How To Make A Million In 40 Trades

This article is a true story of how a friend of mine made a million dollars in 40 trades during a three month period. I should mention first that he did start with $100,000. I could have called this my Jerry Maguire moment. You know the movie with Tom Cruise where he decides to write a mission statement.

Think of this - double a dollar 20 time and you have over one million dollars.

$ Dollars $	Doubled
$1.00	$2.00
$2.00	$4.00
$4.00	$8.00
$8.00	$16.00
$16.00	$32.00
$32.00	$64.00
$64.00	$128.00
$128.00	$256.00
$256.00	$512.00
$512.00	$1,024.00
$1,024.00	$2,048.00
$2,048.00	$4,096.00
$4,096.00	$8,192.00
$8,192.00	$16,384.00
$16,384.00	$32,768.00
$32,768.00	$65,536.00
$65,536.00	$131,072.00
$131,072.00	$262,144.00
$262,144.00	$524,288.00
$524,288.00	$1,048,576.00

Before I start with this story I have to give you some background so that you can really appreciate the whole episode.

It all happened in the 90's. I don't even think the Euro Dollar had been introduced for trading at the time.

Anyway, it was fairly early in my trading career and a few years earlier I had taken a course on Forex trading in London. You know, one of those "I'm a guru and this is the Holy Grail courses".

I distinctly remember that the course cost me £8,500, which was a lot of money in those days, hell, its still a lot of money for a course today.

At the time, I remember coming out from the course thinking that I had cracked it. I was already planning on the car I was going to buy and what sort of massive house I was going to live in.

The course finished on a Friday and by Tuesday I was set up with a broker and ready to make my fortune.

By the following Tuesday I had blown $10,000. I couldn't believe it. I had diligently applied everything I had learned and still lost money. I was thoroughly depressed. At the time I knew very little about money management but I knew enough to know that I wasn't going to make any money trading the way I had been.

I spent the next six months reading everything I could about the Forex market. I became totally obsessed with the thing. I would sometimes work 18 hours straight, studying and testing different ideas.

During all of this I kept in touch with the guy that originally taught me the course (Lets call him Peter as he is still in business as far as I know). I realized months later that the course was useless but by this time I had got to know Peter and he was a very likeable guy, it was hard not to like him even though I knew more than he did six months after I took the course.

At the time, I lived in a beautiful village in the heart of Perthshire called Blairgowrie. Just as a side note here. If you ever go to Scotland, make a point of heading up to Perthshire. Everyone goes to Edinburgh or Glasgow but trust me, the farther North you go in Scotland the more beautiful it gets and the people are much friendlier too.

So, picture the scene. I had eventually got my act together. I was making money trading, not a lot but enough to cover my living expenses and it was in the heady days before I had children so there always seemed to be time for things.

I would get up at around 5 am, make myself a big cup of black coffee, put on some Beethoven or Enya and settle in for the morning. My favorite technique was to try to catch a move on the London opening and be finished by midday.

It's funny you know but even I can see how the action in the market has change over the years. The 5 minute charts just seemed easier to trade in those days.

This left me time for my second passion of going to the movies. Both my wife and I used to be devoted moviegoers. I mean, we would watch every single new release and even the arty foreign ones too. Nowadays, with kids, all I get to watch is Toy Story, The Lion King Or Shrek over and over again.

Back to the story. About a week before this story starts I was speaking with Peter and asked him if he knew where I could get a copy of a manuscript by WD Gann that I was after.

Anyway, about a week later Peter gives me a call and tells me that he has this guy called Fred who has just taken the course and is struggling a bit. He asks me if I would spend the day with him and just try to help him.

I knew of course that the reason he wanted me to help him was because he didn't want the guy to ask for a refund but whatever the reason was, I wasn't interested. I was in my own little groove and life was good. I was doing OK in the markets, getting to see all the movies I could watch, in short I was happy.

This is where he tempted me with something he knew I would be interested in. Somehow he had managed to get his hands on the manuscript I was after. He wanted to make a deal. He would FedEx it down to me the same day if I would spend some time with Fred. He got me with the one thing he knew I would bite at.

Arrangement were made that I would collect Fred from Edinburgh airport on Monday morning.

About two days before I was due to collect Fred, he calls me. "Hi Mark this is Fred, Peter said that we are going to meet on Monday and I just wanted to touch base with you. So how much money are you making?"

Wow, this guy was to the point. I wondered if I had made a good decision agreeing to spend the day with him.

Monday morning comes and into the arrival lounge steps Fred. Big tall guy, over six foot tall. His hair was just starting to turn grey and he was dressed in baggy jeans and a T-shirt. I placed him about 36-40 years old.

