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TRADING
This ebook may be freely distributed, however only in its original form as prepared by
its author and without any amendments and/or edits.
All information obtained within this book is for educational purposes only and do not act as an
actual investment or trading advice. The author of the ebook is not a Chartered Financial Advisor.
When there is a reference to a certain investment vehicle made, such as futures, forex, stocks
or options, this is for educational purposes only. Financial speculation carries a high degree of
uncertainty and risk. An individual who makes a decision to speculate on movements of financial
markets is fully responsible for this decision and its outcome.
“
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About the author: David Fiacan
He later stumbled upon Supply & Demand trading, gradually shifting his
focus from execution of mechanical patterns to discretionary trading of
fundamental principles applicable to all financial markets.
After refining his trading style, achieving consistent results and getting
rock-solid confidence, he founded successful YouTube channel, sharing
his distinctive methodology and influencing thousands of followers.
Since then, David has passed his unique strategy to over 200 aspiring
traders who forever changed their trading thanks to it, and published free
ebook that has seen over 5,000 downloads to date.
Trading.
Dream job of making a lot of money and being your own boss.
No need to be at your desk in that soul-sucking 9-5 job every single day.
Trading promises to give you all of this just by clicking buy or sell.
What’s more, YOU can start doing this business from your bedroom and
you only need a couple of thousand dollars to begin with.
You have most likely discovered the world of trading by seeing an advert
that promised this. Since then, you’ve been jumping from one strategy to
another, but still can’t really get it to work.
Something’s just not quite right about it. Every time you try trading that
proven strategy you got somewhere off YouTube, you lose.
I’m almost certain you can relate to this if you’ve been experimenting
with trading for some time already.
I know you’re thinking – it’s because their trading strategy doesn’t work.
Well, that’s not quite right.
You see, most people assume that the trading strategy is the only thing
that matters. They believe in finding that perfect system that makes
money all the time. Once they have it, they simply follow the signals and
the profits will come. No need to think about anything else.
Yes, strategy is important, but there are other things playing a big role
here.
Not only strategy that wins all the time doesn’t exist (and never will), the
strategy itself is not the only element that determines whether one is
successful in trading or not.
Most beginners don’t pay enough attention to these, as they are too busy
looking for that perfect, holy grail trading system.
They underestimate the importance of starting out with the right trading
approach, timeframe, markets and capital.
By doing so, they decrease their odds before they even placed their first
trade.
I hope that you’re not expecting to become trader overnight – that’s just
not realistic. Trading, like any other business, requires consistent effort
over a period of time.
Don’t let that put you off, though. Trading really isn’t as difficult as those
who didn’t succeed make it out to be.
Good news is that if you start out by having realistic goals, focusing on
appropriate markets and practice the right thing, you will gain advantage
over others and inevitably succeed.
Either way, this book will point you in the right direction, like other 5,000
aspiring traders who already read it.
“This strategy requires only $1,000 and makes 100% per month!”
The problem with such statement is that it claims trading requires very
little capital. This is a deliberate marketing strategy. It makes such state-
ment very appealing, but very unrealistic at the same time.
But still - in order to provide yourself with as high odds as possible, you
need to start with the right amount of capital.
How do you know what’s the right amount of capital? This depends on
number of factors which I discuss later in this book.
Now, am I saying that you can’t make with $2,000? You can, provided you
trade market that’s not too volatile. You need to ensure that the risk you
take on a single trade represents only a fraction of your account’s size.
To ensure you have odds on your side, you need to come from a position
of strength, meaning having enough capital to allow for errors - losses.
When you start trading this strategy real-time, its performance will be
worse – likely about 45-50% win-rate.
This is caused by the psychological effect that’s coming into play when
you start risking real money. Your live trade executions won’t be as good
as the backtested ones, period.
He can, quite easily, wipe out his account just by a few losing trades.
Equity curve on the following page typical for beginner who starts with
capital that’s inadequate for the market he trades.
As an example, let’s assume he’s daytrading with $3,000 and risking $100
per trade.
Equity curve is decreasing rapidly past this point, while the fear factor is
increasing exponentially. 20% of $3,000 represents $600. Risk of $100
per trade this trader takes means that he’s roughly 6 losing trades away
from having a blackout.
