News from NSFG

Looks like I am not the only one who had a bad February for US stock trades, NSFG had a similar outcome, see news from them:

Okay well by now many of you already now that February has not been a particularly great month for trading. This was primarily due to the First Congressional Testimony by the new Federal Reserve Chairman, Ben Bernanke, on the 15th February.

After this point the market was extremely choppy and range bound. Fortunately the pool account faired reasonably well in this unpredictable market, compared to many other trading results. However this was mainly due to the market being unsuitable to trade on an intraday basis and trades NOT being placed and therefore avoiding the losses. It has still produced our worst monthly result so far at only 5.11% (We are not taking commission this month as we feel we should have performed better).

So February ends on 5.11%, which is in the face of it is not to bad. Ken has decided to stop trading this month, and so no further trades have been taken. He has spent the last few days evaluating his strategy to make sure that this does not happen again, and Ken has added the following comments:
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I have concluded my analysis and evaluation over the last few days of trading and have implemented a couple of changes to my overall trading plan. It appears that over 70% of my losing trades can be found before noon my time so from now on I will move my trading decisions (entries) to later on the day. Also, it appears that in more than 60% of the times I have attempted to re-enter a trade or a move, the outcome has been limited or resulted in a loss. On the (very) positive side there is picking market direction. In more than 86% of my trades I had the correct direction picked out but because of price spikes, choppy conditions or to close stop/losses the trades lost.

My conclusion is pretty clear. These changes will be implemented:

- Avoid trading in the morning.
- Widen the stop 5% more and reduce the position size accordingly.
- Don't re-enter a trade once profit or loss has been realized. Wait for the next swing high or swing low to form.
- Filter out more 'B' trades and wait for the 'A' trades only.

On another note... I have spoken to several other traders these last couple of days and most of them have taken some heavy beatings after Bernankes appearance. Some traders operate with acceptable drawdowns of up to 30% have realized losses of up to 18%. Can you imagine that? We are not even close to that risk tolerance or loss level and even though I sometimes takes these losses we endure very very personal I am confident we will head back in serious green once the market has settled a little bit.

Many have asked what leverage is and how we use it so I have written this explanation that I hope you all will find useful. First, let me start by explaining the basic concept of leverage. Leverage, or gearing as some call it, is a way to increase the potential return (and risk!) of an investment through the use of borrowed capital. This capital forms the margin of the account and is provided by the broker. It can be anything from 50:1 to 400:1 depending on your account type. This means that if you open a $10,000 account and your broker offers 100:1 leverage, you can actually control $1,000,000 of money in the markets. It's usually only mini accounts where brokers offer very high leverage. The usual broker leverage for a standard 100K account is 100:1.

The next big important thing to understand is the difference between Broker Leverage and True Leverage. Let's take a look at our $10,000 account again. If this was a standard 100K forex account and I placed 1 lot in a position this would be a 100,000 contract, the smallest position size available for a standard account. Since my total margin is $1,000,000 I use 100,000 / 1,000,000 = 0.10 of my total leverage. In other words, I use 10:1 leverage instead of 100:1. So this position is NOT leveraged 100 times but only 10 times. This 10:1 leverage is the True Leverage.

From a risk control perspective this is still way to high a risk to place on one single trade so you would usually start with a mini account if you only had $10,000 in start capital. Here the contracts are 1/10th of the standard accounts, only 10,000 currency units instead of 100,000 units. This is also one of the reasons why it is not good to open a standard account and being undercapitalized. Your true leverage become to high and you can quickly be wiped out. The same position on a $25,000 account would only constitute a 2.5:1 leverage and is therefore within the parameters of good risk management.