Forex Scalping
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Forex Scalping...
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FREE ! FREE ! FREE ! Forex PDF Guide
“Forex Scalping” Maxx your Profit!
Are You Finally Ready To Start Making Money Easily? Hold on to the Large Traders tail, and enjoy the ride! This guide was created by Maxx Mereghetti, and is offered FREE to all Forex traders.
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Table of contents 1. Is it possible to earn money on the stock exchange? ......................................... 21 1.1.
What the brokers think ...................................................................................................21
1.2.
What the institutional investors think............................................................................22
1.3.
What the managers think ................................................................................................24
1.4.
What the traders think ....................................................................................................25
1.5.
What do people starting out in trading think................................................................26
1.6.
What I think .....................................................................................................................26
2. The price moves without reason.......................................................................... 28 2.1.
Technical analysis ............................................................................................................28
2.2.
Oscillators .........................................................................................................................30
2.3.
Automatic systems............................................................................................................32
2.4.
The Holy Grail..................................................................................................................33
2.5.
Money moves the price ....................................................................................................33
2.6.
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2.7.
Who has power, has money.............................................................................................35
2.8.
95% of the losses end up in the hands of 5% of the rich ..............................................36
3. The trading method ............................................................................................. 37 3.1.
The method’s ups and downs..........................................................................................37
3.2.
Maximum duration of losses in time ..............................................................................40
3.3.
Number of consecutive losses ..........................................................................................41
3.4.
The trader’s goal is to “last” ...........................................................................................43
4. The model of the successful trader ..................................................................... 46 4.1.
No trader has been trading all his or her life ................................................................46
4.2.
All traders have had some difficulties ............................................................................47
4.3.
How a successful trader does face difficulties ...............................................................49
4.4.
The approach of “start with a loss”................................................................................50
4.5.
Everybody makes mistakes with operations..................................................................52
4.6.
Daily and monthly balance..............................................................................................54
4.7.
Earnings, losses and emotions.........................................................................................56
4.8.
Trader or gambler ...........................................................................................................60
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4.9.
My advice for those starting, and for those who have already started .......................61
5. Let me introduce the Forex ................................................................................. 62 5.1.
The broker ........................................................................................................................62
5.2.
The trading platforms: Metatrader................................................................................65
5.3.
The Forex market.............................................................................................................66
5.4.
Volatility in the Forex market in relation to the stock exchange.................................71
5.5.
News on the Forex market...............................................................................................73
5.6.
Leverage............................................................................................................................74
5.7.
The PIP, the true star of the Forex.................................................................................76
5.8.
Lot, mini-lot and micro-lot..............................................................................................78
5.9.
Commission applied by the brokers: the spread...........................................................80
5.10. The broker “is the banker” .............................................................................................84 5.11. Reference currencies........................................................................................................85 5.12. Swap ..................................................................................................................................89
6. The charts............................................................................................................. 91 6.1.
How to set up a chart .......................................................................................................91
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6.2.
The linear chart................................................................................................................93
6.3.
The bar or OHLC chart ..................................................................................................94
6.4.
Bullish bar.........................................................................................................................97
6.5.
Bearish bar .......................................................................................................................98
6.6.
Japanese candlestick chart............................................................................................100
6.7.
Bullish candlestick .........................................................................................................102
6.8.
Bearish candlestick ........................................................................................................104
6.9.
The market trend ...........................................................................................................106
6.10. The primary trend and its four phases ........................................................................108 6.11. The trend.........................................................................................................................111 6.12. Upward trend .................................................................................................................112 6.13. The downward trend .....................................................................................................115 6.14. Trend and reversals .......................................................................................................117 6.15. Trend: fundamental concepts .......................................................................................117 6.16. Upward trendlines..........................................................................................................118 6.17. Channels..........................................................................................................................119
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6.18. Ascending channel .........................................................................................................119 6.19. Descending channel........................................................................................................119 6.20. Supports and resistances ...............................................................................................121 6.21. Dynamic supports and resistances ...............................................................................123 6.22. Static supports and resistances .....................................................................................123 6.23. The importance of a chart .............................................................................................127 6.24. Technical analysis and price .........................................................................................129 6.25. Technical analysis and chart analysis ..........................................................................132 6.26. Reversal patterns............................................................................................................132 6.27. Common aspects of pure reversal patterns .................................................................132 6.28. Heads and Shoulder .......................................................................................................134 6.29. Head and shoulders........................................................................................................135 6.30. Inverse Head and shoulders ..........................................................................................140 6.31. Double top.......................................................................................................................145 6.32. Double bottom ................................................................................................................151 6.33. Rounding tops and bottoms ..........................................................................................156
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6.34. Cup with handle .............................................................................................................157 6.35. Continuation patterns....................................................................................................159 6.36. Triangles .........................................................................................................................160 6.37. Symmetrical triangle......................................................................................................162 6.38. Ascending triangle .........................................................................................................166 6.39. Descending triangle........................................................................................................169 6.40. Flag & pennant...............................................................................................................172 6.41. Pennant ...........................................................................................................................173 6.42. Flag ..................................................................................................................................175 6.43. Wedge..............................................................................................................................178 6.44. Rectangle.........................................................................................................................183
7. Learn to read the market ................................................................................... 188 7.1.
Technical analysis and reading the market .................................................................188
7.2.
