FX Trading vs Golf

Written by Dar Wong

Tuesday, 02 January 2007 00:00

The Chinese have an old saying, "the master-plan of a brand new year starts right from spring season!"
Therefore, regardless of what thoughts you are having in mind now, all of us have to start planning what to do and how to do it effectively(profitably) for this coming year of 2007. Whatever occurred in 2006 had passed, whether it was a profitable or losing year!

One of the most important lessons in life is to realize and amend your mistakes! I know it is not easy to take it down on yourself and reshape things from scratch. But still, it is always better to be slow than perfecting your erronous behavior. In this case, I mean your trading performance of course!

I stopped playing golf for many years due to a shoulder-joint injury. Recently, I went for a game with some old buddies and was very cautious lest would aggravate my old injury. I played strategically and the overall score turned out to be below 100, which was highly satisfactory to myself after having put away my golf clubs in the freezer for more than half a decade. This score card might not attract a pro's attention but definitely was a good borderline result, taking into consideration that I starting again as a newbie!

After the game, my flight buddies asked me how I had maintained my swing momentum despite having quit the game for so long. Actually, it is no magic! I simply played cautiously and adopted the fundamental swings without taking much risk in every of my shot i.e. I did not go for distance projectile in all my long shots but just achieved average distance in the direction that I aimed my ball to.

Generally speaking, to play good golf game needs strength in three areas i.e. the long game, short game and putting strokes. This can be equivalent to profitable trading in the FX market i.e. effective trading in wave extension, within a flag / channel formations and daily execution of risk management.

Just like golf, FX trading is a game. Before you start your game, you need some warm-up exercises and understand the terrains of every green; that is because you will be walking through all these places and conquer one hole before proceeding to another. A trader who has never done his homework (before entering market) conscientiously will never record consistent profit performance!

Every morning, the duty of a good trader involves reading some market news and fundamental factors of what happened on previous day in the intended currency pairs. Scrutinizing through the 30-min chart of the market helps you understand the terrains of the market pricing! I usually execute my first market entry by using "squeeze trading method" based on the 30-min technical chart. In another word, I will refrain from making an entry whenever the pricings are still in congestion range or correction channel! Entry on good timing based on breaking out of market correction (in 30-min chart) always gives you higher rate of making profits even if it is just a 15-40 pips movement. You can always spot this after realizing the mini ABC wave completed inside a correction channel!

Patience and strategy are much needed to play golf if you want to enjoy this game. At the tee off box, you have to decide which club to select depending on the distance to the green. Definitely for a par-3 hole, you would not want to shoot it with a long wood or iron. However, for a long par-hole, you can always play cautiously by picking an average iron that bring you onto the green by 3-4 strokes instead of using a long club that may give you bad draw or slice! Selection of clubs is just like planning the effective strategy to trade for profits.

We taught our associate trainees how to estimate daily market range too. In a wave extension movement, we always recommend traders to sit on it for the whole day and fully extend the realized profits after they have engaged a good entry from the initial extreme shadow. Under such circumstances, the average daily full price range of the 4 major currencies is usually between 120-160 pips, depending again on the extension of number of candle bars in the 30-min chart. Any other days in the flag formation or channel prices, the estimation of current day range can be obtained by taking a spread over last 9 daily bars.

Taking an estimated day range of previous 9 days' range equates sharpening your short game on the fairway. Obviously, you do not want to hold a profitable position hoping for an exit point of 140 pips when the market estimation tells you the current day range will be roughly just 85 pips! In actual market situation, narrow movement of less than 80 pips in an intra-day range either has low volume activity or multiple swings between the 2 extreme ends. You can always choose to stay out of such market days, including those after initial market turnings where few daily doji (candlestick cross-signs) are expected.

When you are charging your way to the green, try to avoid taking unncessary risk that may swell your score figure e.g. keep your ball-flight straight, refrain from charging over dog-legged fairway, stay clear of sand bunkers and water hazards etc. Same as trading, you must always exercise your risk management carefully. Never lose more than 30 pips if your potential profit is at least 2-3 times of your risk. This should total the estimated day range if you do some simple mathematics! If you are executing the "squeeze trading method" for a period of 1-3 hour trade, then you should always close the position when the market extends 2-4 bars (30-min chart) in your favor, before it may u-turn against your position!

