I’m not sure if Texas is more famous for its football or religion. My church likes to combine both with a Sunday night flag football league.
I played on the defensive line last night rushing the passer. The quarterback rolled right. I blitzed trough the two offensive lineman guarding me and got within 3 feet of the quarterback. Just as I dove for the flag around his waist, he turned to throw the ball. My eye crashed right into his knee, followed by my face sliding across the turf (hence, the bloody cut above my eye).
I may be the first man to bleed during a flag football game, but the minor wound reminds me a lot of trading. Taking your licks with no goals or purpose is dumb. Nobody sets out to get hurt. Accepting losses and learning from them is smart.
The author freely admits that he may be the first man in history to bleed from flag football.
A lot of readers get caught up in the idea of winning all the time. Pick your favorite sports team: the Blackshirts, the Yankees, the Cowboys, the Brazilians in the last World Cup. The world’s most storied sports teams don’t win every single game. They don’t even win every season (Cowboys fans know what I’m talking about).
Drop down to the individual level. Is Cristiano Ronaldo a ball hog? Does Alex Rodriguez hit every pitch?
Even the world’s most elite athletes have strengths and weaknesses. It’s ridiculous to expect anyone to perform their best every single day.
I’m especially directing this at newer forex traders. At the risk of offending you with reality, you need to hear this if you’ve been trading for less than 6 months. Your expectations for trading are out of this world ridiculous.
Why you started trading forex
The Challenge
More experienced traders – even the ones struggling with losses – will freely admit getting into trading for the wrong reasons. I started trading because I’m over-the-top competitive. I hate being in 2nd place, but I thrive on being challenged. Beating Mr. Market is extremely difficult. I placed my first trade because I liked the challenge.
The Gamblers
Fewer people will admit to gambling. They’re “investing” or “trading.” Among this group, I’d wager (pun intended) that 90+% of them attempt to scalp at some point. Unless you have a very clearly defined strategy, scalping is the forex version of the slot machines. You see the flashing lights and numbers bouncing everywhere, but over the long run you’re destined to lose.
I’m the guy sitting on the far left side of the bench.
If you’re guilty of scalping gambling, run some back of the envelope numbers. Where do you place your stop losses? What’s your average take profit?
Say that the stop is 15 pips away and that you average 3 pips of profit. Your typical spread is 1.5 pips. That means that you really have to earn 4.5 pips on every trade (3 pip TP + 1.5 pip spread), but you only get to keep 67% of the profit (3/4.5). Even before trading costs, you have to be right in 5 out of 6 trades, 83.3% accurate, to break even. With trading costs added in, the minim accuracy to break even is an astounding 90.1% of the time and you still would not have any profit.
Redundant question alert! Is it realistic to grind out an extra income by being 91.1% instead of 90.1% accurate? It’s absurd.
The Greedy
The final group of traders get involved with forex out of pure greed. It’s all risk, all the time with these guys. I routinely get emails touting a million bajillion percent returns in a month. It happens every month.
I remember FXCM’s King of the Mini contest. Anyone with an account balance under $10,000 was automatically enrolled. Whoever earned the highest percentage return that month won the content prize of $2,000.
Some small trader in Pakistan would turn his $300 mini account into $5,000 in 30 days. It’s true that somebody in the world is doing that as we speak. What’s also true is that their final account balance will be $0. They will invariably blow up. Nobody is ever smart enough to take the profits and run. You are not smart enough to take the profits and run. You’re not the exception. Everyone does this.
Do you know how I know? Nobody ever won the king of the mini contest twice! The client blowing up within 30 days was the closest thing to a sure bet. Trading on leverage that enables spectacular returns isn’t just dumb. It’s suicidal.
The new type of forex trader that doesn’t exist is the guy that enters with an actual business plan. Or even more amazing would be an actual strategy.
This prepared neophyte trader doesn’t exist because beating the market requires experience. And let’s be honest. Experience is a synonum for losing money.
You can throw your money away through gambling or greed. Or you can get an education with your tuition money.
How to Get Hurt for a Good Purpose
The element which makes trading insanely difficult is the lack of feedback. When new trades swap strategies every 3 days, it’s utterly impossible to learn why something worked or failed. The only thing that you really control in the market is yourself and especially, controlling the feedback mechanism.
