Trading Guide

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Trading Guide Contents Important - Disclaimer ........................................................................................................... 2 My Trading Background ........................................................................................................ 3 Introduction ............................................................................................................................ 3 Brokerage and Carry Costs ................................................................................................. 13 How to Start Trading ........................................................................................................... 14 You Must Find YOUR Way of Trading ................................................................................ 15 You MUST Have an Edge ................................................................................................... 16 Timeframes ......................................................................................................................... 18 Discipline as a Trader .......................................................................................................... 19 Money Management ............................................................................................................ 20 Risk...................................................................................................................................... 23 Cut Your Losses But Let Your Gains Run ........................................................................... 25 Technical Analysis ............................................................................................................... 27 Fundamental Analysis ......................................................................................................... 31 Trend Trading ...................................................................................................................... 32 Trading Platforms ................................................................................................................ 34 Losing Streak ...................................................................................................................... 36 Trading Legends ................................................................................................................. 38 God and Trading ................................................................................................................. 40 Solomon Wealth Fund ......................................................................................................... 42 Questions and Answers ...................................................................................................... 44 My 2007 Trading Diary ........................................................................................................ 48 My 2008 Trading Diary ........................................................................................................ 50 The Perfect Trade ............................................................................................................... 57 The Main Event ................................................................................................................... 58

© Oliver Hille 2011 – www.TradingBook.net

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Important - Disclaimer By reading this Guide you agree that this Guide and any trading or investing ideas described are for informational and educational purposes only and do not constitute any advice or recommendation. The information contained in this communication is based on generally available information and, although obtained from sources believed by Oli Hille to be reliable, its accuracy and completeness is not guaranteed. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. No liability is accepted by Oli Hille for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained herein or derived here from. Oli Hille and representatives are not stockbrokers, financial or investment advisors and do not recommend any stocks, bonds, options, CFD’s, currencies or any securities of any kind. Any financial securities that are mentioned throughout the course of this document are cited only for illustrative and educational purposes. Investing in financial markets is risky and it is possible to lose money. It is recommended that you seek a professional licensed financial advisor prior to implementing any investment program or financial plan. You acknowledge that Oli Hille and representatives have not promised you in any manner whatsoever that you will earn a profit from your personal investments. If you do not agree to be bound by these terms then please discontinue reading. These terms can be modified at any time without notice.

[CONSUMER NOTICE: Some of the URL links to third party products in this report are affiliate links. This means I may be compensated when you purchase from a provider. You should always perform due diligence before buying goods or services from anyone on the Internet or offline.]

© Oliver Hille 2011 – www.TradingBook.net

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My Trading Background I have been trading the financial markets part time since 1990. I became a full time trader on 1 January 2007. My average annual return for the period 1 January 2007 to 31 December 2009 was 108.78%. Yes I have been actively trading from January 2010 to the present, and I will be outlining my returns and my Trading Diaries from that period in a later publication. My Trading Lifestyle was covered by the media in 2008 and the story was syndicated country-wide. You can read the article here: http://www.stuff.co.nz/business/367484 In 2011 I was interviewed on video by Top Trading website “The Trading Elite”. You can watch the interview here: http://www.thetradingelite.com/?p=53 I regularly mentor beginning and intermediate traders. IN fact I have mentored over 50 Traders. I co-founded a Trading Club with over 200 members. If you are interested in one on one mentoring via Skype or phone, please email me at: [email protected] I hold a first class honors degree in Accountancy and I am a CA (CPA). I also hold a degree in Psychology. I am a voracious reader of trading books and I have a large trading library of books, articles, CDs, DVDs, etc. I have interviewed a number of top traders and top international fund managers. I plan to start my own Hedge Fund in 2013.

Introduction I have experienced a large number of employment and business situations. I have read accounts of dozens of others. Of all of these there is one and only one that is pure. By pure I mean that at the end of the day there is no doubt about the result of your efforts. In fact the result stares at you in black and white.

© Oliver Hille 2011 – www.TradingBook.net

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There are no employers to tell you how to do it. There are no employees to train and supervise. There are no overheads. There are no excuses. There is just you, your decision making and the result. There is no advertising, no answering the phone, no customers, no inventory, no database, no marketing, no cold-calling, no bad debts, no set hours, no set schedule. Just you, your decisions and the result. Even better than that, you are playing a giant game with players all over the world. When you get good enough to win regularly you get paid – a lot! And it gets even better. The game is so vast and covers so many possibilities that you can choose which sub-game you want to play. So you can choose a part of it that fits with your personality, with your strengths, with your sleep patterns, with your timeframes and your risk thresholds, using strategies that suit you. While there are some basic rules of play, you can develop entirely your own personal rules to win the game! It’s the purest game of all and you can make a living or a fortune playing it. What is the name of this game? Trading! Here is a list of some of the markets you can trade: • • • • • • • •

Currencies Equities (shares) Bonds Interest rates Agricultural commodities e.g. coffee, wheat, beef Metals e.g. copper, iron Precious metals e.g. gold, platinum Indices (indexes) which measure a group of products e.g. a share index, or a commodity index.

Here is a list of some of the ways you can trade these: • Outright purchase or sale • On margin (you put up a small amount of money to be able to trade with a much larger amount) • Via futures • Via options (many different types) Here is a list of the timeframes you can use: • • • •

Intraday (getting in and out within one day) A few days A number of weeks A number of months © Oliver Hille 2011 – www.TradingBook.net

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• A number of years You can use a combination of any of the above depending on your personality and your circumstances. Just like any game, the greater your level of skills and experience, the better you will do. Trading is a wonderful way to supplement your income and it fits into just about any lifestyle. If you have a computer, the internet, a phone and access to a minimum of a few thousand dollars you can start trading. However like anything in life if you want to be really good at trading you must give it your undivided focus. If you treat trading like a hobby, it will be just like every other hobby i.e. it will cost you money! I have been trading foreign currencies and commodities part time since 1990. Let me tell you how I first started. In 1990 when I was 25 I received an inheritance of $30,000. That was back when $30,000 was a lot of money! I must have been reading a lot of James Bond novels at the time because I thought it would be really cool to open a Swiss bank account. I applied to Credit Suisse for the account forms and while I waited for them to arrive I decided to put my dollars into Swiss Francs. At that time there was one dealing room in the city I lived in. I phoned them up and did the deal – I still remember the rate 0.8334! So my NZ $30,000 became 25,002 Swiss Francs. Three weeks later the bank documents arrived from Switzerland. I phoned the bank to talk about transferring the money. The broker told me that the exchange rate had moved in my favor. I asked him what he meant. He said that the exchange rate was now 0.7962 and that if transferred the Swiss Francs back into NZ Dollars I would have $31,400. I said “Do it! Do it now!” When I put the phone down I jumped around the house whooping with delight. I couldn’t believe I had just made $1,400 for doing nothing. The holiday job I had just finished paid $8.60 an hour which was $275 a week after tax. I had just made the equivalent of five weeks of early starts and hard dirty work – just by making two phone calls! I changed my mind about opening a Swiss bank account and instead I started to move my money in and out of currencies. In retrospect it was a very inefficient way to trade currencies but at the time I didn’t know any better. Surprisingly I did six profitable trades in a row and made a few thousand dollars – I literally could not believe it! Back in 1990 there was no internet and it was very difficult to check prices and movements unless you phoned your broker. However, I was studying at University and Reuters had sponsored a live trading screen at the library. I could check my profits and losses between classes! I had a friend at university who had some money so we started trading together.

© Oliver Hille 2011 – www.TradingBook.net

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As I learned more I started trading metals and commodities such as gold and cocoa. I was flying by the seat of my pants and I had no real idea what I was doing. Consequently I had some significant losses followed by that awful feeling in the pit of your stomach. Like anything, the more you do it the better and smarter you become. I have made lots of mistakes in trading but most of these have been real learning opportunities. Losing hardearned cash is a good way to learn fast. You never want to make the same mistake twice. To help you not to make all of the mistakes I have made, here are my trading rules which I will explain in detail in the next section: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Find a Great Broker Never risk more than you can stand losing Never try to pick a top or a bottom in any market Trade with the market’s momentum You never buy at the low or sell at the high Always use a stop loss order to limit your risk Aim for a profit ratio of 3:1 or greater Cut your losses but let your gains run Never, ever, under any circumstances add to a losing position – not ever Set a profit goal for the year Never trade a market you don’t understand Use primarily technical (not fundamental analysis) when making decisions Trade Small

1. Find a Great Broker A good broker can be the difference between making money and losing money, it’s that simple. Of course most new traders use a trading platform and may never talk to a broker. See the section on Trading Platforms. But if/when you use an actual broker they must have sky-high integrity and be totally honest. He or she must be experienced and highly knowledgeable. In my opinion you should only use a broker that also trades actively and profitably on their own account. Always ask a potential broker what percentage of their personal income comes from doing their own personal trades. If they don’t back themselves why should you listen to them? It is important to remember that a good trader makes their own decisions. I use my broker to bounce ideas off and sometimes he will call me with a recommendation. But it is always me pulling the trigger. I have a terrific broker who meets all of my expectations and he is also a great guy. His name is Graham and if you do your homework and ask a lot of good questions, you may be fortunate enough to find someone as good as him.

© Oliver Hille 2011 – www.TradingBook.net

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2. Never Risk More Than You Can Stand Losing Everyone has a different risk threshold and only you know where that is. Basically you need to know that you can sleep well at night and not make a panicked decision during the day. Using a 3:1 profit goal let’s assume you are happy to try to make $3,000 while risking $1,000. You know that if your trade is completely wrong the most you can lose is $1,000. If you are not going to lose any sleep – great, you are within your threshold. But if you take a position that could conceivably lose $10,000 in the eight hours you are in bed, can you sleep easily? Your threshold might be $300 or it might be $30,000, but never go outside it. Otherwise you will find yourself stewing and worrying and perhaps even getting out of a trade at an inopportune time. Like any pursuit in life it should be fun, not worrisome. 3. Never Pick a Top or a Bottom It is a fundamental mistake to look at any tradable product and say “It can’t go any higher!” or “It can’t go any lower!” The truth is, markets go much further and for much longer than most people expect. By trying to guess the top or bottom of a market you are going against the market’s momentum. It’s like standing in the way of a freight train – if you get it wrong you (and your money) will be mowed down. I made this mistake once in 2000. The New Zealand Dollar had fallen rapidly and was a lot lower than it had been for years. I thought to myself “It has fallen so far, so fast, surely it can’t fall further”. So I bought NZ$100,000 against the US Dollar. The next day it continued to slide and I lost $2,500 in one afternoon. That hurt and I’ve never forgotten it. Critical Principle 1: If you try to pick a bottom, all you get is a handful of crap. Critical Principle 2: Almost nothing is cheap if it is against the trend. 4. Trade with the Market’s Momentum Markets tend to move in a particular direction for weeks or months and sometimes years. Property markets, share markets, currency markets, commodity markets and so on conform to these cycles. It is therefore safer and more profitable in general to trade with the market’s momentum. Sometimes this is known as “trading the trend” or “the trend is your friend”. If for example the US Dollar has been going down against the Japanese Yen for a few weeks, it is more likely to continue to go down rather than change direction. NB this does not mean that it will go down in any particular hour or day but rather that it is likely to be lower in a few weeks time than it is now. You have to be willing to ride out daily and even weekly fluctuations if you are trading a long term trend. © Oliver Hille 2011 – www.TradingBook.net

