“The Process of Trading" by Akil Stokes

“The Process of Trading" by Akil Stokes


Akil Stokes - a skillful trader who has adopted the Kaizen philosophy of "continuous improvement" to his trading process. Akil spoke to Maria Goncharova of EXANTE and revealed his exclusive trading tips and tricks.

Akil, please tell us how you started your trading career? What was your primary motivation?

Basically, I never planned on getting into trading, whether it be stock market or Forex or any market out there. I had graduated college at a time where recession has hit over here in the US. There just really weren’t a lot of opportunities to get quality jobs. I remember I was doing a lot at once, I was in graduate school, I was working in the school district with children that had mental behavioral health issues, I was coaching track and field, at night I was also working as a part-time janitor. However, I had a passion for the markets and I said: “If there is a time when I’m really going to go for it - this is a perfect time. I have got nothing to lose, let me try and follow my dream”. And I did so. I was lucky enough not to waste too much money on the markets. I did donate a lot of capital to my learning experience, but luckily I found a mentor very early in my trading career, that help me to get on the right path and it has been great ever since. Now I am just happy that I can share my experience, my hardships and help newer traders to follow me.

I know that you started as a stock trader, but then you changed to investing in the currency markets. What made you to switch?

I switched because I simply wasn’t making enough money in the stock market. Now I look back at it and I think I had no idea what I was doing. I had a business mentor who I worked with, I had office rented and I sit there with 2 TV’s, Wall Street Journal, 5 or 6 magazines that I flipped through to find any stock ideas. I was watching CNBC, CNN and Bloomberg and doing everything that a stock trader is supposed to do. I did make some pretty good moves; the first stock I have ever bought was APPLE. But I didn’t have enough capital to do anything in the stock market and friend of mine told me about FOREX. He told me that it was highly leveraged and I though that is right up my alley. That's why I really made a switch, because this was a chance to make some real money instead of just holding positions in the stock market for a year.

What were the biggest mistakes you made in the beginning of your career and what lessons did you learn from it?

The biggest mistakes all came on the psychological side - they were all mental mistakes. Like many traders out there, I would often blame the system. When one thing did not work I was blaming the system and I moved on to the next thing. Eventually I realized that I was the one making mistakes, it wasn’t the market, the system or the strategy - it was myself. I made the typical mistakes that a lot of traders make, like entering a position too early, exiting too early, entering too late, getting greedy, holding the positions too long. I remember the biggest one though came when I was actually managing money, this is when I thought I was a professional trader and I have learned everything. I was managing money for a client of mine and I was trading a strategy and I took a big hit at once. I overloaded my positions and I talked to the client. He wasn’t happy with the performance and told me I should double down. Anyway I lost about thirty thousand dollars in about a week’s time. I stopped trading for a week as I was too depressed. Didn’t want to do it again. I turned computed on about a week later and saw that if I just would kept with my strategy, if I would have done what I was supposed to do and follow the plan, not only would I have made a thirty thousand dollars back, I would made another thirty thousand on top of that. That was a kind of turning point in my career and I said that something has to change and I need to get on the right track, because this cannot happen again.

This turning point triggered you to master the psychology. Can you share your experience on how to overcome the psychological part, not to stress out and let your emotions affect your trading?  

You are certainly right that psychology is the most difficult part of trading. That is why so many traders fail. I always say that about 90% of traders end up failing. Some say that those numbers are even higher. The easiest way to overcome the psychological errors is to have a clear plan and rules. When you go to analyze a chart or enter a trade, you should be looking at your plan and use so-called “if-then” process. Everything should be “if this happens, then do that”, “if that happens, then do this”. You really turn into sort of a trading robot. You no longer have the freedom to decide what type of trade you like, and what type of trade you don’t like. You have a plan and your only job is to either follow the plan that should leave you to consistent profits, or break the rules you have planned. If you do that, you are going to pay for it. Now still having a plan isn’t enough, because it is one thing to have it and another thing for traders to follow it. The back testing is the key, going through prior data, not just to see if your system or scratch works, but to really gain a belief in it. Once you trust your system, all you have to do is to follow your plan. It makes it a lot easier if you have that belief in yourself and in your system.

And what happens to you when you see that your strategy is not working?

