Why is it that very few traders succeed in the Forex trading environment while the grand majority of traders fail to achieve success? Although there is no hard answer to this question, there are a few things that will put you one step ahead and will definitely put the odds in your favor.

The main purpose of this article is to guide you through some important aspects of Forex trading. But in a different way, instead of telling you what to do or the best way to do it, it will tell you what to avoid. Sometimes it is better to identify the main drawbacks on a discipline and then isolate them so we have the best results at a certain level of development.

The search for the Holy Grail
Many traders spend years and years trying to find the Holy Grail of trading. That magic indicator or set of indicators, only known by a few traders, that will make them rich in a short period of time.

Fact: Well, there is no magic indicator, nor a set of indicators that will make anyone rich in a short period of time. The main reason of this is because market changes, every single moment is unique. Every Forex trading system will fail from time to time. Our work here is to find a Forex trading system that fits our personality as traders, otherwise the trader will find it hard to follow it.

Looking for Easy Money
Unfortunately most traders are attracted to the Forex market for this reason. Mainly because of the publicity showing or rather trying to show how easy is to trade and make money in the Forex market.

Fact: Yes, it is very easy to trade, anyone can do it. It is as hard as one click. But the second part of it isn’t that easy. Making money or achieving consistent profitable results is hard. It requires lots of education, patience, discipline, commitment, and this list could go to infinite. In a few words, it is possible to have consistent profitable results, but definitely it is not easy.

Looking for Excitement
Some other traders are attracted to the Forex market or any other financial market because they think it is exciting to be a trader.

Fact: Yes, it is very exciting to trade the Forex market. But if this is the main reason you are still trading the Forex market, sooner or later you will discover the most expensive adventure you have ever known. Do some thinking on it.

Not Using Money Management
Most traders forget about this important aspect of trading. They think they shouldn’t be using money management until they achieve consistent profitable results. They totally forget about the risk side of trading.

Fact: Money management allows your profits to increase geometrically, but also limits your risk on every single trade. Money management tells you how much to risk on each trade. Using money management is a must if you want to achieve your trading goals. By using money management you make sure you are going to be able to trade tomorrow, the next week, month and the following years.

Not Being Psychology Tuned
This is one of the most underestimated subjects when it comes to trading. One of the main principles of financial markets is that the price of each instrument is based on the perception of each individual participant “the crowd.” In other words the price of each instrument is determined by the fear, greed, ego and hope of all traders.

Fact: Being aware of all psychological issues that affect the decisions made by traders will definitely put the odds in your favor

Lack of Education
Education is the base of knowledge on every discipline. As lawyers and doctors require several years of college until they get their degree, Forex traders also require long years of study. It is better to have someone experienced to guide you through your trading, since some information could take you in the wrong path.

Fact: The market teaches us invaluable lessons on every single trade made. The process of education for a Forex trader could take for ever. That’s right, we never stop learning. We should be humble about the markets and our knowledge; otherwise the market will prove us wrong.

These are some of the most important barriers every trader faces when trying to trade successfully.

Trading successfully the Forex markets is no easy task, it requires a lot of hard work to do it right, but with the right education, you will put yourself closer to your trading goals.

Trading requires time in a couple of ways. The first is the time dedicated to developing a trading system. This can be thought of as a one-off thing, but in reality it is more an on-going process. Once a system is in place, time is required in terms of monitoring the markets for signals, executing transactions, and managing positions. How much time all these different elements require depends on the trading system. The trading system, in turn, needs to take in to account the amount of time the trader has available.

With that in mind, the first question to be answered is how much time each day/week/month (whichever is most appropriate) can you dedicate to the various requirements of trading and managing a trading system? Different trading styles require different time focus. As a rule, the shorter-term the trading, the more specifically dedicated time required. A day trader, for example, runs positions which are opened and closed during the same session. This normally means a lot of time spent watching the market for entry and exit signals. An intermediate or longer-term trader who holds trades for weeks or more does not have to dedicate the same amount of time to watching the markets. He or she can usually get away with only spot checking from time to time. Of course there is a whole array of possibilities in between.

At this point it is also important to consider distractions. There is a major difference between having 6 hours per day of uninterrupted time to watch the markets and having 6 hours of time during which you will be making and receiving phone calls, having meetings, and otherwise not being able to focus on the markets and make trades when required. In the former case one could day trade. In the latter, however, day trading would probably be a disaster as the trader would most likely miss important trading situations on a frequent basis. This sort of thing needs to be taken in to account.

The basic decision one has to make is in what timeframe the trader can reasonably expect to operate on a consistent basis. The individual must be able to do all the data gathering, research, market analysis, trade execution and monitoring, portfolio management, and any other functions required of her or his trading system. That means a trading timeframe has to be selected which allows the trader to handle all of these duties without the kinds of disruptions which can cause poor system input from the user, and therefore poor system performance.

If we were to spend some time speaking with others about what a trend is, we would likely get a range of different answers. Below are some potential answers you could encounter when asking others...

A trend could be spoken of as...

1. A price move in the market over any specific period of time.
2. A series of new highs and higher lows or of new lows and lower highs.
3. A favorite trending indicator showing a long or short signal.
4. An upmove or downmove.
5. An Elliott Wave formation.
6. An astrological occurrence.
7. A fundamental news item.
8. My stockbroker’s next hot tip on a stock.
9. My coin flipping strategy.
10. My throw-a-dart-on-the-“stock” board strategy.
11. The price that a psychic has pinned the Euro to go to in 1 week.

