Wednesday, July 30, 2014

The Easiest Ways to Turn Losses into Profits

“Isn’t the promised reward of greater independence, financial freedom, and life choices worth the risk?” – Louise Bedford

Anyone who says trading is easy is telling a lie. Anyone who says success in trading isn’t possible is also telling a lie. Trading is challenging as well as it’s rewarding. The challenges are the blessings that awaken the trading genius in us.

Even, celebrated psychics have made accurate and failed predictions. If I was sure I could predict the future with the utmost certainty, I’d rather buy lotto tickets and enter my lucky numbers. Before the results were announced, I’d start smiling to my bank because I knew I couldn’t lose! By behaving as though we know what the market will do, we tend to think we’re very smart, but the market is kind enough to remind us occasionally that we’re not always smart. If you don’t forget that you’re a student of the market, that’ll be your saving grace.

The multitude finds trading difficult, owing to some preconceived notions. Trading is emotional, for the results of our decisions are seen on our portfolios immediately. Because of certain preconceived notions, inexperienced and undisciplined traders inadvertently maximize their negativity and minimize their positivity: experienced and disciplined traders do exactly otherwise.

Turning Losing Approaches to Winning Approaches
How can you turn losses into profits? Your past trading records can’t be changed but your future trading records can be satisfactory if you determine to stop using trading approaches that bring you frequent losses over a long period of time.

The market has symmetry: if you do something and make money, you’d have lost if you did the opposite. For example, when you sold the AUDJPY and lost 200 pips, that means you could’ve made a profit of 200 pips if you’d bought it. This means you need to stop doing what brings you losses and try to do it the other way round. Let’s give a few examples:

1.      One secret in trading is that less popular trading instruments are more easily predicted than the popular ones. The less popular pairs have very little noise affecting them, and tend to move in more predictable manners. The EURAUD is thus more easily predictable than the EURUSD, since the EURUSD is very popular and therefore, much affected by noise. It’s the noise that causes a lot of false signals on the pair. The CHFJPY is more easily predicted than the USDJPY. If you’re using a trend-following approach, you’ll find that it works far better on less popular currency trading instruments. Counter-trend methods tend to work better on popular pairs; and vice versa on less popular pairs.

2.      If you discover that you’re more prone to making more money on some pair(s) than the other(s), you need to concentrate on the pair(s) that favor your trading system most.

3.      When you discover that you tend to make more money on Forex markets than futures markets, you may want to give Forex markets some serious thought.

4.      People who lose money by setting risk that’s much bigger than reward would surely do themselves a big favor by reversing that: they’ll need to set reward that’s greater than risk. That means better RRR (like 1:2, 1:3 or more).

5.      If failure to use (optimal) stops constantly has adverse effects on your portfolio, please try to start using (optimal) stops as from now. The stop is not a perfect money management tool – no money management tool is perfect – but the eventual benefit outweighs the short-term disadvantage. That’s your life insurance in the markets.

6.      If you lose money by cutting your winners and running your losers, you’ll start making money when you cut your losers and run your winners.

7.      If you make more money on Monday with, say, swing trading, then you’d want to continue doing that. Those who lose on Fridays may want to stop trading on Fridays. If you discover that your hit rate increases on Tuesdays, Wednesdays and Thursdays, you may want to take trading serious on those days. If you observe that you make money the most in London session, you may want to stop trading the Tokyo Session; and the other way round.

8.      If you lose often when you pick tops and bottoms, then you may want to consider selling at bottoms and buying at tops. If you’ve a strategy that loses too much (always) for long periods of time; if that strategy loses more money in protracted losing streaks than it makes in short-term winning streaks, then you’ll experience your breakthrough if you open opposite orders when the strategy gives you signals, e.g., like going short when it gives a ‘buy’ signal.

Is a higher hit rate part of the solution? A gambler that uses a system with 90% hit rate can still ruin her/his portfolio; whereas a skilled risk manager can have a permanently satisfactory and rewarding career with only 40% hit rate. With some effort, the hit rate can be improved or some losing trades can be avoided by applying filter and/or staying out of a losing streak. Indeed, one way of improving our trading results is to try to avoid some bogus signals as well. We’ve some ways of doing this, but that’ll be the subject of another article.

Conclusion: In summary, the easiest way to turn consistent losing into consistent profiting is to change your trading approaches according to principles that ensure success in the markets. Stop doing what doesn’t work for you and embrace what works for you. If something makes you constant loss, you’ll make money by going contrary to it.

This article is concluded with the quote below:

“By matching the amount of risk you take with your tolerance for risk, you can trade more calmly, and that usually means you'll trade more profitably.” – Joe Ross

Learn from the Generals of the Markets: Market Generals

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