"I thought I might see some sheep running around the airport". What do you mean, I said. "You know, highlands of Scotland, William Wallace and all that stuff." We both started laughing. I knew I was going to like this guy but he had a wicked sense of humor.

We made some general chit chat on the way back to Blairgowrie and eventually we got in front of the screen where I started to explain how I trade.

Around this time I was really into Fibonacci and the approach I used at that time was the forerunner to www.surefire-forex-trading.com.

This is where the real story starts.

Fred just sat there looking at me. He had his face resting on his hand with his elbow on the table, which made his face all scrunched up like a cabbage patch doll. I went on for about half a hour. Then suddenly, Fred pretended to let his elbow fall off the table. "Oh, sorry Mark, I was falling asleep. You could stun a pig with this stuff".

"What", I said, but I knew exactly what he meant.

"Well, I'm not interested in all this crap. Just show me the good stuff, you know, the thing that makes the money."

"This is the thing that makes the money Fred."

"I'm not going to do all this mathematical stuff, there's got to be an easier way to make money than doing all this stuff. Plus, at the rate you make money, I might be 60 before I make any decent money."

I had to laugh, Fred was an entirely different animal from me. He wanted to trade and make it big but he wasn't prepared to do the work.

We spent the rest of the day talking about trading and life in general. I laughed the whole day. This guy only knew how to do things one way and that was with both barrels blazing.

Fred eventually went home and things returned to normal. A few days later I get one of many calls that were to come from Fred.

"Hi buddy, I set up my account last week and it's live today."

Great I said. "Remember to take it easy."

"Its a bit late for that me old matey, I'm short the Swiss for a million."

I just listened dumb stuck. You could and still do get incredible leverage with Forex. In those days there were no such things as mini contracts. I had just started trading with two contracts and here was Fred on his first trade, jumping right in there with ten contracts.

How big is your stop I asked him.

"Stops are for wimps buddy. When I make a couple of grand I'll close the position."

"Listen Fred, that's dangerous."

"Don't worry me old matey. You can sit up there in the Highlands and watch the grass grow while I make the real money down here."

About three hours later he calls again. "Just made $5000 bucko. Put that in your pipe and smoke it." I laughed but I was worried about him.

A few days later Fred calls again. "You wont believe this. I was going to short the Pound so I went short 30 contracts and went out for a coffee. Anyway, when I get back you will never guess what happened. I screwed up. I pressed the buy button instead of the sell button and now I'm up $15,000."

I had also been trading the Pound and there had just been a nice move but I had made about $1000.

So what are you going to do now I said. Are you going to close the position? "Hell no. Push it until it hurts me old matey".

He eventually closed the position later in the week and was up about $45,000. Over the course of the next few weeks Fred made about six trades and was increasing his leverage as he went. He was now regularly trading 30 contracts plus. After about a month and a half his account was standing at $500,000.

Quick Explanation
The pip value varies depending on which currency pair you trade but lets say that a pip is worth $10 with one contract to make this easy. Fred was trading 30 contracts or about $300 a pip. If the pair moved 100 pips that would be $30,000. Contracts in Forex are also commonly known as "lots".

Back to our story. It didn't matter how much he made he wanted to use the maximum leverage he could and push his leverage to the limit. It was madness but no amount of reason was going to stop him.

He had also had a remarkable run. I don't remember the exact number but he had very few losing trades.

I was getting more worked up about his trading than he was. I eventually couldn't take it any more and told him I was flying down to see him. I was also curious to
see how he was doing this. What mad method was he using.

As it turned out, his method was remarkably simple.

Look at this chart

Basically at around midday he would just draw a straight line across the top and bottom of any consolidation he could see on a 5 minute chart. If he had a couple of closes above the consolidation he went long. If he had a couple of closes below the consolidation he went short. There was either no stop or one so far away that it didn't matter much. He just closed the position when he felt he had made enough or judged the market to be turning on him. It was a sort of breakout technique.

Things came to a head when Fred went on holiday. He didn't particularly want to go on holiday but he had arranged this months before him started to trade.

He had arranged to take his family to Disney Land and off he went. Finally I thought, some peace and quite. But not quite.

He could only have been on the ground for a few hours when I got the call. "What's the Yen doing." Forget it I said. You need to take a break and spend some time with the family. Silence on the other end of the phone.

A few hours later he calls again. "Right me old matey, I've just bought a fax machine, fax me over a chart of the Yen." I couldn't believe what I was hearing. He wanted to trade without a dealing station and no access to charts.

"No way Fred."

"Listen up buddy, I am going to take it easy, I just want to be in the market. Send me a 5 minute of the Yen and I will keep it to ten contracts." Reluctantly I agreed but made it clear I thought he was off his head. I knew that regardless of what I said he would find a way to trade.

