Retirees and MT4 Trading Accounts
“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Warren Buffett
Over the last ten years or so, online trading has developed huge retail, i.e. non-institutional, following. There are now thousands of online brokers, operating from jurisdictions all over the world, with millions of clients. Putting a bet on the direction of gold or the US dollar has never been easier or cheaper. However, the intense competition between online brokers has meant they are not always as scrupulous as they might be when it comes to recruiting clients. This article is primarily directed at retirees who are considering opening an online trading account but will be of value to anybody thinking of doing so.
Retirees usually have a lump sum saved at the end of their working lives, and, of course, that makes them very interesting to all sorts of people selling all sorts of things. The last ten years of super low-interest rates has meant that many people are retiring with less in their pension fund than they had hoped for. There is naturally a desire to top up that figure in some way. There is a very false idea in the culture, encouraged by Hollywood movies, and certainly not discouraged by online brokers, that financial trading is a way to make lots of money without having to invest a lot of time and labour. Nothing could be further from the truth. The brutal fact is that almost any part-time job will make more money for most retirees than financial trading will. In fact, 70% of the traders with any online brokerage are losing money all the time. Of course, they will have the odd win, but they’ll lose it just as fast and then some more – often much more. Online brokers really love their clients.
Does this mean that nobody should ever get involved in online trading? No, some people do make money. But, as the quote from Warren Buffet explains above, it’s not the smartest or the most educated who make money, but those who have got their own psychology under control. So, that being said, here are a few tips that will be useful to anyone dipping their toe into the world of online financial trading. They are lessons learned from my own hard experience. I’m not setting out to teach you how to trade here, but to help you to avoid some of the common pitfalls. As the old saying goes, you can’t put an old head on young shoulders. You will have to go through all the hard slog and tears yourself before you can even really understand what I’m going to say to you here. Some of you will read this and just dismiss it. That would be perfectly normal – and even healthy. But, over time, if you keep trading, you will discover these things in your own way. The best I can hope for here is that by reading this article you will not lose so much money at the start that you are forced to give up before you can learn. So let’s get started.
What is the MT4 Platform?
Metatrader 4 (MT4) is a software platform first released in 2005. MT5 has since been released, along with many more modern rivals. However, while these modern rivals look better and can do many more things, MT4 is still the favourite among online traders – particularly for foreign exchange (Forex) trading. MT4 software has been called the AK47 of trading software – it’s simple to use, effective, and hardly ever breaks down. That being the case, almost every online brokerage offers the MT4 platform, and most traders choose to use it for placing their trades. I’d say it’s definitely the best option for beginners.
One of the great things about MT4 is that you can use it to set up a practice account for free. This account will be the same as a real account in every way – except that you are not using real money. And since you are using “monopoly money,” you can decide yourself how much money you’re going to start with. However, you’re best to choose an amount similar to the amount of real money you are considering risking – otherwise there’s no sense of reality at all. MT4 provides you with the charts you will need and many free indicators, such as moving averages. It will take you some time to learn how to read these charts and apply indicators to them.
You need to trade the practice account for a minimum of three months before you open a real trading account. MT4 is a software package and you have to learn it. You will make many mistakes as you learn – and you’re better not to do that with your real money. The broker who’s supplying you with the MT4 account will not mind how long you spend on the practice account. You can also keep using your practice account while you have a real account so as to try out new ideas without risking real money – and there’s never any charge. It’s always free.
However, you will always do better on a practice account than you will do on a real account. The psychology is completely different. It’s the difference between walking on a tightrope two inches above the ground – and walking on one twenty feet off the ground.
Choosing an Online Broker
A good exercise before choosing an online broker is to read the reviews which are widely published on the internet. Some of these reviews can be taken with a pinch of salt, as some people blame their broker for the bad decisions they have made themselves – but you will get an overall feel for what’s out there and one broker is likely to gain your attention. Really, all the large London brokerages offer the same service. They are all registered with the Financial Conduct Authority (FCA) and the Financial Services Compensation Scheme (FSCS). This means that if they go bust, the British government guarantees your account up to £85,000 regardless of where you live. By EU law, London brokers can offer leverage up to 30:1. That means if you have £100 in your account, you can place a trade valued at £3,000. If you go outside the EU, say to Australia, you can get 500:1. However, no serious person would ever dream of doing this. Perhaps Brexit will allow London brokers to offer higher leverage in the future, but even 30:1 is far too high, as I will explain later on.