The importance of minima and maxima......................................................................189
7.3.
New maxima and minima..............................................................................................190
7.4.
Price breakouts and breakdowns .................................................................................192
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7.5.
Time frame and scalping ...............................................................................................196
7.6.
Method, perseverance and discipline ...........................................................................196
7.7.
Market sessions ..............................................................................................................197
7.8.
The session breakout technique ....................................................................................199
8. Price analysis: Candlestick ............................................................................... 204 8.1.
Price behaviour ..............................................................................................................204
8.2.
Candlesticks. What they are and how you draw them. ..............................................204
8.3.
Long black line / Long white line..................................................................................206
8.4.
Short black line / Short white line ................................................................................207
8.5.
Long black / white marubozu line ................................................................................208
8.6.
Long black / white opening bozu line ...........................................................................209
8.7.
Long black / white closing bozu line.............................................................................209
8.8.
Spinning Top ..................................................................................................................210
8.9.
Lower Shadows ..............................................................................................................211
8.10. Upper Shadows...............................................................................................................212 8.11. Doji lines .........................................................................................................................213
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8.12. Reversal Pattern.............................................................................................................214 8.13. Hammer and Hanging Man ..........................................................................................215 8.14. Doji Line .........................................................................................................................217 8.15. Engulfing pattern ...........................................................................................................220 8.16. Dark Cloud Cover..........................................................................................................222 8.17. Piercing Pattern..............................................................................................................223 8.18. Star ..................................................................................................................................224 8.19. Abandoned Baby ............................................................................................................226 8.20. The Tri Star ....................................................................................................................227 8.21. Shooting Star and Inverted Hammer...........................................................................228 8.22. Price and money .............................................................................................................229
9. To sell or to buy? ............................................................................................... 232 9.1.
Scenario analysis ............................................................................................................232
9.2.
We always follow the big fish........................................................................................233
10.
Correlations or alchemy?............................................................................... 243
10.1. Correlation among currencies ......................................................................................243
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10.2. Correlations in intraday operativeness ........................................................................248 10.3. Gaps and correlations....................................................................................................248 10.4. Scalping and correlations ..............................................................................................254
11.
The range........................................................................................................ 261
11.1. Volatility, risks and profits............................................................................................261 11.2. Rates ................................................................................................................................265
12.
Appendix ......................................................................................................... 271
12.1. Price analysis ..................................................................................................................271 12.2. EUR/USD: case 1............................................................................................................272 12.3. EUR/USD: case 2............................................................................................................274 12.4. EUR/USD: case 3............................................................................................................275 12.5. GBP/USD: case 4............................................................................................................276 12.6. UPPER SHADOW: case 5.............................................................................................277 12.7. UPPER SHADOW: case 6.............................................................................................278 12.8. UPPER SHADOW : case 7............................................................................................279 12.9. LOWER SHADOW: case 8...........................................................................................280
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12.10.
HAMMER: case 9 ......................................................................................................281
12.11.
SPINNING BOTTOM: case 10.................................................................................282
12.12.
Case 11 ........................................................................................................................283
12.13.
BULLISH ENGULFING: case 12 ............................................................................284
12.14.
HAMMER: case 13 ....................................................................................................285
12.15.
LATERAL MARKET: case 14.................................................................................286
12.16.
DOJI: case 15..............................................................................................................287
12.17.
BEARISH ENGULFING: case 16 ............................................................................288
12.18.
HANGING MAN: case 17 .........................................................................................289
12.19.
HAMMER and LOWER SHADOW: case 18 .........................................................290
12.20.
EVENING STAR: case 19.........................................................................................291
12.21.
NEW MINIMA: case 20 ............................................................................................292
12.22.
BREAKDOWN: case 21 ............................................................................................293
12.23.
TEST: case 22 .............................................................................................................294
12.24.
GAP: case 23...............................................................................................................295
12.25.
NEWS: case 24 ...........................................................................................................296
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12.26.
Case 25 ........................................................................................................................297
12.27.
Case 26 ........................................................................................................................298
12.28.
EVENING STAR and HAMMER: case 27 .............................................................299
12.29.
Broker: FxPro ............................................................................................................300
12.30.
FxPro ...........................................................................................................................301
12.31.
Broker: Alpari ............................................................................................................314
12.32.
Alpari ..........................................................................................................................314
12.33.
Metatrader..................................................................................................................330
12.34.
News on the Forex market.........................................................................................343
12.35.