While some are humorous, some foolish, and others technical, which, if any, is correct? Well, if we decide to enlist our dictionary for assistance, we come to this definition:

The relatively constant movement of a variable throughout a period of time. The period may be short-term or long-term, depending upon whether the trend itself is shortterm or long-term. For example, a rising market is taken to mean that prices of most stocks are in an upward trend.

Clearly, number one is the closest choice and a neat fit to the definition provided in the dictionary. Trends may be relatively small or may be relatively large, but all trends have some amount of price movement. In a nutshell, trend following is trading on the idea that a some price movement in one direction could be the start of a bigger price move in the same direction.

To illustrate the basic idea, please look at the following diagram:
Start Price (Day 1) End Price (Day 7)
(A) Time Period (B)

where (A) is the current price, the price now, and (B) is the price after some time elapsed.
Referring to the diagram above, note that although the start price and the end price are 2 different prices, they are not necessarily the lowest prices nor the highest prices that the instrument traded at during the specified time period. Below are some sample prices of a mock stock ABCD over a 1 week period. Each price represents the closing price for one day of the week:

Day 1: $20.00
Day 2: $21.00
Day 3: $21.00
Day 4: $19.00
Day 5: $18.00
Day 6: $22.00
Day 7: $28.00

First notice that for a 7-day trend to have occurred, the closing price on Day 1 must be different from the closing price on Day 7.

Trend = Price at End of Time period - Price at Start of Time Period must be >0

So, $28.00 - $20.00 = $8.00 and $8.00 is > $0, so we have an $8 uptrend from the close of Day 1 to the close of Day 7.

More importantly, notice that the price on Days 4 and 5 went below the closing price on Day 1. Therefore, although a trend occurred, but the closing price on Day 1 was not the lowest price during the week. Under the concept of trend following, you believe that a price move in one direction could be the beginning of a larger price move. If you intend to buy on the close of Day 1 at $20 and it falls to $19, you have a temporary loss of $1. Even though, in this case, you know that the price on Day 7 closes at $28, what if you did not know the closing price of Day 7? Would you presume it to be $28? If you have not read the publication on making decisions, please read it.

In this example, if you did not know how Day 7 shall close, and the price drops to $19.00, you should assume an upward price pattern is wrong (whether temporarily or not is not important). When you choose to buy, you expect prices to rise from either the price you bought it at or from a price just slightly below where you bought it at. If you exited the trade at $19 knowing obviously you are either temporarily wrong or permanently wrong, you can always repurchase the stock if it crosses above the current highest closing price of the series to ensure the pattern of prices is resuming upward motion.

Therefore, you should repurchase stock ABCD at a price greater than $21 which would be $21.01 . As long as the stock ABCD traded at $21.01, and you closed the trade at the close on Day 7, you might realize a profit of $6.99 per share. Please note that the actual trend is greater than what you could have collected actually buying and selling the stock. Moreover, you also sold out of our position once, incurring a $1 per share loss. Please notice that there was actually a loss incurred. Losses are generally incurred when a trend has price action against our position causing our upward or downward pattern to be broken.

Here is the price sequence of the week. We anticipate an upward pattern and buy at $20:

$20 , $21 , $21 , $19 , $18 , $22 , $28

Note that the underlined prices invalidate the upward pattern because each consecutive price must be greater than the previous price. Therefore, the pattern is wrong, and we must conclude that the pattern is unknown. But if the price goes above the last high price in the sequence, we can claim that the pattern could have reverted to an upward pattern and place another trade at $21.01 with the hope that the sequence over the remaining period of time turns out to be upward.

In review, trend following is the hope that a price move in a direction could be the beginning of a large price move in the same direction. Trend following is an important concept for the professional investor to understand. Market Speculators utilizes only trend following strategies when trading clients’ monies. We at Market Speculators intend to provide clients with knowledge they need to understand our core beliefs to build a strong business relationship. Market Speculators takes the timely burden of trading a market for clients that is generally active 120 hours of the week. Market Speculators intends to provide a profitable vehicle for investing to those individuals seeking capital preservation and appreciation without having to devote countless hours to a market in which the vast majority of traders reportedly lose in.

Thank you again for reading this publication. Please read our other publications to learn more. We at Market Speculators are dedicated to the preservation and appreciation of your invested capital with us. Please consider having us manage an account for you!

Options provide great position management and risk control potential when using them to trade the market directionally. This goes beyond the simple fact that a long position in a call or put option has an absolute maximum risk equal to the cost of the option (plus commissions, of course). That, in and of itself, is a very useful thing. What this article discusses, however, are a couple of handy little things one can do while holding an option position to maximize the return and keep the risk well constrained.
Roll Up/Down
Most traders are familiar with the concept of a trailing stop whereby one moves their protective exit as the market moves in favor of the trade. This is used to lock in profits. The same thing can be accomplished when one is trading options rather than the underlying. This is done by rolling one's position up or down strike prices depending on whether the trade is a long using calls or short employing put options.

Here's a recent example from the author's own trading.