Many retirees thinking of opening a trading account will have a business background. They will be familiar with concepts such as the diversified portfolio. And numerous studies have shown that a well-diversified portfolio is the nearest thing on earth to a free lunch. You will make money most of the time. However, the key to a diversified portfolio is finding a set of investments that are not correlated – or are at least very weakly correlated. This means that a move in the price of one of them won’t affect the others, i.e. their prices move independently of each other. Finding such a set of investments is extremely difficult in a globalized world, and the top hedge funds spend millions of dollars each year just searching for such investments. Your online broker simply isn’t going to do that for you. They aren’t going to stack the odds against themselves and for you. In fact, pretty much every instrument (currencies, commodities, stocks, etc.) available on an online platform is highly correlated to the US dollar. So, if you’re serious about building a diversified portfolio, you must regard your online broker as only one element in that structure.
Most brokers have a very small minimum amount you must deposit before you can open a real trading account – about a hundred dollars. That leaves a question of how much money should you start with. Well, the sad fact is that no matter how much money you put in to start with – you will lose it. Doesn’t matter how well you’ve been doing on your practice account when you go to real money, you will lose everything you deposit. So, obviously, it’s best not to put in too much. At the same time, if you put in too little, you won’t be able to trade in any realistic way. I’d advise something between 500 dollars and 1000 dollars for a first trial. I trade in dollars rather than pounds or euro, because the US Federal Reserve is the most important central bank in the world, and the dollar is the world reserve currency. One could say that everything else is already priced in dollars. But, at the end of the day, it’s a matter of preference.
When you’ve lost your deposit don’t just jump straight back in again with another deposit. Take some time. Meditate on why you lost the money, and how you might do things better next time. Don’t worry, the market will still be there when you come back.
Mind Reading
In a sense, the market does have a mind and successful traders learn to read it. This is not as daunting as it might sound – you are already a good mind reader. You read the minds of those around you all the time – from what they say to the little unsaid things that you pick up just as clearly. Although reading the mind of the market is much more difficult than reading the mind of a single human being standing in front of you, the basic method is much the same. This is such an important topic that I’ll devote a full blog post to it in the near future, but, essentially, you are trying to discern what the participants in a given market want, and trying to work out the best strategy for them to get what they want. That is the solution that the market is most likely to come to, over time. You do this in an instant with your friends and family, but the information coming from a market involving millions of people is much more obscure and noisy. You will need a full understanding of how mind reading works on the one-to-one scale, and then extrapolate that schema onto the macro-scale. Considerably more filtration of noise will be needed. In short, you will need a routine for gathering and processing information and you will need to be meticulous in its application. You can take it as more or less given that you don’t have information the market doesn’t already have, so give up on any hopes of outsmarting the market. What you want is to discover what the market is doing – and you do more or less likewise. Doesn’t matter how irrational you believe that to be. As John Maynard Keynes is credited with saying – The market can stay irrational for longer than you can stay solvent. But, I will devote a full blog post to this question.
Divination
In ancient times, the Druids would watch the flight of flocks of birds to discern the quality of the time. They weren’t so much trying to predict future events as to know if the time was auspicious for the undertaking of important enterprises. The belief was that the quality of time changed first in the heavens and then filtered down to earth. And, since the birds were nearest to the heavens, their flight would show the first signs of such a change. When you study your charts and indicators you aren’t doing something very different. You are looking at the emergence of patterns on a computer screen that is being influenced by events far away from you, and over which you have no control whatsoever. What information can you really expect to glean from these patterns? Will they really tell you the future? That’s unlikely. What they may tell you, however, is something about the nature of the time. Is this a good time for market prices to move up? Or does the market need a breather? Does it need to fall a bit so as to gather more support at a lower level? Or are times so bad that a total market collapse is possible, or even likely?
So, why can’t we tell the future using charts and indicators? Simply, because markets are complex systems, not complicated systems. A complicated system is one like the links between two or more computers. There may be millions of these links in highly complicated structures, but it is still a bounded system – one that can be fully mapped, i.e. one can know every single link and how it operates and how it will continue to operate in the future. In contrast, complex systems such as human relations are unbounded, i.e. they are infinite in nature and can never be completely mapped or known – particularly not their future behaviour. And markets are human relations. They are not based on cold logic or hard facts, but on human desire.
