Anyone Can Learn to Trade
My wife asked me, “Listen, it’s straightforward. If I can learn to trade with you teaching me, you can teach anyone, right?” I thought what a great way in which to write this article. I’m going to explain it in a way that I’m teaching my wife. She’s the one in my mind, and I’m teaching her.
You might have thought, well, why haven’t you taught her sooner? Well, I wanted her to be doing other things, like her day job, and that’s the whole point. Most of you have got day jobs, and you’ve got better things to do.
You’ve got kids to look after or grandkids to play with rather than spend all your time trading. So the ideal person in my mind, to teach to trade, is somebody who’s got lots of other better things to be doing.
They’re not going to be geeks like me. And if I can teach you or if you’re already trading, make you profitable, then that’s my job. Essentially, I’m going to talk about how we’re going to use technology and strategies to increase our trading profit.
This was taken from a photo long before there were Tiers at Bloomberg, where I used to present my show.
The key thing I want to tell you all is the person I’ve in my mind that I’m speaking to, as I said earlier on, is my wife. Why? She’s got a lot of better things to be doing and trading, but she wants to learn. Okay, so that’s it.
The other thing I want to make clear to everybody is we’re not; how do we become a millionaire by tomorrow morning, or how do we buy the Ferrari by the end of the week? If that’s what you’re looking for, then forget it.
This isn’t the article for you, okay? I’m talking about how we learn the skills to gradually get to the difference between rich and poor, usually for most people at £500 a month or $500 a month. Some of you are from different parts of the world, £500 or $500 a month.
No Guarantees in the Market
Now, there are no guarantees in the market. You are not guaranteed an income from the market. If you think you’re going to get rich quickly and be guaranteed an income, forget it. What happens is some months you make more, and you save that for the month in which you earn less, so we’re going to iron that out.
Our ambitions are going to be very modest. Why? Because initial modest ambitions allow us to focus on the skills and not the money. If we focus on the skills and master those, then the money takes care of itself because it becomes a simple issue of just scaling up gradually and slowly.
When I first started out, I didn’t have loads of money, and I had no silver spoon in my mouth. I learned the skills so that I could go to friends and family and say, look, I’ve learned the skills, can you loan me some money? That’s how I built it up. That’s how most people are going to build it up.
The basic principle being if you can make 500, you can make 1000. If you make 1000, you can make 2000. And if you make two, you can make four. I don’t want you to focus on the money.
Don’t Focus on the Money but Skills
So already I’ve said things you don’t want to hear, which is don’t focus on the money, we’re going to focus on the skills, we’re going to start off with modest ambitions, and we’re not going to get rich quick.
I probably lost some of you already, which is good because I don’t want people who are here to gamble or people who are here to be irresponsible because you’re not going to make it that way. As a professional hedge fund manager, I’m telling you how I made it from being a private investor like you guys.
I was at university as a student and then built up the fund. I was good enough that the Financial Times found me, and they gave me a column to talk about my trades each week.
Bloomberg TV found me and said, “We want you on air and not just now and again, we want to give your own show,” and that helped raise the profile so I could set up the hedge fund.
I’m going to teach you the skills that I use and other hedge fund managers like me utilise. Because as private investors, there are a few things you don’t know. If you knew those, you’d be doing a hell of a lot better.
Can you Trade Automatically?
The other thing we’re going to answer is, can trading be done automatically? That’s the reason you’re here, and that’s why there are humans. If it could be done automatically, neither of us would need to be here. You might have heard of EAs and automated trading systems and robots and black boxes. Bullshit.
It can be done if you’ve got supercomputers and hedge funds worth billions who can put hundreds of millions of pounds into the software. Even mine can’t afford that. We can’t afford that. We can barely afford the overpaid staff that we’ve already got.
The point is, we’re going to use computing power but not automate it. We’re going to use it to automate about 90% of our activities. 90% will be automated, and the last 10% will be trade selection, which we’re going to do.
The trades I’m going to talk about, for instance, it’s like a classroom, and it’s like a one-to-one tutorial I’m giving you. Remember your old biology classes or cookery classes? These are the ones we’re going to focus on today.
There are Marks; there’s GBPNZD, EURUSD; we will look at Google, the NASDAQ, FTSE, Apple, Dow, Amazon, and Bitcoin. Those are the ones we’re going to experiment with, and I’m going to show you with those what trading involves.
All of this data is in real-time, and it’s free. Many brokers offer this kind of software, and my job is to give you free stuff. That’s what I used to do in my Financial Times column. I used to tell the traders who followed me, look, this is where you get the free tools from. I save you money a bit like that Money Saving Expert guy.
What I’m going to teach you is, well, I paid my way through university through training. My tutors will know this because I used to get little beeps now and again, telling them what to do in the middle of tutorials. I’m giving you experience and expertise from that, but not just mine.
I loved this as a career. For some people, it is the best entrepreneurial venture they’ll ever do. That’s why I’m passionate about it, and that’s why I do these articles. That’s why I’ve written my 18 odd books.