A long position in Seagate Technology (STX) was initiated when the stock was trading at around 21.50 using the March 22.50 call options. They were purchased for $0.80. The market rallied over the next few weeks, eventually moving up above $24. At that point, a roll-up was executed by selling the March 22.50 calls at $2.60 and purchasing the March 25 calls at $1.40. This action served two purposes. The first is that it took $1.20 off the table, reducing the portfolio exposure and freeing up cash for use elsewhere. It also locked in a profit of $0.40 ($2.60 sales price minus the $0.80 purchase price for the 22.50 calls minus the $1.40 purchase price for the new 25 calls). At the same time, it had no effect on the remaining upside potential for the trade. The two strikes would probably profit about the same from any further appreciation in the price of STX shares.

If the portfolio exposure was deemed acceptable at $2.60, an alternate course of action would have been to sell the March 22.50 calls and not take any money out, but rather roll it all in to the March 25 calls. For example, if the position was 10 options, selling the 22.50s would net $2600. That cash could have been used to purchase 18 of the 25 calls ($2600/$140 = 18.57). By doing so, one actually increases the upside potential for the trade substantially. Of course, the full position is at risk, meaning one could theoretically lose the whole $2600 invested, which is more than could have been lost when the trade was first initiated.
Roll Forward
One of the issues with options is the limited duration they provide for holding trades. If one is an intermediate to longer-term trader, this can be an important hurdle. That said, however, in a manner similar to the roll up/down, if one wants to extend the holding period of a position it can be done by rolling forward the expiration month.

Continuing with the STX example, we can look at rolling forward. That would be accomplished by going from the March contract to the June one. As of this writing, the March 25s are trading at $2.40 and the June 25s are at $3.60. There's the rub, though. Because of the longer time to expiration, the June contract is priced significantly higher. That is why a roll forward is often best accomplished with a roll up/down.

Consider the earlier roll-up in STX from the 22.50 call to the 25 call. If we were still in the former, and wanted to both roll forward and up, we could jump to the June 25 call. The current price on the 22.50 option is $4.10. With the June 25 at $3.60, we could accomplish both the roll up and roll forward and take $0.50 off the table. That is not quite as much as we accomplished with the roll up, but it does extend the time we could hold the position by three months. Whether that is worth the trade-off depends on the anticipated holding period for the trade.

The rolling of strike prices and expiration is something easily accomplished. The transaction costs for options trades have come down substantially for the individual trader in recent years. That opens up a great many possibilities for playing the market directionally and managing positions efficiently.

Mapping Your Time Frame

It is useful to have a map and be able to see where the price is relative to previous market action. This way we can see how is the sentiment of traders and investors at any given moment, it also gives us a general idea of where the market is heading during the day. This information can help us decide which way to trade.

Pivot points, a technique developed by floor traders, help us see where the price is relative to previous market action.

As a definition, a pivot point is a turning point or condition. The same applies to the Forex market, the pivot point is a level in which the sentiment of the market changes from “bull” to “bear” or vice versa. If the market breaks this level up, then the sentiment is said to be a bull market and it is likely to continue its way up, on the other hand, if the market breaks this level down, then the sentiment is bear, and it is expected to continue its way down. Also at this level, the market is expected to have some kind of support/resistance, and if price can’t break the pivot point, a possible bounce from it is plausible.

Pivot points work best on highly liquid markets, like the spot currency market, but they can also be used in other markets as well.

Pivot Points
In a few words, pivot point is a level in which the sentiment of traders and investors changes from bull to bear or vice versa.

Why PP work?
They work simply because many individual traders and investors use and trust them, as well as bank and institutional traders. It is known to every trader that the pivot point is an important measure of strength and weakness of any market.

Calculating pivot points
There are several ways to arrive to the Pivot point. The method we found to have the most accurate results is calculated by taking the average of the high, low and close of a previous period (or session).

Pivot point (PP) = (High + Low + Close) / 3

Take for instance the following EUR/USD information from the previous session:

Open: 1.2386
High: 1.2474
Low: 1.2376
Close: 1.2458

The PP would be,
PP = (1.2474 + 1.2376 + 1.2458) / 3 = 1.2439

What does this number tell us?
It simply tells us that if the market is trading above 1.2439, Bulls are winning the battle pushing the prices higher. And if the market is trading below this 1.2439 the bears are winning the battle pulling prices lower. On both cases this condition is likely to sustain until the next session.

Since the Forex market is a 24hr market (no close or open from day to day) there is a eternal battle on deciding at white time we should take the open, close, high and low from each session. From our point of view, the times that produce more accurate predictions is taking the open at 00:00 GMT and the close at 23:59 GMT.

Besides the calculation of the PP, there are other support and resistance levels that are calculated taking the PP as a reference.

Support 1 (S1) = (PP * 2) – H
Resistance 1 (R1) = (PP * 2) - L
Support 2 (S2) = PP – (R1 – S1)
Resistance 2 (R2) = PP + (R1 – S1)

Where, H is the High of the previous period and L is the low of the previous period

Continuing with the example above, PP = 1.2439

S1 = (1.2439 * 2) - 1.2474 = 1.2404
R1 = (1.2439 * 2) – 1.2376 = 1.2502
R2 = 1.2439 + (1.2636 – 1.2537) = 1.2537
S2 = 1.2439 – (1.2636 – 1.2537) = 1.2537

These levels are supposed to mark support and resistance levels for the current session.