It happens a lot. Professional traders do take losses. It will drain you mentally but you really got to trust your plan. I think as a trader being able to go through a drawdown, being able to go through a losing week, when seems like your trading life is over and you have to quit, fighting through that, is the best thing that can happen to you. If you can do that once, the belief is there. If you believe in yourself and your strategy, you are going to take the right actions. If you take the right actions, you are going to see the right results. The more you see the right results, the more belief you are going to have in yourself again. It just keeps going over and over again, but it starts with that belief.

I know that you trade Forex. Would you tell us how do you choose your pairs, based on what?

I am a day trader. From a day trading standpoint I choose my pairs of what’s going to move during that time period. I day trade the second half of London, first half of New York. I am taking a lot of EUR and USD pairs, because I know I am going to see a certain amount of action. On the swing trading side of things I pick pairs that fit my strategy. Each pair has a unique “personality”. Each pair is going to perform differently depending on your type of strategy. For trend continuation traders certain pairs are going to work amazing, for countertrend traders and advanced pattern traders certain pairs are going to work a little bit better. When you go through that back testing process, what you do is you have the numbers for your strategy and really it comes to picking the pairs that performed the best. If you plan on trading 4 pairs and you do back testing on 6 - makes it simple, pick the 4 pairs that performed the best and make that to your portfolio.

You are a technical trader, but you know that many traders believe that financial markets are moved by political words and actions. Many wait for press conferences led by ECB, Fed etc and their announcements. Do you ever take into account, in any way, the fundamentals?

No. Let me explain, I do follow the fundamentals, however it is a weakest part of my trading. I don’t have a strong economic background; I started off teaching myself and hooked up with a mentor who taught me the rest. But it is very hard to try and trade both ways. You can end up fixing the technicals to what you think is going to happen on the fundamental side. I remember I used to do it a lot; I used to watch the news, CNBC in the morning etc. I would go to a chart and look only for opportunities to get, like tons of tons of short opportunities. But, because I was dead set on following the fundamentals, I missed so many trading opportunities. From investor longer-term point of view I think it’s good to follow those, as a trader I do not really care at all. I do pay attention, especially for my day trading, to certain news events that come out and tell me that the markets are going to get volatile, so I will just stay out of any positions then. But, as far as my trading goes on a day-to-day basis, I do not pay attention to the news at all, strictly to technicals. I believe that price action will tell you the support and resistance and where the market wants to go. Fundamentals may push it there a little bit faster but at the end of the day, the technicals don’t lie. That is my belief.

My next question is, whether you have your favorite pair? Do you have any strategy when trading this pair?

My favorite pair is whichever ones make me the most money. I don’t really have a true favorite pair. I trade a portfolio and I look at them all the same. Typically EUR/USD is the one that everyone likes to trade and this is actually something I have been watching for a while now. There are few different opportunities. For those who are into advanced patterns, you can see that we do have a potential. From the price action standpoint, I would like to share with you how I use multiple time frame analysis. There was a process that I was taught called IPDE that stands for Identify,Predict, Decide and Execute. When I use multiple time frames I want to split IPDE in half. I want to do my identification and my prediction based off the higher time frames and then once I have idea of how I want to get involved - that’s when I use the lower time frames to get a clear picture. So when looking at EUR/USD right now, the first thing I look at are the current structure levels in the form of resistance.

I also see some support down here.

So there are 2 things I would expect, I would expect a continuation back down to previous structure, before seeing a bounce up.

And if we were to come here, I would expect a hold of resistance and some type of retracement. But lets focus on this current level right now, - the anticipation of where’s heading our structure level. What I am going to do is to identify my level that I am paying my attention to (support zone). 

I want to predict the type of move- and that’s when I go to that “if-then” process. If price action comes down into this support zone then I want to look to get long. So I already know in advance what I want to do with the market.  It essentially cutting my analysis in half at this moment in time I am not looking for any type of short, I am only looking to get long on this particular pair. The first thing I do is to figure out what side of the market I want to be on and for this particular case with EUR/USD I want to be bullish.

As I go down to the lower frame, let’s say hourly, this is when I want to go through the process of predicting the trade and seeing where I want to get involved. The first thing I do is look for potential support and resistance zones.

You can see that the market is moving from swing low to swing high, we see outside return, we see new structure high and I would expect the move back to our previous structure. We see that the marker hit the support line twice and I would expect the third hit.

