Welcome…

ScottWelcome to The Capitalist Trader, where I discuss markets, money, and math, while promoting reason and liberty. I’m Scott, better known around the interwebz as Capitalist, and I’ll be your host.

If this is your first time at The Capitalist Trader, you may want to read about the site and maybe even a little about me and my mission.  Have a question or a comment? Head over to the Contact tab.

I’ve traded several different markets including equities, fixed income, and options since the 1980’s (yep, I’m old).  Since 2004 however, I’ve concentrated on the foreign exchange, or Forex, markets. Many of the trading resources you’ll find on the site relate specifically to Forex.

So come on in, make yourself comfortable and…keep pipping up!

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site | Comments Off on Welcome…

Money Management – allocation by strategy

Greetings!

In the previous post on money management, I discussed the overall allocation of assets across various trading and investment accounts and vehicles. Here, I’d like to drill down a bit and concentrate on money management within a single vehicle. Whether the vehicle is stocks, bonds, currencies, options or whatever, it still may be necessary to allocate funds among various strategies within that one vehicle.

For example, equity traders and investors may want to earmark some funds to value investing and others to momentum investing. Fixed income investors may allocate assets among issuers, durations, and/or credit quality and return. Option strategies abound, so option traders may divide their funds among such strategies as selling covered calls, spreads, straddles, and pure directional speculation.

I’ll use my own forex account as another example. I used to have my account divided into three sub-accounts; one for carry trading, one for pure fundamentally based long-term positions, and one for shorter-term tick density trades.

What this allocation by strategy allows you to do is compare the efficacy of pure strategies with each other. Then, you can decide which to keep using, which to drop, and how much to allocate to each active strategy. For example, when it was clear that my carry trading strategy wasn’t working well, I suspended that strategy, emptied that sub-account, and re-allocated the funds to other more profitable strategies.

More recently, after determining that my other strategies were working well on their own, I combined the sub-accounts and strategies into the combined one that I use today in my day to day trading operations. But when I develop additional strategies, you can be sure that I’ll be trying them out in their own separate sub-accounts first, with their own allocated funds.

So I just wanted to add that little addendum to the Money Management part of my series on trading tactics. As I mentioned before, next week’s post will concentrate on position sizing and risk control within a forex account.

Stay tuned for that, and…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Money, Trading | Comments Off on Money Management – allocation by strategy

Money Management – the strategic triad

Greetings!

This is the first of three planned posts on the subject of trading tactics. I’ll be covering money management this week, followed by risk management and trade management over the upcoming two weeks.

The boundaries between these three subjects are somewhat fuzzy and open to individual interpretation. For our purposes, I’m defining money management as the movement and allocation of financial resources across your entire set of investment and trading accounts. Think of it as how many eggs you have, how many baskets you have, and how you distribute those eggs among those baskets. If all your eggs are gravitating towards one basket, that’s a signal to redistribute!

You’ll have to develop your own money management strategy and rules based on your own situation and goals. Here, I’ll just be describing my own overall strategy as an example. So I’m not recommending that you allocate your funds the way I do. I just want to illustrate why you should think about an overall strategy. In the next two posts I’ll get to the nuts and bolts of specific trading tactics within a forex account.

Any strategy has to start with a goal, so here’s mine: I want to to live well on a stable income from passive investments. This will allow me to spend time doing things that are more important to me than just chasing money and trying to survive. In the words of the villian in “Die Hard,” I plan to one day be “sitting on a beach making 20%.”

Again, your goals may be different, so your strategy will differ too. While I make a distinction between my trading and investing accounts, you may only be interested in one or the other. While forex trading is only one of several different trading activities for me, it may be the only thing you do. Keep that in mind as I describe my own plan below.

Overall strategy

Take a look at the diagram below. My overall money management strategy is based on a triad consisting of employment / business income, trading, and income investing.

In this post on the realities of trading, I stressed the importance of not quitting your day job to pursue a life of trading. Having the relative security of an income that isn’t dependent on your trading prowess helps to avoid those emotional mistakes that plague many traders. When your next meal depends on your next trade, that’s a recipe for disaster.

Notice that in my strategy diagram, everything flows from my employment and/or business income. Obviously this is how I pay my living expenses, but it’s also how I add more funds to my trading and investment accounts. I allocate any surplus funds to these accounts based on (among other things) how profitable they’ve been. Winning strategies get more funding while losers get cut off.