On the example above, the PP was calculated using information of the previous session (previous day.) This way we could see possible intraday resistance and support levels. But it can also be calculated using the previous weekly or monthly data to determine such levels. By doing so we are able to see the sentiment over longer periods of time. Also we can see possible levels that might offer support and resistance throughout the week or month. Calculating the Pivot point in a weekly or monthly basis is mostly used by long term traders, but it can also be used by short time traders, it gives us a good idea about the longer term trend.

S1, S2, R1 AND R2...? An Objective Alternative
As already stated, the pivot point zone is a well-known technique and it works simply because many traders and investors use and trust it. But what about the other support and resistance zones (S1, S2, R1 and R2,) to forecast a support or resistance level with some mathematical formula is somehow subjective. It is hard to rely on them blindly just because the formula popped out that level. For this reason, we have created an alternative way to map our time frame, simpler but more objective and effective.

We calculate the pivot point as showed before. But our support and resistance levels are drawn in a different way. We take the previous session high and low, and draw those levels on today’s chart. The same is done with the session before the previous session. So, we will have our PP and four more important levels drawn in our chart.

LOPS1, low of the previous session.
HOPS1, high of the previous session.
LOPS2, low of the session before the previous session.
HOPS2, high of the session before the previous session.
PP, pivot point.

These levels will tell us the strength of the market at any given moment. If the market is trading above the PP, then the market is considered in a possible uptrend. If the market is trading above HOPS1 or HOPS2, then the market is in an uptrend, and we only take long positions. If the market is trading below the PP then the market is considered in a possible downtrend. If the market is trading below LOPS1 or LOPS2, then the market is in a downtrend, and we should only consider short trades.

The psychology behind this approach is simple. We know that for some reason the market stopped there from going higher/lower the previous session, or the session before that. We don’t know the reason, and we don’t need to know it. We only know the fact: the market reversed at that level. We also know that traders and investors have memories, they do remember that the price stopped there before, and the odds are that the market reverses from there again (maybe because the same reason, and maybe not) or at least find some support or resistance at these levels.

What is important about his approach is that support and resistance levels are measured objectively; they aren’t just a level derived from a mathematical formula, the price reversed there before so these levels have a higher probability of being effective.

Our mapping method works on both market conditions, when trending and on sideways conditions. In a trending market, it helps us determine the strength of the trend and combined with price behavior helps us trade off important levels. On sideways markets it shows us possible reversal levels. It also helps us to set the Risk Reward ratio based on where is the market relative to previous market action.

Part I: Introduction

Leonardo Pisano, better know as Fibonacci, explained the development of natural growing phenomenon through his famous numerical sequence. He proved that this series was highly connected with the growing of dynamics structures, and the most important use is relationated with its ratios.
The objective of the present work is to demonstrate that the application of these rules, have an important probability of success in financial markets, and principally in FOREX.

We start with the premise that the human society is a dynamic system, and its behavior is represented in financial markets through prices.

That is the reason why we will try to prove that there is an important probability to predict the behavior of prices in Forex, joining Fibonacci numbers with Zig Zag Oscillator.

So, we will try to determine the objectives zones, or where the prices tend to go using Fibonacci. We will study the prices corrections against the major trend.
The Method: Fibonacci, and his legacy
In the beginning, we start using the most important correction ratios discovered by Fibonacci. These ratios came from the famous Sequence.

Many contributions were applied to mathematics science by Fibonacci, but the most relevant discover was denominated by the French mathematician, Edouard Lucas, as Fibonacci Sequence in the XIX Century.
The sequence. Properties and principal characteristics
This sequence is a rule that explain the development of natural growing phenomenon. Formed by adding the last two numbers to get the next one.

The formula is:
Fibonacci formula
The Fibonacci Sequence is: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, etc.…

Fibonacci proved that this sequence could be found in the evolution of many natural phenomenons. He used as example the rabbit reproduction process. He wanted to know how many rabbits will be born in a year, knowing that:

1. A couple of rabbits could birth since the fist month, but the others couples just can do it since the second month.
2. Each labor brings two new rabbits as result.

If we suppose that any rabbit die, the process will be the like this:

1. In the first month there will be born two rabbits. So, we will have two couples.
2. During the second month, the initial couple will born another couple, and then will be three pair of rabbits.
3. In the third month, the initial couple, and the second one, will produce new couples. Then, there will be five couples.

Continuing with the present analysis, we could see in the next table the results of the rabbit’s couples forming the Fibonacci Sequence.

Results of the rabbit's couples forming the Fibonacci Sequence

Despite all this, we find the major utility of the sequence in these fundamentals properties:

1. If we divide two consecutives numbers, 1/1, 1/2, 2/3, 3/5, 5/8, 8/13, etc. We could find that the results tend to 0.618.
2. If we divided two non consecutive numbers from the sequence, ½, 1/3, 2/5, 3/8, 5/13, 8/21, etc. We could see that the result obtained tend to 0.382.
3. If we calculate the division between any numbers of the sequence to the next lower, 21/13, 13/8, 8/5... the results tend to 1.618, which is the opposite of 0.618.
4. If we calculate the division between any numbers of the sequence to the higher low non consecutive, 21/8, 13/5, 8/3... the results tend to 2.618, which is the opposite of 0.382.