The tick by tick chart.................................................................................................351
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This is the way my story starts … The part everyone knows is the part which starts in 1997, when I started trading on the Stock Exchange and in 2002, when I started trading with options. But my story really starts on the night of the 23rd to the 24th of October 1975, when I was born for the first time. Yes, for the first time, because since then I have been born again at least 6 times. The first time I was born the same way as everyone else, from my mothers’ womb, under the sign of Scorpio. I’ll spare you the other 6 times, but the thing to know is that I have always been a shy person. One of those people always appreciated for his kind heart, but so shy that he could make even the most introverted person in the group feel uncomfortable. Yes, because when you are shy, not only do you not strike up conversation with a stranger, but you are quite capable of silencing even the leader of a high school class, who has no time to waste on someone who doesn’t speak. I know this seems incredible to those of you who met me in my “dominant stage animal” persona, giving the audience shows and emotions together with amazing creative inventions for trading strategies. - 12 Tutti i diritti riservati © Massimo Mereghetti
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Coming onto the stage, to the Rolling Stones’ music, in front of more than 500 people, like a rock star, and certainly not like the trader in a necktie you are used to seeing at an average financial presentation. But why am I telling you all this? Usually people make themselves seem important by talking about their successes and how they made millions. When I went on stage for the first time, I was in front of 9 people. I remember that during the coffee break I dissolved into tears with my friend Andrea, because I believed I was not able communicate, my heart and my passion to all the people there, together with the information they came for. After the break, I understood something had changed … The people there were participating, smiling, enthusiastic and became an active part of the show, while they were learning. In other words, they were with me, accepting me as if they wanted to consume me and I did nothing other than give them all of myself, my heart and my spirit, along with information and entertainment. When I found myself in front of more than 500 people, who were all there for me, 5 years on from that first time, it was simply extraordinary. I do not usually prepare an opening speech or a rigid programme for my presentations. - 13 Tutti i diritti riservati © Massimo Mereghetti
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I always improvise and try to develop the presentation according to the make-up of the audience. Basically, the audience loves me, it seems to need to meet me. In reality, all this comes from the fact that when I’m on stage I give them my heart and I lay myself bare to everyone. Yes, because if you remember what you read up to this point, I was born shy! When people think they are getting a lot from me, they do not know how much I am getting from them. Being accepted for what you are is the best satisfaction for a shy person, and every person in the room was a big vote of confidence to me! Maybe this is the reason why I never became bigheaded in front of all those people, and I never will. Heart for heart! People always gave their heart to me and I always gave them mine back in return... With time I learned to accept myself fully and to give people back the gift they gave to me: acceptance. I’m not writing these words for myself. It is beautiful to say all this things to the people around you who sometimes see you as an example. Many people think I’m really someone … to put it briefly, I eat and drink, have fun and get angry like everybody else in the world. I have my fears even if I have learnt - 14 Tutti i diritti riservati © Massimo Mereghetti
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to give less importance to fear and more emphasis to important things so that I do not lose the important things out of fear, as often happens . I do not even believe I am “talented”.. I owe everything that I have achieved to my heart, to perseverance and to some flash of “genius” but to nothing unique. Why am I saying all this? To be free, in peace and in tune with the world! I have met more than 5000 people and I felt good with all of them … isn’t that fantastic? I want each of you to receive these few lines and to be able to read them, as if I had written them by hand and addressed them personally to you. In the following pages you will discover a part of the experience I have gained in trading, but what you will not discover is the person I am and this is the reason I wanted to tell you something personal about me. When you read the book, I wouldn’t want you to think that it’s the stuff of genius and therefore is in some way unachievable for the majority. I’m an average person. So make good use of the information and understand that the result will always and only depend on the person you are, or decide to be.
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At this point, it is appropriate for me to thank all the people who made it possible for me to live the first 34 years of my life in the best way possible. Starting in chronological order, my first thanks go to my brother, with whom I’ve had a lot of fun from when we were kids, and who taught me patience, a virtue of which he is so full that many would be ready to make him a “saint” immediately. To my mother and father, who have always lived a life devoted to sacrifice and honesty, which is not a small thing, and always tried to instil those values in me. To my childhood friends, “those you never forget”, with whom I discovered the world step by step. To Claudio, who for years “freaked me out” with his talks on philosophy, leaving a sharp and indelible mark on my youth. To Lina, who dedicated an entire life to others and never got tired of passing on the message of charity. To my high school mates who completely changed my diligent self at school, making me forget about the school uniform and the “good guy” hair cut. To Valentina, who spent 16 years of her life beside me and gave me trust and unshakeable respect. To Andrea Cesarano, friend and brother, who taught me how to sell under the pretext of teaching me how to live with an awareness of the possibilities open to me . - 16 Tutti i diritti riservati © Massimo Mereghetti
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To all those to whom I owe my success at Investing People. To Stefano De Carlo, who was the first person to arrive in the office and who has shown heart and enthusiasm for himself and for everything around him over the last 3 years. To Mirko Masoni, Stefano Gianti, Valerio Maggi, Salvatore Lo Voi and Gianluca Landini, inveterate traders who have experienced in their life what it means to leave a safe job and to live only from trading. Monica, Valentina, Fabio, Alessandro, Stefanny, Elisa, Francesca and Felipe who dedicated time, passion and enthusiasm, both when working for us and during moments of fun or difficulty. Again thank you to Stefano De Carlo, Daniele Repossi, Alessandra Chirizzi, Andrea Mereghetti and Alessandro Bonetti, who share the challenges of trading with me every day, having this as their only profession. To the woman I never thought would arrive in my life but who, in answer to a simple request to Baby Jesus, just arrived like an angel, and gives me tenderness, love and enjoyment every day of my life: Alessandra, for our friends Cina. Thank you, thank you, thank you to over 5000 people who I have met in these 5 years of on and off stage training and who are still reading my words today, in this book.