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5. You Never Buy at the Low or Sell at the High It helps me to remember this and I repeat it to myself. Let’s say that I want to buy into a market that seems too low. I don’t want to try to pick an exact point and buy it there because I am going against the momentum and I will probably get it wrong. If however I wait until it has started moving up and the momentum has changed I can buy it on the way up. The same thing is true when you exit a trade. No-one can predict the future so you can’t expect to sell out at the very peak. It is almost always a mistake to sell because you think the market has peaked. You need to have a good reason to sell out of a position and usually it will be because you believe the momentum has changed. It is human nature to want to get it perfectly right but in trading it is foolish to try. Be happy that you picked the correct momentum and made a profitable trade. Never kick yourself because you didn’t buy at the lowest low or sell at the highest high. This principle is especially important when observing long-term trends. You may observe a market that has been trending upwards for two months and is a long way above its lows. But if you think the trend has another two months left to run you should buy into it and ride it up further. It is irrelevant that you missed the low by two months. If you ride the momentum up and make a profitable trade – celebrate! 6. Always Use a Stop-loss Order to Limit Your Risk When trading a position that technically has an unlimited loss potential (e.g. a spot currency position or a futures contract) you must always use a stop-loss order. It works like this: Place your order e.g. sell US$100,000 (remember because you can trade on margin you only have to put up $3,000-$3,500 to do this) against the Japanese Yen at the current rate, say 106.00. Pick a dollar amount that is the maximum you would be willing to lose if you got it wrong i.e. the US Dollar strengthening against the Yen instead of weakening. Let’s assume that amount is US$1,500. Using a spreadsheet work out where exactly the exchange rate would have to move to, giving a US$1,500 loss. The spreadsheet formula looks like this: = ((100,000*106)/(100,000-1500)) = 107.61 (rounded) Tell your broker that you want to place a stop loss order at 107.61. This means that if you get it wrong (and you will sometimes), once the rate goes to 107.61 you will automatically be sold out of your position limiting your loss to $1,500. Note that © Oliver Hille 2011 – www.TradingBook.net

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neither you nor your broker needs to be watching the rate or even be awake! Your order is computer generated and will trigger automatically. Whenever you enter a trade, always accompany it with a stop loss order. If you take this advice you will avoid large, unexpected losses. Trailing Stop-losses In addition, you can use stop loss orders that you move up as the rate moves up. These are called trailing stop-losses. Using our US Dollar versus Yen example. If you sell US$100,000 against Yen at 106 and two weeks later the rate is 101.44 your profit will be $4,500. Firstly you don’t want to sell at this level because if the market keeps moving (trending) you will make more. But secondly you don’t want to risk losing all of the profits you have already made. The way to accomplish both of these is to move your stop loss order. Tell your broker to cancel your original stop loss order at 107.61 Ask him/her to place a new stop loss order at 102.91 If the market changes direction you automatically sell out at 102.91 giving you a profit of $3,000. But if the market moves down to say 100.00 you would cancel the stop loss at 102.91 and move the stop loss to say 101.50, locking in a profit of $4,435. You keep doing this until the market changes direction. This way you maximize your gains. If you trade using an electronic trading platform you can program an exact trailing stop spacing (e.g. 150 points), and it will track it point for point. NB You will never get out at the very top using this strategy but as we have discussed you never buy at the low or sell at the high. Be happy that you profitably traded the momentum. A Note on Retracements: When I am in a currency position that has performed very well and I am profitable by a few hundred points, I will do an analysis of the currency chart since the beginning of the move to see what the retracement amounts have been. A retracement is a period during which the trend reverses in a small way but then the trend resumes. For example if I was long USD Yen and I was onside by 350 points (3.5 Yen) I would look back to see when the trend started. Let’s say the trend started at 87.00 and the rate is currently 98.00. I would look at every major retracement in that time and make a note of the amount of each retracement. It might look like this: First retracement: Second retracement: Third retracement:

3.26 Yen 1.41 Yen 2.67 Yen © Oliver Hille 2011 – www.TradingBook.net

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Fourth retracement: Fifth retracement:

3.02 Yen 1.89 Yen

Because I am very interested in staying with the trend and NOT being taken out by a normal retracement, I will generally set my stop loss beyond the range of the existing retracements. Therefore because the current rate is 98.00 and I want a stop loss greater than 3.26 Yen (the largest retracement) I will put my trailing stop loss at say 3.3 Yen. My stop loss would then be 98.00 – 3.3 = 94.70. IMPORTANT: Most traders will not allow such a big stop loss because they hate the thought of losing 330 points, especially if they have large positions. However those traders NEVER get to enjoy a move of 30 big figures (3000 points). In 1997-98 for example USD Yen moved up 34 Yen (3,400 points). In order to have participated in the full move you would have had to have used a 5.5 Yen stop loss. 7. Aim for a Profit Ratio of 3:1 or Greater Clearly the goal of trading is to make a profit over time. Not all of your trades will be successful. In fact based on the general assumption that all underlying fundamental economic data is fully priced into the market, there is a 50% chance of any market going up and a 50% chance of it going down. Of course you hope that your knowledge and research will help you make an informed decision, but everyone buying and selling feels the same way! Given the statistical balance of 50%, it would not be profitable to aim to double your money on a trade because if you get half right and half wrong you break even. You should only enter a trade where you believe that you can at least triple your investment. Using the example of the $1,500 stop loss, you would therefore be aiming for a profit of $4,500. If you don’t think that is possible don’t do the trade. Of course once the trade is underway you don’t have to hold out for $4,500 because the market conditions may change. But the key is to aim for at least a 3:1 ratio before you enter a trade. Also of course you shouldn’t sell out with a $4,500 gain just because that was your original goal. Really big money is made when you hold a profitable position and keep making more, as discussed in the next section. 8. Cut Your Losses But Let Your Gains Run See the section later in the Guide. © Oliver Hille 2011 – www.TradingBook.net

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9. Never, Ever, Under any Circumstances Add to a Losing Position – Not Ever! This is a mistake I have made a number of times and I pretty much lost money every time. Basically the mistake goes like this. You sell US$100,000 Dollars against the Yen at 106.00, hoping it goes down. Instead it goes up to 108.00. At this time you mistakenly think “It must turn around soon” so you sell another $100,000 at 108. One of the perceived advantages is that you have “averaged down” your position. This means that because you sold at 106.00 and then at 108.00, the rate only needs to go to 107.00 for you to break even. However, you are trying to pick the bottom of the market and you are trading against the trend. The trend almost always continues and when it goes up to 110.00 you are carrying a large loss position you should never have exposed yourself to. It’s simple – NEVER add to a losing position. 10. Set a Profit Goal for the Year Without a profit goal you do not have something to aim for. Like all goals make it measurable and achievable, but also a stretch. There is something about setting a goal that makes achieving it more likely. Set a dollar amount trading goal for this year now! Then tell a friend. That makes it even more powerful. 11. Never Trade a Market you Don’t Understand The people around the world trading the markets are doing it to make profits and they take it seriously. They research and understand what they are trading. If you trade a market you don’t understand you will probably get fleeced. This happened to me only once. I saw that cocoa (a commodity) was trading at an annual high so I thought I would sell a contract so that I would make money if it went down. Now there are cocoa traders out there who know everything about cocoa supply and demand, which countries grow it and what their political situation is like, what current weather patterns will affect crops etc. So what are the chances of me taking a chance on a whim, of making money? Frankly I’d be better off taking my money to the casino and putting it all on one hand of blackjack. Needless to say I lost nearly $2,000 – lesson learned! Simply put – understand what you are trading and why.

© Oliver Hille 2011 – www.TradingBook.net

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12. Use Primarily Technical (Not Fundamental Analysis) When Making Decisions See the two sections on Technical Analysis and Fundamental Analysis later in the Guide. 13. Trade Small When you are starting out it is very tempting to take positions that risk a large percentage of your capital. Say you start with $10,000. My advice would be to risk no more than 2% of your $10,000 (i.e. $200) on one trade. That way you can get it wrong 50 times in a row before you are wiped out! However most traders are not happy with the small gains possible using only a 2% risk level. Most beginning traders want to make $500 or $1,000 a week from their $10,000, so they take a lot more risk. I know because I talk to beginning traders almost every week. This is the reason so many beginning traders blow up their account (i.e. lose it all). You have to remember that legendary traders who have been managing money for decades are considered legends because they consistently return around 25-30% per year for their clients. Trying to make $500 a week on $10,000 is a 260% annual return. It is just not sustainable. Regardless of your starting capital, trade small. If you don’t have enough capital to make the exercise worthwhile, work on other ways to increase your capital base. In my opinion you should not attempt to make a full time living as a trader until you have at least $100,000 in capital. If you find yourself risking 10% of your capital on every trade, remember that just five losing trades in a row will halve your capital. You then have to make a 100% return in your next few trades just to return to your starting capital again!

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Brokerage and Carry Costs Trading profitably on a consistent basis is difficult. For that reason it is essential that you negotiate a low level of brokerage before you start trading. Brokerage is the commission you pay your broker or your trading platform to enter and exit trades. It also includes the spread (the difference) between the buy and sell price on the instrument you are trading. Even though you want to pay as little brokerage as possible, if you are going to use an actual broker rather than just trade through a platform it is worth paying for a good one. A good broker will more than make up for a ‘cheap’ broker in experience, advice and integrity. Another hidden cost of trading is carry costs. These are costs that can add up every day you are in a trade. For example if you buy the Japanese Yen against the Australian Dollar you have to pay the high rate of Australian interest and you receive the low rate of Yen interest. Given that Australian interest rate is many percentage points higher than Yen interest you need to be aware of the cost of holding this or similar positions.