When dealing with a complex system, one is always dealing with probability. At very short timeframes, such as those used by High-Frequency Traders, i.e. in the microseconds, the laws of probability will give pretty predictable results over a large number of trades. In the universe of microseconds, the human factor is less important. However, anything above those timeframes and life becomes very much more unpredictable. The best way to deal with this unpredictability is to keep your position sizes small. Think of them as probes you are sending to an unknown planet. If the first probe survives for a few hours, then you can add to it, and build up your risk.
Another vital aspect of time relates directly to you. Are you ready to enter the market? Are you ready to take this trade? Any enterprise that involves potential losses with be draining on your mind and body. Is your mind in the right place? Is your body strong enough? Are you ready and able to take the loss if it happens? These questions are all part of the nature of the time. If you can’t answer that you are ready, then the time is not right. This is not an auspicious time for you to enter the market.
Against Number Fetishism
Wanting a certain profit on a given trade is what I call number fetishism. It often happens that traders will have a profit of, say, $1000 in mind. It’s a nice round sum. They get to $990. The market is struggling to make any further gains. But they hold on. Then the price begins falling. They’ve lost half their profit in a very short time. Now they have to hang on in the hope of the market turning. All their profit is wiped out, but they still hang in. A $990 profit is turned into a loss – maybe a substantial loss. And all because the trader was fixated on one number. Sounds crazy, but I doubt if there’s a single trader who hasn’t done this at some point. I know I have. We humans are very prone to fixations. In reality, it doesn’t matter how much you make on any given trade. It’s the method that matters. If your method is good, and your psychology in the right place, you will make money over time.
Likewise, wanting a position at any particular number is number fetishism. Say, you want to buy gold at $1800 an ounce. The price hits $1800 and you’re in with a substantial position. But, the price keeps falling. It hits your stop loss or your account it busted, and you’re out. Instead of being fixated on one number, you would be better to think of your entry as a zone. And the wider you can spread this zone, the better your chance of being able to stay in the trade and make money. You do this by taking very small positions spread over a zone. As you get more experienced, you will be able to know where this zone should begin and where it must end. In short, you’re not picking a point. That’s impossible to do with a moving target with a large component of sheer randomness. You’re laying down a zone. The smaller your position sizes, the bigger your zone can be, and thus your probability of success.
When you spread out your positions in a zone, you are only making small decisions at each point. With small positions, your decisions are quick and nimble. Not very much is at stake in each decision – you’re not emotionally tied to any position – and that gives you the psychological flexibility to get out of bad trades before you lose too much – or even to reverse direction if you see a trend is building up in the opposite direction.
Think of your risk as if it were the accelerator on your car. What do you do when you see a potential problem up ahead? You ease off the accelerator. You apply some brake. You don’t even have to think about this. Your unconscious does it for you. But, many traders will pile on the risk when things get volatile. They have not trained their unconscious to do what it does while driving a car – When you see trouble or feel uncertain or uncomfortable, ease off the accelerator. Apply the brakes. Stop if you have to. Don’t crash your car, and don’t bust out your trading account.
The Double-Edged Sword of Leverage
Leverage is the ratio of your position size to the money you have on deposit with your broker. As mentioned above, if you have $100 on deposit, and you open a trade valued at $3,000 then that is the leverage of 30:1. Now, you might ask yourself why would any broker give you $3,000 to bet with, when you’ve only got $100? Well, brokers actually aren’t so incredibly generous as all that. For example, when you buy $3,000 of gold on an MT4 account, you haven’t actually bought real gold at all. What you’ve done is undertaken to pay the broker the difference in value between the price you bought at and the price it is right now, in real-time, if the price falls. The broker has undertaken to pay you the difference in real-time if the price increases. The money will be added to your deposit in real-time or subtracted from it. Unlike with real gold, you can get out of the trade at any time and in less than a second, and so limit your losses. This arrangement is called a Contract For Difference (CFD), and is a form of derivative. You will have heard that playing with derivatives is dangerous – and that’s for this very reason – it’s so easy to become overleveraged. Being overleveraged has killed some of the top hedge funds in the world, including Long-Term Capital Management (LTCM). LTCM had two Nobel Prize-winning economists on its team, along with a former Number Two to Alan Greenspan at the Federal Reserve. They had the best computers money could buy, along with the best mathematics PhD graduates and algorithms. They traded derivatives at 30:1 leverage – and it killed them. They went bust in 1998 and nearly brought the whole financial system crashing down with them. So, do you really think you will win at 30:1 leverage? Or at 500:1 leverage?