E.g.; 144 / 233 = 0,618 144/89= 1.6179

The ratio 1.618, or the opposite 0,618 were denominated by the Old Greeks “Golden ratio” or “golden section”, and they are represented with the Greek letter phi, referenced by the greek author, Phidias. Chirstopher Carolan mentions in his book that Phidias was the author of the Athens statues in the Parthenon and The Zeus in Olympus. He considered very important the phi number in Art, and in nature.

This ratio, who’s opposite is the same number more the unit, characterize all the progressions of this kind, where ever it is the initial number.

The most important ratios are 0,618 and it’s opposite 1,618, but not the only ones. We can continue on the ratios derivation of the Sequence, just increasing or decreasing the distance between the Fibonacci numbers.

So, each number is relationated with the higher next trough the 0,382 ratio, and with the lower next with the opposite ratio, 2,618.

E.g.: 144/377=0,3819 144/55=2,618

In the same way, the division between a number and the third next, bring as a result, 0,236, and the proportion between a number and the third lower next is 4,236.

E.g.: 89/377=0.236 144/21=4,238

The same occurs with 0,618 and 1,618, these ratios are more exactly, when we use higher fibonacci numbers. The next table shows some examples:
Ratios de 1,618 Ratios de 0,618
1,618 2 = 2,618 0,618 2 = 0,382
1618 3 = 4,236 0,618 3 = 0,236
1,618 4 = 6,854 0,618 4 = 0,146

Carolan emphasized that the Fibonacci ratios could be order as follows: 0,146, 0,236, 0,382, 0618, 1, 1,1618, 2,618, 4,236, and 6,854. Then we could find and additive sequence with the properties of the Fibonacci Sequence, because each number is the sum of the immediately two before, and moreover, each number is 1,618 times the number before.

A casual browsing of currency brokers’ platforms reveals an inescapable message. Forex is different from other markets such as stocks and commodities in many ways. The list of what distinguishes the currencies is extensive. However, what you will not find included in the list is the function of stop loss orders.

At first glance, it does not seem that this area needs exploring. What of an order that attempts to limit a loss or prevent a profit from turning into a loss? Its function is known. End of story; Not so fast.

When a stock trader executes a buy order, he deposits at least 50% of his purchase. If a Forex trader also deposits 50% of his purchase, there would be no need to distinguish between their stop-loss orders. But in most cases, the Forex trader is more leveraged (at times close to 100-to-1); so a certain adjustment needs to be made in placing a Forex stop-loss to accommodate for the extra exposure.

There is also a difference in the technicals. In stocks, participants tend to cluster around levels outside formation boundaries or defined by clear support or resistance parameters. At times, that is workable because stocks usually move a few percentage points at a time. In this situation, even if you are at maximum allowable stock leverage, your loss is still manageable since the largest portion of your assigned capital is still available.

If no leverage is used, the loss has even less of an impact. By the same token, when a Forex trader buys a currency lot and deposits the full amount of $100,000, the currency fluctuation is likely to have a minimal impact. In this case, the application of a stop loss order based on support and resistance would be adequate. But currency traders are not known to deposit the full amount of their position.

In commodities, stop loss orders are sometimes misnomers. That is because commodities can move the limit, meaning there can be no ‘exit door’. A recent example happened in the Cattle market when the mad cow disease surfaced in the US in late 2003. Had you been long cattle futures, you would have been locked in for three consecutive ‘limit down’ days.

Given these disparities between stocks, commodities and Forex, the Forex trader needs to approach the function of stop loss orders from his unique perspective. And because each different leverage position demands its particular considerations, there is no ‘one size fits all’.

The one concept flexible enough to satisfy most conditions pertains to placing stop-loss orders based on dollar amounts. As such, where a position is exited will have a direct relevance to each individual trader’s circumstances, irrelevant of market conditions. If a Forex trader takes a position at 100-to-1 leverage, it makes no sense placing a stop-loss order at some support level that is 2% away from his entry.


One cannot lose sight of the fact that if one loses 50%, one needs to double the money to come back to even. If traders insist on looking for support or resistance parameters to place protective stops, they need to lower their leverage to 20-to1 or less.

Are you studying finance? If so, then terms like present and future value, efficient market theory, capital budgeting, arbitrage pricing and a whole slew of other exciting phrases are becoming part of your vocabulary. And if you’re thinking about studying finance in college or graduate school, be prepared to be lectured on those topics and more during your coursework. This is all well and good. If you plan on a future in finance, you’ll need a grounding in financial theory. Here’s the problem, though. Your instructors won’t teach you the good stuff, the stuff that can really help you excel in your job or make money in the markets. That all falls under the umbrella of “practical knowledge” which is not what college curricula are generally designed to pass along to young, eager minds looking to learn.

Have no fear, though! This report will help fill in the gaps. While it’s impossible to cover everything you could possibly want to learn in this brief space, here you will be given seven specific areas of focus. It is my intent to provide you with something of a guide to help you go beyond your text books and take your financial education to another level. From there you’ll be able truly accelerate your growth at a rapid pace, allowing you the opportunity to have more success. Ready? Let’s go.
#1 You Really Can Make Loads of Money in the Markets
Have you ever had an instructor talk about all the money there is out there to be had trading the financial markets? Unless you’ve had the great fortune of having one of those rare professors who actually has experience doing just that (and there are a few), the answer is most likely, “No”. This is because most finance faculty have had the efficient market theory drilled in to their heads for years. After all, every bit of research they have ever seen says you cannot make “excess profits”. Well, that simply is not true.

