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.
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
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.
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.
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 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
- 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.