You can probably see over my shoulder translated into five languages because I love this stuff. I don’t expect you to love it as much as I love it. I appreciate people like my wife. They don’t love trading; they just want it as a means to an end.
Best Entrepreneurial Business
But the reason if you’re looking for a side gig, as they call it now on TikTok if you’re looking for an entrepreneurial business, the reason this is the best entrepreneurial business in the world trading is this. There’s no cost involved. You can start with a demo account to learn the skills to see if it’s for you.
There are no warehouses, no staff, no logistics, no trucks, and no delivery. COVID doesn’t impact it, and it’s as simple as that. The great thing is that with it because you’ve got less risk involved and less risk capital involved, you can start small. You can switch off whenever you want, and there are no contracts involved where you’re stuck forever.
I think it’s the best entrepreneurial business globally, which is why I left being a barrister to do this full time. Trust me, as a barrister; I’m guaranteed to be a millionaire. Why would I leave a profession that guarantees me lots of money to go into something like this?
Because it gives me the three Fs, which are the three Fs of why we do anything in life: fun, fulfillment, and funds, it gives you lots of funds, and that’s the idea, money. So that’s what we’re going to do.
Trading Strategies by Alpesh Patel
I’m also going to give you the strategies, not based on just my experience, what the hell do you care about my experience, but also from the world’s leading traders as it says in my book. Please don’t buy the book because I will give you the best bits in this article. ‘Lessons in trading strategy from the world’s leading traders’: Financial Times – Alpesh Patel.
The whole point is when you’ve got a credible source of data, a credible source of information, credible, proven strategies, which are published, and then on the back of it, people say yeah, this is bloody good, that’s all you need. That’s all you need.
That’s the starting point for any career. That is the starting point for any successful, proven strategy that you mimic, copy, and replicate. We’re not going to invent anything new. In my case, I’m just copying what those traders had taught me when I was at university 25 odd years ago. People like Bill Lipschutz, who’s that guy – he’s in the book, and I’m going to share the skills he taught me with you.
So, all I’m doing is copying and sharing what I was taught. And what’s been published and proven to work and reviewed and endorsed. Warren Buffett was his chairman.
I’m also going to give you straight facts as I do on my BBC newspaper reviews, which you’re familiar with, I’m sure.
That’s my team outside Number 10. I’m good at what I do; that’s what I’m trying to say. I’m not bragging, and I don’t need more pats on the back. I’ve got enough, thank you very much. The reason I’m telling you is that you mustn’t fall foul of the nonsense.
I’ve never come across anybody on the internet, other than names I’m going to give you, who talk any sense about trading. The names I’m going to provide you with who talk sense about trading are David Harding, Winton capital, that’s one.
Jim Simons, Renaissance Technologies, that’s another. I’ll give you many others: Bill Lipschutz, Jon Najarian, Bernard Oppetit, who runs Centaurus Capital, and David Kyte – Kyte Security. There are very few people who know about trading because guess what they all have in common?
They’re all regulated hedge fund managers, and that’s the best proof of the pudding.
Typical Trading Scenario
Let’s start with a typical trading scenario. As I said, I’m doing this as if I’m explaining it to my wife. So what does it look like? The reason why I’m doing this is as if I’m explaining to my wife if I can explain to her, and she’s a busy lady with a job and a kid to look after. Guess what; she does 95% of looking after the kid bit, so she’s got better things to do.
If I can teach her somebody with better things to do, then I can teach anyone. The first thing I’d say to my wife is this. This is what a typical month would look like – you’re not going to be stuck in front of the screen. I don’t want you in front of the screen, darling. I want you to spend time with me if you’ve got it, or on your job, or with our son.
The first thing we’ve got to do with any kind of trading for regular people is to make sure they’re not going to be screen slaves. Also, guess what? Trading isn’t what you thought it was. In this article, if you read things like darling and sweetheart, I’m addressing my wife and not all of you, good people.
So trading is not getting it right every time. This, she found surprising and thought my husband’s a genius. “I thought, Alpesh, if I asked you any question about the markets, you’re always going to be right.” I said, “Nope. That’s not what trading is.”
Because look, this is GBPUSD, and this was done quite a while ago. I did it just like a typical month, and I didn’t want to keep changing this screen because if I keep updating and changing it, then people might say, “Well, you keep changing it each month to show what a typical month looks like. That’s not fair.”
So I wanted to pick something which gave the good, the bad, and the ugly. Anytime you see a green arrow, that means we’ve got a buy entry signal. I’ll explain what that is, and I’ll explain how you can use the same strategy. All we’re doing is riding the big banks’ coattails and the big moves that other people are making, that’s all.
Vital Factors While Trading
I explained to her about certain vital factors that look; there was a small gain there. She was disappointed, and she said, “What? You don’t just make big money all the time?” She still married me. There were some trades where we didn’t get in at the top or out at the bottom; that’s a short trade – Down arrow: short trade.
We got out too early, and we got in too late, yet we made enough money. I said that’s how it happens and look at this same issue there. There it is. That was a small gain, and that we got in too late and out too early but still made money. Same issue there.
