I talked to a guy recently. A guy, who's been loosing money trading for over 7 years. Can you imagine this? 7 years of loosing money. But he's not giving up. He found a new strategy when the old one failed. So I asked him:
And he replied:
It was his only response. And the only argument for 'bad strategy'. He did likewise several times... Here's the thing - every strategy and every method is going to loose money at some point. There's no "holy-grail-strategy" that always wins. Sad, but true.
Look at the chart below. It shows account balance change of a trader (let's name him X) over some period of time. Numbers are not important here, but what I want to focus on, is the balance change itself. You can see clearly that there were times, when X lost his money, but overall, he is profitable. And why is he?
You may ask now
Well, that's a good question. Finding and developing your own trading method is a topic for entire book, but I'll try to point some important features:
First, your method must fit you! It's that simple. If you don't feel comfortable using it, or you find it difficult to analyse and perform with - drop it. You can't trade well using tools that you don't like. It's like wearing pair of boots that aren't your size!
You also have to test it. Realtime, not on historical data. How else are you going to say it works? You have to go through it and see how it performs in different market conditions and how well you respond to it (yes, trading psychology is important here).
Develop it. Each trader tailors his method to his liking and his needs. Most of experienced traders keep a trading journal, where they track every trade they make along with some additional informations that may help them in the future. Thanks to that, they are able to tell if they put their stop loss too tight or not, or which part of the day is the best for them to trade. And knowing that they can adjust some parameters of the strategy so it performs better next time.
Bring on some statistics. What is your winrate? Your reward/risk ratio? How many trades per ,for instance, a week will you do? What is the longest possible loosing streak? Etc etc... Trading on Forex market is like a war campaign. You have to know yourself, your enemy, your battlefield. And be prepared (yes I've read Sun Tsu's Art of War). IMPORTANT NOTE: you must have some decent amount of data for your method for the statistics to be reliable (which takes time)!
And then, when you spent some significant time with it, you know your strategy. You can now tell its weak points, strong points, you know which markets you can trade with it or when you should sit back, you know how long period of time you need to see it making you money, you can present some statistics and, finally, you can tell 'IT WORKS' (or not
). The problem with the guy mentioned at the beginning was that he didn't put any of the strategies he tried through proper test/development. That's why he couldn't say anything about them except "I started loosing money". He didn't know why (was it really the bad strategy, or maybe bad market conditions, or pure statistical bad luck?) If he did test them, then - I bet - he'd found at least two of them being really profitable.
Now onto the matter of TRUST. Let's say you took some 99% winrate strategy from someone else. He said it's the best-ever-always-winning-etc strategy. But you've only see some charts he showed to you. Will you trust it? I would not. I'd go through all of the stages I wrote earlier and then see if it really works. Guys it's our money we're talking about after all
. But you developed your own method, whether it be based on someone else's or just your idea. You went through it, you know it inside out and - what's most important - you have your own data, statistics, numbers that show you - "it works, it's a good strategy". So you have no reason not to trust it. Even if you loose your money sometimes, you know why. And you don't get angry about it, because you know it's temporary and how much profit you're gonna get in the long run. Do you know why you shouldn't trust other traders selling you the strategy? The same strategy may perform differently with different traders.
There's also a third reason of X's profit I wanted to talk about - risk management. One of the first things that a good trader should focus on. You probably hear a lot stuff like this:
We could go on, right? Ok, but how do you know how to do it, there's no, for instance, universal stop loss value. Risk management parameters differ for each method and each traded instrument and they have to be adjusted to your own risk resilence. And here comes, again your dear method that you developed. If you know that you may have - let's say - 5 loosing trades in a row. Think like it already happened and try to determine how much of your account you're ready to loose and not get mad in the process. If it's 10%, you shouldn't risk more than 2% per trade (I guess I don't have to explain why). Or if you trade on several instruments, set your maximum risk that you can withstand and divide it between them. Check if some of your instruments are converged and try to avoid trading them simultaneously. When you set your stop loss, see how big it is and open a position of a size that don't exceed your already defined risk-per-this-trade.
If you manage your risk properly, you don't have to worry about a loosing period in your trading. And you can use your method with a pleasure, not struggle for a pip. A good method is a mix of well-developed strategy and your own, well-maintained trading psychology - remember it!
If you liked this post, found it useful and would like to read more of my thoughts in the future, tell me, leave some track or even share it further, I will really appreciate it!
You can follow me on my Twitter account to be notified when I post something new: https://twitter.com/MarcellusAure
Ok, so why was your old strategy bad?
And he replied:
Well, because i started loosing money.