What’s clearly visible here is that this trader provides himself with far
better starting position, just by having slightly higher capital and better
managing the risk.
Some of those who lost due to not having sufficient capital start to
believe that it’s just impossible to achieve profitability in trading.
That’s not true. They don’t see they failed simply because they lost
their capital during unavoidable trial-and-error phase that can’t be
avoided, or during a standard drawdown that can’t be avoided either.
What do you see? Strategy to which this equity belongs has clearly got
some edge. Curve has a steady, upward slope confirmed by red trendline
that’s applied on it. Initial drawdown that’s visible right at its beginning
seems very insignificant when put into context with the rest of it.
The thing is that some (but certainly not all) beginners have strategy with
equity curve similar to this one. Vast majority of them ends up losing
anyway. Why is that? You guessed it – inadequate capital.
They lose their capital during an insignificant drawdown, such as the one
you just saw on the equity above. What’s more, this tends to happen just
before the strategy starts recouping its losses and equity starts taking
off.
#2 Don’t trade markets that are too volatile for your account – look for
alternative markets (refer to the guide at the end of this book).
#3 If this doesn’t help, then save more capital. Even a seemingly small
increase in capital makes a big difference, as demonstrated in this
The problem is that if you practice the wrong thing, then you won’t get
any results no matter how much and how hard you practice.
If you just keep practicing something that doesn’t work without stepping
back and evaluating whether it makes sense, then you’re just wasting
your time.
You see, vast majority of those who struggle to make trading work keep
practicing the wrong thing, and then wonder why it is not working. You
most likely started out just like them - with a ‘hot’ strategy off YouTube
with 5 different indicators, promising instant profits.
Many traders get stuck in a circle where they keep jumping from one
strategy to another for months or even years. They invest lot of time and
money during this process, just to find out it doesn’t work.
I spent my first 2 years looking for the holy grail – a perfect strategy that
would make money all the time. Referring back to the phrase I used a few
sentences back, I can say that I practiced the wrong thing for 2 years.
I started with strategy based on indicator called CCI. The premise was
simple – open a chart, wait for the pattern to show on CCI and click buy
or sell. That’s it.
Deep down, I just didn’t buy into it. The whole approach seemed flawed.
It felt like something was missing - a deeper understanding.
There are two issues here. Firstly, more indicators don’t necessarily equal
higher win-rate, as most indicators generate a signal at the same time
and price.
My short trade from mid-Feb 2020 is marked by yellow arrows. All I need
to successfully trade the markets is the Volume Profile and an under-
standing of Supply & Demand.
Learn More
“ ”
I think it’s the best course on trading.
Sebastien V.
CRITICAL
TRADING
So, what should you do?
When I did this myself, that’s when it finally ‘clicked’ for me. That’s the
point at which I started seeing consistency in my trading.
TAKEAWAYS
What was the most attractive thing about trading that made you to be
interested in it?
“Because I want to make a lot of money without having a day job and
boss.”
There’s nothing wrong with having such ambitions. In fact, it’s great to
have them.
Their expectations range from making 100% per month to buying 2020
Mercedes AMG S 63 Coupé with 603 horsepower, 4.0L AMG V8 biturbo
engine and $170k MSRP. Not bad.
I’m trying to say that you don’t need to aim for ridiculously high financial
targets, such as making $500 per day with $500 capital.
Secondly, you can increase your capital at a later stage, raise external
capital, or generate additional income by renting out your strategies.
Meet Joe – novice trader equipped with inadequate capital and unrealis-
tic expectations.
On his first day of live trading, he opens his trading platform and waits
for his signals.
Market makes a clear reversal and price goes down rapidly. Again, no
signal gets generated by his strategy.
“I knew it! I knew the price will go down because of the double top!”
At this moment, Joe throws all of his rules out of the window and starts
clicking buy and sell, biased by the need to trade in order to achieve his
unrealistic financial targets.
Buy
Buy
Buy
Sell
Sell Sell
He’s just made 5 or more trades within few minutes, all of which were
losers.
In addition, not even one of them was in line with his strategy he was
meant to follow.
