Because I get to work with new traders in our FX Power Courses, I get a pretty good idea of why most new traders lose money. One of the reasons is that these traders do not have an idea of what they want to achieve. Sure, everybody wants to make money, but we need to have realistic expectations to get to that level. I like to compare trading to flipping a coin. If I paid you $1 every time the coin landed on tails and you paid me $1 every time the coin landed on heads. We could flip all day and night and most likely break even after every 100 flips. So how is this information useful to a trader? I like to recommend to new traders that they think in terms of winning half of their trades. If you trade with the trend and only take solid setups, this can be done. But that is only half of the battle. If we win $1 when we are right and lose $1 when we are wrong, how can we make money? The answer is that we either have to win more often or win more when we are right. The idea then is to not win $1 when we are right, but to win $2 and still only lose $1 when we are wrong. That is our 1:2 risk:reward ratio we talk about in trading. If you are risking 50 pips on the trade, you should look for twice that in profit, which is 100 pips. Now we can look at that coin toss differently. If I paid you $1 every time the coin landed on tails, but you had to pay me $2 every time the coin landed on heads, I would want to flip that coin 24 hours a day for the rest of my life. Even if I lost five flips in a row, I would still want to bet on that next flip because I know that after a series of 100 flips, I would still win about half and lose about half of the time. So no matter what happens on the next flip, I would consider myself a winner because after a series of flips, I would most likely be profitable. Heads I win…and tails I win too.

Top Currency Trader Is #3 In The Overall Contest!

The leader in the currency trading portion of the contest continues to make his way higher in the ranks of the overall Million Dollar Portfolio Challenge, as he proves to be a jack-of-all-trades. Indeed, Edward Burke, who made over $4,000 on Tuesday on short-term EUR/USD trades, now has the third largest portfolio balance in the whole contest.

With event risk for the euro and US dollar relatively limited this week, conditions may be ideal for Burke’s trading strategy, which has clearly already served him well as he has made nearly $200,000 in the currency portion of the contest alone. Furthermore, he ended Tuesday with a balance of $393,705.44 and an overall portfolio balance (stocks and currencies) of $2,233,941.88.

Meanwhile, contestant number 2, Chi Ming Wong, was a day late and about 10,000 bucks short to the USD/JPY rally. Wong ended Tuesday down at $296,683.24 as he attempted to buy the pair early in the morning as it consolidated between 106.70 – 106.90. USD/JPY subsequently plummeted throughout the European trading session, which triggered Wong’s losses, though pair quickly rebounded as the US stock markets opened higher and led the Japanese yen crosses higher.

Contestant number 3, Dave Von Holten, had much better luck as he ended Tuesday up nearly $8,000 with a currency trading portfolio balance of $275,428.04. His best trades have been in some of the less popular currency pairs like EUR/GBP, NZD/USD, and AUD/USD. On the other hand, his biggest losses have been in EUR/USD and USD/JPY – which are consistently the most frequently traded pairs in the contest – which highlights the fact that traders need to hone their skills and utilize the best pairs to suit their own trading style.

Terri Belkas, Currency Analyst for DailyFX.com

US Dollar Down On Bearish Rhetoric From Paulson, Bernanke

Edward Burke continues to hold on to the top spot in the currency trading portion of the contest and remains the contestant with the third largest portfolio balance in the overall Million Dollar Portfolio Challenge (stocks and currencies). While Burke’s profits of just $1,700 on Wednesday were mild, his slow and consistent gains since the start of the contest have been enough to keep him in the lead with a currency portfolio balance of $395,405.44. Furthermore, his method of executing very short-term trades insulates him from event risk in the markets, to a certain degree, as he is less likely to be holding positions at the time of volatility-inducing news.

Meanwhile, contestant number 2, Chi Ming Wong, had mixed luck trying to sell the Australian dollar. His first attempt was with AUD/USD, which he sold and ultimately lost $9,000+ on. He followed this up with an AUD/JPY short, which was working out well as Wong floated profits of over $12,000 as of Wednesday’s close. However, this position eventually lost money as well, which could put Wong further down in the ranks on Thursday. Indeed, the Australian dollar rocketed higher overnight as the Australian economy unexpectedly added on 29,800 workers in June, allowing the jobless rate to fall to 4.2 percent from 4.3 percent. Chinese and Indian demand for commodities have led mining and energy firms in Australia to continue hiring workers, leaving the industries the prime drivers of economic growth.

