Mark Carrington, an ex management consultant firm owner from Sydney, is a Spot FX and Forex Options trader who began trading after seeing what his fund manager was doing and decided he could do a better job.
In the show Mark reveals
- How his trading psychology changes when he trades Forex Options
- Why he considers Forex Trading a “Zero Sum Game”
- Three signs psychology is affecting your trading
- How to find a market’s equilibrium and why you want to find it
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- Anecdotally, 90% of traders lose 90% of their capital in 90 days (Mark validated this with FXCM and found their rate to be 80% of traders)
- Excellent traders win 60% of the time so 40% of the time they are wrong. You can make money as a trader if you get your risk/returns right if you are wrong 50% of the time
- With Forex Options the strategy and trades were the same, but the psychology is different
- There are basically only two brokers that offer Forex Options globally, IG Markets and Saxo Capital Markets
- Any action that happens in any other market in the world appears in the Forex markets first, allowing you an added advantage in other markets
- The art of charting is to understand where the buyers and where the sellers are – start with the monthly and draw horizontal lines in where the major reversals are, step down to the weekly and draw a couple of lines in there that were not shown up on the monthly, then draw in the major trendlines on the weekly chart, then the daily and the most important trendlines along with any horizontals that you’ve missed out on – those lines tell you where the buyers and where the sellers are. They also tell you where the equilibrium is – markets like to find equilibrium and it’s always going to be somewhere between those two line.
- If you can understand where your equilibrium point is, that’s where your opportunities are because the market is always going to come back to an equilibrium
- Use Fibonacci lines because they can be programmed into computers and the algos are using Fib lines in their robots
- Do not trade on Monday’s or Friday’s and also take the days of that the Bank of Japan, ECB and the FOMC are meeting.
- He’s in control of 20 different trading strategies
- He’s honest that his Forex trading isn’t great at the moment (after 5 years)
- He’s breaking even in his Forex trading over the past 2 years
- He also uses a robot that has traded for 3 years and it was breakeven
- He puts a trade on and his phycology can’t deal with being wrong (as a trader he doesn’t like to be wrong)
- He opened an Fx Options account with $25k and two years later his broker forced everyone to close their positions resulting in a $150k gain
- He only trades on the Daily time frame and break outs that retest (so breaking out of trendlines and channels)
- He only has to look at it once a day
- Sometimes he’ll scale in once he’s comfortable with the direction – he’ll increase trade size and step down to a lower time frame like the 4 hour chart and find when the pull backs are happening on that chart to pick his point to scale into the trade
- He’s looking for a few months to two years from an FX Options point of view
- He looks for a “trade compression” and a break out
Mark’s written answers
Tell us a bit about you personally and what first attracted you to trading?
I have just turned 60. I qualified as a lawyer and as an accountant. I worked for 30 years as a management consultant. My last job was as a partner in a management consulting firm which I started with a few friends and grew in 6 years what our main competitor did in 50 years. When we sold Mitchell Madison Group in 1999 we had grown to 85 partners and 750 staff working in 16 offices all over the world. I had outsourced the management of my portfolios (with the exception of a small technology portfolio and my Australian portfolio) to a global funds manager. There were 3 things that bothered me about the way they managed the portfolios
- They did not manage currencies well
- They mostly ran a buy and hold approach with a touch of rebalancing (e.g., I persuaded them to buy Apple. Peak holding of Apple shares was 2050 shares – all they ever did was sell Apple shares because the portfolio was unbalanced. )
- They sold out during market crashes (mostly 2000 and a little in 2008)
I got into Forex Trading because I wanted to understand forex better so that I could take a more planned approach to managing the currency risk in my portfolio. Context: almost all my assets were outside Australia and AUD went from $0.50 in 2000 to $1.10 at its peak. No matter what my underlying portfolio performance was I was not doing well in AUD terms.
I got into trading other instruments (and I now invest and trade a full raft of instruments) because I wanted to learn how to invest in more than equities and fixed interest and I wanted to learn how to make money when markets went down as well as when they went up.
Can you give the listeners some insight into your trading?