Here we missed this whole fall. Well, how good are you, Alpesh? You’re rubbish. No, that’s not just me. That is how it is. We only make high-probability trades. It’s not just that I’m speaking from my whole industry. I’m going to prove it because I’m going to show you slides from some of the most significant hedge funds, and people know what they’re talking about when it comes to trading.
So there look we had a small gain, that’s real life, and she was disappointed. That’s a small gain, small gain, and then we’re losing trades. That was a losing trade. That was a losing trade. I said to her, “Don’t worry, losing trades are small in size, short in duration.”
She said, “Well, if I’m not going to sit in front of the screen, aren’t I going to miss things?” I said, “No. I’ll give you a little plan,” where each day or each week rather because she doesn’t spend every day in front of a screen. She tries to do all the trades in one go. Where you’ll do it in one go, or if you want to do it daily, we try to minimize the amount of time you’re in front of the screen.
She said, “Won’t that make me rubbish?” I said, “No,” because the more time you spend in front of the screen, our research shows, published in the books I’ve written, the more time private investors spend in front of the screen, the more likely they’re going to make low-quality trades out of boredom.
Set Realistic Expectation
I have proof of it published by the FT on that subject. I’m just setting your expectations that real trading doesn’t involve being right all the time and big wins. I wish it did. There isn’t a single hedge fund globally, not even Renaissance Technologies, my role model, AHL, Winton, or Aspect, or Brevan Howard. Alan Howard, another person I would listen to all day long, knows what the hell he’s talking about.
Not anybody, not any of them, or Soros, is right all the time with big wins. Anybody who tells you that they’re doing that they’re lying to you. That’s the main problem with the internet when everything’s bullshit other than the sort of 0.01%, which is why you need to do even more due diligence. You need to know, are they regulated hedge fund managers?
Are they published by the Financial Times? Who is going to do the due diligence? Are they talking strategies from the world’s bloody leading traders? I’m not pushing at the book just to get an extra pound in royalties; I’m doing it because you need credentials now in the age of the internet.
These are some of my paying clients. These companies have paid me to speak to their audiences because they know I pull them in and give them a good education.
That’s mine in Barclays. Now, I’m not doing this to get a pat on the back. It’s because if somebody can’t give you credentials, then switch off.
That’s me on the front cover of various magazines like Investor magazine and Merrill Lynch HSBC. Enough of that.
Please make sure a note of what David Kyte, one of my mentors, one of my advisors, or my gurus on trading, somebody who knows what the hell he’s talking about, said to me we’re here to make money. That’s his words.
We’re here to make money. It sounds crass, and it’s not the kind of thing British people like David would typically say, but when he said that, I thought to myself, why are we embarrassed to say stuff like that? What is wrong with it?
What the hell do you think people work down a coal mine for? For their health? No, they do it to make money to put food on the table. It’s the same principle that we’re doing this.
No Conflicts of Interest
I have no conflict of interest with you, so this is why I show this. My hedge funds are not open to retail clients because no hedge funds are allowed by law to be available to retail clients, and that’s why I have no conflict of interest with you.
We’re only by law allowed to be open to pension funds, sovereign wealth funds, ultra-high net worth individuals, and family offices.
I’m not a broker, so I am not trying to get you to trade through my brokerage. It’s okay to own brokers, but I don’t own any brokers or anything like that. I’m here to teach you how to do what’s right in this.
Finally, I’m not here to give you investment advice one to one because I don’t know who you guys are; it’s accessible to all. It’s not one-to-one financial advice.
She said, “Well, whoa, hang on. You’re telling me that, and yet I keep reading in the news, and here’s bloody Bitcoin at the moment.” I shouldn’t say bloody Bitcoin. A green arrow means that’s when we have to enter. Now, I wish we were told sooner by our strategies, but we weren’t.
Why? Well, because that down, there was a low probability trade at that point, and that was a high probability trade. I explained to her, and she said to me, “Well, wait a minute, I see Bitcoin soaring; how come 70% are losing money?”
When to Buy and When to Sell
Other good points that she made, or I made for her, were, you’ve only got two decisions to make: when to buy and when to sell. If you’ve only got two decisions: when to buy and when to sell, how come 70% lose money? Indeed 50% should lose money, and 50% should make it? “It doesn’t make sense,” she said.
I said, “You’re right. It doesn’t, does it?” Well, wait a minute, let’s look at the upside. That means 30% of private investors without, in most cases, any skill or training are making money. That’s not bad; that’s not 10%. Don’t forget 90% of all businesses globally, 90% of businesses, general businesses, fail within three years. I mean, COVID really has accelerated that.
So if 30% are making money trading, that’s actually not bad comparable odds to any other entrepreneurial venture. She’s a positive kind of girl, so that was coming. She had to be; she married me. So that was one thing I would put out to her. I said, “Well, we’re going to get you into the 30%.” Our job is to get you into the 30%, that’s my first job. I said the first thing, so she said, “Right, what should I do? What should I do?”