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To them goes all my esteem and respect for the love they have shown me, and the commitment they put into trying to change and to learn at any cost. I want to share with you all my new idea of growing together … Not only through the exchange of information which is possible from a stage, but also in front of a monitor in the trading room and on Investing People’s new TV channel … I am always available to you, I want to meet all of you to drink a glass of good wine or brandy together, in our trading room, in front of a butterfly of $100,000. It has been wonderful … and from today it will be even better! I’m expecting you.. A big hug. Maxx.
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Welcome … “The Forex is the most discussed trading tool in the world at the moment. Easy money now!” This seems to be the trading formula on the Forex. What you will learn in this e-book is how to recognise and interpret the main price scenarios. The price, of course, because only the price contains real information about where the market is going. By reading these pages, you will discover that the price always gives a readable sign from which you can learn important things. You will learn that buying at a high
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price is one of the most common errors to be avoided and you will find out that, often, the techniques you read about in books are the result of experiments which are no use to you for earning money on the market. You will also find out how to follow the “sharks”, the ones who move the market, the ones who are always “on the right side”, in this way it will be easier for you to earn money instead of losing it!
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1.
Is it possible to earn money on the
stock exchange? 1.1. What the brokers think Over the years I have talked to several brokers who have sight of their customers’ accounts. What people say in the trading rooms and at business dinners is that very few accounts operate in the black and many of them are not destined to be profitable in the long term. These observations certainly do not encourage anyone to start out or to continue as a trader. - 21 Tutti i diritti riservati © Massimo Mereghetti
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It is often commission that makes a trading model inefficient, or over rigid automatic systems, or the emotions of the trader who uses his discretion. However you look at it, it seems there is always something that goes wrong, for the majority of professionals, private individuals or for the often ill-prepared people camping in the land of gold, on planet trading.
1.2. What the institutional investors think I have had the opportunity of speaking to institutional investors, that is funds’ managing companies or in general to people whose job is to select managers for funds’ funds. Here things become interesting because the manager's goal is to perform, or to select other managers able to do this for him or her, in order to satisfy a clientele who will then be willing, too, to entrust them with their own savings and capital. The war of the managers, in this case, is divided into two sides: one side is looking for the best performance and the other is looking for the best product package. You know that even managing is selling a product. In this case, you should measure the quality of the product by its return over a period of time, in proportion to risk.
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The product package is important in every case: just think about the amount of money that has been raised from the introduction of capital-guaranteed products after the stock exchange crashes of 2001. In this case the product’s success does not come from the performance promised, but from the feeling of “safety” generated by the product. Some years later you would have discovered that nothing was guaranteed by those products, as the risk assumption made during subscription was based on bonds issued by certain banks that wrote the history of finance and today do not even have an official web site.
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1.3. What the managers think Managers who work for institutional investors, or directly for their own customers are able to achieve positive performance in the long run, but without avoiding periods of loss of varying length. The manager profile is that of a professional starting out as a private trader or as a trader working at the desk of one of the main managing banks, who decides to offer his or her own consultancy to certified managing companies, or to open their own company betting on their own abilities as a manager and a trader. One of the phrases that most impressed me and that best sums up and describes collective opinion, is the following: “it does not matter if you earn or lose, what matters is how you earn or lose”
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1.4. What the traders think Traders embrace this profession for several reasons, but in first place is always the desire for high profits and independence. Traders win above all because they risk their own capital, they enjoy the chance of working anywhere in the world and they earn sums of money that most people cannot even imagine. Traders believe in themselves and in their trading system. After a long time researching, they land on a suitable trading system and as far as they are concerned, there cannot be another system that lets you earn as much as theirs does, or even that lets you earn anything at all. Why do successful traders not believe that another trader can earn money with a different trading system?
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1.5. What do people starting out in trading think Simple: they are buying a dream. The dream of freedom, wealth and prestige that everybody would like for themselves and for the people close to them. The chance to say “go to hell” to their boss or colleagues. The wish to find an ability in themselves to be successful challenging the market, through their own strengths and maybe only in their spare time. Does anybody ever asked themselves whether a commitment at the highest level is necessary in order to achieve excellent results?
1.6. What I think For me, money is only real if it comes from the market. My identity as a trader is very strong and I would never be able to justify not being able to make a profit from the market. I have had periods of low profitability, or no profitability at all, even after having acquired a lot of experience and ability. I’m not afraid of being compared with others, or of admitting this important truth.
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What I do not accept is giving up a job like this, that defines me as person. I believe that often even the best trading methods, and I have discovered and invented hundreds of them, have varying periods of inefficiency or inactivity. I think this is normal, I do not believe that is good business to sell ice to Eskimos, and in the same way to do options’ calendar spreads in the middle of the storm of the financial crisis, or to buy call and put, in a range market, cannot be anything other than a “crime”.