The good news is that you can move your leverage up and down very easily on MT4. Start trading your MT4 account with lot size 0.1. This is $1000. So, if you have $1000 on deposit, and you are betting with lot size 0.1, you are using zero leverage. This is the smallest lot size available. Another way to look at this is that if you are trading an instrument like gold with a lot size of 0.1, you are betting one dollar for every move of one dollar in the price of gold. These days, gold can easily move $30 in a day, but there have been moves of over $70 in one day recently. And these moves were just fluctuations that reversed shortly afterwards and had no impact on the overall trend. Those who kept their position size small could withstand these reverses and then continue to make money. Your profits will be very small – but so will your losses. It’ll take a long time for you to go bust. You might say – Why even bother? That’s just what the average person will say. The extraordinary person will focus on the method and keeping losses to a minimum. Just remember, at first you will have many more losses than wins.
As a general rule, if you find yourself with your eyes glued to the one-minute chart – then you’re definitely overleveraged. Trading is quite boring. If you’re finding it too exciting, then you’re probably gambling, not trading. With gambling, you might double or treble or even multiply your stake by ten in a very short time – and then lose it all twice as quickly. With trading, you are doing very well if you increase your stake by 2% per month. In fact, if you are doing better than that, you are probably gambling rather than trading. Trading means meticulously limiting your potential losses. And that means your gains must be limited too.
When you have large positions, particularly if you’re over-leveraged, a freeze reaction sets in. You’re like the proverbial rabbit in headlights. You sit watching your account being annihilated – but you can’t bring yourself to stop the losses and walk away. You are hesitant to even subtract leverage so that you will lose your money less quickly – you’re so focused on your hope that the market will turn and make everything all right again. One of the main problems with drink driving is that you are actually too focused on what’s directly in front of you and don’t have the flexibility of mind to deal with peripheral events. Your unconscious awareness of your environment shuts down, so your speed of reaction is severely curtailed. In effect, leverage has the same effect as alcohol.
Being over-leveraged encourages what’s known as The Gambler’s Fallacy. This means doubling your bet each time you lose in the hope that when you do win, you’ll get all your losses back. For some reason, this fallacy is deeply rooted in the human psyche. I suppose we have to live in hope that no matter how bad things are now, life is soon going to get better – and that if we give up now we’ll lose the chance to enjoy that turn in fortune. And yes, it is sickening when you walk away – and the next minute the market turns. That will happen. But, we have to think in the long term. It’s better to suffer being sick watching the market leave you behind – than it is to keep betting until you’re broke – or, even worse, in debt on your credit card. Just remember that tomorrow’s another day – and the market is always offering new opportunities. What you think is of the utmost importance today will be nothing but a vague memory in a month’s time. Then another opportunity will be commanding your attention – and you will still have money to trade it.
The highs and lows of trading with too much leverage release a dopamine rush into the brain that becomes very addictive very quickly. The addictive pull is so strong that you will probably find that your biggest challenge will be keeping your leverage under control. This is a battle with your own unconscious – which is very powerful and wants to enjoy all that dopamine. Using mental images is one of the best ways to communicate with your unconscious and entice it to work with you rather than against you. For example, you could imagine the market as an infinitely large gold mine that you have just found. You want to get the gold for yourself as quickly as you can. But, you only have a small amount of metal to make a shovel from. You say to yourself – I’ll make the biggest shovel I can so that I can get lots of gold quickly. But, your big shovel is made of very thin metal and it buckles and breaks when you try to dig for gold. Angry, you make the next shovel even bigger – and thus the metal is even thinner. Again, you are left with nothing but a broken shovel and no gold. So, eventually, you say to yourself – I’ll meltdown this broken shovel and make a very small shovel of very thick and strong metal. You begin to dig. After a day, you have a very small amount of gold. Next day, you have a little bit more. In a month, you have enough gold to buy some more metal to make a slightly bigger shovel.
