Thursday, 13 September 2007

Forex CFD Trading Update: August

I haven't posted about my day trading of AUD/USD Forex CFDs for a while. Mainly because it's being done as a hobby rather than a serious attempt to generate income (although a profitable hobby is always nice to have!). I've now been casually trading for almost six months, and there might be some lessons to be learned from my experiences.

I initially started out with $1,000 of seed money, with an expectation of possibly making some small profits, or at least lose it gradually while having some fun. The first month started off well, before ending up with a small loss. The second and third months lost money, and I decided to add some additional funds to my trading account while trying to improve my trading methods to reduce the impact that large losses were having on my overall results. At that stage I had the tendancy to hold onto losing trades in the hope that the market would ultimately behave as I had initially expected when opening a position.

** LESSON 1: Never trade more than you can afford to lose ** If I really couldn't afford to lose more than $1,000 I should not have added in extra funds when my initial $1,000 kitty was nearly depleted. Although I may eventually trade my way back to an overall profit, I'm currently down around $2,000. If I do have a bad run and end up losing the entire $4,000 I've put into my CMC Markets Trading account I will call it quits. A $4,000 loss If I haven't learned the "secret" of making a profit trading Forex by then, I probably never will. It would also be nice to "quit while I'm ahead" if I ever get to into the situation of having made an overall profit. However, if I do end up in the black I'll be tempted to think I now know what I'm doing, so I'll probably keep trading until I eventually lose the $4,000. Mental note to self: if I ever build up an account balance over $8,000 I should withdraw the inital $4,000 capital.

The problem with my intial trades seemed to be that although I should close any trade where the market doesn't behave as I had expected, there is a lot of "noise" which makes it hard to tell a temporary "blip" from a change in trend until after the trend is well established (and I've therefore lost more than I'd like). Cutting losses too early also didn't seem to be an option, as this tends to close out too many trades that, after a small blip in the wrong direction, eventually come good.

I've recently started to trade more conservatively, taking small profits and cutting losses before they get too severe. This seems to have improved my results (I'm up so far in September), but it means that it will take a long time to claw back to my initial account balance.

My goals at the moment are to have more than 50% winning trades, and to keep the average gains made from winning trades larger than the average losses of losing trades (ie. cut losses and let winning trends run a bit longer before traking profits).

** LESSON 2: Only the house is guaranteed to make a profit ** The chart of my trading results also includes a pale blue line which shows what my account balance would be if there wasn't a 2-pt buy/sell spread (CMC Markets profit margin). To the end of August I had paid just over $800 in buy/sell spread to CMC Markets. No wonder there are so many companies competing to provide CFD trading services, and that they can afford to offer "free" seminars, courses and software to attract new clients.

Summary of overall trading results to end of August:
Gain/Loss Winners Losers Avg Win Avg Loss % Win
-$2,367.98 87 151 $ 80.46 -$ 62.04 37%
Summary by month, showing "progress" in learning to trade:
By Month Gain/Loss Winners Losers Avg Win Avg Loss % Win
APR '07 -$ 318.31 6 11 $142.39 -$106.60 35%
MAY '07 -$1,440.95 10 18 $ 64.48 -$115.88 36%
JUN '07 -$1,011.67 3 19 $ 54.57 -$ 61.86 14%
JUL '07 $1,132.73 40 52 $ 71.01 -$ 32.84 43%
AUG '07 -$ 729.77 28 51 $ 89.18 -$ 63.27 35%

I'm hopeful that my monthly trading results indicate some progress towards profitable trading - August was an unusual month due to some large losses when the AUD plunged due to the Sub-prime mortgage worries, and when the Australian Reserve Bank suddenly intervened to reverse the plunge once the AUD dropped below 78c.

There's no great science to my trading - I just keep a look out for apparent trends up or down, and try to buy in to the trend once it's become apparent. Unfortunately while there appear to be obvious trends when you look at a chart in retrospect, they're almost impossible to spot when they're just starting.

The combination of the time it takes to spot a trend, and the buy/sell spread, means that only large movements or prolonged trends are profitable. My results so far suggest that short-term forex movements are largely "noise" and trying to pick trends is a bit like finding patterns in the interference showing on an untuned TV set. Having strung together six months where I managed to guess correctly less than 50% of the time, it will take a lot of months where I average more than 50% winners for me to be convinced that I am doing better than chance. Even if I do manage to improve my trading to be better than picking randomly, it is unlikely that my "skill" will be sufficient to offset the cost of the buy/sell spread, let along the opportunity cost of the time spent trading. The only good news is that I enjoy trading as a recreation.

Copyright Enough Wealth 2007

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