Unrealistic Expectations


BarroMetrics Views: Unrealistic Expectations

In “Asia’s Best-Forming Hedge Funds“, Bloomberg reported that the best funds averaged around 15.5% with two outliers at 30% and 45% ROI. And these are the best funds for Asia.

Compare this with these expectations: “If I didn’t believe I could make at least 5% per month, I’d give away the game!”.

“And, what would you expect your losses to be?” I asked.

“I don’t believe in losses” was the reply.

The above is an accurate restatement of a conversation I had over lunch with some retail traders.

Let’s have an in-depth look at the retail comments:

  • A 5% monthly return is 60% p.a. far better than any of the Asian funds.
  • The best average loss for the funds was about 8% whereas the retail trader did not expect any losses.

Given the unrealistic expectations of newbie traders is it any wonder over 90% fail at the trading game?


Perception of Reality – The Key


BarroMetrics Views:  Perception of Reality – The Key

Before the blog, a comment on my schedule. I thought I’d have more free time this week. Nope! For example, tomorrow I have medical appointments lined up back to back from 8:00 am to 2:30 pm AEST

So, my blog posting will probably be inconsistent until I have recovered from the hip replacement.


Continuing from the last blog…..

One of the differences between successful traders and unsuccessful is the fact that successful traders align their perception with reality. You will recall that my view of the way we humans interact with reality is “out there as seen by the in here”.

There are three ways humans use their perception:

  • Contextual: the Freud approach…we have unconscious responses built upon previous experiences, especially those from our childhood.
  • Reframe: the NLP approach…..we reframe past experiences, so they provide empowering rather than limiting stimuli.
  • Acknowledge and Accept: the ACT approach….through attention and awareness we accept our feelings so as to prevent the 3Fs (flight, fight and fear) from overwhelming our cognitive faculties. By developing value-driven goals, we engage in value driven effective action – effective because the actions lead to goal attainment.

In a recent session of Ultimate III, I saw just how important is ‘attention & awareness’.

We were running through the process which FX pair we’d trade last week. During the review, the reasons why the USD should prove strong, the AUD, NZD, EUR and JPY weak. The rest I’d rate as neutral.

One student traded the AUDCAD because I recommended it – notwithstanding that I specifically said I’d leave the CAD alone because it was neutral.

It’s important to understand that the student believed that I had recommended the CAD as a possible pair. Luckily I video all sessions, so I was able to check.

Now that was a minor issue. More important is the way this approach when trading – we’d continually reinterpret events to suit our analysis. Then we’d wonder why we can’t make money.

Success is dependent in aligning our perception with reality. The tools we use are attention and awareness to our emotions and behaviour.




BarroMetrics Views: 65%…IF

The stats based on 20 or so years of teaching are unequivocal – of those who begin their journey to trading success:

  • 15% will succeed no matter what. They possess the tenacity and skill sets to pursue their dream, overcoming all hurdles.
  • 18% to 20% will drop out no matter what. They lack the necessary commitment to make the grade.
  • Of the remaining, 67% to 65%, the course and instructor can be one determining in their quest.

So what do the 65% have to do to succeed?

Success is predicated on acquiring the necessary knowledge and skill set. Both require a commitment to do whatever it takes. Not what the trader would like to do, but to do whatever is necessary.

Assuming that commitment is present, what bridge does she need to create between knowledge and skill-set, between theory and practice?

One of the essential factors, and one of the most difficult subjects to communicate, is the need for a probability mindset: to understand emotionally and intellectually that on a trade by trade basis, trading results are random. It’s over a large sample size that our edge manifests.

The easiest way to acquire a probability mindset is to under, emotionally and intellectually, that reality is not just the objective reality but a construct of ‘what’s out there as seen by the in here’.

How to use this idea to attain our trading goals, I deal with next week (no blog tomorrow en route to Sydney; and on Wednesday and Thursday, I want to address the US elections).



Boundless 2 – Structure


BarroMetrics Views: Boundless 2 – Structure

Success in any endeavour requires a structure, a repeatable process that over time garners the results we week. In endeavours other than trading, some or all of the structure is externally driven. Trading is the only activity I know of where the structure is solely internally driven.

So what does this structure look like?

The best one I know of, at least at this stage, is the ACT model (Figure 1). Yes, I have written about it on more than one occasion – just search for ACT, and you’ll see the various entries. So, I won’t go into the model here. What I’d like to do is to consider the question: why is it that although we know the model helps us achieve our trading goals, we fail to execute its practices?

Among the participants of UIII, almost all have completed the left-brain aspects – they have completed the value elicitation exercise, they have formulated their SMARTER goals.