If you want to trade the markets, or even think you might want to, then these three books by Jack Schwager are a must read: Market Wizards, The New Market Wizards, and Stock Market Wizards. These books are all essentially a collection of interviews in which the great money managers, investors, and traders or our time share their experiences with Schwager, a respected professional in his own right. These men and women have literally made billions in the markets. You get direct insight from these market luminaries, and Schwager also provides tons of educational content in his own right through glossaries, discussions of market topics, and outstanding summaries of the knowledge and understanding the interviews impart. Belief that you can achieve awesome results is the first component to being successful, and the Market Wizard series will definitely make you believe! There are other books with a similar concept, but Schwager’s works are by far the worth owning. You will absolutely read them again and again, and they will more than pay for themselves.
#2 The Stock Market is Not the Only Market
If you read the Market Wizards books noted in the previous section, you will quickly realized that there is money to be made in all sorts of different markets: stocks, bonds, currencies, commodities, futures, options. In fact, the equity markets are really a minor player in the realm of modern global finance. This is not something that gets a lot of play in the classroom, though. Why? Because of the focuses on portfolio theory, capital budgeting, and other subjects which end up have relatively little importance to the average financial professional. In particular, you should explore currencies and fixed income in more detail than what you will probably get in your classes.

The currency market (also known as foreign exchange, forex, or FX) is by far the largest. Currencies are usually discussed in an international finance type of course which provides a cursory coverage at best. Yes, the triangular arbitrage is important, but even with the advent of many so called “trading rooms” in business schools across the country, students are not being taught the real practicalities of forex trading and the impact of foreign exchange market movements on the rest of the financial system. The fact of the matter is that currency trading is now even easier than is the case for stocks. You can do it on-line, 24-hours per day. Those interested in learn more on the topic, or taking the plunge in to foreign exchange trading would do well to start with Cornelius Luca’s excellent book Trading in the Global Currency Markets. It is a good introduction to the market, including the terminology and analytic methods one needs to talk the talk and walk the walk. For those with an interest in learning how some of the real currency superstars think, Investment Biker and Adventure Capitalist by Jim Rogers and Soros on Soros and The Alchemy of Finance by George Soros are well worth the read. Rogers is a well known investor and commentator and just the name “Soros” in and of itself has the power to move markets.

Perhaps even more important than foreign exchange, if smaller in actual trading volume, is the fixed income market. Fixed income encompasses tradable instruments ranging from very short term paper such as T-Bills, Eurodollars, and Commercial Paper out to long-term debt in the form of Treasury and Corporate Bonds, not to mention mortgage and asset backed instruments. Fixed Income securities are issued by governments, government agencies, municipalities and companies all over the world. The sad thing is how little coverage this topic gets in financial education. This despite the fact that the basis of fixed income is cash flow, which is also the core of most valuation methods currently taught in college business programs. Interest rates drive everything, from the action of the stock market to fluctuations in currency exchange rates. That is why even the slightest little comment from folks like Alan Greenspan and other similar monetary authorities around the globe is analyzed for its meaning and potential impact. An understanding of the fixed income markets will benefit you enormously, regardless of what area of finance you specialize it. To that end, The Bond Market by Christina Ray is a worthwhile reference. Ray breaks down the intricacies of fixed income securities in a very easy to understand fashion. Of course there is also Fabozzi’s The Handbook of Fixed Income Securities, which can probably be found on every trading desk. The Fabozzi book is comprehensive in nature, where as the Ray book covers fewer topics, but breaks them down in a more manageable, practical way.

There are, of course, many other markets and tradables beyond these. The point I want to reinforce here, however, is that as a financial professional you need to be aware of what is happening in currencies and interest rates. Failure to do so means you will have an incomplete market picture for your analysis.
#3 The Mind is More Important than the Tools
In finance class we learn all sorts of things, like how to calculate present and future values and how to price securities. Finance is all about numbers, formulae, and analysis, right? Wrong! We are given all sorts of tools to use, but there is something very important missing - an understanding of the human mind and its impact on how those tools get applied, misapplied, or not applied at all. It would behoove anyone with an eye on the market activity to take a few psychology classes along the way.

The financial markets, no matter how they may be characterized otherwise, are a collection of individuals interacting with each other. As such, it is important for us to understand the impact of collective psychology. You merely have to watch the markets to see the impact of group think. The bubble in internet stocks that burst in 2000 is a perfect example. Clear-headed market analysis went out the window as everyone jumped on the bandwagon thinking that there was no way to lose. Then, on the downside it was the exact opposite. The no one wanted anything to do with stocks in certain sectors, not because of any legitimate evaluation, but because they had been burned before. This sort of thing happens to greater or lesser degrees all the time, in all time frames. A very good book on the topic is Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay and Bernard M. Baruch. It explores the whole topic of manias, especially where it relates to the financial arena, and should give you an excellent view in to mob mentality.