And I said, “Well, let me tell you first of all the things you shouldn’t do.” The secret to success in most things in life is avoiding the things you shouldn’t do, right?” Then what we’re left with are the things you should do. Because guess what? 90% of the stuff out there is what you shouldn’t do.
So I told her, “Let me tell you things that you’re not going to do. First of all, you’re not going to follow any other teacher because they’re crappy little teachers, and they haven’t got a clue.”
They don’t know anything, and I said, “Unless it’s Jim Simons unless it’s David Kyte unless it’s Jon Najarian, Bill Lipshutz, or David Harding unless it’s one of those, you’re not following them,” I told her.
The next thing: bad education. We’re not going to be sitting in front of the screen all day, I told her, “Darling because I’d like us to spend some time together or do the other stuff.”
Nor will we be using out-of-date stuff, which, oh god, head and shoulder patterns, which works sometimes but don’t work often enough. We’re not going to be looking at all these indicators and Kagi and Fibonacci and Elliot waves.
Sometimes, they work, and if you draw enough lines on a bloody graph, I can make any random plot look like it has got sense. ‘Fooled by Randomness,’ by Nassim Taleb, an excellent book to read. We’re not going to be looking at things the old way.
As I said, we’re not going to be following anything which says trading academy or trading university or trading school or trading college. I’ve looked at every single one of those, we’ve researched them, and they’re full of shit, okay? Or a trading institute. Ignore it.
Anybody who shows you lots of screens they’re lying.
The one thing we’re going to avoid is this notion that, by the way, when I met the world’s leading traders, what was I? 27 years old? Twenty-two years ago, when I met them, I asked them, “How did you get rich?”
Learning From Hedge Fund Managers
Obviously, that’s what you ask them if you’re standing in front of the world’s leading hedge fund managers, and you’re a student training to be a barrister. Guess what you’re going to ask them? You’re going to ask them, “How did you make money?” Please tell me. My book was the way in, to them and to get access to them.
That was my strategy. And so I asked them, and I was expecting them to say, “Alpesh, you know what we do, we’re really clever. We just get some inside information, and we make some huge bets on a few things. That’s how we did.” That’s what I’m expecting them to say. It wasn’t true. None of them said that.
Don’t Gamble on Trades
Every one of them said the things and taught me what I’m going to tell you. It wasn’t just one of them who taught me one way; all of them were doing the same thing. And that I was shocked and surprised by, in a very nice way.
What they said is actually what they were doing is relatively small trades and making a small profit. I said, “Why? Why can’t you see into the future and see how to make the big trades and do gambles on Brexit outcomes?”
This is what I’d asked them today, “Or make a big bet on the vaccine or whatever.” Their answer was no, that’s called gambling, and you don’t do that.
Also, we’re not going to be taking our profits too early. So these are the eight things we’re going to go through.
First things first, the strategy that works. Very simple, we’re going to be trend following and momentum following. We’re going to be looking for trends in that direction. It’s going to be simple and straightforward. If it’s not simple and clear, you won’t bloody follow it.
There’s going to be a stop-loss strategy to prevent big losses. What’s that strategy? It is this. This is the strategy for stop losses. Yes, we’re going to have some losing trades. A coin is right 50/50. Even if we’re right only 50% of the time, as you can see on the screen there, the 50% we’re wrong, the losses will be small in size and short in duration.
Our stop loss strategy is going to have two aspects to it. Write it down; it is this. The first part is VPS, Volatility-based Position Size, the more volatile the market, the smaller our position size. And VSL, Volatility-based Stop Loss, means the more volatile the market, the further away the stop loss.
If the market is more volatile, the stop loss is further away, but the position size is smaller, so we’re not risking more money. If it’s less volatile, stop loss is closer, and why wouldn’t it be?
Our position size increases because it’s less volatile. On both occasions, we risk losing the same amount of money, which I’ll discuss later. So that’s your stop loss part of the strategy.
There are two parts to the strategy: when to enter and when to exit. One part of the exit is the stop loss, and VSL and VPS are the two parts. On the entry part, we’ll come to that in a second.
80% Profits Will Come From 20% of Trades
Now, look at this. I want you to write this down. 80% of your profits in a year will come from 20% of your trades. That’s just the way it is. Why is that? Because there’s going to be a bunch of winning trades and a bunch of losing trades.
The losing trades will be small losses, and the winners will be some small winners and some big winners. The big winners will be 20%. Why can’t you see into the future? Because I don’t have a crystal ball to make them all 100% winners. Write that down. 80% of your profits will come from 20% of your trades, got it?
You’re also going to use a simple platform. I don’t care which broker you use, and we can talk brokers later, but in your strategy, you’re going to use a simple broker that allows you to buy and sell, okay?
That’s it, buy and sell buttons, stop level, and that’s it. I don’t care about all the whizzy things they’re trying to sell you on; it’s a marketing gimmick. Don’t fall for that. Also, as part of your strategy, I don’t want you trading on the phone. Write that down.