© Oliver Hille 2011 – www.TradingBook.net

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How to Start Trading First, read a lot of books about trading. Here are some of my favorites. They are in order of importance for the new trader. Each title is a clickable link to Amazon.com: Reminiscences of a Stock Operator Stock Market Wizards Market Wizards New Market Wizards Way of the Turtle Hot Commodities The Complete Turtle Trader Winning on Wall Street How to Make Money in Stocks How to Trade Stocks Beating the Street Fooled by Randomness Stock Trader’s Almanac Commodity Trader’s Almanac Adventure Capitalist Investment Biker A Bull in China Buffettology Julian Robertson: A Tiger in the Land of Bulls Hedge Hogging Wealth War and Wisdom Soros on Soros The Alchemy of Finance God in the Pits When Genius Failed Buffett: The Making of an American Capitalist The Tipping Point Blink The Templeton Plan Pit Bull How I made $2,000,000 in the Stock Market Japanese Candlestick Charting Techniques The Complete Trading for a Living How Legendary Traders Made Millions Lessons from the Greatest Stock Traders

Edwin Lefevre Jack Schwager Jack Schwager Jack Schwager Curtis Faith Jim Rogers Michael Covel Martin Zweig William O’Neil Jesse Livermore Peter Lynch Nassim Taleb Jeffrey A Hirsch Jeffrey A Hirsch Jim Rogers Jim Rogers Jim Rogers Mary Buffett Daniel Strachman Barton Biggs Barton Biggs George Soros George Soros Mark Ritchie Roger Lowenstein Roger Lowenstein Malcolm Gladwell Malcolm Gladwell John Templeton Marty Schwartz Nicolas Darvas Steve Nison Dr Alexander Elder John Boik John Boik

All of these books and lots of other trading books and resources can be purchased here: www.Amazon.com

© Oliver Hille 2011 – www.TradingBook.net

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Second, I recommend starting out by “paper trading” which means trading using play money on a trial trading account. You can start with $100,000 of paper money and familiarize yourself with the systems and strategies before you put up real money. NB While paper trading can be fun and a great learning experience, psychologically it is completely different from real trading. Losing 20% of your trading capital in a paper trade doesn’t hurt, but in real money it really hurts! Similarly a 20% profit is inconceivably better in real money than play money!

You Must Find YOUR Way of Trading The opportunities for Trading are so vast and cover so many possibilities that you can choose which particular market you want to trade in. So you can choose a part of it that fits with your personality, with your strengths, with your sleep patterns, with your timeframes and your thresholds, using strategies that suit you. While there are some basic rules you need to adhere to, you can develop entirely your own personal rules and personal strategies to make money. This is one of the beauties of Trading for a living. You get to choose the instruments and the risk levels and the timeframes that suits your personality. I am continually reading Trading books and interviews with top traders. They almost all emphasis this point, that you must find a way of trading that suits you. This means that just because your friend or uncle or colleague trades in a certain way does not mean you have to follow suit. It is far better to start with a clean slate and decide exactly how you are going to make money on the financial markets. I also mentor a number of beginning traders and I see them over time gravitating to what most suits their personalities. To speed up the process I suggest you: 1. Read up on all the different markets, and strategies, and instruments you can. 2. Think about how much time you can devote to trading. 3. Work out what time of the day you are most comfortable doing analysis and actually taking trades. 4. Think about your anxiety and risk levels. If you cannot sleep with an open position you might need to be a day trader. Or if you don’t like taking multiple trades in one day you might need to be a trader that holds positions for a number of days. © Oliver Hille 2011 – www.TradingBook.net

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Cautions 1. Never “fall in love” with a market or a trade. Remember all you are actually dealing with as a trader is pieces of paper. They go up in value and they go down. I know a number of traders who like gold and they can’t bear to go short gold, ever. This is a weakness. You are not actually buying and selling yellow metal, you are buying and selling pieces of paper that go up and down in value. 2. Successful trading is almost always boring! Yes it’s true. If you are getting in to trading for the excitement, you are gambling and you are better off at the casino. Your sole reason for entering a market must be to dispassionately take money out of the market. I am not saying you cannot be pleased with your gains. Of course you can, but that is a byproduct, not the reason. 3. Most human beings have a psychological trait known as “Dollar Fear”. This is when the pain of losing $1 is greater than the pleasure of making $1. For most people this means that trading losses are more painful than the enjoyment of an equivalent trading gain. You need to examine your personality to see how averse you are to losing money. Losing money is one of the cost of doing business as a Trader. You cannot quickly take off a losing position just because it is losing. Many profitable trades are under water for at least a short period of time. 4. IMPORTANT: If you want to be successful as a trader you must give it all of your energy, focus and attention. You are playing in an environment where everyone is deadly serious about what they are doing. If you come in with a cavalier attitude or you are lazy and ill-disciplined, you will lose money. 5. Trading is like anything else in life, it is a learning process. Over time you will learn more and more, and you will make fewer and fewer mistakes. In my opinion it is this process that makes great traders. So if you are unprofitable for the first year or two, keep at it. Conclusion Before you start trading, examine your personality and work out how, where, when and you are going to trade. Also work out your risk thresholds. And finally give it all of your attention.

You MUST Have an Edge When you start trading your precious capital you must have an edge in the market. To explain what I mean, think about a casino. The Casino has an edge in every game in the casino. For every bet placed there is a probability that the Casino will © Oliver Hille 2011 – www.TradingBook.net

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win. That means that the Casino is happy to lose some bets because it knows over a period of time it will win. You might think that in any trade you take in the financial markets there is a 50% chance of winning or losing. This is NOT the case. In fact if you believe that you should not trade at all because after you have paid commissions etc you must LOSE over time. A lot of new traders make the mistake of starting to trade without an edge i.e. without working out a way to put the probability in their favour. Any Trading System is a system that has been designed to have a probability of profitability. Critical Principle

Do not start risking your capital until you have developed or adopted a Trading System that has an edge in the market.

How do you find an Edge? A Technical System is one based on market price information only. This is different to a Fundamental System which is based on the understanding of the actual underlying economic and instrument-specific information that moves the market you are trading. You can have an edge in both types of system. However it is my belief that unless you have significant in depth knowledge of macro-economics or of a specific commodity (for example you know almost all there is to know about how wheat is grown, cultivated, marketed, and consumed) then you are far better off trying to develop a Technical System that has an edge. The essential assumption of a Technical System is that there are recurring patterns in financial markets. In its simplest form therefore a Technical System with an edge is one that: 1. Has identified a pattern in a specific market. 2. Has identified a way to profit from this pattern recurring. 3. Has been backtested (tested over historic data) and shown to be profitable. 4. Has been forward tested (tested in a live situation) over current data and shown to be profitable. Whilst it is possible to purchase systems that purport to have an edge in the market, the vast majority for sale DO NOT actually have an edge in the market. Think about © Oliver Hille 2011 – www.TradingBook.net

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it. If you developed a Technical System that was consistently profitable would you sell it? No, you would trade it. There are some exceptions, but very few. For that reason my strong recommendation is that YOU research, find and develop your own Technical System with an edge. Yes it is a lot of work. But remember trading for a living is a business. There are no free lunches. If you insist on trading your precious capital without finding a system with an edge, I can make life much easier for you. Give all of your trading capital to charity. The result will be the same (your money will be gone) but at least you will have a warm feeling, and a tax deduction!

Timeframes Trading Timeframes are critical to your technical analysis of price information. In broad terms here is a list of the timeframes you can use: • • • • •

Intraday (getting in and out within one day) A few days A number of weeks A number of months A number of years

But the critical factor is that the probability of a successful trade increases to the extent the timeframes are in alignment. So for example if you are looking to go long USD CAD and the one hour chart shows an uptrend, the trade has a higher probability of success if the four hour and the daily chart also show an uptrend. At least once a week you also want to look at the long term price trend. This is useful for gauging historic highs and lows and historic support and resistance points. It can also show you how high or low the price might go. I also recommend looking at the monthly chart of any financial instrument you are about to trade. You certainly should always look at multiple timeframes when taking a trade. Ideally only trade when there are multiple convergences across all timeframes. I also recommend frequently looking at longer term multi-year timeframes. I have found an excellent resource for long term charts: © Oliver Hille 2011 – www.TradingBook.net

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http://www.chartsrus.com Your Personality You will find that you naturally gravitate to a particular timeframe. That is great because you want to trade in line with your personality. My favored timeframe is daily charts. That is because I like to take multi-day and ideally multi-week trades. However a day trader might gravitate to 5 minute or 30 minute charts. But even though I look at daily charts for my signals, I will always look at the hourly chart to see where my best entry point and stop loss point will be.

Discipline as a Trader When you read interviews with Top Traders and Market Wizards (the traders interviewed in Jack Schwager’s books), and read autobiographies of the most successful traders, the trait that comes up over and over and over again as the most important for trading success is Discipline. Why is this the case? It is because trading the financial markets is filled with opportunities to experience: • • • • • • •

Greed Fear Anxiety Worry Elation Euphoria Pain

When you are hit with this barrage of emotions on an hourly, daily and weekly basis the natural human response is to react in a manner that we are programmed to. Every person is programmed to seek pleasure and avoid pain. Making and losing large sums of money is a massive trigger for pleasure and pain. This means that in a trading environment our natural inclination is to do a number of things that are counterproductive to success: • Avoid actually taking a loss and keeping the position and hoping it will come back into profit; • Adding to a losing position to average the loss; • Breaking risk rules when on a winning run; • Cutting a loss even through the loss is not near our stop loss. • And so on. © Oliver Hille 2011 – www.TradingBook.net

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It is because of these swirling emotions that discipline is so difficult to maintain. But it is critical to long term success. Let me give you a personal example. I used to have my risk rules written on my wall. They governed how much risk I could have in the market at any one time. However a few times a year in periods when I was making a lot of money I would deliberately break my rules. This happened once too often I got crushed, and in one night I lost over 20% of my capital. I thought to myself, “This is ridiculous, I have risk rules but I don’t keep them”. So I emailed two people I have huge respect for and I asked them to be my trading accountability group. I emailed them my risk rules and I committed to them that I would not break them. I would not dare disappoint them, and so I have kept to my risk rules ever since then. For a general outline of the importance of self discipline and how you can change undisciplined behaviors into disciplined ones see: www.LifestyleBook.com/Discipline

Money Management I have mentored numerous beginning and intermediate traders. I have also cofounded a Trading Club which meets six times a year and has nearly 200 members. I talk to other traders regularly and I often answer trader’s questions. The ONE key area that leads to the greatest losses among beginning and intermediate traders in poor Money Management. Critical Principle:

If you do not master Money Management you cannot master Trading

So what is Money Management? It is simply managing your money and managing your risk. The reason it is so difficult to master is that the elation of making money and the pain of losing money are among the most powerful human emotions. When we become gripped with these emotions, or even the imagination of what those states would feel like, most people stop thinking rationally and start acting in a high adrenaline mode. This high adrenaline mode is great if you are in physical danger or you are exerting yourself in an exciting adventure. But it is NOT conducive to good trading.