In my case, I have some scheduling flexibility in my job, so as I generate more income from my passive investment accounts, I’m able to reduce my employment hours accordingly. My overall goal is to eventually be generating all of my income from passive investments instead of from employment.

Note also that I’m not planning to draw from my trading accounts to live. For me, trading is an intermediary step between employment and passive investment income. While some might find the idea of trading for a living exciting, it’s a bit too exciting for me. I don’t want to constantly be chasing the next trade in order to pay the rent. So instead, I use the profits generated from my trading activities to fund my passive investments. It’s those investments that will eventually pay the rent.

Finally, did you find where my forex trading fits into the overall plan? Yep, for me, it’s just one of several different trading activites. This illustrates the advantage of having an overall money management strategy. By not keeping all of my eggs in one basket, I can jostle each basket a little harder, even at the risk of breaking a few eggs. In other words, I can take somewhat greater risks in my forex account in order to generate higher returns. That’s because it’s not my only trading vehicle, and a large loss in the account won’t destabilize my entire financial plan. Neither will a sudden regulatory change that restricts retail forex trading, etc.

For the curious, I’ll describe my various trading and investment vehicles in more detail below.

 

Investments

My ultimate financial goal is to build a portfolio of stable, conservative income assets.

In my retirement brokerage accounts, this would consist of taxable instruments like high grade corporate bonds and bond funds. Income equity funds would go into these accounts as well. The reason we put taxable instruments in retirement accounts is because while their nominal yields are higher than tax-preferred instruments, that yield is shielded by the tax advantages of the account.

In non-retirement accounts would go the tax-preferred instruments like government bonds, municipal securities, and Master Limited Partnerships (MLP’s). Oil and gas MLP’s are one of my favorite investments, and I often wrote about them for the Motley Fool. Again, the reason we put tax-preferred instruments in non-retirement accounts is that they have lower nominal yields, so their tax advantages would be wasted in a retirement account.

 

Trading

I allocate funds to several different trading activities based on factors like how profitable the activity is, how time consuming it is, how risky it is, etc. Here’s a rundown of the trading vehicles that I’m currently using, have used in the past, or plan to use at some point.

Equity indices: Over the past few hundred years, the stock markets of the U.S. and other nations have risen steadily, notwithstanding the various famous crashes and panics. So it makes sense to me to have constant positions in securities that track the major indices like the DJIA, Nasdaq, S&P, etc. These can be Exchange Traded Funds (ETF’s) like the diamonds (DIA), the cubes (QQQQ), and the spyders (SPY). Index funds are another alternative, especially if they have low or no trading commissions. This is because I don’t just buy and hold such securities. Instead, I use variants of Robert Lichello’s Automatic Investment Management strategy to trade around core positions in these instruments.

Equities: I trade individual stocks using William O’neill’s CANSLIM method. I’ve found this to be the most consistently successful approach to picking stocks, and recommend the Investor’s Business Daily website to anyone who’s interested in this market.

Options: I’ve traded both equity and index options in the past, but haven’t done it for several years. I consider this more of a complimentary technique than a standalone trading vehicle.

Forex: Since most of the e-books, discussions, and trading tools on the site are dedicated to currency trading, I don’t think I need to elaborate on this here.

Binary options: I haven’t tried trading these yet, but I like the concept a lot. At some point I’ll open an account with Nadex and try it out.

Crypto-currencies: This is BitCoin and other variations on the idea of a blockchain based currency. I’ve had an account at Coinbase for quite some time, which I can use to trade BitCoin, Etherium, and LiteCoin. Because of the volatility of these instruments, they’re perfect for Lichello’s AIM technique.

VirWOX currencies: These are currencies used in on-line virtual worlds such as Second Life. The Virtual World On-line Exchange (VirWOX) facilitates trading in these currencies, all of which can be exchanged for real-world currencies like the U.S. dollar and the euro. I opened an account with a small amount of cash as a fun experiment, and have nearly tripled my money in a little over a year. That’s because this is a very obscure and inefficient market niche. I’m frequently able to take advantage of very wide spreads in certain markets here, just as a market maker would. In fact, I’m often “the whale” in some of these markets. However, there’s limited liquidity in these currencies, so there’s probably a low upper limit to how much money I can make in a given period of time. Also, I haven’t tried making a withdrawal yet, so all may be for naught if VirWox turns out to be sketchy. I’ll probably do a more detailed post on all this at some point.

As I mentioned above, forex trading is only a part of a much wider overall money management strategy. Because of that, I can seek higher risk/reward opportunities in my forex account without jeopardizing my entire financial strategy. In next week’s post, I’ll concentrate exclusively on my forex trading; specifically on the subjects of risk control and position sizing.