As it turned out, even on his two week holiday he made over $100,000. Obviously going over his 10 contract limit he promised me.

I could go on here about his trades but the incredible run finally ended one Sunday night after about three months and around 40 trades, Fred had managed to parlay his initial starting capital up to one million dollars.

Now if you trade currencies, you know that nothing much happens on a Sunday night. Asia opens but generally there are no big moves.

The phone rings about 1 am and wakes me from my sleep. "What the F%$* is happening to the Swiss." He didn't even wait for an answer, he just hung up. I lay in bed for about ten minutes thinking about what Fred had said and then curiosity got the better of me, I had to go see for myself.

I knew as soon as I saw the chart what was worrying Fred. For some reason the Swiss had gone up over 100 pips on a Sunday night. I had never seen such a big move on a Sunday and I couldn't find any news as to why this might be happening. Fred must be short the Swiss I reasoned.

I decided to call him. "Your short the Swiss right?" yes, he replied. "I just don't understand it. I thought I would place my positions ahead of Mondays opening and then this Sh*% happened. What do you think I should do?"

I didn't know. "Look, you really only have two options, close the position now or wait for the London open and see what happens. Whatever you decide put a stop in to be on the safe side."

I remember watching that 5 minute chart of the Swiss all night long and about eight am London time the Swiss began to rise again. It had moved another 80 odd pips up. I called Fred. "What did you do." Silence on the other end of the phone. "Fred, what did you do."

"I shorted it again. I thought that as it had already moved so much it must be ready for a pullback so I shorted it again. There is something else Mark but I am too embarrassed to tell you."

"What is it Fred?"

"I've been adding contracts and now its looking real shaky."

I never did find out exactly how bad his situation was that day but I could guess. Not only had he shorted the pair again he had added contracts.

After that trade, nothing seemed to go right for Fred. He had some wins but in a period of about a month he lost everything. Even his starting capital. He was the
first trader I knew who actually had a margin call. That's when the broker calls you to tell you that there is either not enough money in the account to cover the position or it is getting dangerously close to that level.

I still consider Fred a close personal friend and we have remained friends throughout all the years. It took some time but Fred to recover but he did eventual make quite a bit of money in the property game.

Here's the moral of the story. I have met some incredible traders over the years. I even know one trader who makes millions of dollars a year and before you ask, no, he doesn't share his method with me.

Of all the hundreds of traders I have met over the years I only know a handful that still trade and make money year after year. All those traders without exception have strict money management principles and a simple method or system.

Don't be in a rush to make it in trading. You need to learn this profession. You need to have money management principles in place that allows you to stay in the game even when you go through a bad patch and trust me they will come.

I asked Fred one day why he never stopped or drastically reduced the amount he was trading when he had a million dollars. This is what he said.

"I have a glandular problem, I have this huge greedy gland that just wont let me stop. When I got to a million I immediately thought, why not ten million me old matey."

Here's a scary thought. There was a time during all this when I would have believed he could have done it.

Good Trading
Mark McRae

On Randomness and Streaks

One of my favorite books is Fooled by Randomness by Nicholas Taleb

http://www.amazon.com/gp/product/158...books&v=glance

I’d suggest that you purchase it and read it cover to cover several times. The major theme of the book is that people totally fail to understand randomness – even logical, educated people. In fact, sometimes logical, educated people can be fooled even more than the non-logical, and uneducated.

For example, last week in an article by Chuck Branscomb, you learned that good traders learn to tolerate long losing streaks, including making 12 losses in a row. We got several comments on that one.

Here is one of them:

You say that a winner still knows that he's a winner even after an expected 12 losses in a row. Who in his/her right mind would "expect" 12 losses in a row?

If a system is designed to win 50% of the time, the chances are only 2 in 10,000 of getting such a result if the system is performing as expected.

Even if the system is designed to win only one out of ten (and presumably make more than enough on the one win to make up for the nine losses), the probability of 12 losses in a row is still less than 50/50 at only 28%. Getting a result like 12 losses in a row would more than likely mean that the system is not working as intended.

I understand the intent of your statement, but show me a person who "knows" that he/she is a winner with a system that loses 12 in a row, and I would like to see that system ... so that I can take the other side of the trades.

My guess is that the author of this letter is very intelligent and understands quite a bit about probability. For example, he was able to illustrate that the odds of 12 losses in a row with a 50% system are only 2 in 10,000. He’s a little off — it’s actually 0.000244.

However, his calculations were based upon making 12 losses in a row in 12 trades with a 50% system. What if you make 100 trades each year? Or what if you are a short-term trader and make 1000 trades each year? Then the chances of a long losing streak are quite large.