But we should not just think about the market when we think about psychology. If you want to be a successful trader or investor, you need to understand what’s going on inside your own head as well. Being able to produce sustained above average returns takes more than luck. It takes a major mental commitment and knowledge of the pitfalls we can create for ourselves without even knowing it. We can have the best trading system in the world, but if we cannot stick to the methodology because we allow our mind to override the signals or analysis, what good is it? Dr. Van K Tharp, who is profiled in Market Wizards and has worked with a great many traders, put together an excellent work on the subject. Trade Your Way to Financial Freedom is a good follow-on to the Market Wizards series. Another good mental book is The Way of the Warrior Trader by Richard D. McCall, and Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude by Mark Douglas is a popular title on the subject as well. Be sure to take seriously the psychology of trading. It really can make the difference between success and failure.
#4 Technical Analysis is Respected
The weak form of the Efficient Market Hypothesis essentially tells us technical analysis, which focuses a lot on historical price movements, is worthless because it has already been factored in to the market price. As such, technical analysis has been widely looked down upon in academia for years. Well, the real word of trading and market analysis takes another view. It is true that technicians were once a rare and misunderstood breed. Over the past decade or so, however, the discipline has become increasingly valued as a legitimate methodology. Academics still raise their eyebrows at the mere idea that one could make money looking at charts, but practitioners are paid to get results and many use technicals to do just that. As such, technical analysis should be seen as a legitimate analytic tool for your own work in the markets.

Here’s the thing, though. Technical Analysis covers a vast array of techniques and methods. Some folks are chartists. Others use calculated indicators. Still others use astrology and other more esoteric methods. As suggested above, in a wide definition, technical analysis is the use of past market action to determine likely future action. The idea is that markets will react somewhat predictably to certain occurrences. Underlying that notion is the fact that people react somewhat predictably to stimuli, and the market is nothing more than a collection of people. Ah, ha! Psychology comes back again. I told you in the last section it was important.

I am not here to advocate technical analysis, though. It is merely one of many available tools. Some folks prefer it. Others are more fundamentally oriented, using earnings, economic conditions, etc. to determine valuation. A lot of it comes down to personality and interests. You learn the basics of fundamental analysis (pro forma earning projections, growth rates, discounting future earnings, etc) in your finance classes. If you learn technicals at all, is probably only in passing. It is up to you to explore the topic on your own. There are several very worthwhile resources at your disposal in that regard. Tops among them is John Murphy’s Technical Analysis of the Financial Markets. This book is widely considered the bible of technical analysis and will give you an outstanding overview of the topic. The Steve Nison books on candlestick charting, starting with Japanese Candlestick Charting, are excellent as well. Mind over Markets by Eric T. Jones discusses the “Market Profile” technique, which is not widely known in academia but has many adherents in the markets.

Perhaps the best book on combining technical and fundamental analysis is How to Make Money in Stocks by William J. O’Neil. Among titles to consider about developing trading systems there are Campaign Trading by John Sweeney, Street Smarts by Laurence A. Connors and Linda Bradford Raschke, Long-Term Secrets to Short-Term Trading by Larry Williams, and Trading Systems That Work by Thomas Stridsman.

Anyone seriously considering the pursuit of technical analysis, personally or professionally, should consider joining the Market Technicians Association. The MTA provides a certification and other educational programs, and is a good way to meet technicians from around the world. Also, Stocks & Commodities magazine is the industry standard for the discussion of technical analysis and trading system design.
#5 You Can Trade Real Estate
You know all that accounting you have to learn, and all those finance basics they make you take before you get to the good stuff? Well, you can put that education to use in the real estate market right now. The most advanced topic one needs to understand to play the real estate market is that of leverage, or to put it another way, how to use other people’s money (OPM). Property can be bought and sold just like any other asset. You can trade it, which basically means buying a property and selling it shortly thereafter, preferably at a higher price, oftentimes after doing some fix-up work. You can also invest in real estate by going for longer-term price appreciation and/or cash flow from rents. The best part is, anyone can do it, regardless of income or education.

Analyzing a potential real estate purchase is much like doing fundamental analysis on a stock you might like to buy, and oftentimes with similar time frames in mind. You try to determine a fair market value, see what kind of returns you can generate, etc. Obviously, owning property does not provide the same liquidity, nor does it have the same kind of potential for that trading rush, but there are advantages. You can buy property for very little down, sometimes with nothing at all down. Can’t do that with stocks where at a minimum you have to have 50% for the margin requirements. That means your potential returns in real estate can be truly exceptional.

With all this in mind, you would do well to learn all you can about real estate, and there is certainly a lot of information out there. If there is a class available to you, take it. Talk to people you might know in the business - realtors, bankers, attorneys, investors. It is not necessary for you to have loads of money, great credit, or any of what we normally get told are the requirements for buying real estate. Creativity, persistence, and a strong desire to succeed are more important. A couple of books that will help you learn some great techniques for building a real estate investment program are Nothing Down for the 2000s and Creating Wealth by Robert Allen, the man who put the concept of little or no money down on the map. Another worthwhile addition to your library would be Ira Wealth: Revolutionary Strategies for Real Estate Investment by Patrick W. Rice, Jennifer Dirks. This book provides a good discussion of how IRA accounts can be used to invest in real estate, despite what you might have been told by banks and brokers. Real Estate is a fantastic way to build wealth, and the best part is the tax code actually works in your favor! Make sure to take a look in to it for yourself.
#6 Study Personal Finance
Some colleges actually have personal finance courses available, but oftentimes business students consider such classes beneath them. I should know. I was one of them. It isn’t high finance. There’s no glamour in managing your checking account, and insurance can put one to sleep. Wrong attitude! A good understanding or personal finance will go a long, long way in life. In fact, it will probably be more valuable to you in the grand scheme of things than all the stuff in your finance course text books. Personal finance covers a wide array of topics. I will briefly touch on some of the bigger ones.