Until then…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Markets, Money, Trading | Comments Off on Money Management – the strategic triad

Weekly update – 7/22/2017

Greetings!

The account was up 1.18% this week, bringing the equity to 151% of inception value.  I’ll be starting my series of posts on trading tactics this week, so the first post should be up shortly!  Nothing else to report, so…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site, Trading | Comments Off on Weekly update – 7/22/2017

Weekly Update – 7/15/2017

Greetings!

The account was down 4.23% this week to 149% of inception value.  Last week I mentioned my concern about the volatility in the account due to an issue with my money/risk management rules.  The problem was that my initial entry sizes were based on my maximum allowable risk, but I then continued to add to those positions in later weeks.  This obviously causes position sizes to be much too high.

My fix for that will be to size my initial entry for 1/2 my maximum risk on the position.  I’ll then size subsequent entries to bring that risk up to 3/4, 7/8, and so on.  I’ll provide more detail on this in upcoming posts on trading tactics.

Speaking of upcoming posts, here’s where we stand on site development.   I’ve finished my 3 planned e-books and the “Getting started in Forex” page.  I’ve also finished most of the “Trading Profitably” page, with the exception of the last section on trading tactics.  That section will consist of links to the series of posts that I’m going to write next.  Now that just about everything else is done, I can finally concentrate on writing more substantive posts each week along with these lame updates!

So stay tuned for that and…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site, Trading | Comments Off on Weekly Update – 7/15/2017

Weekly Update – 7/8/2017

Greetings!

The account was up a whopping 15.06% this week, bringing the equity to another all-time high of 156% of inception value.  I’m a bit concerned about the volatility in the account over the past couple of weeks however; you may recall that I had a single week loss of 15% two weeks ago.  This has to do with my money management and risk management rules, a topic that I’ll be writing about in the near future as I build out the educational section of the site.

Speaking of that, I’ve finished the draft and editing of the “Getting started in Forex” guide, but I won’t be publishing it until the other guide, “Trading Profitably” is ready to go as well.  The two guides link to each other, so I want to avoid publishing one without the other.  My goal was to get both up this weekend, but I’m running a bit behind, so we’ll see.

At any rate (fast or slow, like me)…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site, Trading | Comments Off on Weekly Update – 7/8/2017

Weekly Update – 7/1/2017

Greetings!

In a welcome change from last week’s big decline, the account was up 5.48% this week to 135% of inception value.  The short NZD/CAD position went back into profitable territory and I’ve locked in part of that profit with a trailing stop.

I hope to finish the draft of the “Getting started in Forex” page this weekend, so that may be live soon. Keep a lookout for that, and…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site, Trading | Comments Off on Weekly Update – 7/1/2017

Weekly Update – 6/24/2017

Greetings!

The account was down a whopping 15% this week in the largest one week drop since inception. This was primarily due to a reversal from an open profit to an open loss on my short NZD/CAD position.  I know, I know, you’re not supposed to let a profit turn into a loss, blah blah…I get it!  My trading tactics (which I’ll describe in future posts and site pages)  involves giving a position a lot of room to breath, so this happens sometimes.  Anyway, the account value now stands at 128% of inception value.

I’ve begun drafting the pages for the “Education” section of the site, so I’ll continue work on that this weekend.  As always…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site, Trading | Comments Off on Weekly Update – 6/24/2017

Are you ready to start living the forex trading dream?

 

You know the dream, right?  Gazing out at the sunset from your penthouse apartment on the 50th floor of the swankiest building in the city as you contemplate the latest developments in the global markets. After an exhilarating workout in your own private gym, a hearty meal, and a glass of wine that costs more than most people’s cars, you sit down at your trading station. The screens around you glow with information about the economies of six continents as you check the markets. The yen is down but the pound is still holding steady. Your fingers begin tapping the keyboard as you enter the first trade of the night. You know just what you’re going to do…because you’re a trading ninja!

So, ready to start living that dream?

Yeah, me too.

Splash! That was me throwing some cold water on you. Time to wake up. Let’s talk reality.

Sure, you could get there (or to whatever your own personal vision of success is) at some point. But it’s not going to happen overnight, or even in the next year. Not, that is, unless you’re extremely (and I mean extremely) lucky or you’re some kind of super genius. In either one of those cases, you don’t need my help, because I’m neither lucky nor a genius.

