We’ve got quite a few questions to cover this week. Enjoy, and don’t forget to send your questions to Brad here.

Question:

Can you suggest a good platform for trading? I’ve been using Schwab but curious what you think is best. I’m not a newbie so I don’t need full service.

Answer:

I think the best all round platform is Optionsxpress. Its very user friendly, intuitive to use, and brokerage rates are competitively priced.

Question:

Hi Brad, first time I traded, I traded Forex with some guru and lost my entire account, second time I took some time and used some basic risk management and about broke even. I joined your service from when it was free and then when you gents began charging for it I thought to myself, hey this is expensive. My wife said something I won’t repeat about paying that kind of money and something else about Vegas, then I looked at my previous years and how much god-damn money I’ve lost doing this and then reconciled it with my account which I started with your then “free” months you provided, and I figure I’m just about to make back all my losses from profits you’ve helped me make. That’s why I’m still here and paying. 🙂 though I haven’t actually told my wife…

My question is this. If I’m trading spot Forex as apposed to say long dated calls/puts on an FX cross I just don’t get the leverage available to me and I can’t compound returns as fast. Surely with good stop losses in place the risk/reward to spot FX is greater than buying the long dated options?

Answer:

Yes the payoff of a leveraged spot FX position is better than with long dated options. However, that is only from a “theoretical” perspective. Practically the payoff isn’t better because if you get stopped out a couple of times on a spot FX trade before the trade eventually goes your way, the cost of those stop-outs will make even an expensive option look very cheap! Secondly, if you get stopped out a couple of times on a spot FX trade will you come back for a third or forth time? If you don’t put the trade on again after being stopped out and the trade eventually takes off, in what would have been your favour – what will this lost opportunity do to your self confidence?

I think people don’t give enough thought to the financial and emotional costs of getting stopped out in leveraged FX trades. People lose money in this game because they are emotionally incapable of doing what they need to do.

Question:

How do you go about figuring out lot sizes for your trades? I’d love an easy method of calculating what size I should position for each trade.

Answer:

I trade in options mostly. I have an easy “formula” for exposure to a single trade. For options going out 2 years 1% of capital, for 12 months 0.5%, and for 3-6 months 0.25%. If you find these amounts to aggressive then half them… so for 2 year options 0.5% etc. I try to keep things very simple, its easier and cleaner that way.

Question:

I’ve been following you from the start. Do you offer managed accounts?

Answer:

Yes I do manage accounts for selected high net worth clients and have been doing so since 2000.

Question:

I’ve been using a demo account for all your trades, which pissed me off because I realise that I could have been making real money, but wanted to be sure before “going live”. Now I need to find a good platform to trade on. I’ve been using a demo at Saxo so was going to just use that but thought I’d ask.

Answer:

I have found that demo accounts are only good for teaching you how to use a platform. They give you little or no insight into trading because trading is 80% emotion (or something like that). If you don’t have any skin in the game you won’t have any emotional attachment to trades. I have seen people do very well using demo accounts only to fall apart when making the transition to live accounts. My idea would be to start out by putting one or two contracts on for long term options… with amounts of money that you wouldn’t think twice about losing.

Question:

I know that you’re bearish JGB’s and the Yen. In the last Q&A Chris mentioned the sell-off in Japanese equities and the fact that the Japanese bond market didn’t rally. I’m sorry but I don’t understand how this is “meant to work”.

Answer:

Well it is meant to work like this. The JPY depreciates, making Japanese exports more competitive which, given that most large cap Japanese companies are export orientated, pushes the Nikkei higher. However, when the JPY depreciates it should lead to a rise in the cost of imports which leads to inflation… well at least after a certain degree of depreciation in the JPY! So with respect to the direction of JGBs all you need to know is what is going to happen to the JPY – if the JPY was to weaken materially then JGBs should collapse. The big problem with JGBs is their size, they are very big contracts and really only people with significant capital behind them should be entertaining the idea of trading this market.

From Chris: What I meant by this is that if you look at risk off trade, this normally entails equities getting hammered and a bond market rally. In the case of Japan, equities have been hammered while the bond market failed miserably to attract capital flows. I think this could be a significant shift in sentiment. Time will tell.

Question:

I haven’t invested in any of the option trades so far. But I am going to put aside a portfolio amount. I was wondering whether Brad would be able to review each of the previous alerts and advise whether they are still worth investing in? Do the ones that have gone up still have upside? Do the ones that have gone down represent better value now? Or have times and implied volatility changed?

Answer:

All the previous trades I have talked about were selected for their long-term prospects/payoffs. Some of the trades have already closed out while most of the trades that are long dated (which is most of them) haven’t moved too much since I posted them up on the site and the ones that have still have significant upside on the offer. Now here comes the important point – I have no idea as to which trades are going to do the best. So I would say that if you are going to allocate capital to these trades do so equally across all trades – i.e. don’t favor the outcome of one trade over another. After many years trading I think this is one of the most valuable lessons that I have ever learned.

– Brad

“It is what people actually did in the stock market that counted – not what they said they were going to do” – Jesse Livermore