Any trader that’s losing needs to apply their tuition money to a set, defined strategy. The strategy cannot change. When you observe the profit and loss of a strategy over 6 months, you observe how seasons and varied market conditions impact the performance. You’ll even start to get the “uh-oh” feeling in your stomach ahead of certain trades, only to realize that your intuitions are completely wrong. It’s only when you get the uh-ohs and your feelings are correct over and over again that you know to trust your instinct instead of fearing it.
Your tuition strategy
The first step is to write your tuition check. Kiss the money goodbye. You’re not doing this to earn money. You’re trading the money for experience.
This strategy consistently covers long stretches of time with consistent returns. It’s prone to catastrophic failure, though. All mean-reversion systems are. Nevertheless, I feel it is a good system.
Chart: AUDCAD H1
Indicator: SMA 50 applied to the close
Rules:
- Buy when the price crosses and closes below the SMA 50.
- Sell when the price crosses and closes above the SMA 50.
- Place an emergency stop loss 1% of the current market price away from your entry.
- Your lot size should be 2x your trading account. That means your minimum tuition check needs to be $500 so that you can at least trade 1 microlot, which is worth $1,000.
Aside from the market rarely hitting your stop loss, you’re in the market 100% of the time. You’ll notice streaks of winners and streaks of losers. You are expected to keep trading during losing periods. You’ll be convinced that the next trade will be a loser. Maybe it is, but you won’t have the experience to know if your intuition meant anything or if luck happened to deliver a loser.
You are not allowed to exit a trade at any moment in time other than when the bar closes. Taking profits 45 minutes into a 1 hour candle is cheating. Again, you do not have the intuition to know if this improves or hurts your overall performance.
As for my face, the sacrifice was worth it. My pressure on the quarterback made him force a pass… right into the hands of my teammate.
Experience = losing money… so true. In any business when a guy with experience meets a guy with the money he leaves with money, leaving the other one with experience. That’s how world works, I guess…
Indeed.
Hi Shaun, should your strategy not be: BUY when it closes above and SELL when price closes below?
Cheers
James
Hi James,
No – that’s a very good way to lose money. Breakout trading intraday is almost always a surefire money loser.
–Shaun
Very well said, I know and agree with all you said with the trading / gambling situations. Sorry for your sore eye.. Regards, Barry.
Thanks, Barry. The eye is recovering nicely. It’s more of a turf burn than a cut.
Shaun, is this correct – go short when the price closes above the 50 period sma and long when if closes below? Seems backward.
Hey Ron,
Great question and I’m glad you asked it. That’s one that I probably should have anticipated while writing.
The strategy is correct as presented. Most traders feel like the price should break away from the average. But, think for a second what an average is. It’s the average. The price isn’t supposed to be far away from the average. It’s supposed to come back to the average.
I have done TONS of quantitative analysis on moving averages for years. Every bit of research that I’ve ever produced shows that intraday prices revert to the mean. I chose AUDCAD because it’s one of the strongest pairs exhibiting this behavior.
Are you going to take me up on the strategy challenge? I hope you do!
–Shaun
Hi Shaun. I’ll give it a try. Your strategy is, at least for me, not intuitive. You say it’d prone to catastrophic failure, but since you have the 1% stop I don’t see why you consider the trade hitting the stoploss order a catastrophe. A couple things you don’t specify in your trading plan. I’m assuming the 1% stop is a trailing stop since we would never be out of the market. We just reverse when we get a close on whatever side of the 50 sma. Do I have that right? You also say that we can exit the trade when the bar closes, but are really saying we never exit the trade, only reverse. There’s also no money management. I’m assuming that every time we reverse out a position, we have to reevaluate our position size based on earnings or losses?
Ron
Great questions again.
You say it’d prone to catastrophic failure, but since you have the 1% stop I don’t see why you consider the trade hitting the stoploss order a catastrophe.
Ok, maybe I’m overstating the risk. I just don’t want anyone hyped up when they start the project.
I’m assuming the 1% stop is a trailing stop since we would never be out of the market.
No trailing stops! You only exit via SMA cross or predefined stop loss. That is it. A trailing stop would almost certainly reduce the performance as it’s a ranging strategy. And you’re correct about the exits. They also trigger an entry in the opposite direction.
There’s also no money management.
It’s the 2x your account equity mentioned in the article. I’m assuming that you’re running an account dedicated to this strategy and that you’re only trading 1 pair to both harden your nerves and build your confidence. AUDCAD is farily tame. Good trading is boring trading.
