“When I began teaching other traders…, I was shocked by their lack of… knowledge. They were trading with one hand tied behind their back. They were using a water pistol, and the insiders were using real guns.” – Joe Ross
1. Maggie* is using a negative expectancy system without knowing it. She decides to trade without stop loss because she doesn’t like to think that she can be stopped out by a trade that could later go in her direction. Her funded account is $1000, and as a result of this she’s using 0.5 lots for each trade. She’s confident that the trading strategy she’s bought would definitely make her very rich in a matter of months. She starts to grow the account. The markets are moving very well in her favor. In less than 3 weeks, her account is up by almost $5000. She’s very happy, and she begins to think of how to withdraw some of her profit. However, she won’t like to do that until the 3 remaining open trades have been closed. Those trades are still negative, but not so bad. She waits for them to fluctuate favorably and hit their tight take profit levels, but something happens. Later that day, there begin surprise reversals of hundreds of pips per trade; things that wipe out her account. She stops trading and relocates to another state.
2. Phoebe always sets her stop loss level at 300 pips per trade and her take profit level at 50 pips per trade; something that gives her a risk to reward ratio of 6:1. She doesn’t know that with this kind of risk to reward ratio, she can’t be a permanent victor in the markets – even with 99.84% accuracy. She’s a counter-trend Forex trader; looking for turning points and always trying to identify support and resistance zones. Trading on multiple currencies, her kind of trading approach works for several months, and she goes up by over 80%, using 0.02 lots for each $1000 (which seems safe). Then the markets enter a period of extended trending mode which holds out for more than a few months. Many demand and supply zones are rendered ineffectual. All her gains evaporate in those strongly trending markets. Besides, her initial account balance is eaten deep.
3. Jeremy looks very optimistic, breathing the market. He has just learned how to use a Moving Average crossover strategy on the EURUSD. His target is about $100 per day on his $1000 balance, and he decides to use 0.3 lots per trade. He’ll sit in front of his system during the New York session and close his trade once the open profits are up to $100. He doesn’t know that targeting 10% profit per day is suicidal. He isn’t aware that it’s unrealistic to predetermine the amount of profit one will make per day (even per week or month or year) in an unpredictable market. He never intends to use stop loss because he thinks that stop loss is for the faint-hearted. He raises his account to $1600 within one week, thus feeling on top of the world. Eventually, one trade fails to move positive on the EURUSD throughout a whole day. The contrary move of -200 pips has been registered as -$600 potential loss on his account. Since he’s not using a stop loss, he decides to leave the trade till the next day. The trade is still negative after that, so he thinks he can leave it until it moves positive. But the EURUSD has just started a 1200-pip journey. This ultimately results in a margin call. Since then, he can pull out a gun if he hears about Forex.
4. Atimad is using a positive expectancy system but he doesn’t always follow his trading rules. The rule says that all the entry conditions must be met on a bigger timeframe and a smaller timeframe. This helps him take high probability trades and avoid bad signals in bad markets. Atimad’s problem, however, is that he tends to trade late and invalid signals – always violating the trading rules given to him. This has resulted in average losses that are much bigger than average gains.
5. Toby has experienced a margin call in the past due to attempts to live off a small account. Now he’s is using 0.1 lots for his new $400-account. A marketer has shown him how a profit of $1950 per month has been achieved on one $200-account, using pieces of account history on which only 3 trades per piece are shown. Toby wants to earn Miss Rose’s respect and love by proving to her that he’s a guru. The account grows up to $550, but later drops to $200. Since he has confidence in his strategy – something that simply lets him know when to buy and when to sell – he increases his position sizing to 0.2 lots. As if he hasn’t learned his lesson…
If I tell a client that I’d like to target only 1% to 4% returns per month, she/he would certainly not want to have anything to do with me. How could one target so small amount of income per month when there’s another trader over there who promises a profit of 170% per month? To many people, the idea of making 1%-4% per month doesn’t make sense. Nevertheless, with a profit of 170% per month, one can even resign one’s day job and continue smiling to the bank for the rest of one’s life. Many people think trading doesn’t make sense if you can’t put $2000 in your live account and pay all your bills and children school fees constantly from it. Should we blame the markets or ourselves for our grim experiences in the markets – the result of suicide trading techniques?
It’s very easy to do things that’ll later backfire: doubling down on losers, jumping in early to make the most profit, trading without stops because we think it will take us out too early (because we think prices will always come back), thinking that big position sizes make great returns, trading without clearly-defined trading rules, thinking that we can make as many trades as we want in a day, and thinking that the more trades we open, the more returns we’ll make.
You can’t be a permanent victor in the markets until you do certain things. Many traders would agree that money is difficult to come by, yet they won’t think of the safety of their money when they are trading. Using big position sizes while trading is a suicide trading technique. If you know what risk control means, you’d be more inclined to follow the principle that can keep your account safe, whether you derive immediate benefit from it or not. More importantly this can keep you from overtrading and help you stop making terrible trading decisions.
*Names have been changed.
I conclude this article with a quote from Bert Antonik:
“That statement may seem harsh or contradictory but the undeniable truth is confused traders are the necessary contributors from whom the properly educated derive their gains.”
NB: Please watch out for my coming articles with these titles: ‘Making Money out of Losses – A Blessing in Disguise,’ ‘Achieve a Better Hit Rate with Gap Trading (Using the Logic Yourself),’ ‘Play the Markets Victoriously with Nano-cent Accounts,’ ‘Why It’s Difficult to Do the Right Things in the Markets,’ ‘How to Identify a Sideways Market – Be Safe!’ ‘A Negative Expectancy System – Pushing Against the Wind?’ ‘The Most Important Trading Skill – Who’s a Winning Trader?’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 1 – 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘A Hedge Funds Strategy,’ ‘My Hedge Funds Strategy Update,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Resist the Lure of High Risk – Part 4’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses – Part 4 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 6,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Before You Open that Trade,’ ‘Cogent Trading Biases,’ ‘Overview of My Signals Strategies – Can You Trade Like Me?’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘You Are a Blessing to the World of Trading,’ ‘Annual Trading Results (2011)’ ‘2012 – Another Year of Victory in the Markets,’ ‘Monthly Trading Report (December 2011),’ etc.
Your questions and opinions are highly welcome.
With best regards,
Forex Signals Strategist, Funds Manager &Coach
©2011 FX Instructor Forex Blog - For Traders, By Traders. All Rights Reserved.
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