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2.
The price moves without reason 2.1. Technical analysis
This is my strongest position. There is no technical analysis that can predict price. Technical analysis is a very good discipline for describing and justifying the past, but definitely not for earning money operating on the market in the present. Directional traders often support this. What also helps me here, are the completely informal conversations I have had with traders who live from trading on the stock market or on the Forex and who have spoken to me about how their strategy, is based on studying the price but also takes into consideration previous key levels, - 28 Tutti i diritti riservati © Massimo Mereghetti
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and only works because of the care taken to enter into the position at the right moment and only earns because of care with risk management. When I talk about risk management in my courses, the audience only pays attention because of the word “risk”, and all the rest is just boring as people want to hear about profits, and definitely not about how to manage their own operational plan: management does not fascinate anybody. In this book you will learn that technical analysis is the result of the amount of money operators put into the game and not the opposite. A resistance does not only form because the price reacts psychologically to a specific past price level. If no money was involved, the price would not go anywhere. A level of support results if money flows in the market but the fact that those movements correspond with a support, does not tell us if it will be a support, or a “broken support”. What should I do when I read about the presence of a support on a chart? Do I buy it, thinking that it works as support, or do I sell it, thinking that there will be a breakout? Is this not the same thing as deciding to buy or to sell at any time?
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2.2. Oscillators Oscillators are definitely a taboo subject. People say that oscillators do react late in relation to the price, that they give a more immediate and filtered reading of the price and that they therefore reduce the information it gives. Of course, a line drawn with a mathematical formula can not, at any time back up my personal decision about the risk I want to take. A very interesting observation came from a pleasant chat with a directional trader recently... When stock exchange traders were floor members they certainly did not have computers and could not calculate the MACD or stochastic value at any moment of the day. Traders knew the prices of the previous stock exchange session and they could mark with a pencil, in a notebook, the prices of the trading day that were shown on a luminous strip display. These traders managed enormous capital and represented the interests of institutions that definitely did not trade on the stock exchange to lose their money. Today, computers allow us to automate complex formulae in a second and this allows analysts and private traders to go crazy using indicators and "magic
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formulae", which have nothing to do with the price, other than as the basis for a calculating model that tries to explain what the price already says. The more you move away from the pure price, the more you go towards something that does not represent the price at all. In any case, I want you to remember that what we buy and sell is always a price, never one of its derivatives, the stochastic is not on sale☺.
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2.3. Automatic systems In the era of the iPod, palm and laptops, which are forever getting smaller, we have the feeling that everything can be automated. In trading, the “robot” that imitates human abilities without emotions is one of the frontiers in the top ten interests for newbies and professionals. I have heard a lot of talk amongst professionals on this subject. A lot of talk amongst traders new on the scene, who already want a trouble free life. A major split has emerged between those who consider the trading system as the only way to success, and those who consider it as the surest way to a guaranteed decline in performance and capital in the medium term.
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2.4. The Holy Grail When the moment comes that you are consistently earning more money than you budgeted when you started trading, you will know for sure that you have earned the results with commitment and you will certainly not believe that you have found the Holy Grail but of have simply learnt a profession after having committed yourself to it with consistency and passion.
2.5. Money moves the price Many people think that trading is a war to be fought against the market. The market satisfies the demand and supply of those who place orders to buy or sell, and that’s all. If the price rises, your order has contributed to that movement, just as it has when the price falls. It is simply a matter of understanding whether there are people able to “manipulate” the price or not. In any case we will not be those people, and we have to accept this fact.
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In any case, if a character exists who "manipulates” the market, (usually called a “strong hand”), it would be interesting to understand what logic this character adopts and what moves he/she makes, so that we can be on the right side of the market. I have never found the phone number of someone who could keep me updated about the intentions of the “strong hands”, but what I have identified is the “track” that those “strong hands” leave when they move. This particular detail warrants consideration in this e-book, which does not intend to explain direction as the result of a technical observation, but simply as the result of the circulating money flows. To know where the money masses are directed gives us the chance to be on the side of those who earn simply because they have enough capital available to influence the rules.
2.6. Who has money, decides Usually money can make the difference in the decision process. Useless to say that, being able to change the rules of the game is a winning hand in any activity. In trading this is only possible at the very highest levels.
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Levels of power that are in the hands of a few.
2.7. Who has power, has money The figures of power who hold important political and financial roles have access to unobtainable information and are even able to create such information, not just modify the rules of the game. To know that the market can be manipulated and that this ability is in the hands of the few, makes us conscious of the real risk, that of the impossibility of predicting the price. If anytime you enter the market, you are conscious of the fact that you can lose In spite of your trading system, you can think of making this fascinating job part of your future.
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2.8. 95% of the losses end up in the hands of 5% of the rich But who is this 5%? Who are these people? Let’s say that if the strong hands are able to move the market with some efficiency, and to be a significant counterpart to the equivalent value exchanged, maybe those strong hands will be a big part of this 5%. This reduces the chances of us being elected to the 5% of profitable traders even more. The simplest thing to do, I think, is to follow the moves of those who definitely have the cards, whether legitimately or not, to play the game. That is why simply watching the price and reading the tracks left by the big operators is an inescapable necessity for the trader. The trader is “the little fish” that swims under the “shark”. The shark moves and looks for its prey to eat, and by remaining under the shark’s belly the meal is guaranteed, and if nothing else, we also avoid becoming the shark’s dinner.