Where I see resistance is in the daily revision of their goals, and in the ‘right-brain’ aspects:

  • Daily mindfulness exercises or meditation.
  • Applying tools to ensure conscious awareness of when diffusion is required.
  • Learning to accept (intellectually and emotionally) the realities of the market –
  1. To win, we need to have a probability mindset.
  2. That risk and loss are an integral part of the game.
  3. The degree our trade preparation and trade management are effective is the degree to which we will be successful.
  4. To be aware of and manage our Default Futures
  5. Finally to prevent our hard-wired fight, flight and fear responses from taking control and sabotaging our decision-making process.

It’s important to note that I use words the ‘3Fs’ and not ’emotions’. The distinction is intentional and necessary.

The works of Antonio Damasio and others have clearly established that emotions are necessary for optimal decision-making. It’s not our emotions but the 3Fs that are the enemy.

And the best way to do that? My solution: accepting a state which I call ‘being comfortable with discomfort’ – with the key word being ‘accepting’. We can feel the discomfort, but our actions need not be guided by it.

So, if you feel your results could be better, have you looked into ACT? And if you have read or talked about it, to what extent have you put its ideas into action?






BarroMetrics Views: Boundless

The market’s greatest gift – the reason why I love trading so much – is also its strongest curse: the market offers boundless opportunity for profit and loss. We, and only we, decide whether this trade will be a profit or loss.

Think of it:

  • Who decides when to initiate a trade? We do.
  • Who decides when to end a trade? We do.
  • What do we need to make a profit? We need only buy at a lower price than we sell.

Success is dependent only one person – we or me. And to succeed, we need to design a set of rules.

The first reason we need to create rules is to protect us from the damage we can do to ourselves (Money). The second is we need a set of rules to guide us towards the consistent success we all desire (Method).

Most newbies focus solely on finding the system that generates profits without loss – without realizing that losses are the entry fee to the game of trading profits.

And even if we have a Method that makes money over a large number of trades, human nature is such that we only have to strike a series of losses for us to stop executing consistently.

Now add to that is the knowledge that  our Method may no longer be operational under current market conditions and you have an understanding why 95% of traders fail.

So how do attain the success we seek? More tomorrow……

No Reason 2


BarroMetrics Views: No Reason 2

  • ‘Once the reason for a trade is gone, exit’.
  • What’s the best trade? ‘Being wrong and not losing money.’

These are among my two favourite sayings by Pete Steidlmayer. In today’s blog, we’ll see both principles in action.

Figure 1 shows the USDCAD setup:

  • The Rule of 4: on the 4th attempt at an extreme, the odds favour a successful breakout. If the breakout fails, expect the start of the move to be breached. In this case, the extreme is 1.33650 and the start, 1.3005.
  • The reason for the trade: because of the Rule of 4, I was expecting a valid breakout. For this to be true, we should not see acceptance below the FTP (yellow rectangle) low (1.3318).

The early morning manipulation first saw a breakout. So, now it was time to enter.

I enter on a retest of the FTP zone. I decided to reduce my position size to 50% (because of the pattern I mentioned in ‘No Reason‘). I had my stop below the start of the latest 1-d swing directional move (1.3226).

After entry, the USDCAD broke below and accepted below the FTP low at 1.3325 – the price action negated the assumption behind the valid breakout. For this reason, when the pair rallied, I exited the position at breakeven.

So, what now?

The trade is still on with a slightly lower FTP low (1.3368). My process:

  1. I wait for a valid breakout;
  2. Then I look for a retest of the FTP within
  3. (Usually) 6-16 bars (of the execution timeframe) of the breakout.

Let’s see what happens.







BarroMetrics Views: Hurdles!?

Unsuccessful traders face two major hurdles to their success:

The first I first learned from the late Mark Douglas, the Four Fears:

  1. The Fear of Missing Out.
  2. The Fear of Leaving Money on the Table.
  3. The Fear of Being Wrong, and
  4. The Fear of Losing Money.

Insidiously, the four fears set us up for failure. Imagine this: “We’ve just missed getting long by a tic or two. It then immediately roars up without us. We sit there stunned as the market keeps moving parabolically up – a humongous move and we are not aboard!”

So, the next time, with this memory fresh in our mind, we just jump in ……sure enough, this time, the trade goes against us, and we suffer a larger than normal loss.

In both trades, the market triggered at least one of the four fears. In the first, the fear of losing money and fear of being wrong and in second, the fear of missing out.

The second hurdle:

  • Seeking to control what is beyond our control – usually the outcome of a trade; and
  • Ignoring to manage what is within our control – usually our behaviour.

Successful trading requires a merging of our intellect and emotions – that’s the Holy Grail of trading – the road to profitability. But, newbie traders instead focus on a mythical holy grail method that does away with losses. The claims in my email inbox to the contrary, no such method exists (and if it did, would it be sold to you?).

Consistent profitability comes from producing a win rate x average dollar win greater than a loss rate x average dollar loss. And, we attain this positive expectancy when:

  •  we have a method that possesses a statistical edge,
  • marry the method with a money management approach, and
  • execute it on a consistent basis.