Contestant number 3, Carlos Godfrey, has been in and out of the top 3 over the past few weeks. On Wednesday, he ended the day up at $284,252.16 as he finally decided to close a long EUR/USD position that he entered on July 3. The pair has done little but consolidate over that period of time, but given the surge in EUR/USD this morning, it looks like Godfrey may have missed the big move. Comments by US Treasury Secretary Henry Paulson in his testimony before the House Committee have sent the US dollar tumbling across the majors. Paulson said that the market turmoil would take “additional time” and confirmed his free-market views that financial firms “must be allowed to fail.” The commentary suggests that the financial sector will not be bailed out if conditions get worse, which explains why Federal Reserve Chairman Ben Bernanke also said that the Fed wanted bank to raise capital. Though the Federal Reserve is not expected to cut rates again, the news is nevertheless quite bearish for the US dollar and equity markets.

Terri Belkas, Currency Analyst for DailyFX.com

Fannie Mae, Freddie Mac Concerns Weigh On US Dollar

The leader of the currency trading portion of the contest, Edward Burke, continues to dominate, as he has made over $200,000 to bring his portfolio to $407,502.44 as of Thursday’s close. Burke’s gains have outpaced the other contestants by a large degree, as his portfolio balance is more than $100,000 higher than the second runner up. Furthermore, his currency profits have allowed him to advance in the ranks of the overall contest, as his stock and currency portfolio has the third largest balance (as of Thursday’s close) at $2,185,277.48. However, there’s one week left in the contest, giving the other contestants time to either rack up massive profits in order to catch up.

Meanwhile, Carlos Godfrey has been working on trying to hold his own in the top 3, and managed to do so on Thursday. Not only did Godfrey have the portfolio with the second largest balance of $292,104.16, but he also had the third largest balance of $289,424.47 as well. Last night, his portfolios were floating $5,000 - 7,000 in profits on the back of a short GBP/USD position, which he entered just above 1.98. However, the trade has gone against him in a big way this morning, as the US dollar has plummeted across the majors and sent GBP/USD rocketing above 1.99 despite broadly bullish US data.

Indeed, the US trade deficit unexpectedly narrowed to $59.8B from $60.5B while import prices rose 2.6 percent during the month of June and rocketed 20.5 percent higher from a year earlier, marking the sharpest gain since record-keeping began in 1983. The news will only add to the Federal Reserve’s inflation concerns, and a breakdown of the report shows, unsurprisingly, that petroleum was responsible for the majority of the increase as the component jumped 7.4 percent during the month and a whopping 78.6 percent from a year earlier. However, concerns about the solvency of Fannie Mae and Freddie Mac, both of which are government-sponsored, stockholder-owned companies, has weighed heavily on US equities, the Japanese yen crosses, and more specifically, USD/JPY. Given the extent of US dollar weakness this morning, Godfrey may not remain in the top 3 as of Friday’s close.

Terri Belkas, Currency Analyst for DailyFX.com

USD/JPY Weakness Brings Contestant Back Into the Top 3

The contestant with the third largest balance in the overall Million Dollar Portfolio Challenge – which includes stocks and currencies – isn’t even in the top 25 of the stock-trading portion. Nevertheless, Edward Burke has managed to work his way up in the rankings by dominating the currency portion of the contest and making over $330,000 in EUR/USD trades alone. Indeed, his strategy of executing positions in the pair and holding them for only minutes at a time has served Burke quite well, as he has managed to avoid large moves in the currency markets. With only a week left in the contest, Burke’s currency portfolio lead of nearly $140,000 ahead of contestant numbers 2 and 3 put the odds very much in his favor.

Contestant number 2, Chi Ming Wong, is working on catching up, though. As of Friday, Wong held a currency portfolio balance of $294,717.92 and is currently floating profits of nearly $14,000. Thus far, a short USD/JPY position is working in Wong’s favor, as concerns about the solvency about Fannie Mae and Freddie Mac - the dominant providers of funding for home mortgages in the US – has weighed on both equities and the US dollar in general. While news on Sunday that the Federal Reserve Board of Governors granted the New York Fed the authority to lend to Fannie Mae and Freddie Mac if necessary has helped support US stock markets this morning, the government's seizure of IndyMac Bank has done little but add to evidence that conditions in the US credit markets and financial sector are bound to get worse before they get better.

