Algorithmic and Mechanical Forex Strategies | OneStepRemoved

Prop Trading Plan For Success

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Every successful forex prop trader or other small business owner sets a course with milestones leading to specific objectives. And, when limited account sizes are traded using maximum leverage, the chosen goals must be realistic and well-planned. Most importantly, it’s better to work on eliminating trading mistakes rather than to focus on meeting performance targets alone.

Personal responsibility

As a trader, it’s important to “own” the results of each trade, whether good or bad. Like children, new traders grow and mature by taking personal responsibility for their trades and learning from them, no matter the outcome of any single trade. It’s a journey to build a trading success story.

A trader should rejoice at each winning trade, and plan for further successes by carefully reviewing why that trade was profitable. By doing so, winning becomes a well-planned routine.

Likewise, with each painful loss a trader should learn something, and find a way to do things differently during the next trade. Successful prop traders know each lesson learned is valuable, regardless of whether that trade was a winner or loser.

Passion and planning

For a prop trader, the thrill of trading is just as important as the financial gains. For anyone contemplating a career in prop trading, passion is just as important as planning for success. Yet, passion alone isn’t enough to ensure a trader’s survival.

If a trader is motivated only by the idea of buying exotic sports cars and scantily-clad women, he’s not likely to last over the long run. Good planning is also essential. For traders who are caught up in the excitement and overconfidence of a series of profitable trades, it’s better to focus on what’s already been accomplished, then learn from it and build upon it, instead of overreaching.

Regular, objective reviews of trading performance are the forex prop trader’s best way to improve profits. As mentioned above, when you’re using an already-winning system it’s easy to earn more money simply by identifying and avoiding ever-smaller errors over time. Ask any football coach – Most games are won by whichever team makes the fewest errors.

Maximum leverage requires maximum planning

The power of extreme leverage requires careful planning and quick learning. Losses can occur very suddenly. Have you thought about how you’d handle that situation?

Shaun and other leading prop traders take personal responsibility for their trading outcomes, and they’re quick to learn from their results, both good and bad. Also, they avoid becoming greedy – each month, they pull profits from winning accounts, so accounts stay small.

Free blow up insurance?

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Last week’s drama with the collapse in the EURCHF peg hammers home an uncomfortable truth: you can lose more in your account than you deposit.

Trading on leverage is inherently dangerous. Although an instant 20% move in a major currency is a once in a lifetime event, it goes to show just how quickly the markets can charge over alleged safety features.

Did placing a stop loss at 1.19 for an open EURCHF trade do any good last week? Not a bit! As soon as the market breached 1.20, it instantly gapped down 10%.

When markets go bidless, it means that there is no liqudity in the market. That’s jargon that means everyone is too scared to do any buying or selling. There literally is no price at the moment where anyone is willing to trade.

It was at 1.20. The next thing you see is 1.08 and the price falling fast.

I was fortunate enough to be awake at 3 a.m. when the proverbial cow-pie hit the fan. Although I’m an alogrithmic trader, I confess that my immediate instinct was to hop on the bandwagon and buy!, Buy!, BUY! all the Swiss francs that I could handle (when you go short EURCHF, you’re selling euros and buying francs).

The way I coped with the urge was to IM a friend and pass a running commentary on the insanity. Posting on Facebook and Twitter also kept me busy. Basically, it was a strategy to keep myself wholly occupied and distracted so that I wouldn’t be tempted to jump in.

I’ve seen mega moves before and, more importantly, I know from experience how badly people can get hurt. My favorite war story from working as a broker was a wealthy client in Kuwait that opened an account with $250,000 the night before NFP. He went long on 100:1 leverage and of course the report was the complete opposite of expectations. The market gapped instantly and before his trade could close, his account balance was -$20,000.

You don’t read stories like this on the forums because… who on earth wants to go advertise their financial destruction on the internet? It’s embarrassing and, if we’re honest with ourselves, that person is probably doing everything humanly possible to not think about their situation.

raised hands

Nobody raised their hand to tell me about catastrophic losses in the CHF

 

Free insurance

The primary reason to trade with maximum leverage is because it’s like free insurance against devastating losses. You never know when a peg will go bust or the next 9/11 is going to happen.

Let’s game this out. You were long USDCHF on Thursday and there was no stop loss in the world that could protect you against an instant 10% gap. Consider two scenarios:

  • You had a $30,000 account balance and were trading an institutional level of leverage like 5:1. That means your position value was 30k * 5 = $150,000. The instant gap created a loss of 10% * $150,000 = $15,000.
  • You had a $3,000 account and were trading the “crazy” leverage of 50:1. The position value was also $150,000 and yields a $15,000 loss.

Now let’s talk about what happens in the real world. In the first sceario, the money is on deposit with the broker and you 100% have lost $15,000. It’s a guaranteed fact and you can safely kiss the money goodbye.

In the second scenario, you may legally owe the broker $12,000 (3k-15k=-12k). However, what is the broker’s likelihood of recovering the money? If you’re in the UK and you trade at Pepperstone in Australia, they’d have to sue you in an Australian court. The attorney’s fees alone would be several thousand dollars. And most convincingly, you probably don’t have any assets that the court could award to the broker.

Even if you are in Australia, think about all the bad PR hitting the forums when the big dog starts suing little retail traders. There’s almost no business-case for pursuing the negative balances of retail forex traders.

You’re going to see a lot of hooplah this week about brokers “forgiving negative balances.” It’s great PR and it’s the best way for them to play it. They know darn well that there’s almost no chance of recovering that money. It’s the best way to turn lemons into lemonade because the brokers lost an epic amount of money.

How to protect yourself

Chris Zimmer, the programmer here at OneStepRemoved, sent me this as soon as the day ended.

I was already on board with it but this recent event makes your method of pulling money out of FX accounts look very obvious.

I just checked and the USDCHF dropped over 1600 pips on that bar. That really hits close to home as we could have easily been Long that pair and something tells me any stop would not have been filled.

Trade on leverage and, for goodness sake, withdraw the money at regular intervals. Nobody can take it away if you don’t keep it in their hands.