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The Four Contributors to Poor Money Management 1. Risk See the section below on Risk. 2. Discipline A lack of discipline is also a cause of a lot of losses in new and intermediate traders. Such undisciplined habits include: • Not triple checking a trade (levels, position size and risk) just before you execute it; • Not writing down the reasons you took the trade; • Not spreadsheeting the trade so you have a record of it; • Not doing a daily revaluation of all positions so you know your profit and loss on an ongoing basis; • Not going back and regularly analyzing where you made money and how, and where you lost money and how. • And so on. A close cousin to a lack of Discipline is… 3. Laziness It must also be said that poor money management is in many cases rooted in Laziness. Traders often cannot be bothered to calculate the exact percentage risk and the exact dollar risk of each position. More dangerously many traders do not calculate the risk of combined and correlated positions. So for example if you have the following positions: • • • • •

Long AUD USD Long NZD USD Long EUR USD Long GBP USD Short USD JPY

- what you actually have is one BIG position that is short USD. If the USD strengthens you could be stopped out of all of your positions in one session. This might be a five times bigger loss than you were expecting. Let me tell you the full story about Laziness and lack of Discipline. It takes just a few minutes to: © Oliver Hille 2011 – www.TradingBook.net

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• Triple checking every trade (levels, position size and risk) just before you execute it; • Write down the reasons you took the trade; • Spreadsheet every trade so you have a record of it; • Do a daily revaluation of all positions so you know your profit and loss on an ongoing basis; • Go back and regularly analyze where you made money and how, and where you lost money and how. The losses that are racked up by people not doing the above means that the exact same people who are lazy actually have to go to work for days and weeks and sometimes months to get back the money they lost! The few minutes they saved being lazy in their trading has become hundreds of hours they have to put in just to get back to even! If this is you, do yourself a favor. Do the easy and quick work – be disciplined in your trading! 4. Lack of Understanding New and intermediate traders often simply do not understand what they are trading and how the financial instrument works. One of the best examples is writing or selling options. When you are a seller of an option YOU take all the risk. In fact the profit potential is limited and the loss potential is unlimited. The attraction in selling options is that someone pays you a premium. So as soon as you sell the option someone pays you money. As an example say you sell a currency option for three months and you are paid $1,000. It is completely conceivable that in three months time you could owe the person you sold the option to $25,000!!! Let me give you a real life example. In the bull run in equities in 2005-2007 a lot of new traders were advised to sell put options on stocks. If stocks (shares) kept going up the trader just kept the premium. So I heard of a school teacher who started doing this. Month after month stocks kept going up and he made $1,000 a month, $2,000 a month, $4,000 a month! Fantastic. But what this trader didn’t know was the risk he was carrying. In the meltdown of 2008 this humble school teacher had to PAY OUT on the options he was selling and lost over $100,000 and lost his house. © Oliver Hille 2011 – www.TradingBook.net

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Incidentally I NEVER sell options. I do buy options but that is fine because my risk is limited to the premium I am paying and I have unlimited potential to make money.

Risk I talk to other traders and brokers regularly and I often answer trader’s questions. One of the main habits that cause traders to lose money is taking too much risk. The most common reason that traders lose money is: • Not understanding risk; • Not quantifying risk; • Taking too much risk. A good trader knows how much percentage and dollar risk they are exposed to at any one time. A good trader understands the types of risk he/she faces: • • • • • • •

Risk of slippage; Risk of gapping markets; Risk of lack of liquidity; Event risk; Risk of taking trades overnight, over weekends and over holiday periods; Carry cost risk; And so on.

Did you know that most Top Traders risk less than 1% of their capital on each trade? Top traders also often limit their overall risk to less than 4% of their capital. This means that to emulate their risk habits with an account size of $20,000 you would need to risk less than: • $200 per trade; • $800 at any one time in the market (all trades combined). I take slightly more risk. I allow myself a maximum 1.6% risk on FX trades and 2.2% risk on Commodity trades. I recommend these as the absolute maximum risk levels you allow yourself. Sadly most new traders happily risk 20%, 30% and sometimes 100% of their capital at any one time. It is no wonder they get wiped out! © Oliver Hille 2011 – www.TradingBook.net

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Here is an email I received recently and my response: “Sorry to bother you. But you are the best person to turn to for a bit of help and guidance in my situation right now. Yesterday I made 4 trades all on USD. Bought the eur/usd, gbp/usd, sold the usd/cad, usd/chf. And the next morning all 4 trades went south and I got stopped in all 4 trades and sustained substantial loss to my trading account. I had $17,000 and now down to $10,000 I guess I used more leverage on these trades than my usual. Anyway lesson learned very harsh about not to over leverage, I will never let this happen. Now I am just skeptical about putting on any trades no matter how sure I am. It’s stopping me. What do you think? I am sure you've been there, so what spotlight can you flash on me to move on? Any wise words from the wise man??? :)” And my Response: “Thank you for your honesty! Being honest with yourself is half of being a good trader. I can tell you one problem you have straight away. You are taking WAY too much risk. Top traders tend to take very low risk per position, usually under 1%. I allow myself a maximum of 1.6% per FX trade. So 1.6% of $17,000 is $272. That is the MOST you can risk on any one trade. And those should be the trades that tick EVERY box. So generally limit your risk to 1% per trade. Okay so assuming every one of these four trades were trades that met ALL of your criteria, your maximum loss would have been $272 x 4 = $1,880 rather than the $7,000 you lost. I know it is frustrating because you want to make a lot of money, but traders who take too much risk inevitably LOSE lots of money.

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So now you have $10,000, your MAXIMUM risk per trade can only be $160. This should enable you to place the trades you like because the risk is nice and small. Also one final word of caution, if you have say seven trades all correlated you still would have too much risk even if each trade only had $160 risk. Because as you found out last night correlated trades can all go bad at the same time. Think of the $7,000 you lost last night as tuition fees you have paid the market. As you say you will never make that same mistake again so in a few years time when your trading account is large, it will seem like a cheap lesson the market taught you.”

I have a friend who is an FX broker. He has been a broker for more than a decade and he has literally hundreds of traders on his client list. He told me once that he sees dozens of new traders and almost all of them live out the following pattern on a weekly or monthly basis: Small gain, small gain, small gain, small gain, small gain, MASSIVE LOSS. And then he never hears from them again. The reason is simple. These traders load up with positions and in one big move the market goes against them and their whole capital is wiped out. PLEASE heed my advice. Take small amounts of risk.

Cut Your Losses But Let Your Gains Run Whatever markets you trade and whatever timeframes you use, you will frequently get your trades wrong. Even if your model tells you there is a 90% chance of success, the 10% will occur. Broadly speaking there are two ways to make money trading: 1. Sniping (sometimes called Scalping) This is where you take high probability trades (70% or above probability that the particular trade will be successful). When you are sniping you take profits quickly and regularly. Day traders are usually Snipers. © Oliver Hille 2011 – www.TradingBook.net

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2. Trend Trading Take low probability trades (under 50% probability of success) but where the losses are small but the profits on the winning trades are large. In this type of trading you cut your losses quickly but you let your gains run until such time as either: (a) The trend changes; or (b) Your analysis leads you to change your view. Medium to long term traders are usually Trend Traders. I am a trend trader. The only way to make money over a long time period trend trading is to limit your losses and maximize your gains. One of the best ways to ensure this is to: “Cut your losses but let your gains run.” Too often traders hold on to losing positions hoping they will turn around. Even more often traders will take a profit and then watch with dismay as the market keeps on going in the same direction and they miss out on much larger gains. I have been guilty of both of these mistakes. There is also a simple way to let your gains run – using a trailing stop loss. Break Even I can always tell a novice trader. They are concerned with breaking even on a trade when the trade is losing. Critical Principle – Breaking Even is a Terrible Strategy Breaking Even is a terrible strategy for two reasons: 1. If your entry point was correctly set at the break of a key support/resistance level it is almost certain that the market will come back and test the support/resistance level. A mistake most novice traders make is that once they are onside with a trade they will move their stop loss level to break even. Then the market returns to that level taking out their stop, and immediately turns around again and goes in the direction of the trade. It is times like this that the novice trader thinks that “the market is out to get them”. No, it is simply bad trading. © Oliver Hille 2011 – www.TradingBook.net

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2. The only one solitary reason why traders want to break even when they are carrying a losing trade is ego. If you can only break even you can walk away feeling like you didn’t lose. So what? If you are 50 points offside on a trade and you no longer believe in the trade cut it immediately. Holding on for it to move 50 points in your favor is blind hope and most of the time it doesn’t happen. You have to get to the place where you are happy walking away with a small loss. Because a small loss more often than not turns into a big loss, and that really hurts. And practically what does breaking even matter? In a month’s time you won’t even remember your small losses and your profit/loss statement will barely show them. But a big loss because of your ego will stay in your memory and in your profit/loss statement all year. One of my greatest strengths as a trader is that I think of losses as Cancer. The quicker I remove them the healthier I will be. I don’t sit around and hope that the Cancer will heal itself. I operate immediately. Now that doesn’t mean that every time I am offside by 20 points I cut my position. But it does mean that before I even enter a trade I have my stop (exit point) in place. I never move that stop unless it is to protect profits. Also if I have a trade that does not do what I expect it to and I am holding a small loss, I will cut the position and wait for something I do believe in.

Technical Analysis A Technical Trader trades only on price information. In fact a true technical trader could make money sitting in a windowless room with no information coming in except price (and in some cases volume) information. So this means no news, no commentaries, no CNBC, no newspapers, no conversations – nothing except price information. Such a trader relies only on Technical Analysis to make buying and selling decisions. Technical Analysis then is simply the study of price information. I particularly like this quote from Wikipedia: “Traders generally share the view that trading in the direction of the trend is the most effective means to be profitable in financial or commodities markets. John W. Henry, Larry Hite, Ed Seykota, Richard Dennis, William Eckhardt, Victor Sperandeo, Michael Marcus and Paul Tudor Jones (some of the socalled Market Wizards in the popular book of the same name by Jack D. Schwager) have each amassed massive fortunes via the use of technical analysis and its concepts.” © Oliver Hille 2011 – www.TradingBook.net

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The most common format for viewing Technical information is in the form of a picture because human beings process information faster in this format. Thus we have Charts or Graphs. Most traders now use Candlestick Charts. Candlestick charts simply show high, low and close prices in an easily visualized way. Candles that show an advance in the price are green. Candles that show a decline in price are red (sometimes white and black respectively). Before the advent of computers, charts had to be drawn by hand and were very time consuming. Now charts are created in seconds and include huge levels of detail. As with any series of numbers, price information can be analyzed using all different types of statistical and mathematical analysis. Some of the most common Technical Indicators are these: 1. Moving Averages A moving average simply averages the prices in the previous number of periods you are interested in. So for example if you overlay a ten day moving average over a daily chart you will have a line which at any point on that line is the average price of the preceding ten days. It is a lagging indicator which can show a trend change. I find myself using Moving Averages more and more. In order to use Moving Averages as a trend trader I recommend the following: Set up all four of the following simple Moving Averages on your trading platform: 10 period 20 period 50 period 200 period Briefly, if all four Moving Average lines are moving in the same direction, and fanning out (i.e. there is a space between each of them and they are all either sloping upwards together or sloping downwards together) - this signifies a strong trend. You can use this strategy to identify trends on all timeframes. For a more thorough explanation of this strategy please read my blog post on the subject: http://www.tradingbook.org/blog/trending-markets-how-to-get-on-and-not-get-leftbehind/