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3.
The trading method 3.1. The method’s ups and downs
I went through phases when opening a calendar spread was a free meal in 80% of the cases. I remember when this happened between 2005 and 2006. I bought butterflies without an afterthought in the first part of 2007, when the market went down without a hitch and I was earning from volatility, time or from direction, but it was not difficult to bring money in, taking well judged risks. I saw the break-even points of my options strategies fly from one side to the other during the crashes of 2007, whatever the underlying.
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I then decided to operate buying monsters and gianty swaps, as we called them, to earn from volatility without taking a risk on direction even when the market went on moving violently and did not seem to want to stop. I operated with options on the Vix, to earn rapidly during market crashes, with an underlying that was maybe even more volatile than the market itself, simply because the Vix represents the measure of the market's volatility. I have been able to create, with the help of expert scalpers, an unshakeable operating strategy for the Forex. Besides all this, I had to face difficult, non-profitable or even loss periods. But above all, why did I go on changing strategy if I had a strategy that worked? The method is useful to understand how a determined strategy has to be applied. In any case, you cannot think that the strategy you use is the only one for your entire life. Your ability as an experienced trader will allow you to understand the conditions in which to use one strategy or the other. No business lasts forever without innovation. Trading needs to travel step by step with evolutions in the market. The application method of a strategy can last for 6 months, a year or maybe 2 Then this method will end up in the drawer to make room for a new method, waiting for one you used for the previous 2 years to come back into fashion. - 38 Tutti i diritti riservati © Massimo Mereghetti
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And when your method ends up in the drawer, what do you do? The method is not wrong. What is wrong is to always go on using the same method, at any cost. The true method is the one of knowing how to recognise the method that works in a defined, longer or shorter phase of the market, and to know that if you do not know the right method, it is better not to risk your own money. I expose myself to risk when I’m conscious of having the chance of earning a profit and definitely not when I‘m at the mercy of risk.
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3.2. Maximum duration of losses in time If the method you have spent so long looking for and that has worked for a period is not working anymore, whose fault will this be? whoever taught you the method ? your emotions? your lack of discipline?
Wake up! The market could simply have changed and the moment has come for you to adapt. When the system is not performing anymore, the only responsibility you have is to notice it before having lost your entire capital and having given it away to whoever was already ready to receive new money, yours!
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3.3. Number of consecutive losses The maximum number of consecutive losing trades is a bother. If you lose for 5-10-20 consecutive times, troubles will start. You start losing your trust in the method, and then you start doubting the market moment, and in the end you lose trust in yourself as a trader and as a person. When you reach this stage, the first instinctive reaction is one of discomfort, then the feeling grows and starts taking on the look of frustration, and then sadness amplifies the feeling of frustration. At this point, if you want to get out of the “corner” and not go k.o. you decide to quit, looking for an alternative that justifies the fact that trading does not suit you, or ,simply that trading is a tool with which it is impossible to earn and in doing so you feed the legend that “with trading people do not earn money”.
I decided that I would definitely stop trading when in only 6 months I managed to accumulate a small fortune that allowed me to buy my parents' house in cash. At that time those were modest dreams: I lost the same amount of money in around 3 months.
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The feelings I felt were so strong for me, that a wave of pure ammonia in a closed elevator would have been nothing in comparison, even if the wave went on for 1 hour. At that point I decided to definitely stop trading. To rebuild the “neuronal” journey that allowed me to accept the loss and to start facing the market again has not been easy. It was like after the first free fall parachute jump , the emergency landing near a tree made me completely forget the idea of carrying on jumping, and years later a partner of mine suggested I try again. Well, at that time I was already conscious that I wanted to trade again and I was already earning money with it, which made it seem easier for me to do another parachute jump. That's how I got my parachutist’s licence.
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3.4. The trader’s goal is to “last” Joe Ross has surely seen more than I have on the markets. His fame and his mature age make him one of the best known traders in the world. The other day I was surfing on Facebook, I was looking for some well-known name in the trading world, and you know what? Joe Ross is on Facebook. What do I do? I send him a Friend request. The next day I receive his confirmation: I am a friend of Joe Ross on Facebook! But that’s another story. What I want to tell you here is a phrase that a trader told me some days ago: “the trader's goal is to last”. This trader did courses with me and then after 3 years of study finally started operating with real money. In 3 years he had not even opened an account. He studied all sorts of books and collected all the information he could find on the web. I remember the hours spent coaching him, discussing all the details of optionstrategies and even the most useless and hidden curiosities of trading.