Trade anywhere, anytime
Strategy: you are not going to be trading on the phone. Why? Because you will over trade like those nutters on Facebook all day long, and therefore you’ll make low-quality trades.
You’re going to spend instead a specific amount of time; I’m going to tell you what, at a particular period in the day, looking at specific trades, which I’ll let you know as well.
You need a road map, and you need a business plan. It has to suit you and the hours that you work. If it doesn’t, there’s no point in giving you a strategy just like my personal trainer does, which I can’t follow. So it’s going to suit you.
I’m going to provide you with one which requires the least amount of time. I can give you one that takes all your life up, but there’s no point in doing that. Everything I’m going to teach you on the entry now is what was taught to me by that guy, Bill Lipshutz, so it’s all been published. Now, why would I do this? Why can only hedge funds do it? Well, I’m not the first, and I’m not going to be the last.
Men AHL shares their strategies as well, and many hedge funds do. The scarce resource is not a strategy; the scarce resource is how to raise capital, which is entirely separate. Equally, we will not be gambling despite what you read in headlines on Brexit and so on.
What we’re going to be doing is riding the coattails of moves made by others. While I might talk to you about trading around “deal or no deal” and all the rest of it, I’m merely going to be riding moves provided by others.
What is SELMMA?
Let’s just have a look at NASDAQ earlier. Our strategy involves SELMMA and has stop loss, look that’s the short, and that’s our entry, which is the ‘E’ in SELMMA. E, That’s the entry, so we’ll come to that in a second.
The stop-loss, remember what I said about the stop-loss, the stop-loss has volatility-based stop-loss, so the more volatile the market, the further away the stop loss.
If you want specifics, and those familiar with the Average True Range, you can make it a 2.75, the Average True Range over the last 14 periods. Now some of you’ll say, what the hell does that mean? Well, for most of you, what I suggest is you look at the chart you’re going to put the stock in.
We get the computer algorithms to do it for us, but you put the stop loss at a distance, which is you look at this, and you say that’s noise, and I’m going to put it two and a half times the distance away from what the average noise is – two and a half times the distance of the average noise.
So if it’s moving up, roughly, you just estimated 10 points, then you put it 25 points away. So there’s your stop loss right there, and it’s volatility-based. What you work out is if that gets hit, how much money could I lose? That’s what you’ve got to work out.
Now, wherever the stop loss is that money should always be the same amount you could lose. I’ll tell you what percentage of your total capital that is in a second.
That is probably one of the most important things; it is what all hedge funds do. They use volatility-based stop-losses and volatility-based position sizing. If you do not do that, you are screwed. I want you to write this down as well: Losers add to losers.
What I’m telling you is the top tips of what they do. I had a very short period of time to teach my wife all of this. Losers add to losers; we will never have a losing position.
No hedge fund manager I’ve ever spoken to, whether it is the ones from the books or the ones anywhere else, ever added to their losing positions. I’m sorry, they don’t, so you’re never going to add to it. VSL and VPS, that’s your stop losses.
So we’ve got an entry, which I’m going to come to, don’t worry. We’ve got a stop, which I’ve just covered.
The ‘L’ is limit order and where you take profit. I’m going to come to that in only one second. But first of all, is money management, which is going to be in the business plan.
You make sure that if you have a loss and the price goes against you, you won’t lose more than a certain proportion of your total capital, which I’ll tell you in a second. Trading psychology is a significant problem for people.
And because you’re going to have a process, which I’m giving you now, you won’t need to have the psychological problems that most people have. The final part of SELMMA is adding, adding to winners. You add your winners here, and that’s the secret sauce.
The S and the A are the secret sauce to success, a common characteristic of the most successful hedge funds and the 30% of private investors. I did another book where we took all the research from a few brokers, anonymous analysis, what their clients who were winning were doing.
We searched for where men are doing better than women? Were certain products more profitable than others? I’ll share some of that data in a second. Were certain times of the day more profitable than others? If you held something beyond a specific time period, were you more likely to be a loser than a winner?
We look for all of these factors because if we could get an edge, it was worth it, and I’ll share that data with you in just one second. So we add to winners, and that dotted line is where you add to the winners.
Adding to the Winners
It is the adding to the winners, which is the 20% of trades, which will give you 80% of your profits. Not every trade will allow you to add to a winner because it won’t get down there.
Some of them will be losing trades, for instance, and where’s that dotted line? How did I come about it? Well, that distance from entry to the dotted line is the same from there to the losing position.
You can tell your broker when you get an entry signal and say, I want to put a stop loss here, and I want to buy more precisely the same amount as I’ve initially done at that point, and that’s going to have its stop loss there.
You can tell your broker that it’s easy and takes you three seconds to learn how to do that online. Your broker will even teach you how to do that if you ask them. It’s as simple as that. Why are we adding to winners?
Because and this is something every hedge fund said and every single successful hedge fund does it, most famously, George Soros does it when he broke the Bank of England, winners add to winners.