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While on the page, sign up on the right of the page to get instant notification of future blog posts. 2. Relative Strength Index (RSI) The RSI is a measure of the current and historical strength or weakness of a particular financial instrument. It measure between 0 and 100. In simple terms a reading above 70 shows extreme strength (sometimes considered “overbought”) and a reading below 30 shows extreme weakness (sometimes considered “oversold”). Interestingly William O’Neil notes in his book “How to Make Money in Stocks” that a high RSI score for a stock is a bullish sign. I was fortunate enough to interview J. Welles Wilder the inventor of the Relative Strength Index. You can read the interview at www.TradingBook.org/interviews 3. Moving Average Convergence Divergence (MACD) The MACD shows the difference between a fast and a slow exponential moving average (a type of moving average) of closing prices. Just like a moving average it is a lagging indicator. But it is used to confirm trend changes and the strength of price movements. NB Technical Traders (including me) often use the RSI and MACD to confirm a price move. If the RSI and MACD move at the same time and in the same direction of the price move, and make corresponding highs (or lows) with the price, this adds weight to the expectation of further prices moves in the same direction. 4. Bollinger Bands Bollinger bands are used to measure the relative distance of the current price to its standard deviation (statistical distance) and can be compared to a previous standard deviation from the price at an earlier time. There are three Bollinger Bands consisting of the middle band which is a simple moving average, an upper band which is a specified standard deviation above the middle band, and a lower band which is a specified standard deviation below the middle band. When the outer bands widen out it indicates a trend is underway, and when the outer bands tighten in it indicates no trend is underway. 5. Fibonacci The Fibonacci sequence is a sequence of numbers that continually appear in nature. It has been reasoned and tested that numbers in the Fibonacci sequence are part of price information and therefore form support and resistance levels in © Oliver Hille 2011 – www.TradingBook.net

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financial instruments. Such analysis had become mainstream. It is especially useful when combined with other technical indicators. 6. Pivot Points A Pivot Point is simply the average of three numbers: • The high price • The low price • The close price So a Daily Pivot Point would be the average of the previous day’s high, low and closing prices. The most common Pivot levels are: Daily Pivot Weekly Pivot Monthly Pivot It is uncanny how often such points provide support or resistance to prices. Convergence of two or three pivot points at the same level adds significant strength to the support or resistance. For an example of how to use Pivot Points in your trading see my blog post here: http://www.tradingbook.org/blog/buying-silver-on-the-run-up-could-you-use-aweekly-pivot-as-a-stop/ While on the page, sign up on the right of the page to get instant notification of future blog posts. 7. Convergence It appears that when there is a convergence of different technical indicators pointing to the same or a very similar price point, this does indeed provide support or resistance to prices. So for example a pivot point converging with a Fibonacci level and/or a previous high price or low price, adds strength to the support or resistance of that price level. Critics argue that such convergence is simply a self fulfilling prophesy i.e. it becomes a support or resistance point simply because so many people have identified it as such. © Oliver Hille 2011 – www.TradingBook.net

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These are just some of the dozens of technical indicators available on almost all trading platforms. Every trader develops favorite technical indicators which are usually based on that trader’s personality. I am a technical trader, in fact I have a rule which is on my wall:

Price is King I will only Trade Price

Fundamental Analysis A Fundamental Trader trades only on Fundamental information. Fundamental information is specific news and information that relates to the underlying financial instrument that is likely to move prices now or in the future. So for example if you are analyzing a currency the fundamental information would include: • The interest rate on that currency; • The political climate in that country; • The international capital flows into and out of that country for example imports and exports; • The economic landscape in that country including Gross Domestic Product (GDP), Growth prospects, unemployment, the saving habits of the citizens; • The indebtedness of that country; • And so on… And for example if you are analyzing a stock, the fundamental information would include: • • • • • • • • •

The company’s debt; The company’s PE Ratio; The company’s past growth in revenue and earnings; The company’s dividend policy; The company’s products; The company’s markets; Legislation that affects that company; The state of the industry; The company’s management; © Oliver Hille 2011 – www.TradingBook.net

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• The part of the business cycle the company is in. • And so on… And for example if you are analyzing an agricultural commodity, the fundamental information would include: • • • • • • • •

The countries that crop is grown in; Political situations in those countries; Legislative (e.g. tax) issues in those countries; Seasonal factors; Planting and harvesting statistics; Important weather factors (e.g. hurricane season for Orange Juice); Specific international supply and demand for the commodity; The prospects for the price of the US Dollar (almost all commodities are priced in US Dollars); • Global growth and therefore consumption of the commodity; • And so on…

In my opinion there are only a very few economic analytical geniuses who can hope to master fundamental analysis well enough to really make a fortune. Of these I include Warren Buffett, George Soros and Jim Rogers (who started the Quantum Fund with George Soros). This is the reason there are so many trend traders, and traders who use primarily price information to make their trading and investment decisions. It is my belief that no-one can know every factor that moves market prices, in fact nowhere near every factor. But whatever forces are at work buying and selling, will by definition show up in the price.

Trend Trading One of the most common trading styles is Trend Trading. This is essentially taking a position in the market with the predominating trend. So for the specific timeframe you are interested in, you either join the uptrend or join the downtrend. Trend trading has been around for hundreds if not thousands of years. It is sometimes used in conjunction with trading cycles. The belief behind both trend trading and cycle trading is that prices move in a particular direction for a period of time before changing direction. A trend can be on any timeframe from a one minute trend to a multi-decade trend. There are very few people who do not believe that market prices trend. © Oliver Hille 2011 – www.TradingBook.net

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You have probably heard the saying: The trend is your friend. Or: The trend is your friend, until the end, when it bends! One of the first people to do research and document trend trading was Charles Dow who developed the Dow Theory well over 100 years ago. Since then there have been hundreds of proponents of some type of trend trading system or another. As I outlined earlier it partly depends on your personality whether trading the trend is something you feel comfortable doing. For me, it perfectly suits my personality. I like to try to identify trending markets and just like an escalator I like to ride up when the trend is up and ride down when the trend is down. It is apparent to me that the strong emotions of fear and greed often push market prices well above and well below equilibrium levels. Being a trend trader allows me to ride these prices in either direction without having to figure out what is going on in the minds of other market players. Let me give you an example. For argument’s sake assume the Chinese government has realized it does not have enough Soybean Oil for the needs of its population. It cannot afford to tell the market this because that would immediately lift the price of Soybean Oil. Similarly it cannot simply buy every contract available because this would also dramatically increase the price in a short time. What is has to do is slowly and quietly start buying Soybean Oil contracts. So the price of Soybean Oil starts to rise. As a trend trader I notice this and at a certain point my trading model tells me to buy contracts. My trading model forces me to hold these contracts as the price continues to climb. I can only get out if and when the price reverses. Such massive buying from the world’s biggest consumer of Soybean Oil is likely to lift and support Soybean Oil prices for weeks if not months. I might never know what caused the price rise or I might find out months later, but that is irrelevant. I have joined the trend, and profited. Of course trend trading is only one type of trading, and even within trend trading there are dozens of different systems which use different timeframes and different entry points. © Oliver Hille 2011 – www.TradingBook.net

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And some fantastically successful traders do not trend trade at all. One of my market heroes is Fund Manager Paul Tudor Jones. This is a quote from him: “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”

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Trading Platforms Just a few years ago all trades had to be placed through a real person, a broker. Now electronic platform trading is used almost exclusively for trading, especially in Forex and equities. A trading platform gives you a feed of price information and allows you to buy or sell online. The fierce competition for this business has meant that more and more sophisticated platforms are available and many are free. Some platforms only allow you to trade Stocks. Some only allow you to trade CFDs (Contracts for Difference) or spread betting. However almost all platforms now allow you to trade almost everything from your computer screen: • • • • • • •

Stocks Options Futures Indexes Forex CFDs And so on. © Oliver Hille 2011 – www.TradingBook.net

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Of course as in everything else in life you get what you pay for. Whilst you do get live prices for Forex on all platforms, you usually get delayed prices for futures and indexes and options. Also the charting and the usability of free platforms are sometimes poor. I thoroughly recommend trying a number of free platforms before you commit to one. Also you must phone and email the help desk before you commit. It is critical that you can speak to someone if there is a problem. You also need to check the functionality of each platform. Does it include all of the technical analysis tools you need? Can you easily place stop loss orders? You also need to aware of the margin requirements for each product you are trading. This means how much money you need to have in your account in order to trade a certain size contract. What happens if the position goes against you and you exceed the entire margin in your account? Are all of your positions automatically cut? Finally you also need to be aware of the credit risk of the provider of the platform. So if you put $50,000 into your trading account and the institution becomes insolvent the next day, you may never see your $50,000 again! Know who your provider is and what their credit rating is! The accepted leader in Trading Platforms is Tradestation - www.tradestation.com To use their platform will cost you US$250 per month. So for US$3,000 per year you need to be sure that the advanced functionality and feed is going to improve your P&L (Profit and Loss account) by at least US$3,000 per year. However you can be profitable without paying for a trading platform! Remember 10 or 20 years ago traders had no electronic platforms and people made plenty of money back then without them! I use a free platform that does everything I need it to, Saxo Trader – http://saxotrader.saxobank.com However because Saxo Trader does not have live prices for Futures, Options and Indexes I also use a dedicated Futures platform which my broker provides me, PrimeTrade which is a Credit Suisse First Boston product – http://www.csfb.com/primetrade

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Conclusion Online Trading Platforms now allow you to trade all financial markets from your computer. They are incredibly powerful and have amazing functionality. If you are a beginning or intermediate trader a good free platform is all you need. But ensure that you: • • • • •

Check your broker has a good help line; Trial a number of platforms before you commit to one; Look at the functionality of each platform; Check the margin requirements of your platform; Check the credit worthiness of the counterparty you are depositing your funds with.