So I have been trading forex since March 2011 – so a little over 5 years. During that time I have gone through 3 major sets of training and can now trade upwards of 20 different strategies. Quite frankly my forex trading is not great. It is better than the 80% of traders who lose 90% of their capital in 90 days. I did make a big dent in my first trading account losing half my account in the first year and dribbling away another third in a few months after that. In the last 2 years performance has been better than breakeven but only just. So if you believe that trading is a zero sum gain, my account shows that. In that time I have also invested a fair amount of time in training trading robots. My own robots are showing the same sort for performance – without intervention they basically break even. I have also outsourced 3 portfolios – one for an extended period of time and 2 more recently. They are not doing any better – one has lost 25% over a 3 year period, one has lost 10% in 6 months and the other has not made 1% yet.
I have been trading other instruments actively now for coming up 4 years. This has developed from investing in technology stocks and Australian shares to a mix of investing and a mix of trading across multiple markets and multiple instruments. The time horizon for most of this longer term with a growth strategy though I do use shorter time frame vehicles in parts of the portfolio (e.g., CFD’s and Options for leverage)
Your trading style, strategy, time frames, ave. trade duration, % winner’s, typical risk reward ratio, typical yearly/monthly return, number of instruments you trade, maximum/average number of active trades, typical drawdowns you experience… those sorts of things.
The real problem is I have not yet found a trading style that matches my psychology. Taming psychology takes some hard work and insights that are hard to grasp. I may just have pinned mine down in the last few weeks. I have a very strong intellect and I can remember detail – I can remember the detailed rules for almost every one of the 20 trading strategies that I know. That means I can find a trade setup on almost every chart that fits one of those sets of rules. FIRST mistake – trade setup is not about fitting a setup to the rules it is also about finding the reasons NOT to take the trade. SECOND part of my psyche is I do not like to be WRONG. This is a tough nut because for an excellent trader you are wrong 40% of the time. And you can make money being wrong 50% of the time. Now it is perfectly fine to be wrong if you know how to manage that state of mind. THIRD part of my psyche is I do not like to see losing trades – then I start to take actions – closing losing trades early; tightening stop losses too early or too tight; cutting winning trades early.
So I have done two things
- Focus on smaller strategy set and on one timeframe.
- Use FX Options as my preferred trading vehicle
On 1 – Basically trend trading on the Daily – looking for continuations or reversals off a convergence of trend line; horizontal levels (of the weekly or monthly) and Fibonacci levels. Trade entry is on the daily though I will work on a 4 hour or a 1 hour chart inside a confirmed trend. Confirmation using MACD mostly though will use RSI or Stochastic. Trades are typically running 2 days. Aiming for Risk to reward of 1.5 to 1 though with my trade psychology this seldom transpires as I tend to cut the winners early – aiming for break even fast. I run a strong risk management approach of no more than 3% at risk at any time and starting with 0.25% trade size with some scaling in. So that lands up at no more than 5 or 6 trades though it can reach to 10. I trade all pairs and Gold and Silver. Bias at any time will be driven by a view on fundamentals – so the canvas changes quite a bit.
On 2 – this is a completely different approach. Trading strategy is to identify fundamental trends and look for compressed trading ranges and then aim for breakout trading. Time frames are as long as one can find. I use two trading platforms. At Saxo Capital Markets, they offer a carte blanche service – choose a strike price and an expiry up to 12 months out and they will make a price on most of the major currency pairs. At IG Markets we have to request specific contracts to be made up 2 years out and they will then make a market.
It is best to describe the approach by looking at examples. Identified a number of big trend changes
- JPY weakness in late 2012 (traded through all the crosses)
- AUD topping out May 2013 (traded especially long GBPAUD and short AUDUSD)
- Oil – came across this by accident (GBPCAD; USDNOK; USDMXN; USDRUB; EURRUB)
- China Devaluation (USDCNH)
Timeframes are as long as one can buy to start off. Once price moves through a strike I tend to roll to the next strike level for 3 or 6 months out. This manages the exposure to trend reversal. Approach to risk is totally different too. Risk is defined – pay the premium and total loss is know. Looking for 100% returns. Best returns have been 6 or 700% – certainly made that on RUB and short AUD and short JPY. In the current market this is a little harder because the implied volatility on forex trades has risen hard. What I do is allocate a percentage of my portfolio to this strategy – typically 5 to 10% and then place trades in $250 to 500 trades.
For the most part trades have been standard options trades – buy a call or buy a put. In the current market I have been doing a few more spreads (i.e, buy a Call and sell a higher strike Call) because the implied volatility is higher. I have also done a few diagonal spreads where the bought call is further out in time than the sold call.