Daily practice of risk management is compulsory. This will ensure your life-span in this market. You might have seen some golfers who played very well in the first 9 holes, but went hay-wired on the second 9; all because they became complacent and thought they could stomach some small errors. This wrong thinking will eventually lead you to downfall!

In a golf game, small errors usually go into irreversible mistakes (scores add-on) when the ball lands into the hazard with penalty. Likewise, traders with suffix margin tend to lose monies easier because they think they can afford it! I had come across some complacent traders who had made good profits over few months continually, but would incur losses easily or even paid them all off just in one time by adopting a trading behavior of vengence attitude! I also met good-buffered traders who kept averaging their positions against market trend claiming what could be the worst, if the market would incur losses on them. Such wrong philosophy will very soon lead you to the mother of all losses!

Barely a decade ago, I was still under the employment by Smith Barney Shearson on the trading floor in Singapore. I witnessed how the mega-sized Barings Bank was brought down single-handedly by a rogue trader (N.L.). The saga started from a mere error trade of some few thousands bucks, which the rogue trader refused to cut loss but decided to roll it into the house account. The loss gradually snow-balled continually over many months thereafter, when he tried to average the losing positions by locking them into inter-month spread with some hedged into options trading, so as to cash out the premiums to finance this loss.

Kobe earthquake occurred in early 1995. That day made the cummulated losses so massive and irreversible that brought down the 150 year-old bank! So do not try to do anything funny even though you have more monies than Barings Bank!

Remember this: It is not how much you can make from the market. It is how long you can make the monies from the market!

Now you have finally landed on the green. A good golfer will take no more than 2 strokes to hole-out his putts, whereas professional players usually take only 1 stroke for this finishing touch.

This part simulates your exit point. Nevertheless, in FX trading, you only exit one time and that is it. You do not have a second chance!

Therefore, this will make a difference if you can make some more extra monies upon exit. For instance, I have estimated a certain price to exit when the market starts running in my favor; when it is about to reach my targeted price, I would refer to the 30-min chart again to check the range extension. If the candle-bars extend fully in line with my target, I would exit without regret. If the candle-bars are beginning to shoot out but it is already nearing my target, I would then wait for the price bars to fully entends itself over next 1-2 time brackets to take advantage of the extra profit movements. That is how I execute my profitable trade exit.

I have always seen newbies exiting a profitable trade about 30-50 pips. When market continued to run in their projected trend, they would wait for another 30 pips to confirm the continual trend was strong. If market lengthen its original track, these people would quickly re-enter to chase the market. Such trade usually result in loss because simple mathematics tells you the intra-day range is almost full!

In short, exit point is important and you can only do it once. However, the first criteria is of course a good and steady entry that does not suffer too many intra-day swings before market can extend into your favorable shoot-out. On the other hand, a casual first market entry will easily trigger your stop loss. If you have got kicked out (stop loss triggered) too many times, then you might find trading no more fun; just like you do not enjoy your golf game if you ball constantly goes beyond the O.B. (outward boundary) line or into the hazards (penalty)!

In summary, I am a person who practice strategic-planning in whatever I do whether it is business, FX trading or my life. If I have to execute a new task in a terrority with unfamiliar environment, I would always structure it down into modules and start working at it on each layer. After completing each partial task, I would access how I have done it and fully comprehend the know-how techniques before going to another higher level. Sometimes, it may be slow but you will keep making improvement with gradual positive orientation of the surroundings. It is always good to be sure with good foundation rather than other starter-sprinters who will never reach the destination. I called this calculated risk management.

FX trading needs solid ground foundation, just like a competent golfer who plays excellent long game, short game and puttings. Other than the comprehension of price wave extension, flag / channel formations and daily risk management, a proficient trader needs to be backed up with good technical and fundamental knowledge just like the science behind executing a good powerful swing and the observance of rules on the fairway.

Last but not least, no man can come close to distinction record without having put in any effort. Practice is only way and also the common key to perfect your skills in these 2 games i.e. Golf and FX trading. Remember that only when you practice long enough and keep following the market movement chart, only then will you be familiar with market behavior and naturally stand higher chance of capturing profits.

Does it sound easy to you?