It was his only response. And the only argument for 'bad strategy'. He did likewise several times... Here's the thing - every strategy and every method is going to loose money at some point. There's no "holy-grail-strategy" that always wins. Sad, but true.
Look at the chart below. It shows account balance change of a trader (let's name him X) over some period of time. Numbers are not important here, but what I want to focus on, is the balance change itself. You can see clearly that there were times, when X lost his money, but overall, he is profitable. And why is he?
- He has a good trading strategy that he can trust
- He sticked to it even when it failed, he was consistent
- He has a proper risk management (so he didn't clear his account during the drawdown)
You may ask now
Ok, Aure, but how do I know that my strategy or method is good? How can I trust it?
Well, that's a good question. Finding and developing your own trading method is a topic for entire book, but I'll try to point some important features:
First, your method must fit you! It's that simple. If you don't feel comfortable using it, or you find it difficult to analyse and perform with - drop it. You can't trade well using tools that you don't like. It's like wearing pair of boots that aren't your size!
You also have to test it. Realtime, not on historical data. How else are you going to say it works? You have to go through it and see how it performs in different market conditions and how well you respond to it (yes, trading psychology is important here).
Develop it. Each trader tailors his method to his liking and his needs. Most of experienced traders keep a trading journal, where they track every trade they make along with some additional informations that may help them in the future. Thanks to that, they are able to tell if they put their stop loss too tight or not, or which part of the day is the best for them to trade. And knowing that they can adjust some parameters of the strategy so it performs better next time.
Bring on some statistics. What is your winrate? Your reward/risk ratio? How many trades per ,for instance, a week will you do? What is the longest possible loosing streak? Etc etc... Trading on Forex market is like a war campaign. You have to know yourself, your enemy, your battlefield. And be prepared (yes I've read Sun Tsu's Art of War). IMPORTANT NOTE: you must have some decent amount of data for your method for the statistics to be reliable (which takes time)!
And then, when you spent some significant time with it, you know your strategy. You can now tell its weak points, strong points, you know which markets you can trade with it or when you should sit back, you know how long period of time you need to see it making you money, you can present some statistics and, finally, you can tell 'IT WORKS' (or not
). The problem with the guy mentioned at the beginning was that he didn't put any of the strategies he tried through proper test/development. That's why he couldn't say anything about them except "I started loosing money". He didn't know why (was it really the bad strategy, or maybe bad market conditions, or pure statistical bad luck?) If he did test them, then - I bet - he'd found at least two of them being really profitable.Now onto the matter of TRUST. Let's say you took some 99% winrate strategy from someone else. He said it's the best-ever-always-winning-etc strategy. But you've only see some charts he showed to you. Will you trust it? I would not. I'd go through all of the stages I wrote earlier and then see if it really works. Guys it's our money we're talking about after all
. But you developed your own method, whether it be based on someone else's or just your idea. You went through it, you know it inside out and - what's most important - you have your own data, statistics, numbers that show you - "it works, it's a good strategy". So you have no reason not to trust it. Even if you loose your money sometimes, you know why. And you don't get angry about it, because you know it's temporary and how much profit you're gonna get in the long run. Do you know why you shouldn't trust other traders selling you the strategy? The same strategy may perform differently with different traders.There's also a third reason of X's profit I wanted to talk about - risk management. One of the first things that a good trader should focus on. You probably hear a lot stuff like this:
Cut your losses!
Set the proper stop loss!
Never use too much leverage!
Set the proper stop loss!
Never use too much leverage!
We could go on, right? Ok, but how do you know how to do it, there's no, for instance, universal stop loss value. Risk management parameters differ for each method and each traded instrument and they have to be adjusted to your own risk resilence. And here comes, again your dear method that you developed. If you know that you may have - let's say - 5 loosing trades in a row. Think like it already happened and try to determine how much of your account you're ready to loose and not get mad in the process. If it's 10%, you shouldn't risk more than 2% per trade (I guess I don't have to explain why). Or if you trade on several instruments, set your maximum risk that you can withstand and divide it between them. Check if some of your instruments are converged and try to avoid trading them simultaneously. When you set your stop loss, see how big it is and open a position of a size that don't exceed your already defined risk-per-this-trade.
If you manage your risk properly, you don't have to worry about a loosing period in your trading. And you can use your method with a pleasure, not struggle for a pip. A good method is a mix of well-developed strategy and your own, well-maintained trading psychology - remember it!
If you liked this post, found it useful and would like to read more of my thoughts in the future, tell me, leave some track or even share it further, I will really appreciate it!
You can follow me on my Twitter account to be notified when I post something new: https://twitter.com/MarcellusAure