You don’t, when you have a winning trade, sit there and go, “Oh, that looks nice.” If you were digging in your garden and found oil, you wouldn’t just say, I’ll put a cap on it, and I’ll look for it elsewhere. That’s why when people talk to you about risk/reward ratios, they’re stupid. They’re liars. They’re idiots.
Risk and Reward
Why? Because a risk/reward suggests that you’re putting a cap on your reward. If you’re putting a cap on your reward, you’re going to miss the longer trends. We’re short on NASDAQ at the moment, as you know, from my Twitter earlier on.
If you’re a beginner, write this down. I’ll come to that part, the money management in the business plan section, in a second, I can’t do everything in one go. I know you’re in a rush, but hang on.
The other Aspect with this, which is critical to success, I’m telling you the most important parts, winners add to winners, so we’re going to add to our winners.
If you’re a total beginner, and like my wife is, then I say to her keep that stop-loss fixed and keep that as a take profit or limit order, the ‘L’ in SELMMA, if you are a total beginner.
If, however, you’re an intermediate, so once she gets a bit more confident and she learns this, then I say to her this. Don’t have the limit order, don’t take the profits there, and don’t add to your winner either because you’re intermediate, so it’s too complicated for you.
Trailing Stepped Stop-Loss
But instead, I say have a trailing stepped stop-loss. What does that mean? When the price goes down here and is in a bit of profit, then the stop loss moves down. When it moves, trailing steps if you don’t know what that is, Google it or ask your broker. Not trailing dynamic, okay? Trailing stepped. That’s incredibly important. Again, there’s mathematical research to show why that would work in that particular manner.
The Dow? The Dow we’re long. Yeah, that’s the Dow and what you can see there, and this is live in real-time so that you can see it. The reason we are long the Dow is that we’ve added to it here is simply this. Now, this stop loss has moved up here. The reason we add to our winners is this.
Again, both mathematically something called the Kelly formula and look at it in terms of money management and why you would add to winners. The reason you add to this is you’re willing to risk some of your profits to make even more. 80% of your profits come from 20% of your trades is because you’re adding to winners.
Now, you’re only going to add to winners if you’re advanced. If you’re a beginner, then fixed stop loss and fixed take profit, intermediate, no take profit but a stepped trailing stop loss, and if you’re advanced, then trailing stepped stop loss and add two winners. Got it?
I’ll go through some of this stuff again. I’ll repeat it, but I’m giving you a hell of a lot of information in a little time. I appreciate that, but I want to make sure you get it all in one go. And then we’re going to recap some of it.
So we still in SELMMA need to work out entries. Now, let me tell you what we’re trying to achieve in our trading. Again, just so you’re clear, if something’s at 100 like that, and let me put some ink on here.
Working out Entries
If something’s at 100 and let’s say we think it got 120. For whatever reason, we’ve got a signal. Entry is what I’ve still got to discuss with you; I have not forgotten. I’m going to recap the other stuff and entries, and how do we get them?
How do we automate it? How do we get the computer system to do the work for us, so we only have to trade select the easier trades? And I’ll tell you how we trade select and how you’re going to trade select it in a second. I’m going to give you some rules for that. So you know what to trade and what not to trade.
It should never just use the same strategy for anything all the time and anytime. No, that would require more computing power than your brain and computers have. We’re going to be selective, so we’re going to be know how to trade select.
So entries, let’s say for whatever reason we thought it could go to 120, but it could quickly go to 80. You can do this experiment yourself. Guess what, out of 100 trades randomly placed like that, 50 will go up 20, and 50 will go down 20.
Your net return will be zero before costs. Great, thanks a lot, Alpesh. All we’re trying to do is get you from 50/50 to 60/40 just to have some kind of small edge. What’s that slight edge? What’s going to give us that small edge to tip the balance just a little bit?
Now I wish I could tip it more. If I had a crystal ball to see into the future, and all my trades will profit. It doesn’t work like that for me or any of the funds I’ve mentioned. What we’re going to do is ride on the coattails of those who are already moving the market. How do we find that? I’ll show you how we do it based on what Bill Lipschutz told me.
Meet my Mentor
By the way, just in case you’re wondering who he is, not only was he in the book and a mentor of mine. He was Global Head of Foreign Exchange at Salomon Brothers, which meant he was the world’s largest trader.
Global Head of Foreign Exchange Trading at Salomons made him the world’s largest trader. Saloman’s had an unlimited line of credit or bigger than any hedge fund. He was also a couple of years ago, hedge fund manager of the year.
So even 20 years later, he was just like me. Twenty years later, after first starting, he’s still out there winning the awards. That’s extremely important; you need that longevity.
He said this, “If you’re waiting to be right 80% of the time, you’ll never make it as a trader,” his words, not mine. Don’t take my word for anything because I’m only repeating what I’ve been taught. Any success in my life has just been copying other people; that’s all it’s ever been.
Data on Strategy
Now, I want to share this data with you on the strategy. Some of the things I want you to focus on are these. In the data, we found specific currency pairs with a greater percentage of winning than losing.