What I am is someone who has traded in several different markets (stocks, bonds, options, and currencies) since the 1980s. And I had (and still have) that dream. But what I found is that it’s a lot more work than most people imagine. I found that making consistent profits takes a lot of study and persistence. I found that even if you’re profitable, you can’t live on your profits unless your trading account is worth at least six figures (and mine never was). I found that it’s hard to keep building up your trading account when life keeps getting in the way.

In the late 80s I had a plan for building a fixed income portfolio over a period of 10 to 20 years that would match and eventually exceed my salary as a civil engineer. Except that my engineering job evaporated in a real estate crash that hit the northeast around that time. So much for my dream of being financially independent by age 40.

In the mid 90s, I began building a portfolio of growth stocks that included Novell Networks among others. I liquidated that account to pay for car repairs.

In the late 90s, while working at Fidelity Investments, I began using William O’Neil’s CANSLIM method and his newspaper, Investor’s Business Daily, to pick stocks. This worked pretty well, until another layoff came. I switched to trading Bulletin Board stocks full time and managed to average just under 10% each month. But that wasn’t enough to pay the bills, so that account was eventually gone as well.

Since I discovered retail forex in 2004, I’ve managed to blow up a couple of small accounts during the learning process. I liquidated a larger profitable account when I was between jobs and needed the cash.

And don’t even talk to me about the missed opportunity to be an early adopter of BitCoin.

Get the picture?

I’m not complaining; I’m telling you all this right off the bat to make a few points before we get you started down the road to being a forex trader. If you can avoid some of the mistakes I made, you’ll probably end up getting to that dream a lot faster than I will.

  1. Keep your job and stay financially stable while building your account. If you don’t, being profitable won’t matter, You’ll constantly be emptying out your account for each emergency that comes along.
  2. Be realistic about your trading goals. If you could double your money every month consistently, starting with just $1000, you’d be able to buy the whole planet in less than a decade (that’s not an exaggeration by the way…do the math). That’s not going to happen. As I write this, my trading account is up about 51% over the course of about nine months, and I’m frankly surprised that I’m doing even that well.
  3. Understand that trading, like every other skill, involves a learning process that can often be frustrating. I hope the research and tools on this site makes that process smoother for you, but everyone still has to work through the challenges in their own way. Here’s a great description of the development of a successful trader.

So don’t give up on the dream. It’s very possible to make it a reality. All you have to do is be realisitc about it and be willing to do the work.

So get ready to…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Rants, Trading | Comments Off on Are you ready to start living the forex trading dream?

The CapTraderPro dashboard is live!

Greetings!

The account was up 3.35% this week to a new all time high of 151% of inception value. This was primarily due to the short NZD/CAD position I entered on Monday.

After completing the ordering page for Beyond The Big Mac last week, I decided that I was on a roll. So I went ahead and completed the sign up page for the CapTraderPro dashboard as well!  So head over there and take a look at the sample dashboard.

The CapTraderPro dashboard makes implementing the indicators that I’ve described in my three research reports easy to do, because you don’t have to do all the tedious calculations each week. I do them for you and publish the results on the dashboard each week, along with a detailed breakdown of my own trading activity.  Sound good?  Then sign up, already! Sheesh.

My next project is to build all of the educational pages for the site, after which I can get back to more substantiative posts each week. So I’ll get right on that so we can all…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Site, Trading | Comments Off on The CapTraderPro dashboard is live!

Update 6/10/2017

Greetings!

The account was up 3.67% this week, primarily due to the drop in the British pound after the surprising election results in the UK. That brings the account up to an all time high of 146% of inception value.

I’ve made the third research report, “Beyond The Big Mac — Buying Power Reversal Potential (BPRP)” available on its order page! However, I haven’t finished working on that page yet, and had the wrong button code up there for a day or so.  That’s fixed now.  I’ll finish writing the description on the order page this weekend.

That finishes my planned set of the three reports that describe the research on the three indicators that I use in my week to week trading operation. I have a fundamental indicator (BPRP) as described in this latest report, and two technical indicators. One technical indicator, the Weekly Reversal Potential, is based solely on price action. The other, Tick Density, is based on price action combined with tick volume behavior.

Next, I’ll be building out the subscriber dashboard and the free educational sections of the site.  So stay tuned for that, and as always…keep pipping up!

 

NOTE: As always, comments are closed due to WordPress spambots. However, to comment on this or any other post, just go to my Forex Factory journal.

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather
Posted in Research, Site, Trading | Comments Off on Update 6/10/2017