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I sincerely thought that for him trading was a fascinating subject to study with an academic approach. Even if rare, his was not the first case I saw of a person who, after having attended a course and traded virtually, did not start operating in real money after having passed the critical limit of 6 months. By this time more or less everyone starts trading, even the most risk averse, with the desire of challenging their own goals. Well this person, who is now a friend of mine, comes into my office for a talk, after I had not heard from him for a while,. We meet and we discuss the latest trading news and what do I find out? He started trading. With an account of $100, you will think. Absolutely not. His first account was $100.000 and his profit in the first 3 months $30.000. I have always told people to start trading virtually, with paper money, and then to open a small account and then, goal by goal, to increase the managed amount. In any case, starting is very important, once you feel ready, to get a feeling for the market. He did virtual trading for more than 2 years, he carefully consolidated his knowledge and he started without losing 1 dollar.
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His first quarter has been a very good one for a beginner, not only because he has proved that he can manage risk emotionally, but also by because he has gone on the market with a such a significant amount of money for his first options account. I strongly recommend not opening such a big account, during the first few months of operations, but his story has been a lesson for me. Just thinking of the number of books about trading he suggested I read, in only one evening, his study time has not been too long or too short. I also told him I would read them but I do not think he believed me, as I did not write down one title or author he told me about. This has been a period for him when he gained awareness of the risk and he worked out his identity as a trader. The job was so well done that when he started, he started with the confidence that only a trader with at least 1 year’s experience on the markets could have had. When you work with different people, you understand that what you can teach them is simply the beginning. After a while, you will definitely learn far more from each of them.
- 45 Tutti i diritti riservati © Massimo Mereghetti
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4.
The model of the successful trader 4.1. No trader has been trading all his or her life
I started trading in 1997. So I cannot state that I have been trading all my life, as I believe nobody can. There is always a beginning, and when you start you are exactly like anyone else starting something: doubtful, confused, maybe a bit clumsy, and if you add some insecurity, the recipe is made. By 2009, in the 12 years since I started trading, I had seen at least 3 important crashes on the stock exchange: the one on the Japanese market, the 9/11 crash and, finally, the one that involved the whole financial world and is still having an impact today (2010) all over the world.
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The beginning is the first phase, the one that is for brave, passionate or simply curious people, but the results fill the white pages of your own story only because you started one day.
4.2. All traders have had some difficulties All the jobs in the world and all the professionals face some difficulties in their careers, why should a trader not face any? The first difficulties are those that define the boundary between earning and losing money. If we think about this, these are the most important difficulties and those which will determine whether the trader succeeds or quits. The trader who quits is the one who is tired of frustrations and failures or the one whose capital has been reduced to zero by the number of failures . But there also are traders who operate for years and then, facing a long-lasting period during which they lose or do not perform, prefer to quit because they have lost confidence in trading or in themselves. Losing confidence in oneself or in the trading world is the biggest reason for failure for those who have achieved some results over a long or short period. But then fall out of love with trading when facing
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a difficult test. The thing is, those people did not think they would still have to face such a trial after quite a long successful period in trading. Difficulties have existed, do exist and will always exist even in the life of a super trader who has faced the market for years and managed any amount of money. We cannot know what we are not prepared for until the day when, unexpectedly, it turns up at our door.
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4.3. How a successful trader does face difficulties A successful trader is, above all, a successful person. Achieving success in life at a certain level is never due to fate. And I’m not talking about being the first in sport or in a particular profession at world level. I’m simply talking about achieving results above the average or at an unusual level. Average people get scared, feel fear, anxiety and frustration. Successful people feel the same emotions, otherwise they would not be people. The difference lies in the fact that facing the same feelings, successful people do not give up. Often people confuse enthusiasm for reaching a goal with a consciousness of the result. If I’m conscious of the result and of the goal I want to reach, I will remain focused on it even in difficult moments when enthusiasm decreases. If I live pushed by enthusiasm and not by determination and consciousness of the result, a gust of wind coming from a failure or from any kind of problem will be enough to shake my certainty together with my enthusiasm and everything that follows.
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Success is not 100% enthusiasm, and even successful people experience discouragement but they do not give up disheartened in the face of an obstacle. There are no obstacles that can stop successful people, and maybe this is the only difference between a successful and an average person.
4.4. The approach of “start with a loss” When I open an operation I do not expect to earn. When I do open an operation I ask myself what I will feel if this operation loses and I decide to accept this feeling from the beginning. In this way I become conscious of the risk and I accept it. The perception of risk is always higher than the real risk. When a person is “risking”, he or she experiences feelings of “fear” that link the risk to the conscious and unconscious memory. For this reason, if I risk being knocked down by a car I experience a temporary shock which, after the event, leaves me completely immobilized or makes me feel sick with fear. The “fear” remains and over time it will influence my future behaviour in relation to similar situations, when it comes back to me or when I live through it again in the future.
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When you lose or risk losing, you also experience a “fear” that will go with you in your conscious and, above all, unconscious memory. You will live through this uncomfortable feeling again every time you risk losing money and this quite heavy, unpleasant feeling could provoke a reaction of refusal to trading, where every day and in every single operation you risk losing money.