Pete Steidlmayer’s success equation remains as true today as when he penned it:

Market Understanding x ‘YOU” = SUCCESS

So how are you the ladder of success? Are you overcoming the two hurdles? If so, how did you do it? Care to share?

Success: Single Most Important Ingredient!

  • On BarroMetrics Views: Success: Single Most Important Ingredient!

“By the students, the educator is taught.”

Modern research is unequivocal – success comes from developing our ‘inner voice’. And developing that inner voice is to ensure compatibility between a trader’s Method and his MIND.

By that I mean to trade successfully you need to melding your intellect and intuition.

For example, for the discretionary trader, he is constantly drawing a line between being wrong and losing money on the one hand, and on the other, missing out and leaving money on the table.

To resolve the conflicting fears, we need both our intellect and intuition.

The tools we use are:

  • Intellectually: stats – MAE ( Maximum Adverse Excursion), Positive Expectancy Return, etc.
  • Emotionally – learning from our experiences to accept outcomes outside our control, e.g. the result of any individual trade.

The resulting experience provides insights into our behaviour – insights essential to our trading success.

The problem most newbies encounter is this: they are unawareness of the role of the MIND. They tend to jump from method to method, looking for the success that eludes them – not realising that part of the solution is within.

If you aren’t experiencing the success, your skill and knowledge deserve, perhaps you have not developed your Inner Voice?

Preparation and Prevention

BarroMetrics Views: Preparation and Prevention


Yesterday again proved the value of in-depth preparation for a trade.

I had been stalking the AUDUSD for around 10-days. Finally, the AUDUSD moved into my sell zone with momentum divergence on a 60-minute chart.  I also had determined the lowest price I was prepared to initiate the trade, where my stop and first exit target was going to be.

I turned to the 5-minute for my setup and entry. And just as my entry bar appeared to be forming, my home PC dies!

I had to:

  • Boot up my IPad Pro
  • Connect to the office PC via GoToMyPC (needed the AccuStrength service)
  • Logged in to my entry platforms (first time on Ipad Pro).

Luckily, the pair had not moved too far from my theoretical entry. So, I executed. Only problem?

I had set up the Dec AUDUSD CFD and not the FX pair!

Now Dec is an illiquid month. So, I immediately exited Dec (loss $250.00) and re-entered an FX position at .7674 (optimal entry .7684). The whole exercise cost me about 11 pips.

The point is that but for knowing my levels, especially the minimum price I was prepared to accept, the boo-boo with Dec may have cost me so much more.

The moral of the story: I ask the attendees to my courses to spend some time visualizing their trades:

  • Where they will be entering.
  • Stop placement
  • Target exit, if any.
  • What can go wrong? Plan and see their response.
  • What can go right? Plan and see their response.

Most times, the visualization does not come into play. But sometimes, like yesterday, it proves its worth. How about you? How do you prepare for your trades?


You, the Market and the Times



BarroMetrics Views: You, the Market and the Times

If ever there was a time when trading skills were required, it’s NOW!

For some time I have been of the view that a Black Swan event will shake the stock markets’ belief in Central Banks.

All over the world – from the US to China, from Europe to Japan – stock prices have divorced from the economy, and aligned with ‘easy money’.

Once this belief – that central banks can defy economic laws – is shaken, the central banks will be unable to prevent a correction that has been ten years in the making – ever since QE began in 2007. 

The question is how many retail traders are ready to meet the challenge.

In one sense, trading is relatively simple: buy lower than you sell. But, as my mentor, said: “The devil is in the details”.

Pete Steidlmayer’s equation for success was: You x Market Understanding led to success. The problem is both are difficult to come by.

Self-awareness, given human nature, is difficult because there is pain involved. Pain is seeing ourselves with all our flaws; and pain, if we elect to change.

Market Understanding is at least as difficult. There are so many conflicting ideas on how to interpret and respond to market information: from mechanical approaches to the esoteric ideas of Gann and Elliott.

What’s a trader to do?

Firstly recognise that our end of month statement, over time, will reflect the state of our knowledge and execution. If we execute consistently and fail to produce a positive return, our market understanding is at fault. That we can change.

But, if we fail to execute consistently, then we don’t know if it is the lack of consistency or our plan that is the reason for the losses.

So, the first steps are:

  1.  Formulate trading rules,
  2. Execute consistently, and
  3. See if, over a large sample size (30 trades), we generate a profit.

In this trial period, trade small. I recommend trading micro CFDs and FX where 100 pips will be only $10.00.  Once you have proven to yourself you can make money, you invest more capital.

So, where are you on the road of success – still flaying about seeking for that easy (doomed to failure) road to riches? Or are you ready to work for your success? Only you have the answer.