Losing Streak Let’s not sugar coat this. Losing money trading is painful. Big losses are gut wrenching losses. Huge losses are turning pale, hand trembling, losing sleep, ache in the pit of your stomach losses! But let’s put losses into perspective: Losses are simply the cost of doing business as a trader. You are going to have losses, get used to the idea. It’s just like a fruit and vegetable shop that has to throw stock out that has gone off. You get rid of the losses so you can put your working capital back into a profitable trade. And let’s put the size of losses into perspective: If your losses or your potential losses are keeping you awake at night or causing negative physical symptoms your position size is too big. Simple, reduce your position size. Here is a saying I love and I know personally to be true: Losses make you stronger, profits make you weaker! Yes, think about that. Losses make you stronger, profits make you weaker! © Oliver Hille 2011 – www.TradingBook.net

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You learn the most in life when you go through challenging times. You learn the most in trading when you have losses. You learn most about your trading systems, and your threshold for pain, and your feelings about money when you lose. So losing can be a very good thing. In fact whenever I take a significant loss I always view it as tuition fees I have paid the market. I analyze the loss, learn from it and strive to improve myself and my trading system so that I do not lose money in the same way again. A lot of top traders say the same thing, something like “The reason I am so successful now is that I have made so many trading mistakes and lost money so many times, that I finally understand what I am doing.” Losses are an integral part of the trading experience. If trading was easy there would be no bus drivers (no offence intended to bus drivers). All Super Traders take losses (usually super losses). Here are some examples: In 1998 George Soros lost $2 billion in Russian Funds when they defaulted. Julian Robertson was the fund manager of Tiger Management Group, which had $23 billion at its peak and $6 billion when it was rolled up (i.e. it lost $17 billion over that period). He lost more than $1b of his own money. Richard Dennis (Market Wizard) ran into a losing streak: In 1987 and 1988, when he was trading as much as $159 million, his net loss after fees was $60 million. And in 1992, when his equity climbed as high as $86 million, he lost $48 million. Mark Cook (Market Wizard) starting trading with a few thousand dollars and by selling options built it up to $165,000 in a few months. Within one month he lost over $500,000; the $165,000 plus $350,000 he didn’t have. Rather than declare bankruptcy he worked two full time jobs for five years to get back to even. Jesse Livermore who made $100m by short selling the 1929 crash was declared bankrupt in 1934! How do you lose $100m in five years??? Marty Schwartz (Market Wizard) has this to say in his classic book “Pit Bull”: “Every trader faces it. Only the winners know how to handle it. The dreaded losing streak rears its head every so often and attacks every great trader. It eats away at your judgment; it saps your confidence. Sometimes it can take you so low that you think you’ll never get out. You’re sure that something has gone wrong, that you’ve © Oliver Hille 2011 – www.TradingBook.net

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lost your touch, that you’ll never be a winner again. When you’re in the middle of it, you think it is never going to end, but mostly, your judgment and rhythm are off and what you have to do is stop and regain your composure.” My Experience In my worst period of trading I had an unbelievable losing streak. I lost money every month (except two small monthly gains) for 16 months in a row and lost 57.8% of my capital. That is easy to write, it is easy to read but it is hell to live through. It wasn’t even the money that was the worst thing. The worst thing is that I was woefully unsuccessful in an area that I thought (and other people thought) I was very successful in. That was a huge blow to my pride. In my book I go through it in detail. But it was a LOT of money. It was my “going broke” trade (a “going broke” trade is a common occurrence among successful traders. It is the trading period after which they finally realize the implications of risk). What can we conclude? If you are going to trade you are going to have losses. If you are going to trade big you are going to lose big. If you are going to trade other people’s money you are going to lose other people’s money. You therefore need to develop strategies for: • Money management in losing periods; • Dealing with the stress of losing money; • Dealing with the loss of confidence in yourself and your trading system.

As a matter of interest here is a list of over 40 people who have lost more than US$100m trading: http://en.wikipedia.org/wiki/List_of_trading_losses

Trading Legends In a way success in any venture is simple. Find someone who is among the best in the world at what you want to be good at and model them. © Oliver Hille 2011 – www.TradingBook.net

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If you want to be a great golfer, model Tiger Wood’s golf swing. If you want to be a great Basketball player, copy Kobe Bryant. If you want to be a great painter, study Monet. If you want to be a great composer, study Beethoven. Exactly the same is true in trading. Top traders are at the top because they followed a particular path. If you want to be a top trader you need to study their habits, their lives and their strategies. Learn from their mistakes and pick up tips and advice from them. Of all the traders I know, no-one has anywhere close to the resource library I have. I have dozens of trading books, documentaries, CDs, DVDs, articles and interviews on successful super-traders. I went through a period when I read a trading book every week. Even now I am always either reading or re-reading a trading book. Just this week I ordered a new trading documentary and I also received a CD set of trading interviews. In 2008 I made over $100,000 in a two month period and it was SOLEY due to reading two books, one on trading commodities and one on the Turtle Trading System (I follow a personally modified version of this system). For a list of trading books I recommend, please see section above “How to Start Trading”. Here are a few of the Super Traders that you can read about, study and emulate. Each link is clickable: Jesse Livermore Paul Tudor Jones Bruce Kovner Ed Seykota Larry Hite William O’Neill Marty Schwartz Jim Rogers © Oliver Hille 2011 – www.TradingBook.net

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Martin Zweig Warren Buffett Mark D Cook Richard Dennis Monroe Trout Barton Biggs Stanley Druckenmiller George Soros Mark Ritchie Welles Wilder Julian Robertson

God and Trading A number of people have asked me about my relationship with God and its impact on my trading. For those who are interested, these are my views: Firstly God is not my “trade picker”. By this I mean that I do not seek divine guidance before I enter a trade and I do not expect God to give me any specific guidance on taking trades. However, my spiritual life interweaves everything else I do and therefore is part of my trading activity. The bible makes it clear that we are able to and in fact should ask God for wisdom: Proverbs 2 v 6: For the Lord Gives wisdom, and from his mouth come knowledge and understanding. James 1 v 5

© Oliver Hille 2011 – www.TradingBook.net

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If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him. So in practical terms one of the things I do in my work life is ask God for wisdom. I especially ask for wisdom for a general understanding of the world as it relates to trading. If I was a teacher I would ask God’s wisdom to teach, if I was a plumber I would ask for practical wisdom, if I owned a corner shop I would ask for wisdom in retailing etc. I believe it is the responsibility of every Christian to ask for wisdom in their vocation so that they can do the best job, but also to be able to build God’s kingdom and make the world a better place at the same time. One of the most successful fund managers of the 20th Century Sir John Templeton summarised his views on God and investing and prayer in his book “The Templeton Plan” as follows: At Templeton, all of the directors’ and shareholders’ meetings open with prayer. But prayer is never used as an aid in making specific stock selections. “That would be a gross misinterpretation of God’s methods,” Templeton says. “What we do pray for is wisdom. We pray that the decisions we make today will be wise decisions and that our talks about different stocks will be wise talks. Of course our discussions and decisions are fallible and sometimes flawed. No one should expect that, just because he begins with prayer, every decision he makes is going to be profitable. However I do believe that, if you pray, you will make fewer stupid mistakes.” Another practical step is to commit my day to God at the beginning of every day. I start my day by reading the bible and praying – specifically to commit my day to the Lord. It is my belief that God has given me an ability to manage and make money. I treat this as a gift God has given me which is the underlying reason for my trading. I believe one of my purposes on earth is to raise money to further the Kingdom of God. Essentially this simply means that I should use a large part of the money I make to do things that I believe God would want me to do. Put another way, I have to think about what God would do with the money if He was in my shoes. Examples are; feeding the hungry, sheltering the homeless, supporting missionaries, supporting churches and those in ministry. It is a biblical principal to give away 10% of what you earn. It is my strong opinion that this is a universal principal much like the law of gravity. What I mean is that the law of gravity applies to all people, regardless of whether they even believe in the law of gravity. The same is true of giving. Regardless of your relationship with God © Oliver Hille 2011 – www.TradingBook.net

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and even your belief in God, if you give at least 10% of your income away every year, God will bless you financially. We even recognise this in our secular society with sayings like “What goes around comes around” and “That will give you good Karma”. Here is what the bible says about giving 10% (a tithe) of your income every year: Malachi 3 v 10 “Bring the whole tithe into the storehouse, that there may be food in my house. Test me in this," says the Lord Almighty, "and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it.” On another subject I do think it is okay to ask God to bless my business and my trading, and so I do ask for His blessing. However I like Bono’s (from U2) quote: “I met a wise man once who taught me that instead of asking God’s blessing on what I was doing, to find things that God was already blessing and get involved in that.” In summary, my relationship with God gives me my reason for trading in the first place; i.e. to raise money to further His kingdom. I also believe that God gives me wisdom in every area of my life if I ask for it. Further it is a universal principal that if you give generously, God will bless you financially. Finally God loves to bless us if we follow Him and do his will on earth. Whatever your pursuits and occupation, these principles hold true.

Solomon Wealth Fund I have been trading my own funds and a small number of clients’ funds full time since January 2007. I have decided to start a fund in 2013. My annual average return over the period 1 January 2007 to 31 December 2009 was 108.78%. I do NOT intend to try for such large returns in my fund, and I outline the reasons below. Starting a fund is for me, the next logical step, to manage other people’s money. In order to learn about fund management I started talking to the most successful people I could find in the industry. I have met with a number of very successful fund managers including one manager with over $20 billion under management and one © Oliver Hille 2011 – www.TradingBook.net

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with over $1.5 billion under management. Incidentally both started with nothing and one is a billionaire and the other is worth $400m. My most interesting discovery is that investors do not want outsized returns! The fund with $1.5 billion under management has averaged a return of 12% per annum since inception! Believe it or not if you can consistently return 12 to 15% year after year with very low volatility, investors will flock to you. However it does take time. This fund started with nothing, finally after a few years managed to attract $10m of investor funds and three years later managed to double investor funds to $20m. Seven years later funds were at $1.5 billion. I heard similar stories from three different fund managers. Needless to say a light went off in my head when I heard these stories! Investors would rather I consistently delivered 15% returns with very low volatility (and therefore very low risk) than 100% return with the huge volatility I have been trading with. I have therefore decided to progressively lower the volatility and returns of the model I am using so that the fund is more attractive to investors. Fortunately making the model less volatile is fairly simple because I can simply reduce leverage and reduce the position sizing, while still taking the entry and exits signals generated by the model. As well as starting the fund, I have also decided to allow investors to use managed accounts. This means that an investor can keep their money in their own account and I am simply given the ability to enter and exit trades on their behalf. In the current climate with frauds and scandals in the news, this gives investors full confidence because the funds are always in their name and under their control. You are welcome to visit the website of the fund but you are required to read the disclaimer: www.SolomonWealthFund.com

© Oliver Hille 2011 – www.TradingBook.net

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Questions and Answers I have been asked a lot of questions by beginning traders over the last few years. Here are their questions and my answers: Question 1:

Do you trade mainly on fundamentals or technical signals?