This is common among traders who aim at targets they can’t handle. By
doing so, they put themselves under a lot of pressure, and are prone to
violate their plan.
Throw fast-paced intraday charts into the mix, and you’ve got only one
possible outcome – losses.
Losses Errors
Unrealistic expectations
As I said previously – it’s not all about the strategy itself. In the previous
scenario, Joe quite possibly had a solid strategy.
Many people don’t understand why they had a blackout and lost.
Unaware, they try again with different strategy or market, but with
same capital and target that’s far beyond of what’s feasible. They end
up losing again, despite their strategy shows positive expectancy and
beautifully looking equity curve on historical backtests.
What if Joe started with slightly bigger capital and lower expectations?
He would do himself a big favour, as he wouldn’t feel the pressure to
trade every single movement in the market.
One of such factors that you must take into the account is the maximum
drawdown associated with the return. Have a look at the below – key
financial metrics of system traded by Larry Williams, a veteran trader
who’s very well known in the industry.
Source: www.worldcupadvisor.com
You can source more capital at a later stage, once you are able to
achieve consistent returns, or explore alternative income sources.
TAKEAWAYS
One of the selling points used was that Forex is the biggest exchange in
the world (as if this was important at all), and that I can trade it during
the day to generate a steady, daily income.
Starting off with market and timeframe that are appropriate for your
strategy and capital makes a big difference. Without exaggeration, it can
even determine whether you survive in this business or not.
What I noticed over the years is that those who haven’t made it tend to
focus their efforts on things they should not be really focused on.
This is a great selling point for brokers and get-rich-quick marketers, who
spread the idea that more trades equal more profits. Despite this is true
in theory, reality usually turns out to be very different for most beginners.
I always advocate that the best way to start is by swing trading on daily
timeframes. My reasoning here is the fact that swing trading is far less
mentally demanding than daytrading.
If you execute your strategy on daily timeframes, you can plan your
trades in advance which frees your mind to focus on executing them
well. If you watch 3 indicators generating 5 contradicting signals within
15 minutes, you have far lower chances of doing so.
Daytrading definitely isn’t the easiest type of trading you can choose.
Low timeframes are dominated by high frequency trading algorithms
– HFTs. These blazing-fast algorithms are manipulating the orderflow
and are essentially hunting for unprepared retail traders.
HFT manipulation became very apparent in the recent years, when the
majority of short-term trading opportunities on low timeframes almost
entirely disappeared from markets.
The problem lies in the way intraday markets move. They are designed
(by HFTs manipulating the orderflow) to attract retail traders to enter in
certain situations, at certain times.
0 2 4 6 8 10 12 14
Not only Joe starts with inadequate capital, he, as many of his peers,
decides to trade Forex on 1-minute timeframe.
Each trade is shown by a coloured vertical line – green for profit, red for
loss. Blue lines are missed trade opportunities.
10 20 30 40 50 60 70 80 90 100
Joe’s first trade is profitable. His stress levels rise, as Joe has to carry on
trading to meet his unrealistic financial target. The profit he just had is
therefore at stake.
Second trade is a loser. Stress shoots up, as Joe realises that he just
gave back the profit he made in the beginning.
A nice signal is generated only a few minutes after, but Joe misses it.
This doesn’t help his psyche at all – stress is at its peak and recovers
slowly.
It’s been a while since the start of the trading session, and Joe hasn’t
managed to generate any profits. He’s getting impatient.
It’s now been 50 minutes since the start of the session, and so Joe isn’t
as sharp as he was initially. As a result, he misses another valid trading
setup.
Next trade is a loss – a nail in the coffin for emotionally shaken Joe.
His emotional stability falls apart, he gets a blackout, throws his rules
out of the window and starts clicking.
He ends up making 3 more trades, none of which are in line with his
strategy, and are all losses.
Conclusion?
Fast-paced intraday charts generating barrage of distractions in a very
short time don’t allow for your stress to recover quickly enough.
I’m not saying you absolutely can’t succeed in daytrading. In fact, some
of my students trade my strategy on intraday basis, like the one below.
So, can you make it in daytrading? Yes, you can, but make sure you’re
aware of its challenges before deciding to do it.
