that no market trades in isolation, that all markets are interrelated and the four key sectors are currencies (Forex), commodities (Futures), bonds and stocks. The bond market is heavily influenced by the commodities, bonds normally trend in the same direction as the stock market, the United States Bond and Stocks markets are linked to global markets and some stock groups such as oil, gold mining, copper, interest-sensitive stocks are influenced by related futures markets”. Technical analysis remains the same no matter the derivative. It’s sort of like the lifeblood of trading, without which, your trading capital is dead. You cannot isolate price action in whatever form it comes whether it’s through trend following, momentum scalping, the use of signals and indicators, chart pattern recognition or whatever means you use to trade. It’s therefore paramount for new traders to have the basics into technical prior to them narrowing down to their trading style and fully recognizing their trading personality.

Let’s shift our focus to the emotions that come to play when real money is on the line. Hersh Shefrin has done a tremendous job in explaining fear and greed. His book, Beyond Greed and Fear gives you insights on the mass psychology of the markets which is primarily what drives the financial markets, one of the cues you should be looking into. He takes us through behavioral finance, some of the lessons you’re not taught in school. In his own words, Shefrin says “behavioral finance is everywhere that people make financial decisions. Psychology is hard to escape; it touches every corner of the financial landscape and it’s important. Financial practitioners need to understand the impact that psychology has on them and those around them”. Greed breeds overconfidence. “Overconfident investors who know a little of behavioral finance can do themselves great harm trying to exploit market inefficiencies. They are not smart investors and do NOT do the following; distinguish luck from skill, know that only some risks are worth taking and recognize that mistakes of other traders produce an extra source of market risk as well as a potential profit potential”. Fear breeds loss aversion. Quoting Shefrin, “Most people exhibit loss aversion. They have great difficulty coming to terms with losses. Consequently, people are predisposed to hold on to their losses too long and selling their winners too early”. Hope springs eternal. “Hope and fear affect the way that investors evaluate alternatives. Fear causes investors to look at possibilities with an emphasis on their desire for security and a potential for the upside”. Do not throw away good money chasing the bad because you can’t keep your emotions in check. When doubt creeps in, it’s time to exit, as simple as that. When you have hit your profit target, it’s time to exit. Take it from me, learned that the hard way.

Finally, this remarkable woman has some interesting stories. Those that keep you glued to your screen, you can’t catch a break. Kathy Lien in her book Millionaire Traders, How Everyday People are Beating Wall Street at its own Game will give you valuable lessons you can employ in your trading journey. To be continued…….

Disclaimer, this article is in no way a marketing tool for the authors mentioned, rather my take home lessons from the knowledge I have gathered from reading their book material cover to cover. I hope you grab one of these books and read it for yourself. After all, ignorance is pretty damn ugly. I’m going to start with my current read, Trend Commandments by Michael Covel. One of the nuggets I like from this guy is his phrase, “Eat dinner or be the dinner”. In his entire book, he goes to portray that trading the financial markets is just a game of survival. More like Capitalism right? Whether or not you agree with it, it does exist and those who take advantage of it, make a great killing in the markets. Trade Hard, Slay Hard. That you really don’t have to be college educated, all you need to know is how to ride the markets. Digest how Michael puts it,

“Consider those who pursue academic PhDs. A PhD is a specialist, not a generalist. In the real world, not the academic one, the generalist is today’s winner. Not all PhDs are motivated entrepreneurial competitors capable of “killing it” (of course there are exceptions). A PhD, or any degree, does not protect you from failure. A degree says more than anything that we passed the test. My comments are no knock against degree winners, but they are a reminder that it is you against the world. If you have a degree, any degree, that’s awesome. I have three letters behind my name, but so what? Don’t use the degree on the wall billboard, circa 1950s leave it to Beaver America, to imply you are special? Those days are long gone…or maybe not!” In short, papers are good but they are not everything. Which is why at Sylvia’s Traders Lounge, we accept all types of students in different career paths, we also love high school drop outs.

The second book I really enjoyed is The Master Swing Trader by Alan Farley. This is a book I’d recommend to mature traders, those who’ve already identified their trading style falling under the classification of a Swing Trader. Meaning that you hold onto positions for a longer time frame. Alan emphasizes the need to identify the type of errors you can make and how to preserve your trading capital. Quoting him “Trend relativity errors steal more profits than any other trading mistake. An excellent position for one holding period often fails in the next larger or smaller time frame. Natural price waves that generate through multiple trends must align with reward targets and the chosen time frame. Make sure that strategies always focus on the right elements for that setup.

Investors make frequent relativity errors, but their broad position timing often forgives mistakes. Swing traders that miss their time frame will wash out of the markets quickly. Shorter holding periods spawn more critical time errors than longer ones. Short-term trends generate very noisy signals that trigger early positions. High transaction costs and lost opportunity also take their toll on these misinformed entries. Control this tendency through longer-term charts that capture broader price movement and filter errors”.

Let’s get a bit more technical, if you haven’t read Trading in the Zone by Mark Douglas, drop everything and find your way to the library right now. This is a great read especially for new traders because it covers trading psychology. We all know that the markets do not really care about your status, your prowess in communication, your background, I can go on and on. If your psychological make up isn’t right, you’re bound to fail. Your energy capital, brain capacity matters just as much in fact more than your skill to trade and analysis of data or news. In his own words, the legendary Mark Douglas says “I’ve worked at a personal level, one on one, with virtually every type of trader in the business, including some of the biggest floor traders, hedgers, option specialists, and CTAs, as well as neophytes as of this writing, I have spent the last seventeen years dissecting the psychological dynamics behind trading so that I could develop effective methods for teaching the proper principles of success”.

He goes on to add that “What I’ve discovered is that, at the most fundamental level, there is a problem with the way we think. There is something inherent in the way our minds work that doesn’t fit very well with the characteristics shown by the markets. Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful. They no longer fear the erratic behavior of the market. They learn to focus on the information that helps them spot opportunities to make a profit, rather than focusing on the information that reinforces their fears”.

Fooled by Randomness by Nassim Taleb one of the guys who made a killing during the 2008 global financial crisis completely takes my mind to a new planet. Look out for the lesson in part 2 of this blog post.