I used to always form my fundamental view first, and then wait for confirming price action. However my experiences in 2008 have taught me that my fundamental view can be and often is completely wrong! It is simply not possible to know even a tiny fraction of all of the fundamental market information, let alone know what each individual trader is thinking and doing. No-one foresaw the massive deleveraging of assets during 2008 for example. From now on I am only going to trade the technically i.e. on price action. I even have written on my wall: Price is King I will only trade price. The second thing to say is that I ALWAYS calculate the dollar amount of my risk before I enter a trade, and I always have a stop loss. The dollar amount of the risk relates to the total size of my equity. I generally do not risk more than 1% of my total equity (all the money I have set aside to trade with) on my first entry of my trade. So for example if my personal trading equity is currently $350,000, on my first entry I will risk less than $3,500 on my first trade. Question 2: How do you determine your entry, exit as well as Stop Loss points for FX trades? I use chart analysis. I especially like new highs, even better if they are new 20 day highs or new 55 day highs. I also like to see (on a daily chart) a number of higher highs and higher lows if I am going to buy. And of course the opposite if I am going to sell. Question 3: I gather that you add onto winning positions; what amounts do you normally do at a time and when do you add position? I will usually start with a single entry that risks less than 1% of my total equity, and then I will add to that position ONLY when the first position is significantly in profit. Usually this is at a level where my stop loss on the second position is at or above the entry of the first position. I will generally add until I have four positions. I will also © Oliver Hille 2011 – www.TradingBook.net

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generally lift my stop loss on earlier positions as I add new positions. This keeps the risk low. Questions 4: How do you work out your trailing stops? See above. Question 5: How do you decide whether you would use Spot FX or FX Options for your trade? I have found that Options only really work well when there is a very fast moving market, or you anticipate a big move. Also, I only buy options when historical volatility is low because this means the option is relatively cheap and will increase in value if volatility goes up. Question 6: When buying an option, what sort of Strike Prices or period will you be looking at? I personally buy 2-3 months out, and far enough out of the money so the option is relatively cheap. But close enough to the money that if I am right as to the movement in the market, the strike price will be reached approximately one third of the way through the option period. Questions 7: Considering time decay on options, when do you cut your loss for an option? If after two weeks it is not profitable, I am clearly wrong (at least on the timing) and I get out. I may not even wait that long. This is safest because the time decay is the slowest in the early part of the option period. Question 8: Assuming the first option is in your favour; when do you add options (you did mention doubling of the value of the first) and if so, what will be the strike prices and period for new ones? That depends on how quickly the first one doubled. As a general rule I will again look for the same period (e.g. two months) and the same distance from the money as the original option. Question 9: What do you look for as a sign of a trending market? I look for a number of patterns or price action signals. NB These examples are of an upward trending market: 1. A new 20 day high or a new 55 day high; © Oliver Hille 2011 – www.TradingBook.net

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2. An all time high or a multi-month high or a multi-year high; 3. A number of higher highs and higher lows over a number of weeks using a daily price chart (candlesticks). Each high must be higher than the previous one and each low much be higher than the previous one; 4. Bollinger bands; where the bands are starting to splay outwards after a narrow channel has formed; 5. A clear channel in a candlestick pattern that shows an upward trend that does not break out of the channel; 6. A strong MACD signal in the direction I am taking. 7. A strong RSI signal in the direction I am taking. Question 10: When you are looking for 20 and 55 day highs do you judge these off a daily line chart or a Candlestick? Candlestick as it is much more accurate. Question 11: How do you decide if you have missed the entry point? i.e. are you concerned about intraday movements? If so how do they impact your trading or do you buy at the level of that 20 / 55 day high exactly? Can the market go past and come back intraday and you still make the trade? Generally I put my order in one tick or one point above the 20 day high so I get hit as it goes through. If it goes through and comes back I would put my buy order in above the high that it just made, to ensure I am getting it on the way up. If I miss the market by quite a bit I will probably wait for the 55 day high or if there is a period of consolidation, wait for it to break out of that and enter then. Question 12: Do you for example see that AUD/NZD is trending up and get your broker to let you know when that point/high is reached and decide on whether to take the trade then? As I have been keen on long AUD/NZD but I have missed what I would see as a good entry point. I never get my broker to tell me anything! I really only use my broker to execute trades. In other words it is me who sees the price go to a point I like and it is me who initiates the trade. If you have missed an entry point you are better off waiting for another opportunity. Questions 13: Starting out my capital is very small. Do you have any advice as it seems that even a little volatility in a given market it’s very easy to get stopped out trying to only risk 1-3 % of your capital per trade? I guess it’s a matter of being very patient and looking for the Beautiful trades as you put it. Or do you have to accept more risk initially? Or am I better to wait and just build up more capital so that trading risking less is easier?

© Oliver Hille 2011 – www.TradingBook.net

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My view is that you should build good habits now while your equity is small. That way the mistakes you are going to make will be the cheapest. So yes, only risk 1-2% of your equity on each trade. If your stops are too tight leading you to getting stopped out too often, your position size is too big. Use a trading platform to trade smaller sizes even $10,000 trades. Trading $10,000 with at a 2% risk only allows a $200 loss and of course a 2% stop loss position should be plenty for Forex. Question 14: What are your thoughts on long AUD/JPY still looks positive to me. What else do you like in the market at the moment that you are following? Actually I have to be careful because I am not licensed to give specific advice on trades and there are legal issues if I do. My BEST ADVICE is to trade SMALL and WAIT FOR THE BEAUTIFUL TRADE! Question 15: What are your main strengths as a trader? I think my main strength is that I viciously cut losing positions. I think of them as a cancer. The quicker I get rid of them the healthier I will be. Add to that, if I am unsure of a position I immediately cut it as well. If all you have left is hope, get out and put the money into something you believe in, or wait until a trade comes up that you really believe in. ALSO, if you are trend trading as I have detailed above you MUST expect to take small losses on approximately 7 out of every 10 trades on average. The 3 winners will cover your losses and give you big profits. So another of my strengths is that I am happy to take multiple small losses in a row while I am waiting for the big winner. Finally, sometimes the best trading decision you can make is to do nothing. It is far better to sit on the sidelines and wait for a BEAUTIFUL trade, than to try to chase a market that is not working.

© Oliver Hille 2011 – www.TradingBook.net

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My 2007 Trading Diary For illustration purposes here is a summary of my trades for the 2007 calendar year: Total Number of Trades for the Year: Number of Profitable Trades: Number of Losing Trades:

122 51 71

Total Equity at 1 January 2007: Total Equity at 31 December 2007: Total Net Profit for the year: (net of brokerage and carry costs)

$100,000 $271,270 $171,270

Percentage gain for the year:

171.27%

This total profit was made up of the following: Net Profits from Currency Trades: Net Profits from Futures: Net Losses from Precious Metals: Net Losses from Equities: Total

$241,979 $ 8,599 - $ 2,471 - $ 76,837 $171,270

Notes: 1. The first point is that I had 39% more losing trades than winning trades. The reason I was nevertheless profitable for the year is that I cut my losing positions quickly and let my winning positions run. In fact I had two hugely profitable trades during the year. One lasted a few weeks and the other lasted under two weeks. Essentially I made all of my profits from the year on those two currency trades. Incidentally both of these resulted from jumping on an already existing trend and staying with it until it turned. 2. The second thing that sticks out is that I made a huge profit in Currencies and a large loss in Equities. This is partly because I was not disciplined enough in keeping my equity losses small, and partly because when I finally decided to start buying equities, the market turned from being a bull market to being a bear market. I should have been more aware of this and I therefore need to be more cautious going forward when trading equities.

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3. Third, I probably over-traded, which means that I entered too many trades rather than simply waiting for a really good trade. 122 trades is a lot in a year, especially as I took nine weeks family vacation in 2007. This means that I entered 122 trades in my 43 trading weeks. This is an average of over 2.8 trades per week. Given that I trade in trends that last weeks and months, this is too many trades. I needed to be patient and wait for the right trades. My Two Most Profitable Trades 1. Sold the US Dollar against the Canadian Dollar. Total Profit: $100,282 I started this trade with an option over $500,000 that cost me just $2,492. Once that option had doubled in value, I used the paper profits to buy another option. I continued to do this until the market turned. I then sold all of the options and took my profit. 2. Sold the New Zealand Dollar against the Japanese Yen. Total Profit: $156,615 I started this trade with an option over $400,000 that cost me just $6,968. Using the same strategy as above, once that option had doubled in value, I used the paper profits to buy another option. I continued to do this until I became cautious that the market had moved too far too fast. I then sold all of the options and took my profit. Starting small and adding to winning positions is called “scaling in” to positions. The advantage is that if the trade does not go your way, you only take a small loss. Interestingly my two biggest losses occurred when I did not scale in to a position, rather I took a large initial position that turned against me. My Two Biggest Losses 1. Bought the Canadian Dollar against the Japanese Yen. Total Loss: ($41,372) I started this trade with an option over CAD$35,000,000 that cost me a monstrous $123,996, plus brokerage of $3,846 on each side of the transaction. The position started going badly from the start and 21 days later I finally sold out and took my loss. I should not have taken such a huge first position and I should have cut my losses a lot sooner. 2. Sold the US Dollar against the Japanese Yen. Total Loss: ($56,459) I started this trade with an option over US$7,800,000 that cost me a whopping $60,895. Once again, the position started going badly from the start and ten days later I made a foolish mistake and added to my losing position by taking another option over $15,000,000 that cost me an additional $15,517. © Oliver Hille 2011 – www.TradingBook.net

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What I should have done was cut my losses early and I should NEVER have added to my losing position – lesson learned. Both of these losses occurred after I had made big gains and I was flush with cash. I have learned that the most dangerous time for trading is immediately after a large winning period.

My 2008 Trading Diary Here is my percentage gain/loss monthly summary to July 2008: January February March April May June July

-17.63% 168.72% 31.29% -13.62% -25.30% 20.91% -49.42%

Net to this point:

+114.95%

As you can see I had a fantastic first quarter in the 2008 trading year, although I was down for January. The second quarter was mixed but overall down and July 2008 was awful! I made the decision on 17 July 2008 to stop for the year. What actually happened is that I did stop for three full months. I did one small set of trades over late October/early November – long USD. Then I stopped again until mid-December where I did one last set of trades – short USD. I was VERY patient and I waited for the right signal. In mid-December I did a fantastic set of trades (short USD) and made $135,872 in five trading days. The main reason I stopped in July is that I want to preserve my track record and ensure I made over 100% for the year. Remember I had a gain of 171.27% for the 2007 year. I actually made the decision in mid-June that if I got to +200% or risked going below +100% I would stop for the year. As soon as I made that decision I felt great! You could say that it was a waste of three months trading time, but I prefer to think of it as a gift. I really enjoyed my time off. I did a lot of writing, went overseas four times (two of which were family holidays) and spent a lot of time with my family. © Oliver Hille 2011 – www.TradingBook.net

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Here is my percentage gain/loss monthly summary for all of 2008: January February March April May June July August September October November December Total Return:

-17.63% 168.72% 31.29% -13.62% -25.30% 20.91% -49.42% Did not trade Did not trade -1.15% 3.00% 93.53% 210.33%

I also used my non-trading time to motivate myself to trade better. The reason I went down to 114.95% in July after sitting between 130% and 170% for two to three months is that I was trading badly! The truth is, I deserved to lose money in July! The reasons I deserved to lose money during this period are:

1. I stopped Trading the Trend I am a trend trader. That is how I make the bulk of my profits. Other traders make money other ways, but I follow trends. The fact of the matter is that in the markets I trade, there were no good trends from April to July, with the exception of one currency pair – Kiwi Aussie. What I should have done was – nothing! I should have sat on my hands and waited for a good trending trade. Instead I got chopped up trying to trade break-outs that turned out to be false break-outs and then I made the mistake of trading the range. I should have recognised earlier that we were in a range trading market. I should either have kept my trades very small or I should not have traded at all. 2. Overtrading As you will see from the summary below I did 271 trades in just over six months. If I take out the holiday weeks where I was not trading, it means on average I did 11 trades per week, or over two per day! Note that I am NOT a day trader. In fact I am a medium term trader who takes a view over a number of weeks or months. © Oliver Hille 2011 – www.TradingBook.net

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Profitable medium term trades DO NOT occur 11 times per week. In fact they generally occur only a few times per year. Critical Principle Profitable medium term trending trades only occur a few times per year. WAIT FOR THEM. My overtrading mistake is a common one for professional traders. I sit in front of a computer screen all day looking at fifty different financial instrument. Although nothing jumps out at me as a good trade, I often see something that I think I can make money on, and so I take the trade. This is a mistake. There is always going to be something that looks okay if you look hard enough. But taking an “okay” or “quite good” trade is an avenue to the poor house! Funnily enough it was not until a week after I completely stopped trading that I recognised this. While I was in the midst of trading like this I literally could not see the wood for the trees. It didn’t occur to me that I was trying to chase a market that wasn’t there! One of the reasons that the Turtle Traders described in Curtis Faith’s book (see below) traded so well is that they were literally not allowed to take a trade until a prescribed set of rules was met. They played a lot of ping-pong to help the hours go by when there were no trades allowed! I need to do the same thing. I now have a strict set of rules that will only allow me to enter a trade under certain specific circumstances. I know I have a lot of things I can do with the extra time! For illustration purposes here is a summary of my trades for the 2008 calendar year: Total Number of Trades for the Year: (NB This includes multiple entry points for staggered trades. Excluding the multiple entries, there were 153 trades).

