and Fred do not end in Chapter 1. In between each chapter of the book are 26 case studies that I call the Pendulum Scenarios. In these “addendum” to the chapters, we will examine the emotional-psychological roller-coaster ride that the two traders go through and how these challenges expose their strengths and weaknesses. It might surprise you, but there are strengths in Fred you can learn from and weaknesses in Stacey you can learn to avoid.
Although we are using two fictional traders as the protagonists of these case studies, these are not contrived examples; instead, they are real situations that happened in real trading scenarios that I have experienced with my students.
Here are the Pendulum Scenarios that Fred and Stacey deal with every day in their trading:
The scenarios above are based on these key pendulum factors.
The Pendulum Factors
The pendulum factors represent duality situations arising from trading the markets. On one end of the pendulum swing there is a condition, and on the other end there is another (often opposing) condition. Ideally, you, as a trader, want to remain or get back to the neutral position because staying at either end can be unproductive.
The pendulum swings are typically caused by the constant flux of the market. You can do nothing about the swings of a pendulum, but you need to learn how to ride them as all successful traders do. The lack of skills to weather the swings is what makes trading an emotional-psychological roller-coaster ride for traders.
Pendulum factors have three aspects:
Skillful traders know when to enter and exit a trade. They have learned how to recognize the pendulum swings in the market and not to enter trend trades after extreme and exhaustive moves. They readily understand the market cycles and will only enter after the corrections.
Making money from trading is not a one-way street. On one end of the pendulum swing there are times when you make money, and on the other end are times when you lose money. Both winning and losing money are part and parcel of trading. It is how you manage the equity in your account and take appropriate actions through habits that will determine your success (or failure).
The emotional pendulum is best described with the fear and greed continuum. On one end of the pendulum swing, you have the desire to earn more money from your trades and might be driven by greed to take larger positions irresponsibly; on the other end, you are in fear of losing money, and fear might hold your actions back. Learning how to balance between these two factors is the focus of the Pendulum Scenarios in this book.
Complementary Resources
Complementary to this book are several materials available on the accompanying website, including the Trader's Business Plan, Trader's Scorecard, Simple Trading System Template, Trading Blotter, and the “10 Habits” videos. Flip to the “Resources” page to find out how you can download them.
The discussion in this book is completed with detailed technical descriptions of an array of tools straight out of the Trader's Analysis Toolbox, which I call the building blocks for building strategies and trade plans. These are the essential tools that will help you to gain insights into the markets and make better trading decisions. Find out about them in PART V, The Trader's Tools.
The Trader's Scorecard
The best way for you to take advantage of this book is to go online and complete The FX Trader's EDGE™ Scorecard presented in Table I.1. Then, after you finish reading the book and implement some of the 10 habits, you will be asked to take the test again. By comparing your results before and after working through the ideas in this book, you can gauge how much you have progressed as a trader.
Table I.1 The Trader's Scorecard
So now, complete the Trader's Scorecard to gain a clear understanding of your current situation. Rate your reactions to each pair of phrases. Decide where you lie on the scale from 1 to 10. Add up your total from each column.
Visit www.wiley.com/go/traderspendulum (see About the Companion website) to complete the Trader's Scorecard online. (Or, go directly to the interactive site now: http://fxtradersedge.com/scorecard/)
It is my sincere hope that what you learn from these 10 Habits of Successful Traders and the Pendulum Scenarios will give you an edge in trading and move you over to the right side of the scorecard as you progress as an Entrepreneurial Trader.
Chapter 1
The Successful Trader versus the Average Trader
Fred Boros, a man in his early thirties, had reached his breaking point. He pushed away from his desk, stood up, and switched off his computer screen. It had happened again. Things just weren't working out as he had hoped. He began to pace back and forth in his office.
Fred had been trading stocks for over a year and had envisioned that by this time, he would have been successful enough to move out of his cramped apartment and up the financial ladder. Previously, Fred had worked as an engineer with a large defense contractor, a job that paid him well but required long, unfulfilling hours. He had wanted a fuller life outside the cubicle prison. But it didn't seem to be working out.
The Conversation that Changed Fred's Life
One evening, two years earlier at his neighborhood health club, Fred had the conversation that changed the course of his life.
While waiting for a pick-up game of racquetball, Fred started talking with an ex-work associate. The man told him how he had escaped from the corporate world and became a self-employed day trader. He was full of excitement about his new life, and had spun such a wonderful story that Fred was excited to know how he, too, could be free and financially stable.
Fred became obsessed with learning to trade. He invested his time and money attending seminars, read every book he could get his hands on, and paid expensive membership fees to join online forums where he could exchange notes with fellow traders.
Always a top-notch student, Fred learned quickly and began to trade actively in his paper trading account. He still held his day job, but found himself spending more and more time monitoring and analyzing his paper trades. Within several months, he was stuck to his computer screen like a teenager to a game console. He fell behind with his engineer work projects and found himself putting in extra hours just to keep up with his work responsibilities.
One day, fate stepped in.
To weather a major financial hit, his company had to tighten budgets and cut back on human resources. They let Fred go. Although he was shocked by the news, he was strangely not upset. On the contrary, he felt a sense of relief and an inexplicable surge of excitement.
He took this as a “sign” to pursue his dream. He thought that he was being guided toward a new future. He felt what lay in front of him was a worthier journey with a more enjoyable lifestyle, where he would have more control over his life, more freedom of time and, of course, a fuller bank account.
When Reality Kicked in: Paper Trading versus “Real” Trading
Fred