Right, so remember this: Average Profitable/Loss per Winning and Losing Trades per Currency Pair. Now you’ll notice with retail clients, they lose in every single currency pair than they gain, but they’re a bit closer on some compared to others.
I’m going to tell you, and we’re not just going to talk about currencies. We’ve seen earlier on that we also talked about other things as well.
We also spoke about Bitcoin, Apple, and Amazon, and we’re going to come back to those in a second.
I’m going to come back to which ones are, therefore, the bottom end of the research, which of these I want you to focus on. I’m will explain to you in a second about trade selection and which ones to narrow down as well.
We found that our algorithms or our strategies work better on cryptocurrencies because the big banks are not causing volatility.
Big banks are like bulls in china shops, they’re running around like crazy doing different orders for different clients, and they’re creating a lot of noise and mess. You want to stay away from what is the most popular stuff. I’ll tell you in a second the part of your strategy and which to focus on.
How much Capital Should You Have?
The other thing you need to know is how much capital you should have. There’s a load of stuff I’ve got to cover in just a short space of time, and that’s why I’m running through it. What we discovered is this. The winning percentage of traders went up as they have more capital in their account.
Now, I’m not a broker, so I’m not trying to convince you to put capital into your account. In fact, I want you to start with no money in the account and just have a demo account.
We found that people with more capital in their account were more likely to be profitable and look at that 43%. When you see all those brokers’ accounts, 70% lose money, and therefore 30% make profits? They don’t break that down by account size.
If you break that down by account size, then what you find is that those with larger accounts tend to make them more likely to be profitable. Why? Well, because the ones with smaller accounts, and by the way, when somebody joins my hedge fund as a trainee and they start with knowing nothing – they’re like my wife, they start off with knowing nothing about trading because they’re cheaper to hire.
It’s easier for me to train them, and it’s a bit like when a football club picks an 11-year-old up and says you’re going to be signing up for us. It’s a lot cheaper to do that than to buy them for 100 million years later. We start with $1,000 of my money on a demo account, and that’s where we get them to train up.
People lose money with less capital because these people are usually trading too large a size and too large a size; usually, if you’ve got $1,000 means £1 a point, whether you’re doing CFDs or spread bets futures or options. It can all be converted into pounds per point, £1 a point.
Now listen to me, there are brokers out there, which will let you trade with 7p per point or 7¢ per point. We’ll talk about brokers at the end of the article. Those are the ones you should focus on. By the way, never a broker out of Cyprus. Never out of Cyprus ever, ever, ever.
I’ll repeat it, ever. Am I clear on that? Because I don’t want to get your email saying to me, Alpesh, I’ve just lost loads of money with this broker, so can you help me? I’m fed up with getting those bloody emails from people who have lost money from brokers out of sodding Cyprus.
If they’re regulated out of Cypress, just stay clear. There might be one or two good ones. What about this one, it’s regulated out of Cyprus? I’ve just answered the question.
Just give the money you were going to give them to charity or to the homeless please this Christmas instead because you’re going to lose it. It’s as simple as that. Now, the reason is they trade too large, so we want to do a 7¢ or actually demo account. That’s the first reason and really important.
That’s not to say open accounts with over $10,000. It’s actually to say it is turning it around, starting with a demo account or $1,000 account, and do 7¢ a point as my wife does. That’s how she’s learning. Why? Because it’s my money I said I’d give her, well it’s hers as well, but to trade with.
Winners Add to Winners and Losers Add to Losers
“It’s not whether you’re right or wrong, but how much you make when you’re right,” which is why winners add to winners and losers add to losers. Even if we’re right 50% time, we’re going to add to our winners.”– George Soros
So I want to do that bit again. See that losing trade? Again and for a third time too. Three losing trades and one winning trade, so you were only right 25% of the time.
I’m telling you this because we could add to the winner, which makes us the money. How relieved am I that I don’t have pressure to be right 90% of the time or 80% of the time, and as a married man, I know that’s important?
I don’t even have pressure to be right 70% of the time because I know winning I’m going to add to the winners when they come, and the losing trades I can patiently wait for because I know my losses will be small in size and short in duration.
How do I know that? Because of the stop-loss strategy I already described. This is one of my apprentices. Now, he has a large position size. Why does he do a larger position size? Gradually, you build up the confidence you get to friends and family, get capital, and gradually build it.
Only when you’ve proven to yourself, you’ve got a consistent track record. You don’t have to prove it to me; you’ve got to prove to yourself that you’ve got the skills like when you drive.
That was a summary again of that strategy. So far in this article, you should have realized that 90% of what you’ve been doing up till now doesn’t work and isn’t going to work ever. Either because I’ve appealed to your logic or proven it through the leading traders’ credentials.
What I want you to do is – and these are the figures I gave my wife. 15 minutes a day in front of the screen, I want you to scan 12 to 20 products. One screen, one trade a day, and 20 trades a month. Now you can argue the toss with me, she didn’t, and she said, “Okay, I’ll do what you say, Alpesh,” as she always does. Well, she wasn’t keen to do more.