For example, I did 20,000 Monte Carlo simulations of 100 trades with systems that are 25% correct; one that is 50% correct, and one that is 75% correct just to see what the losing streaks might be. What I found is shown in the table below:

1.)The first column is the win percentage of the system.
2.)The second column shows the length of the losing streak that will occur100%of the time in this system. That is, you are guaranteed of having a losing streak that long.

3,)The third column shows the average losing streak for that winning percentage. You have a 50% probability of getting a losing streak this long.

4).The fourth column shows a 10% probability losing streak. Losing streaks will happen this long 10% of the time if you make 100 trades each year.

5.)The next to last column shows a 1% probability losing steak. In other words losing streaks this long will happen 1% of the time if you make 100 trades each year.
6.)And the last column shows the maximum losing streak in 20,000 simulations of 100 trades.
Losing Streaks As A Function of Winning Percentage of Your System

See Chart Attachment

Notice that with a 50% system, you are almost guaranteed to have five losses in a row in 100 trades and you’ll probably get six losses in a row. If you simply calculated the probability of getting six losses in a row, you’d say it’s unlikely because the probability is 0.0156. You’d conclude that its nearly impossible.

But it’s not impossible in 100 trades. In fact, it’s almost certain.

In our simulation, we also found that you have a 10% chance of nine losses in a row and a 1% chance of 12 losses in a row. One percent is unlikely, but not impossible. And just when you decide it’s impossible, it would probably happen for you.

I don’t have a simulator that will easily do 20,000 simulations of 1,000 trades, which is still quite likely for a short term trader to make in a year. I will easily have over 1,000 trades this year and I’m not a day trader. Many of my clients will easily have 1,000 trades each year. I’m right on about 45% of my trades and I probably have a losing streak as big as 15-20 losses in a row this year. Some of my students (who are superb traders) frequently report losing streaks as long as 20 in a row.

Most long-term trend following systems are not right 50% of the time. They are more likely to be right 30-45% of the time. Thus, the probability of having 12 losses is a row in 100 trades is no longer just a possibility – it’s a distinct probability.

So what does this all mean for you?

It simply illustrates the point that the average person does not understand randomness, even the average highly intelligent person.

Second, it says that long losing streaks are quite possible. Most people who insist on being right will typically give up their system, thinking it is no good. In reality, the system is doing what you probably should expect.

And, lastly it shows the critical importance of position sizing. If you risk 1% on each trade, then after 12 straight losses you’d probably be down about 10% (i.e., you’d be down less than 12% because you’d only be risking 1% of what’s left after each loss).

Your next trade might be a 20R winner and you’d be up — even after 20 losses in a row.

Don't worry, only 2 out of every 100 traders will pick up on this information, the other 98 will be paying for your winning trades the rest of the year

A look At Optimization

To the new systems developer one of the most exciting things to play with is optimization. Optimization is using the power of the computer to examine every possible sequence of parameters and rules to find those that have worked out best in the past. With enough computer crunching power its possible to find systems that perfectly “predicted” the past. We can run number crunching PC's on automated routines and have them analyze billions of bits of data while we are sleeping! Many traders do this long enough and eventually "discoverer" the holy grail of trading systems. They jump into the markets with their new super predictive algorithms only to find they fall apart in real trading!

“What happened?” they ask themselves. The answer is that what they created was likely a system that was a statistical coincidence (known as a "curve fit"). Curve fitting is where a system has been optimized to a unique set of historical data. The problem is that the markets will behave much differently in the future than the past, therefore, a “perfect” trading system in the past could be useless in the future. For example, your computer finds the perfect dates in the past to have bought and then sold the market. Obviously this data does not mean anything in the future. . This is a simple example but most curve fits are some complex form of this basic concept.

Lets look at another flawed example. Assume we wanted to optimize a set of nickels that were most likely to land on heads. What we could do is flip a million nickels and only select those that landed on heads. Then, we can take those remaining nickels and flip them again, once again only choosing those that land on heads. We could repeat this process over and over again each time only choosing those nickels that land on heads. At this point we might conclude that we had narrowed down our nickels to only a small handful that were “optimized” to land on heads. We could then go out and make large bets with those nickels putting all our money on heads. We would quickly make a fortune right? WRONG!

Unfortunately we would very quickly lose our money. These nickels were not optimized for heads; they always did and always will have 50/50 odds. What might have confused some is that they thought they had found a predictable set of nickels when in fact they had just found a statistical coincidence!

Because there is so much data and so much computing power available, these kinds of errors find there way into trading systems all of the time. One of the worst offenders of such flawed optimized systems can be neural networks. When developing a system its imperative that optimizing is avoided as much as possible. You need to find NON curve-fit robust systems. There can be a place for certain types of optimizing, but it must be handled correctly.