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4.5. Everybody makes mistakes with operations If the trader trades, he or she will inevitably have right and wrong operations. To admit one’s faults is a sign of maturity and to understand that faults are part of the way to success is an unavoidable step for the trader’s career. The most interesting observations we should make are about the emotions felt after a losing operation. The first losing operation is normal, the second is annoying, the third makes you angry and after the fourth, you start losing confidence in the method or in yourself. And it is at exactly this point that the desire comes to recover the losses, maybe with only one right operation. From the probability point of view, you put yourself in a situation which is more and more uncomfortable and difficult to satisfy. If the fifth consecutive loss also arrives, usually the extent of this last one is bigger than the sum of the previous ones, because of the higher amount of money you invested or the higher risk situation you exposed yourself to, in the hope of recovering the first four losses.
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The fifth loss exceeds the stress levels that the trader had fixed in advance and furthermore it goes against the estimated acceptable risk ,because the trader was not prepared to accept that fifth loss. At this point the trader goes into shock and stops for a few days before regaining confidence or before being simply drawn back by a dependence on the “gaming table”.
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4.6. Daily and monthly balance I understand perfectly that closing every daily or weekly trading session in profit is difficult. For this reason, above all if the operativity is not intraday based but on a multiday base, the balance has to be done monthly or quarterly. If the quarterly balance is negative you need to ask yourself some questions about the method or your personal discipline in trading. If the problem lies in the method, because it is unable to perform in that particular market phase, obstinacy is the worst path to follow. If the problem is lack of discipline, I suggest you take a holiday. These moments, when you lack results and you need a break, are the most difficult to face because at this precise moment of wanting redemption and recovery, the trader should stop. At this point ego and obstinacy come into the game and the trader would like to continue on his nerves. Stopping could be seen as fear and the trader does not want this for him- or herself: fear is unacceptable.
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In reality a degree of humility never hurts and a break to reflect could be more valuable than any other solution. The backtest simulation, like a demo trading account, is a very good solution to regain confidence and to keep on training or to test your own method during an unsuccessful phase of the method itself. To simulate without money allows you to draw more reasonable conclusions about the operativity, exactly when the results are not those you were expecting and the loss of money could invalidate your rationality in analysing the problem.
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4.7. Earnings, losses and emotions “If you don’t scratch you don’t win”. - What do you feel reading this phrase? Maybe the push to try and win, too?
“The pleasure of an easy win”. - What do you feel reading this phrase? Are you already feeling lust for the possession of money? But not the money you sweated for and worked for, the money you got without doing anything and that has an immeasurable value. The money that falls at your feet and you did not have to commit for. The money that changes your life in a moment because fortune choose you.
“Do you feel lucky today?” - What do you feel reading this phrase? If you wake up in the right mood and you go to have breakfast in a café, would you not invest at least 10 € on a lottery ticket?
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If it is luck and the feeling of it being "the right moment" which is driving your choices, you will probably have disappointments of huge proportions. It is through emotions that people choose, but you do not have to confuse emotions with luck.
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“Win for life, happy and lighthearted” - What do you imagine reading this phrase? Not having problems any more? Not depending on anything or anybody? Not needing money any more? You can win all your life at a cost of only 1 €.
It really seems that with the financial crisis, the income from lotteries and gambling has increased out of all proportion. If the probability of winning is very low and the money usually ends up in the hands of the Government, why then do so many people decide to gamble even if they know they will be throwing their money away? This is the reason why the slogans I reported above are the true luck of the marketing companies that look after the lotteries and the gambling industry’s ad campaigns, and especially the Government’s coffers. If this phenomenon did not constantly increase, the Government probably would not be able to keep its public debt at an acceptable level. Money coming from gambling actually represents capital which the Government cannot give up without having to create new taxes or new more restrictive measures.
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If, starting tomorrow, “everybody would stop” gambling and the Government then decided to increase taxes to compensate for lost revenue, a “civil war" would probably break out.
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4.8. Trader or gambler If reading the above phrases did stimulate your mind so much that you feel sympathy with them, forget about trading. Buy a lottery ticket, so that you won’t be one of those people who say you cannot make money trading. The attitude to trading cannot be the same as the attitude to gambling. Traders would not be successful people if they believed they were lucky or if they approached this profession like you approach a casino. I understand that these simple observations could seem stupid, but the failure of a trader often stems from exactly this sort of thing. These are the same phrases and slogans that attract gamblers and stimulate the minds of those starting up in trading. So be careful and try to understand if your approach is the one of a trader or rather that of a gambler.
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4.9. My advice for those starting, and for those who have already started Believe in the fact that trading is a profitable activity. Believe in yourself. Look for an intelligent trading method, test it and start believing in the method itself. Once you overcome those three steps, start trading and never, for any reason, doubt yourself or trading. Only in this way will you belong to the group of people who have achieved success with trading, without paying any attention to the people who told you to be careful or laughed at you because you chose to become a trader.
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Disclaimer The present book is only intended to be educational. It must not be considered in any way as operational investment advice, or as solicitation of funds from the public. The results presented – real or simulated – are no guarantee of hypothetical future performance. Speculative trading activity carries enormous economic risks and anyone who does it, does so at his or her own and exclusive risk, and so the Authors do not take any responsibility for potential direct or indirect damages arising from investment decisions the reader may take.
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