How does the swing trading compare? Same visual layout as on previous
illustration applies. Again, every trade naturally produces spike in stress.
That’s simply part of the game. In this case, however, horizontal axis is
the number of days rather than minutes.
1 2 3 4 5 6
Stress
2 4 6 8 10 12 14 16 18 20
It’s without a doubt that by swing trading, you provide yourself with con-
siderably more time to recover from stress caused by an outcome of any
given trade.
I prepared a handy guide to help you. We’ll look at different options you
have with regards to markets, depending on the size of your capital and
the timeframe you’re looking to trade.
Let’s start with scenario that will likely apply to most people – capital of
around $3,000. With this amount of capital, you can’t expect to become
fulltime trader next month – that’s just not practically possible.
You can, however, use this capital as a great tool to start trading your
strategy in real markets, gain confidence and source more capital at a
later stage.
Despite your options are quite limited with this capital, there’s still a lot
more available than unregulated Forex.
What’s critical is to make sure that you have strong control over your risk.
If you trade on intraday basis, I recommend not risking more $60 per
trade, including trading commissions.
E-mini and e-micro futures have great liquidity and are strongly regulated,
unlike Forex. If you have starting capital even lower than $3,000, then go
for e-micro Futures that allow you to trade with roughly $30 stops. If you
want to stick with Forex, then trade e-micro FX futures contracts.
Below are the actual markets you should be looking at with this amount
of capital.
Source: www.cmegroup.com/trading/equity-index/#usIndexes
Do you have any other options with this capital? Yes – swing trading.
Capital: $3,000
Option B: Swing trading of US stocks
I suggest that you start with a fixed watchlist of 20-30 different stock
tickers to keep it simple. Later, you can opt in for scanning all tickers
that belong to certain index. This is what I do with my systematic trading
strategies.
You can use online stock scanners to scan hundreds, or even thousands
of tickers based on various criteria, such as breakout of recent n-day
high, or whether the price is above the moving average.
Let’s now look at what your options are if you have $10,000 or more.
Capital: $10,000
Option A: Intraday trading of US e-mini indices
In this case, I suggest that you focus on e-mini S&P 500 (ES), or S&P
midcap 400 (EMD). These require slightly bigger stops than mini Nasdaq
or Dow Jones, although you can still trade those if you wish.
Start with one contract, master the execution of your strategy and get
consistent results. At this stage, you shouldn’t focus on the actual gains,
but rather on achieving results that are almost identical to your backtest.
After you’ve managed to do this, add more contracts and diversify using
multiple exits. For instance, I use two types of exits in my strategy - one
is a small target with high win-rate, second aims for much higher profits
but its win-rate is lower.
Capital: $10,000
Option B: US stock swing portfolio
I suggest that you allocate your capital into 8-10 positions per strategy to
start with, with 50% margin used after you’ve gained solid grounding.
I don’t recommend you do this if your capital is lower than $10k mark.
Stick to one strategy only, otherwise your transactional costs go through
the roof.
As far as actual stock tickers are concerned, I suggest using online stock
screeners to scan through various indices to find suitable stocks to
trade.
This way, you are not limited by fixed watchlist, but are rotating the
stocks that you watch.
Now, if stock trading is not for you, and you’re looking for higher returns
by trading leveraged markets, then there’s one more option available -
see the following page.
Make sure you’re not risking more than 5% of your capital per trade. With
$10,000 capital, this translates into $500 stop-loss. This is the limiting
factor in the process of choosing the right markets to trade. In terms of
Futures, you’re pretty much limited to US grains only. Some of these are
available in form of mini contracts and so are the ideal candidates.
Source: www.cmegroup.com/trading/agricultural/#grainsAndOilseeds
Focus on ETFs that copy movements of Futures that are too volatile for
capital you have available. This allows you to trade movements of ‘big’
markets that would otherwise be out of your reach.
That’s it for this ebook. I hope that you found it helpful, and that you took
away a lot of practical information that you can use in your own trading!
The reality is that most people simply fail to set it up right in the very
beginning, as demonstrated in this book.
Good luck!
David Fiacan
Founder & Head Trader | Critical Trading