Currently in my two year account I have 40 trades open with 12 currency pairs driving 3 ideas (USD strength; China Devaluation; JPY devaluation). In my 12 months account I have 13 trades open in 8 different pairs running 3 basic ideas (USD strength and over-reaction to Brexit and China devaluation). Of note in these accounts is currently only 3 of these trades are in the money but I do have time on my side. So if it stays that way drawdown will be say 80%. Good news is I am now working on someone else’s money and I have limited this strategy to between 5 and 10% of my portfolio.
What does your typical trading day look like?
Given that I am based in Australia, the majority of trade action happens after hours.
My day goes like this:
- Turn on Sky Business and Bloomberg to see what has happened overnight in US markets (playing while I do breakfast and drink coffee)
- Update all prices into my portfolios and account for stock trades triggered overnight
- Review FX opportunities and identify potential trade opportunities for the day
- Review ASX opening and place any short term equity trades
- Go for a bicycle ride.
- Review market status on Bloomberg and Sky Business at lunchtime.
- Do other things for the rest of the day
Once a week I have a review of opportunities for other market areas – this is a constantly changing feast of looking for undervalued situations and for overvalued areas.
I also participate in a Coaching program once a week. My coach covers off a weekly review of major macros factors affecting the markets. This gives me a base to work from –
In the beginning, what made you different from the average mom or dad trader out there?
I have met quite a few mom and pop traders during my training processes. I liked to think that my intellect would help – I am very analytical and can process large amounts of data. This has not really played out in the way I expected – many of my fellow trainees have done better – not many though are still going. I guess the difference is I started with a large capital pool and did not commit an undue share of it. I certainly found in the training rooms that I absorbed the ideas and techniques really fast. Has that helped? No not really because I have tended to jump in and then jumped from idea to idea rather than cementing anything really solid in place. The key trait that I have is I do not like being WRONG and I react badly to a trade that goes the negative. The key thing I have changed is moved to a trading approach that defines what the maximum loss is up front and go from there. Premium is paid – the money has left the bank account – it can only get better. I am now working on a different approach – once a trade is heading in the right direction, explore scaling in. So that when I am RIGHT, I get better than a 1 to 1 return.
If you were a retail trader working a day job, what steps would you take to start earning an income as a trader?
Work out how much time you can commit each and every day – set that time aside.
Set aside an amount of capital that you can definitely afford to lose.
Get proper training in technical analysis and trading psychology with an accredited trainer.
Find one strategy in one time frame and master that. Choosing that strategy will come from a mix of time you can spend, time of day you can spend it and your trading psychology. You might get lucky to find the strategy that fits with you on a demo account BUT my advice is not to declare victory until you have mastered your trading psychology with real money.
Every time you are about to place a trade, write down the reasons not to take the trade. Pay heed and take fewer trades
Add more capital and build into a business
Can you explain to the listeners your preferred trading strategy, the ins and outs of how it works and why you choose this type of strategy over others?
This is a bit like the search for the Holy Grail – I am still searching. For example, I have spent quite a lot of time in the last month looking at Harmonic Patterns a’la Scott Carney as a way to spot reversals.
However, for FX Trading, I would say breakout and retest is my preferred approach. What I am looking for is a price that breaks through some levels and comes back to retest a level – then I want to trade because I have confirmation of the direction of the trade and I have a defined stop loss strategy. My charts have 3 sets of lines on them – trend lines (from weekly and daily); horizontal lines (from monthly and weekly and sometimes the daily) and Fibonacci lines from the last move. As an options trader I like breakouts – I do not have to concern myself with the retest because I will use the length of the contract to get me past the risk of a false break
If you split your trading up into technical vs fundamental, what would that split look like?
This is a conundrum question and it has different answers depending on the instruments I am trading and the vehicles I am using. I like to think I lean in the direction of fundamentals – trading in the opposite direction is a reason NOT to take a trade. Will I take a fundamental trade if the technicals are not right – YES. That said, I have lost quite a lot of money trading forex when I have leaned too far in the direction of fundamentals. I think there is value in asking a question a little differently. There is a third factor which drives markets strongly – SENTIMENT. Every trade that I have lost in the direction of fundamentals has failed because I did not read the sentiment right. I try to trade with the fundamentals always (for FX trading say 60%) – which way is the currency supposed to be going? Then I will assess what the technicals are telling me (because they tell me more about setup than they do direction). For spot trading I am increasingly making sure the technical set up is right.