Carlos Godfrey, meanwhile, is still in the top 3 with a portfolio balance of $283,542.16, as of Friday’s close. However, this is down almost $10,000 from Thursday’s close, as his short GBP/USD trade went against him. Godfrey re-entered the position on Friday at a higher price of 1.9883, but with the US dollar remaining broadly weak and bullish UK data anticipated to be released on Tuesday, this could become yet another losing trade.

Terri Belkas, Currency Analyst for DailyFX.com

DJIA, Yen Crosses Tumble On Bernanke’s Testimony

The top contestant in the currency portion of the contest continues to leave the other traders in the dust, as he made $8,440 on Monday to bring his portfolio up to $441,714.33. As we discussed in yesterday’s Currencies Update, this trader’s strategy of executing EUR/USD positions and holding them for only minutes at a time has served him quite well, as he has managed to avoid large moves in the currency markets and rake in massive profits.

What are the other contestants in the top 3 doing to stay ahead? Contestant number 2 made over $20,000 on Monday by trading USD/JPY, which brought his portfolio balance up to $297,373.73. He sold the pair late last week and benefited from yesterday’s drop toward 106. Likewise, contestant number 3 sold USD/JPY on July 3 and finally closed out the position last night with a net profit of nearly $10,000. However, it appears that both of these contestants missed the big move in USD/JPY, as the Japanese yen crosses have collapsed across the board amidst declines in global stock markets overnight and bearish commentary by Federal Reserve Chairman Ben Bernanke this morning.

Indeed, Federal Reserve Chairman Ben Bernanke's semiannual testimony on monetary policy to the Senate revealed increasingly pessimistic views on the US economy, and mounting concerns about rising inflation pressures. Mr. Bernanke noted the "considerable stress" that financial markets and institutions remain under and the concerns surrounding the health of Fannie Mae and Freddie Mac. Nevertheless, the Federal Reserve appears ready to do whatever it needs to do, as Mr. Bernanke said that "healthy economic growth depends on well-functioning financial markets and "helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."

Focusing on the economy specifically, Mr. Bernanke mentioned the weakness in the labor markets, housing sector, stagnation in real earnings, tightening of credit conditions, and sharp drop in consumer sentiment, all of which is likely to restrain consumer spending "over coming quarters." Meanwhile, inflation remains of great concern, and according to Mr. Bernanke, "FOMC participants viewed the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast." The greatest concern, however, is that increasing prices "might lead the public to revise up its expectations for longer-term inflation."

Overall, instability in the financial sector and looming downside risks to the economy create perilous conditions for the US, and despite the threat of rising inflation, the Federal Reserve has little room to fight that threat with increases to the fed funds rate. Furthermore, with the economic slowdown likely to quell domestic demand, inflation pressures are likely to ease on their own over time.

Terri Belkas, Currency Analyst for DailyFX.com

300+ Trades On Tuesday Nets Top Trader A 31% Gain

The top contestant in the currency portion of the contest is making a sprint to the end as he made nearly $140,000 in a single day to bring his portfolio balance up to $580,879.33, which puts him nearly $300,000 ahead of the next runner up. Contestant number 1 certainly had to work hard for his 31% gain though, as he executed over 300 short-term EUR/USD trades!

Meanwhile, contestants number 2 and 3 haven’t really made much headway. Contestant number 2, whose portfolio amounted to $288,517.10 as of Tuesday’s close, actually lost money as he sought to catch a bottom in USD/JPY. On the other hand, contestant number 3 has not made any trades since closing a short USD/JPY position near 106, bringing his balance up to $285,300.49. However, USD/JPY started to show signs of recovery this morning when the pair has bounced from the 104 level amidst a rebound in equities and surge in the US dollar.

Indeed, Wells Fargo’s announcement that net income fell less than expected and a 10% boost to the firm’s dividend has led the DJIA to rise back above 11,000. Meanwhile, significantly stronger-than-forecasted US inflation figures supported the greenback. In fact, CPI jumped 1.1% during the month, bringing the annual rate up to a more than 17 year high of 5.0%. Unsurprisingly, a breakdown of the report shows that energy prices were responsible for the bulk of the rise, as they gained 6.6 percent from a month ago and 24.7 percent from a year earlier, while food costs rose 0.8 percent. What may be most disconcerting to the Federal Reserve, however, was the unexpected increase in core CPI of 0.3% during the month and 2.4% from a year earlier. As Federal Reserve Chairman Ben Bernanke noted yesterday, "the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation." Nevertheless, the central bank is unlikely to raise interest rates in response due to the looming downside risks to growth and unstable conditions in the financial sector.