Savings and investment is probably what most people think of when we talk about personal finance. In short, it is what you do with the income you have above and beyond your normal living expense, commonly referred to as discretionary income or funds. Obviously, retirement savings is a hot topic. You need to be fully educated on whatever program your employer provides, if any, and what options you have outside that. Make the best use of what’s available to you. The more funds you can get to work early, the better for the long term situation thanks to the magic of compound interest. At the same time, you should be putting money aside in a rainy day fund. You will hear different experts recommend anything from a month to a year worth of salary as a reserve against loss of income, emergencies, etc. Your situation will dictate what is right for you, but something should definitely be set aside in a secure, easily accessible place. Of course if it’s your ambition to trade, you’ll want a program in place to build up a sufficient bankroll for that purpose. In most cases, $5000 is the recommended minimum. Starting much lower than that will make transactions costs significant, plus you will have fewer options in terms of working within a risk structure suitable to your needs.

A very important area of personal finance, and one that needs more focus, is debt use and management. We are a society fueled by debt. That has its plusses and minuses. Borrowing, when handled properly, allows us to do things we would not have been able to do otherwise: buy a car or a house, pay for our education, fund investments, etc. Unfortunately, too many people misuse debt, especially credit card debt, and get themselves in trouble. A lot of these problems can be remedied through discipline. Do you really need those DVDs? Are you dining out more than your budget allows? Remember, you are going to have a hard time building up investment capital if you have to pay all your excess earnings out to the credit card companies. Moreover, you do not ever want to put yourself in a potential bankruptcy situation? It takes a long time to recover from that kind of filing.

The last big personal finance topic we will cover is estate planning. For a young person that sounds like something way off in the future. True, it is, but that does not mean there are not things you need to be looking at now. Do you have a will? Not everyone really needs one, but if you have assets you would like to make sure go to those you want receiving them should anything ever happen, you should put something together. The process is not that difficult. Do you have life insurance? Again, you may not need it. Many single people do not, whereas most folks with a family should probably have a policy. It’s a topic a lot of folks hate even think about, but it is well worth the time.

There are a lot of things related to personal finance you can do now, or at a minimum learn about, that can help you throughout your life. For example, taxes will be an ever present part of your life. Understanding them, even if you never do your own returns, cannot help but provide benefits. Take that view with the whole arena of personal finance. Make it a habit to explore something new all the time. You never know when it could come in very handy. Maybe you’ll even do it for a living!

A very useful tool for improving your personal finance acumen is Cashflow® , a game you can play in board version, or on your computer. The game covers a wide range of topics in a fun, entertaining fashion.
#7 Beware of the Experts
Thinking for yourself is a good thing. Learn to do your own due diligence when it comes to your money. There are lots of so called experts out there. They get quoted in the media all the time. Be careful what you read in to that, though. Newspaper columnists, for example, want something to keep the reader’s attention, make them come back again. Sometimes that means people get quoted, even though they really do not have much to say. An expert is born! I speak from experience on this topic. Myself and my former colleagues often had inane comments not even intended to be serious analysis find their way in to major columns. We’re talking significant business media, not to mention getting picked up by the wires and local papers across the country. Reporters also have favorite interview sources. That can be great if the source is good, but if not the interviews and quotes will give credibility to one who may not deserve it. For that reason, you should really take anything you hear or read with a grain of salt. People have a lot of different perspectives which will not always match your interests.

There’s also the fact that sometimes even the best and the brightest can really mess up royally. We need look no further than Long Term Capital Management (LTCM) to see that. A group of very smart, very successful traders did quite well for a while. Then, it all fell apart and forced some major action by the monetary authorities to prevent what could have been a global financial market disaster. You can learn more about LTCM by reading Roger Lowenstein’s well titled book When Genius Failed, which documents the rise and fall of the firm and its major figures. There was also a PBS documentary you can get on video called Trillion Dollar Bet which covers mostly the same topic.

The bottom line is that you need to make sure of the value you are getting from these so-called experts. Use your own education, experience and basic common sense, mixed in with a good dose of research, to see if what they have to offer is a) credible and b) worthy of your attention. Even then, once you have decided that they can help your toward your goals, make sure any recommendations you receive fit in with your situation.

By the way, this goes for you too. Do not allow yourself to get big in the head once you have achieved some success and set yourself up for a major reversal. The old saying “Pride goeth before the fall” is very true. If you are not careful, you can lose track of what made you successful and find yourself suffering a major set-back. Refer to some of the interviews in the Market Wizards books noted earlier to examples.

Hopefully you have at least started the process of expanding your financial awareness beyond the narrow bounds of what college finance programs provide. The finance industry and markets can be both incredibly rewarding and highly frustrating. If you take the contents of this report to heart and use it to guide your own personal education, I think you will find yourself experiencing more of the reward and less of the frustration.

I was never the best student growing up. Homework wasn’t something I focused on a whole lot as a kid, especially when I could just get it done in homeroom! We’re not kids anymore, though. If you haven’t already, you will come to find that homework is an important part of life. I refer not to bringing work home from the office, however. Instead, I mean being prepared. Whether it’s an interview, a meeting, a class, a trade or investment, or just life in general, it always is best to go in prepared. Consider the topics addressed in this report, and do your homework.