Diving a little deeper on fundamentals, what 3 things would you recommend a novice or intermediate trader educate themselves on?
For every currency pair build a grasp of economic drivers:
- Relative interest rates
- Terms of trade – i.e, balance between exporting and importing
- Capital investment flows and relative dividend yields – eg how important the stock and bond markets are
- What the relevant central banks are doing.
Diving a little deeper, thinking about any price chart, what 3 things would you recommend a novice or intermediate trader educate themselves on when reading a chart?
Identify where the buyers and sellers are and what is the natural area of balance. This is quite simple really.
Horizontal Levels Take a monthly chart and draw in horizontal lines for each reversal on the chart (I make these yellow). Do the same on a weekly chart and mark in any weekly reversals relevant to the current price that are also not a monthly level (I make these green). Sometimes
I also add in the daily (I make these red)
Trendlines Draw in on the weekly the main underlying trendlines (trend line is 3 touches to the tops or bottoms of the bars). Draw in on the daily the most recent trendlines (I tend to draw these on the closes rather than the highs and lows)
The buyers are hiding below the lines and the sellers are hiding above the lines. Market equilibrium will be the line closest to the middle
Understand Fibonacci Draw in the most recent Fibonacci retracement from high to low or low to high. This tells you where the market is likely to make the next turn (I like to look for reversals in 0.5 to 0.786 range).
How long did it take you to go from trading newbie to consistently profitable trader?
Stopped losing money after 3 years
What’s your favourite entry setup?
3 types of Reversals – swing high or swing low; high or low test off a level; engulfing bar (becoming a hot favourite)
What strategies do you use to exit and manage active trades?
Stop loss until breakeven – move on two successive bars in the direction of the trade or on a reversal – then price target based on risk reward or a Fibonacci extension and stop losses moved to swing low or swing high. For stock trades I use Bollinger Bands
What’s your recommended “must read” trading book?
Trading in the Zone by Ari Kiev – trading psychology is key.
If there was one thing you would recommend any retail trader spend the next month mastering, what would it be, why and how could they go about mastering it?
- Understanding where the buyers and sellers are lurking and where market equilibrium is
- Ignoring the media
What trading related internet resource do you always use?
This will surprise you. Tradingview.com – it delivers any price in any market on demand. Price action tells me what is going on. I use Bloomberg.com a little but I do not follow it slavishly. I watch it on TV a little but do not have it on in my trading room.
What’s the biggest mistake most retail traders make?
Overtrading – master the art of REASONS NOT to make a trade
What’s your preferred broker and trading platform?
I use several . Cannot say I have any real preferences. I do al my price analysis on Tradingview.com – it gives me real time forex prices at much lower cost than eSignal (which I did use). All my trading is done on MT4. For forex options, I go directly to Saxo Capital Markets – excellent service and great product.
If you could leave our listeners with one piece of advice what would it be?
Take 2 days off a week – do not trade on Mondays before London opens and on Fridays when traders go for beers at lunchtime
We’d like you to give us the “bones” of a full trading strategy – the entry setup, stop loss, take profit targets, market, timeframe… Something our listeners can try out at home?
- Breakout and Retest – Daily
- Setup comes when price has broken through a level (could be a horizontal line or a trendline and better if it is both) and has come back to that same level to retest.
- Entry comes when price action shows a clear reversal (ring high or low; low or high test; engulfing bar). Enter by stop order above or below the entry signal bar. Confirm with a Fibonacci level of 0.5 or 0.618 or 0.786 – so no trades on daily on 0.38). I like to confirm MACD is in the direction of the trade (above zero for long and below zero for short)
- Stop loss goes below the reversal (I like 13 pips on a daily)
- Clear out 3 reasons not to take a trade 1. News in the next 24 hours for either pair plus the Fed and ECB. 2 No other levels in the way 3. No divergence on MACD or RSI
- Take profit – set at 1.5 risk return initially.
- Trade management – aim to get to breakeven as first priority. E.g., move stop loss for every reversal (ie. a lower low for long and higher high for short) and every 2 consecutive bars in the direction of the trade. Once past breakeven, you can set a target based on the next levels or a Fib extension or by trailing stops behind each ring high or ring low
- Scaling in is possible – do this on reversals on the 4 hour chart (but stop loss stays at the main stop loss level because you are still trading the daily.
What’s the best way for traders to get hold of you?
Twitter @go4forexprofits or http://go4forexprofits.com or Skype carrinm