Terri Belkas, Currency Analyst for DailyFX.com

Traders Focused On Single Strategies Fare Better In Final Days

The top currency trader is doing everything he can to get ahead in the overall contest, as he has executed over 500 EUR/USD trades over the past two days, netting him nearly $220,000. In fact, contestant number 1 made $78,908.66 on Wednesday to bring his portfolio balance to a whopping $659,787.99 and widening his lead to almost $400,000 ahead of contestants 2 and 3. For more on his trading strategy, check out Monday’s Currencies Update.

With the end of the contest nearing on July 19, currency traders are scrambling to try to catch up to the leader. Contestant number 2 had a rough run with USD/JPY, as this trader bought the pair on Tuesday afternoon near 104.80, but was subsequently stopped out near 104.43 as the pair dipped lower early on the following morning. However, contestant number 2 has had much better luck with EUR/JPY, as he went long Wednesday morning. The pair has since rallied nearly 200 pips since then, and with the position still open, this contestant is currently floating profits of over $43,000. While contestant number 2 ended Wednesday with a portfolio balance of $287,108.06, he could crack the $300,000 mark by today’s close if he closes those profitable positions. There is some downside risk for the Japanese yen crosses, though, as US equities have had trouble holding on to yesterday’s massive gains given the news that J.P. Morgan posted a 53% drop in profits, exacerbating concerns about the health of the US financial sector.

Meanwhile, contestant number 3 is all over the place. This trader ended the day up at $282,812.05, as he closed a number of positions to net just over $4,000. This trades worked in his favor as he held a discernable bias: short euros and long US dollars via EUR/USD, EUR/CHF, and USD/JPY. However, a number of open positions are not as consistent, which may be part of the reason why he was floating almost $6,000 worth of losses at Wednesday’s close, and is floating nearly $10,000 in losses at the time of writing.

Terri Belkas, Currency Analyst for DailyFX.com

Top Currency Trader Shooting For a Win in the Overall Contest

Four days, over 700 trades, and nearly $311,000 into this week, our top contestant has brought his balance to a whopping $743,287.99 as of yesterday’s close. During Thursday’s trading session alone, contestant number 1 executed over 200 EUR/USD positions to net $83,500, widening his already-substantial lead even further. At this juncture, it’s fair to say that this contestant’s win in the currency trading portion of the contest is essentially guaranteed. However, constant number 1 is obviously trying to win the overall Million Dollar Portfolio Challenge, and it remains to be seen if his combined trading of stocks and currencies can lead him to win.

The efforts of contestants 2 and 3 should not be ignored, however, as they raked in hefty profits on Thursday as well. Contestant number 2 closed out multiple positions to net just over $30,000, with his most profitable ones being long EUR/JPY entries. Indeed, the massive rebound in US equities on Wednesday and Thursday signaled a return to risk-seeking behavior throughout the markets, which is part of the reason why EUR/JPY rocketed over 300 pips from Wednesday’s lows. Contestant number 2 flipped his bias, however, by selling USD/JPY yesterday afternoon following the pair’s failure at 107. Thus far, the position is profitable as USD/JPY has struggled with that resistance level, and if equities tumble during Friday’s trading session, the Japanese yen crosses could fall lower across the board.

Contestant number 3, on the other hand, made his net profits of nearly $14,000 on Thursday thanks to relatively short-term EUR/USD and USD/CAD positions. This trader bought both pairs in order to take advantage of the range bound conditions we’ve seen very recently. However, at the time of writing, contestant number 3 is also floating heavy losses of over $10,000 due to losing USD/CAD, EUR/CHF, EUR/AUD, and EUR/CAD positions. As we mentioned yesterday, traders that remain focused on single strategies tend to fare a bit better in the contest.

Be sure to check out our Currencies Update on Monday for a final look at the top 3 traders in the currency trading portion of the contest!

Terri Belkas, Currency Analyst for DailyFX.com