Just to recap again all the process: we identified what the market is doing, I made a prediction on where the market’s likely to go and now I decided where I want to get long in this market. I want to build my case for entry, that’s why I will take my Fibonacci extension tool that goes from swing high to swing low. After you find out where you want to get involved in a market, there are tons of ways to do it. I use a lot of different entry techniques. There is aggressive entries where I just put a limit order down there and there are conservative entries where I can wait for a double bottom that is giving king of confirmation that that’s level is going to hold.

And which indicators do you use the most?

I do not use too many tools, no fancy indicators, simply - price action, harmonics and Fibonacci’s.

Akil, what could be your win percentage?

One of the myths there about trading is that you have to be 85%, 90 or 95% profitable. Lot of traders boast that they do not lose that many trades. That is just not realistic. If you ask most professional traders out there they will tell you that their win percentage is probably 60% maximum, somewhere between 50-60%. I am about 55-60% trader in general. I lose just as much as I win and I am “OK” with that because I am setting myself up with optimal trading opportunities.

Do you define your exit strategy before the execution? May be you could expand on that?

Before I take any trade you need to understand 3 things. You need to identify entries, stops and target - that is very important. You can have the best trade setup in the world but if you risk reward is smaller than your risk you are sabotaging your system. You always need to measure your risk reward and set yourself with a positive risk reward. When I am entering a trade I am saying to myself that stop loss needs to be below previous structure resistance. Then I always asking: “is this a type of trade I want to involve myself?” Just because something is a good trading opportunity doesn’t mean you need to take it. I need to have at least 1:1 risk-reward in order to take a trade. If in my trade my risk outweighs my reward I just won’t take it. This is very important to analyze risk-reward first because we want to put ourselves in a position when we win we make a lot more when we lose. Loses are taught, but when you have a confidence that a single win can make up for 2 or 3 loses then when these losses come you just brush them off, they don’t really mean that much.

That was very informative, thank you! Another question, how many factors would you take into account before taking the trade?

For me, the most important part of my trading is structure. Structure is at the foundation. I would not take a trade unless I have structure which backs me up. It doesn’t matter if we have a lot of Fibonacci’s, if we have flat patterns, if we don’t have structure I won’t take the trade. In general, I have a checklist I called CTS checklist that combines technical score, it is a list of different factors in the market. There is the RSI, there are harmonic moves, ABCD patterns, double tops double bottoms, advance patterns. The best thing about that system is it allows you to be consistent in your analysis. Consistency is a key thing that matters to me.

I know that you are not only inspiring people to trade, but also getting inspired by others. You have read lots of book on trading and I guess you should have some suggestions for our readers. What would you suggest to read?  

Exactly. I have got a big trading library, but I tend to like more the book that focus on psychology. I think trading is actually pretty easy, once you learn how to do it correctly. The hard part is that psychological aspect in dealing with the grind that is trading. Three books I would recommend are “Market Wizards” by Jack D. Schwager. Market Wizards is a great book where Jack has interviewed the top traders to see what do they have in common, was there a one big thing that made them all great? And there really wasn’t. Each of these traders traded in a completely different way yet they were all fantastic. He proved that there is no one magic formula, no Holy Grail system that you trade to be profitable. You can do it tons of different ways. I understood that all these traders struggled a lot before becoming successful. That inspired me a lot. Another book is “Trading in the zone” by Mark Douglas - that is really good on trading psychology and it made me realize why I have been afraid of dogs my whole life:). So I killed two birds with one stone. The third book that I am reading now is called “One good trade” by Mike Bellafiore about professional proprietary traders. It is about putting yourself in a right position, process over outcome.

I would like to ask you to share with all of us your final suggestion, something that you have learned and would like to pass on to other traders.

My one suggestion - be consistent but give yourself rules, in order to take the emotions out of it. Trading is a lot like gambling, a lot of traders in it for the rush. They want get the action and don’t want to be patient. However you need to be consistent and make sure your system has a positive expectancy. If whatever you are looking at doesn’t meet your rules, just play the sidelines, do not take it. Wait for the best opportunities, there always is going to be an opportunity to buy or sell in the market, but that's not what we want to do. We want to put ourselves in a position when we are only taking the highest probability trades. We only want to be involved in the market when we know we have an edge, meaning that the market is more likely to follow our prediction then do owerthise. Also, when the risk reward lines are in our favor. If you consistently can do that and you are in the position to win more, you are going to see a big improvement in your trading. But again, you got to be disciplined and follow those rules. That's typically the hardest part, especially when most of you out there by yourself.

Source: webinar conducted by EXANTE and TradingView on 11 May 2015. 

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