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What to Expect When Building a Forex Trading Strategy

You are more than likely reading this article because you have not experienced consistent trading success. Take a moment to distract yourself and focus on a hypothetical scenario: you just decided that you want to play the piano. We will circle back to how this relates to developing as a trader.

Trader Joe sits down and starts tapping away on the keys, much to the irritation of those around him. He taps and taps away. Nothing in the cacophony of pounding keys sounds remotely like music, but Joe discovers an interest in how those keys produce sound.

The first hours yield the most progress. He quickly deciphers which notes sound right together. The dexterity skills remain undeveloped. Despite the limitation, he strings together Twinkle, Twinkle Little Star with some awkward pauses between the notes.

Time yields clear progress. The more that Trader Joe practices, the more he develops his piano playing skills. He may realistically expect his level of skill for the amount of time and effort expended.

Trading Ain't That Simple

Trading is entirely different. As difficult as playing the piano is, trading is many orders of magnitude more difficult. The activity does not yield itself towards measurement by a convenient benchmark.

Playing the piano yields a benchmark for success; pressing the correct keys in the correct sequence yields the correct music. You cannot accomplish any piece of serious musical talent through dumb luck.

Traders measure success through the amount of money earned. It sounds logical enough. Money is, after all, the stated purpose of trading in the first place. The problem is that a lucky idiot can string together amazing streaks of success through dumb luck.

The only required skill to make money on any given trade is the ability to push a buy or sell button. The trader, through sheer chance, mathematically expects a 50% chance of making money on the trade (excluding trading costs). That does not mean that he will win exactly 50 trades out of 100. Instead, it means that his number of winners will tend to fluctuate around that number. The problem from an evaluation standpoint is that the number often seems to fluctuate dramatically around it. Most people conclude that those fluctuations indicate some type of skill or lack of ability.

The lucky novice with 75 winning trades out of 100 feels like a rock star. The reality is that he probably has no idea what he is doing. The poor novice that only wins 25 of 100 trades comes on this web site to figure out what he is doing wrong. Looking at the big picture, nothing much happened here. Each individual experienced varying degrees of luck, and nothing more. A future article will discuss how to replace profit as your benchmark for trading success.

When analyzing the profitability of a group of novices, you may realistically conclude that all of them are the victims or beneficiaries of luck. As the number of trades and amount of elapsed time increases, the number of traders still at the table eventually dwindles.

Trading resembles playing the piano in that over time, the impact of skill might eventually take hold. Say that trader Joe executed 10,000 trades and earned a modest profit for his efforts. It is important to highlight, once again, that profitability does not mean that he is skilled, even after 10,000 trades. All that may be said for certain is that we cannot prove that he is bad at trading. His monetary gains might be the result of either luck or skill, although we are unable to decide which is true.

Experience is Critical

What Trader Joe does gain after 10,000 trades is experience. He very likely formed market theories of his own. He probably feels that he sees some patterns in the price and its behavior. Most importantly, he probably experienced the inspiration moment where he developed the tools to necessary to build his own forex trading strategy. Building the rules is the first step in a long process towards the end goal of evaluating whether Trader Joe truly has an edge, or if he is just lucky. It also gives him a set of tools to logically determine if he should continue trading or throw in the towel.

The type of people that develop successful trading robots all have one thing in common: experience. I have never spoken to a trader with less than a few years of experience that appeared remotely close to developing a useful strategy. A customer and now friend of mine is a young CTA. Despite only being 30, he has over 10 years of full time trading experience. Working together with his list of rules, we created an Expert Advisor that he uses to manage a multimillion dollar portfolio.

Another is a trader who partnered with a mathematics professor to develop a system based on a sound scientific theory. Experience taught both of them the nature of the market. They were able to turn that experience into a full-fledged trading system with a real expectation of positive returns.

These examples illustrate how traders come to success: they put in an enormous amount of effort. Only then are they likely to find their inspiration moment with any real chance of positive performance.