of what type of trader you are is critical to achieving success. Are you entering
a trade as a scalp, a day trade, or a swing trade; or will you look to
expand the trading opportunity as a position trade to ride a long-term
trend? Another reason that I shared with you in Chapter 1 on the various
forex investment vehicles besides the spot forex markets (such as the exchange
traded funds (ETFs) and the futures and options markets) is so
that you can decide which investment vehicle you may want to use to capture
a profit within your risk-to-reward parameters and in the time frame
you expect the market might take to reach those objectives based on decisions
regarding what your objectives and your expectations out of the
trade are or what the time horizon for the market might need to reach
those price objectives. Then you will be able to determine which time
frame to follow, and then you can monitor the shorter-term time frame as
well.
You may think of yourself as just a day trader; or maybe you are a
long-term trend follower. Eventually you will encounter market phases
that may dictate that you diversify your trading tactics. In periods or consolidation
phases, as a longer-term trader, you may need to use short-term
day-trading tactics to cover your operational business expenses. This is a
great time to bring this to your attention because if you are reading this
book to expand your knowledge to learn how to trade or if you are currently
trading for a living, remember that this is a business. You need to
treat it like a business.
Therefore, some considerations need to be made,
such as forming a corporation in order to deduct expenses such as your
computer equipment, your quote feed, your DSL line, travel to various investment
conferences, and continuing education seminars. You should
seek advice from a tax specialist so that you can take advantage of all regular
and necessary expenses as business deductions. This can help you
save thousands of dollars each year. What matters most to every trader
and investor is creating a positive cash flow. After all, it would be horrible
to finally start learning to make money consistently in the market and find
out that you cannot take any expense deductions that could literally save
you thousands of dollars each year.
As a forex trader, let’s see what your total expenses could be: Suppose
your quote feed is $200 per month and your DSL is $50 per month. Renting
a small one-room office could run $500 to $700 per month. Then there are
equipment expenses, such as your desktop computers, a laptop for travel,
monitors and printers and ink cartridges and general office supplies to purchase
and upgrade from time to time, say $2,000. Attending an investment
conference could mean $700 roundtrip airfare, plus $250 per night for hotel
and meals. If you have business entertaining expenses and went to at least
two conferences per year, you could be talking as little as $5,000 to as
much as $25,000 in actual business expenses that can be deducted if you
are running trading as a business.
If you are a first-time smaller investor and decide that trading for a living
is something you have the financial resources, time, and emotional
makeup to trade full time, what business plan do you have in place to protect
the money you make in the market? Where will you put your profits as
a short-term trader? As a longer-term trader, what will you do when market
conditions change according to your system or methods? Not only do you
need to cover your cost-of-living expenses, mortgage payments, or, for
some, dockage fees for the yacht, but you need to cover the business expenses.
The forex market offers an individual a bare-bones means to participate
in the markets on a pay-as-you-go method because there are no
commissions. Forex dealers do provide, as we covered, free charts, quotes,
and news. There are, however, the considerations to cover the bid and the
ask spread each time you trade. So if you are a day trader, consider that if
you trade a minimum of twice a day at 3 PIPs (percentage in points) per
transaction as your cost to enter a $100,000 contract value position, then if
you trade 10 lots each trade, that amount would equate to $600 per day. At
an average of 200 trading days per year (minus personal days, holidays, and
vacation time away from the markets), you need to cover over $120,000 a
year, not including covering the losses on bad trades. My point is that trading
is not free. Therefore, it is important—more like critical—that you explore
all your options and trading opportunities. Now with that said, let’s
see how to use various time frames in your analysis.
The first step is to identify the type of trade into which we will enter. Is
it a day trade, is it a swing trade (which lasts two to five days), or is it a
long-term position trade? Once we acknowledge what our objective is and
what our goals are, then we can narrow our expectations. Let’s assume I
am a day trader. I will generally be able to identify what the average range
for a day is and expect that if I miss 20 percent of the bottom and 20 percent
of the top, then I can expect to capture 60 percent of the average daily
range. My expectations are now for X amount of a given range. Now how
do I start? First, I need to structure my computer and charts to a format
that is conducive to day trading. As we went over in the previous chapter,
using a system that earmaked 40 PIPs profit on a day trade system, some
FX prop traders even set their goals on less that that, for instance, 30 PIPs,
or within a specific time period, such as eight or six bars from entry. You
need to determine whether you are day trading in order to use these parameters.
Let me show you what I use in day trading.
Source: Forex Conquered: High Probability Systems and Strategies for Active Traders