Now, thankfully, she didn’t say to me, which annoyingly some people do, “Alpesh, but surely if I bang the keyboard more every day, I’ll make more money magically coming into my bank account.” It doesn’t work like that. If it did, all I’d be doing is getting some 16-year-old to bang my keyboard all day long. It doesn’t work like that.
There is something called quality. Quality trades are few and far. What’s a quality trade? Well, and let me tell you how we’re going to make a trade selection. Not only are we going to focus on, I’m going to tell you a particular group of trade, we also really want ones where the trends adjust smoother.
One Trade a Day
A lot of my analysis is not just based on my algorithms to narrow things down, but it is then to do one final filter check with my own eyeballs, just like driving. You’re not going to put a car on autopilot; I never am. Screw Elon Musk; I’m never putting a car on autopilot. You must be bloody kidding.
I’m still going to have my hands on the steering wheel. I’ll let it do 90% of the hard work, power steering, brake, and acceleration, but mate, I’m going to be the one pushing the trigger on it. Similarly with this, I’ll have one final note when I get an entry and say it looks smooth; it seems like it’s moving upwards, okay, I’m willing to take that, and boom, it happened.
Not because I had some secret formula but because what was happening beforehand here, which I’m going to come to on the entries, gave us the edge. We only need a slight advantage from 50/50, so I’m going to come to that.
Why one trade a day? Well, I’m going to give you the business plan on how that makes you the money. Like I’ve said to you now, major versus minor currencies is what I want you to focus on. Indices, my favorite is, write this down as part of your strategy, DAX. I love it.
I do like trading Bitcoins, sometimes, only when it’s like what I just showed you on the chart when it’s going a lot smoother. In other words, when they’re not bloody talking about it every second of the day. For the other ones I just showed you, take a picture of those minor versus minor currencies. If you don’t like currencies, you don’t have to do them.
Focus on the DAX, focus on some individual stocks as and when they might look good. Apple, at the moment, on the short-term trade, we’re long on Apple. As part of your strategy, please focus on 15-minute bars, 30 minutes, or one hour.
Now, if you’ve got a day job, if you spend 20 minutes in front of the screen, you will get one signal, at least, when looking at those. Now I’ve done a smaller group of ones, but if you’re looking at 12 to 20 instruments, you will get – People get rich. The rich people who get rich in anything in life are because they have a lot of choices.
That’s giving you choices on the screen, but they pick and focus, so one trade through many options. A lot of opportunities, but you don’t take every bloody opportunity. So 15 minutes, 30 minutes, and one hour, how long will those trades last? Well, they close themselves out because you’re going to have the trailing stop, remember?
A one-hour trade will last a few days; a 15-minute one will last about a day if you want a specific number: 2.75 ATR, 14-period ATR. It’s as good as any. Basically it’s the principle that matters about stop-loss that it’s trailing and it’s stepped.
Sometimes, here look, it goes back up, and you lose and you again, it doesn’t matter. That’s the reality of trading. You can’t see the stock on it because it’s off behind the screen down here, but the stop’s down here. We get our computer systems to write it down, and it’s based on the volatility.
Now, you don’t have to do it that complicated. You can just say I’m looking at this; it’s moving 10 points on average over the last 14 periods; I’ll put it 25 points away, two to three times as far away because you don’t get stopped out by noise.
That’s not because there is some magic number. There isn’t a magic number. It is that some things are too close and some things are too far. How do we find it? We found that roughly around those two and a half to three times away is right.
We’d rather get on with trading than pissing around trying to find if it’s 2.6453782 multiplied by pi divided by 3.1412? No. We want to get on with it, so that’s an important principle. The markets are not just open 9-5; they’re open 24 hours a day, it’s essential, six days a week.
Key Trading Tips
We’ve found some of the best times to trade between 8 am and 10 am New York, London, or Tokyo time. If you don’t know where you’re located, what time is it for you? Let’s say you’re in Dubai, when it’s 8 am in New York, Google it.
We still need to know the business plan and the entry, so I’m going to give you that next. The reason I talk about quality and only spending 20 minutes a day is this. Bill Lipschutz let put it this way, “If most traders learned to sit on their hands 50% of the time, they would make a lot more money.”
In other words, it’s about making fewer trades and doing them right than trying to do every thing. The reason people lose money is that they do a lot of poor quality. No, it doesn’t look at fundamentals at all, as you can see, because if it did, I would have said it.
We’re not going to be looking at fundamentals because we’re looking at a 15-minute timeframe. Why would you think the earnings of a company make a difference in a 15-minute timeframe? They don’t.
We’re not going to gamble around the news for the simple reason, if you want to gamble around news when you’re trading, like is there going to be a deal or not, go to Ladbrokes. They’ll give you great odds, better odds than the market would. We’re talking about trading.
When we’re investing, we might look at fundamentals because they work over a calmer period. Fundamentals do not work over a 15-minute timeframe; market supply and demand trends do.
Alpesh Patel OBE
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