Got is Shaun, but I just though of another question. If we are stopped out — I assume we can’t reenter until we have a cross of the 50 sma on the opposite side we were stopped out. If we are stopped out, do we leave the original stop in place or move it to 1% of where we were stopped out?
Sorry, these might not be legal questions.
Ron
I assume we can’t reenter until we have a cross of the 50 sma on the opposite side we were stopped out – this is correct.
If you’re stopped out, then the stop order is removed. You have a clean slate to take the next order upon crossing above the SMA.
Shaun,
if you get a SL hit, I assume you have to wait for another crossing to trade again.
Sorry for the noob question.
sorry, ignore, I see Ron asked the same question…….
Yes, exactly.
Always S.O.E.R ( Sell On Every Rises) & B.O.E.D ( Buy On Every Dips) – Contrarian styles, use your MACD, RSI, Pivot, Stochastic, Elliot Wave, Fibo, Ichimoku Clouds, SMA, DMA, Bollinger Band, POC, DNT, short squeeze pattern in London Fix, Vanilla Option Expiries, from minute till monthly chart, all bullish and bearish pattern, monetary policies stance & all event economy calendar events including political science issues on risk aversion info.
That should just about cover it!
Hey Shaun
Could you please provide more details about when to exit the market? As far as I know closing a trade at the right time is the most important thing. I couldn’t understand from your strategy, when is the appropriate time to exit long or short positions.
Hey Roy,
Exit long when the price crosses and closes above the SMA50.
Exit short when the price crosses and closes below the SMA50.
Hope that helps,
Shaun
Hi shaun
I need to know how to lose money in Forex) Is there anyway ?
The whole article was about that topic. I don’t understand the question.
Why we should waste our time & wasting money in such false trading enviroment? just simple question and for all whom concerned .
You should only do it if you want to learn to trade. Otherwise, it’s not a good idea.
Hi Shaun….that mean to say we r trading on the next 1hr bar base on the previous bar taking the SMA50 as a reference. ? Or do we wait till the 2nd bar close?
This one – we r trading on the next 1hr bar base on the previous bar taking the SMA50 as a reference
Shaun, your right on the spot. sometime lose and other time win,
waste of my time no really, I have put money no only in Forex but also in the share market, and only Forex give you the incentive to have discipline to able to move from loser to a winner and that cost money. thank for you article
Indeed. You gotta roll with the punches, I’m afraid.
Shuan, based on that strategy, if I start with going long, unless I hit the stop loss, I will always be doing the long trades, is that so?
I mean, for instance, entering trade (buying) when price crosses and closes below the SMA50, then exiting when the price crosses and closes above the SMA50, next trade would be again when price crosses the SMA50 below (since I have closed above it) and so on..
Should we choose which cross & close to choose. Or is it part of the strategy to trade every single time when cross and close happens (even if price closes 1pip below/above the SMA line)?
Hi Giorgi,
You’ll do long and short trades. When you’re exiting a long trade and it’s not because of the stop, you’re simultaneously going short.
Do *not* choose which trades you’re going to take. You have to take them all. Every… single… time. Without exception.
–Shaun
Hi Shuan, so if i got it right, when first trade is done with 1 microlot, exiting it (not because of stop) would be done with 2 microlots (out of which 1 would close the previous trade, and another would open a new one).
Shuan, is that so?
Correct.
Dear, try to start: EUR / USD; M30; EMA (22), red; EMA (9), blue;
CCI (14) levels: *-100*; *0*; *+100*;
Everything is worth testing.
So the game starts out as flag football league and the end result looks like a rugby injury. I see some of my trading in there …..
HAHA. Touche, my friend.
You live, you learn, I reckon. Aren’t all forex traders gamblers to a certain degree? At the very least, “easy-money-buffs” which is gambler’s second cousin and greed’s first cousin. I think it’s pretty easy to separate yourself from a group – “Them degenerate gamblers and us pros” – but from my experience everyone’s a mixture of all types. The ones that know how to learn from experience and manage to control their temper might as well be profitable in the long-run.
Hi Jamey,
I agree to a certain extent, but after I was trading for a year, I never traded unless it was with the rational expectation of success. I’d done my homework before the orders went into the market.
–Shaun
Hi,
Will this work on daily charts?
Regards.
Not likely. It’s designed for mean reversion, which isn’t really present on daily charts.