342

Number of Profitable Trades: Number of Losing Trades:

155 187

Total Equity at 1 January 2008: Total Equity at 31 December 2008: Total Net Profit for the year: (net of brokerage and carry costs)

$150,000 $465,490 $315,490

In cash terms, beat last year by: Percentage gain for the year:

$144,213 210.33%

This total profit was made up of the following: © Oliver Hille 2011 – www.TradingBook.net

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Net Profits from Currency Trades: Net Profits from Agricultural Commodities: Net Profits from NZ Bank Bill Futures Net Losses from Precious Metals: Net Losses from Equities: Net Losses from Crude Oil Futures:

$180,959 $130,848 $ 7,715 - $ 7,601 - $ 18,277 - $ 21,304

Total

$315,490

Analysis 1. The first point is that I had 21% more losing trades than winning trades (in 2007 it was 39% more losers than winner!). Once again the reason I was nevertheless profitable for the year is that I cut my losing positions quickly and let my winning positions run. In 2008 I had four significantly profitable trades. Two lasted a few weeks each and the other two were short trades. Essentially I made all of my profits from the year on these four trades: One series of Agricultural Commodity Trades; One NZD AUD Currency Trade; and One series of Bank Bill Trades; and One short USD trade. 2. What sticks out is that I made a huge profit in Agricultural Commodities which I have never really traded seriously before this year. I owe all of these profits to reading two books: “Hot Commodities” by Jim Rogers, and “Way of the Turtle” by Curtis Faith. It just shows me how important it is to read, read, read! 3. Once again I had a significant loss in equities. This is an area I really had to improve on because it had been a losing category for me for two years. 4. As I already said, I overtraded. 271 trades in six months is way too many. In last year’s summary I said I overtraded but this year I traded 2.8 times as often!!! I will say it again – great trades do not come up every week or even every month – so what am I doing taking trades that do not look great? Answer: throwing money away. My Four Most Profitable Trades 1. Sold the USD dollar against the Euro, Sterling and the Swiss Franc © Oliver Hille 2011 – www.TradingBook.net

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Total Profit: $135,872 This was the trade that took just five working days in December 2008. The best thing about this trade is that the TOTAL risk on the trade was $2,775. Yes just two thousand seven hundred and seventy five dollars. The reason the risk was so low is that I only started with one position long 100,000 Euro vs USD. I put my stop loss in so that my maximum loss was only $2,775. When that position was profitable I locked in the profit by raising my stop loss and then I took another position. I continued to do this until I had many hundreds of thousands of dollars worth of positions, all protected by trailing stop losses. NOTE CAREFULLY this was one of the best of all of the trades available in 2008. The USD dollar fell 17 big figures (that is 1700 points) in five trading days. That is almost unprecedented and falls of that magnitude only happen a few times in a decade, so do not think you are going to go out tomorrow and risk $2,775 to make $135,000. 2. Bought Agricultural Commodity Futures Total Profit: $122,921 I used a staggered approach so that I started small and increased my exposure as the price rose. I traded a number of these commodities concurrently during February and March and did especially well with Cotton, Soybean Oil, Cocoa, and Soybeans (in that order). 3. Sold the New Zealand Dollar against the Australian Dollar Total Profit: $93,344 I started this trade with a physical (margin trade) position of $400,000. When it became strongly profitable I added a second $400,000 position. When that position it became strongly profitable I added a third $600,000 position. Then when that position was also profitable, I sold all three physical positions and put all of the profits into buying an option over $3m. That option cost me NZ$25,170. Using the same strategy as 2007, once that option had doubled in value, I used the paper profits to buy another option, this time over $2m. I did this one more time and purchased a third option over $5m. At this stage I had options over NZ$10 million. I sold all of my options when it looked like the market had turned, and took my profits. However, after this trade was completed I analysed what would have happened if I had just kept my $1.2m in the physical (cash) position and not sold this to buy options. As it turned out I would have been better off if I had kept the physical positions. The reason for this is that this currency pair moved © Oliver Hille 2011 – www.TradingBook.net

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slowly. Where currencies move slowly it is better to have a physical position because the time value of the option erodes faster than the currencies are moving. Also there is usually a big spread between the price of buying and selling the option and you need to make up that spread during the time of the trade. As I said in the 2007 summary; currency options are best in fast moving markets but not so good in slow markets.

4. Bought New Zealand Bank Bill Futures Total Profit: $45,676 This is a good example of a profitable trade that was easy to see and was very likely to be profitable. Unfortunately it is not a trade that is likely to be repeatable in the near future. Bank Bill Futures are primarily valued in relation to the expectation of the future Reserve Bank Official Cash Rate (OCR). At the time I traded these, the Bank Bills were priced such that a cut in interest rates was not expected until late 2008 or early 2009. It was my strong conviction that the Reserve Bank would have to cut interest rates earlier than that. Bank Bill Futures rise in price as expectations of an interest rate cut increase. It was relatively straight forward to hold these futures over market announcements (which were usually bad) and take profit after the announcement. Unfortunately the opportunity has now gone, but there will be a time in the future when the market is mispricing interest rate policy, and I look forward to that! My Two Biggest Losses Similar to last year my two biggest losses occurred when I took large up-front positions rather than scaling in to positions. When am I going to learn? Answer: now! I have strict rules against this practice now. 1. Sold $1.5m NZ$ against Japanese Yen AND sold $1.5m US$ against the Japanese Yen. Total Loss: $44,594 I started this trade with $500,000 positions in each currency pair and I quickly added two more $500,000 positions in each. This was way too much to have on this trade. Even though I scaled in only when the previous positions were in profit, and I used stop loss orders, when the trade turned around I went from a profit of $20,349 to a loss of $44,594 in one night! So in one night I lost © Oliver Hille 2011 – www.TradingBook.net

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$64,943 which is a ridiculously high level of risk when my starting equity for the year was $150,000. Of course once again it occurred after I had made big gains elsewhere. However it is critical that I limit my potential losses to 4% of my equity on any one instrument. This is also now a rule! 2. Long Crude Oil. Total Loss: $26,488 I made this trade and took this loss in under six hours – ouch! My position size was too big and my stop loss was at a place where everyone else had their stop loss. Consequently I had a slippage loss of over US$10,000. I also (knowingly) traded through the weekly crude oil inventory news release which caused the big sell off and therefore the slippage. Also I was “playing the range” rather than staying with the trend. In other words I got bored waiting for a good trending trade and decided to try to buy it at a low point in the trading range, hoping to sell it higher in the trading range. I am sure there are a lot of traders who are good at trading the range. However, I am not one of them! I should have been patient and traded what I am good at – trading the trend. Trade I Missed There is one glaring trade I should have taken that would have increased my profitability by at least $100,000. I watch around 15 futures contracts and when I get a buy signal I must buy each time and every time. Unfortunately I was too busy in February trading my agricultural commodities to look at Heating Oil. The buy signal in Heating Oil Futures was given in early February and the contract climbed strongly until the end of May. Had I taken it, the trade would have been my second most profitable of the year. The lesson here is that I need to keep looking at all of the signals on all of the commodities I trade. I also need to look for a second entry point if I miss the first entry point. If I had entered in March I still would still have taken 75% of the profit from the trade. Summary 210.33% is an excellent result. However with more discipline it would have been smoother and even more profitable. Also, I had large equity swings from month to month: January February March April

-17.63% 168.72% 31.29% -13.62% © Oliver Hille 2011 – www.TradingBook.net

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May June July August September October November December

-25.30% 20.91% -49.42% Did not trade Did not trade -1.15% 3.00% 93.53%

This doesn’t look good and it doesn’t feel good! I have instituted a new “Preserving Capital” rule as follows: If in any one month my equity falls 9%, cut all existing trades (except strongly profitable trades) and enter no new trades until the beginning of the next month. Having had the discipline in 2008 to stop completely for three months, I realise the huge benefit of stepping back from the markets to get some perspective.

The Perfect Trade Yes there really is such a thing as the Perfect Trade. I am not going to go into detail here, but my book is centered on Creating the Perfect Trade. In the book I have a whole chapter specifically detailing how to create the perfect trade. The perfect trade can be created using a decision flow chart and by adhering to a formula. My book outlines both.

Share This Guide Please share this Guide with friends, colleagues and fellow traders. Please email them this PDF document.

The Main Event – over page. © Oliver Hille 2011 – www.TradingBook.net

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The Main Event How to Make Money Trading. In Good Times and Bad… We all want short term and long term trading success. We all want to: Make Money Trading, In Good Times and Bad…

I’ll be honest, the tips, principles and strategies in this guide are just the introduction. The Main Event is my EBook “Creating the Perfect Trade”. My book will help you avoid many common mistakes and help you make the right trading choices. My EBook “Creating the Perfect Trade” is the place where I have revealed all of the secrets of how you can succeed in trading.

© Oliver Hille 2011 – www.TradingBook.net

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When you visit this page you can register for the launch of my EBook “Creating the Perfect Trade”. Register here:

www.TradingBook.org/launch

I hope you do because I want to make your trading successful and enjoyable. Happy Trading,

Oli Hille PS If this guide has been useful to you, there are two ways you can help me: 1. On my website I have a Tell a Friend page so you can quickly and easily tell your friends about my website which has tons of Free Trading Info and Resources. http://www.TradingBook.org/friends 2. By going to my blog and adding a quick comment you can help others understand why they need to read this guide. Just go to this blog and tell the world what you think of this Trading Guide: http://www.TradingBook.org/blog

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