Do you know how top traders handle their positions? Schools encourage us to multi-task flawlessly. The more errors a student makes, the worse the marks awarded and therefore less the commendation, for many errors. Mistakes are frowned on in the medical world, business world and the engineering world. Indeed, the willingness to be perfect in all fields of human endeavors is acknowledged – an inborn tendency.
The tendency to be perfect has made neophytes believe that good traders should never lose; or should rather have 85% - 95% probability. They think they need to win always in order to make gains. After a losing streak, some swear never to trade again. The fact is that people will do things that increase their enjoyment and refrain from what tends to aggravate their pains. People try to escape negativity by failing to trade new signals, since – psychologically – it’s thought that more loss is avoided if new signals are not traded. You would need to do away with bad thinking that has adverse effect on your trading. When you have a negative trade, try to find out why and how you could improve your trading. Do not dwell on your past bad experience since this does not help you. You would need to focus on more opportunities ahead of you, and not weighed down by the forgone events.
Those who wish for perfection while speculating would be quick to truncate their winners because they don’t want them to revert to negative territory. As a result of this, a trading system that has more than 70% should be evaluated in the context of the mean equity curve and drawdowns. Someone with 95% accuracy can receive a margin call on his account, if his position sizes are too big, and no stops are used, or the stops are too wide and take profit zones are too tight. Someone with less than 33% accuracy can become a permanent victor in the markets, if his position sizes are very small, and he uses stops, and rides his winners or he sets tighter stops and wider take profit zones. You can win 3 trades, lose 7 trades, lose another 7 trades and win additional 3 trades and still be a winner. Conversely, you can win 8 trades, lose 2 trades, win another 8 trades and lose additional 2 trades and eventually receive a margin call. It all boils down to money management, golden rules of trading and risk control. Therefore, in spite of being inborn, perfectionism doesn’t work in trading.
With much experience as a trader and trading systems developer shows that over a very long period of time, one would hardly be right far more than half of the time (if many signals are generated on monthly or yearly basis), even if it appears that one achieves 100% accuracy under certain market conditions. Very soon, a winning technique would undergo some losing streaks, whether on a monthly basis, or quarterly basis or yearly basis. There aren’t many speculators who can boast of more than 65% probability in many years. These traders are geniuses and would often apply common sense with any trading methodologies they use. There’s not much psychological benefit from a winning trade that’s realized when we violate our rules. That winning trade is only realized out of luck. We should accept that fact that we’re the ones that opened a losing trade as well as a winning one. This is a fact.
Are market wizards (generals of the markets) achieving 90% - 100 % probabilities consistently? If we analyze their trading performances since the beginning of their various careers, we’d see that this is far from being true. Think of Dr. Brett N. Steenbarger, Dr. Alexander Elder, Philip Fisher, David Harding, Adrian Manz, John Templeton, Michael Covel, Tim Knight, etc., these are successful names in the trading world. Yet, they got no 100% accuracy. With being right less than half of the time, they still achieve decent percentage returns. They simply make more money than they lose. You see, the market presents equal opportunities to everybody on earth. Everybody competes in the market, but only the skillful and the disciplined come out home and dry. How many percentage returns do you think Warren Buffet make on annual basis? Did you think he doubles his accounts every year? Even there are years in which Warren doesn’t even make a profit. There are also traders who perform better than him, only that they have smaller portfolios.
How could you end up winning with lower hit rate? That’ll be explained in another article. Wasn’t it 40% accuracy that gave me nearly 12000 pips (49%) in the year 2011? Wasn’t it only 35% accuracy that gave me 4500 pips (21%) in the year 2012? Isn’t less than 40% accuracy that has given me over 2200 pips (10.2%) so far in this year? Even with this, I usually have more than a few months of losses in a year. Sometimes, I even lose more than 10 or 5 trades in a row, and yet I don’t go down more than 5% or 8%. This is possible because of my very small lot sizes and risk control techniques. I got to cut my losers, or else I’m in trouble. I just make the losses to be so small, so that whenever the market conditions become ok for me, I shoot ahead. For example, if I win 10 or 15 trades in a row, I gain about 10% or 16% or even more.
Conclusion: It’s common that certain traders don’t consider exotic pair and crosses when they trade, because they’re not as popular as majors and because their spreads aren’t tight as those of majors. Should you trade on an instrument with a higher spread when the spread on the GBPUSD is much lower? Why would you trade the GBPCFH when the EURUSD is readily available? Some think that low spreads matter and that high spreads could magnify losses and reduce gains. This is true. But there are many wonderful opportunities on those exotic crosses as well, especially if you’re using a trend-following strategy. If the GBPNZD moves by more than 500 pips in one week, would it matter much if the spread on it is 20 pips?
This article is concluded with a quote from George Soros:
“I’m right in arguably no more than half of all cases, but I just make a lot of money whenever I’m right, and lose as little money as possible when I’m wrong.”
For more articles, go to: http://www.paxforex.com/forex-blog
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