Wednesday, February 18, 2015

When a Good Strategy Is Losing Money – Part 1

“But in the market any price is always history. It’s the price of the last transaction, holding no guarantee for even the nearest future.” – Dirk Vandycke

What do you do when a good trading system, whose historical results have been satisfactory, gets into a losing streak?  Good strategies lose now and then, and then gain now and then. Losing streaks are alternated by winning streaks, and what you can do is to minimize your losses in losing periods, controlling the drawdowns on your accounts. This is done so that your capital would be intact when a winning period comes around. This is a reality of trading as there’s no way around that. Yet, it doesn’t preclude you from being consistently profitable in spite of occasional drawdowns.

People who’re rational in other fields tend to be irrational when trading. They don’t know that trading is just any other business in life. There’s no strategy on earth (and there’ll never be a strategy on earth) which doesn’t experience drawdowns. No matter what trading approach you’ve adopted, there’ll be periods when the price actions are against you.

We’re happy when we make money, without giving any thoughts to how we control our emotions when we lose. We’re able to remain calm during losing streaks, providing that we’re willing to do that. Let’s think about a system that wins about 65% of the time. That means we may have about 35 losing trades out of 100. When you buy such a system, you can lose the first 10 or 20 trades (or even more) in a row. Then you conclude that the system is trash. You don’t know that the system would soon start winning many trades in a row.

Trading has to with probabilities and profits are analyzed over a long period of time – not over a short period of time. When about 100 trades are analyzed, then you’d see the merit of a good strategy. Trading should be treated like an enterprise: losses being the cost of running the enterprise and profits being the reward you gain from your venture.

Our society is rife with perfectionism tendency, and that’s why there are many people who criticize everything, expecting too much of other people while they themselves aren’t perfect. Those who do well in life are probably correct less than half of the time, yet, mistakes are often ridiculed. Perfectionism has no place in profitable market speculation. You got to know that one needs to stick to a positive expectancy system even in a period of losses, for it’ll soon be in a winning period. However, most people dump such a system and look for another fool-proof one. The truth, however, is that another ‘fool-proof’ system that has good results in the past would also experience drawdowns. Would you then dump such a system again? You might trash the new system and look for another one.

For you to be called a super trader, you got to stick to a good strategy throughout its vicissitudes. Profitable speculation in the market needs perseverance, rules, and determination. You get rich slowly, not quickly. Success comes at cost – it requires effort and doggedness. Keep a log of your trades and look for ways to optimize the system.

Should you disagree with this, you may want to go from one trading method to another, for life. Otherwise, you may want to master a good trading method and stick to it for life. Should you prefer the latter, you may eventually reach financial freedom. A good system makes money eventually, but you’ll need to be faithful to it, which is something that irrational trades don’t want to do.

You make money when a market moves. A fast-moving market like Forex is ideal, since you make money when the move is in your favor. But you don’t make money when then move is against you. Please take risk and money management seriously. This is your life insurance in the markets. All traders experience negativity, but good traders deal with negativity triumphantly. You need to risk only 1%, or better, less per trade. You need to make sure that you don’t go down less than 4% or 5% in total. When the position sizes are too big, it would be difficult to control emotions.

The most important thing in trading is not to lose one’s capital. We trade not to lose, and that’s the only way to prepare for slow and steady growth when the time comes. Only effective risk managers can survive in the markets indefinitely.

We learn much more from losing trades, and we learn very little from profitable trades. Therefore, it’s what we learn from losing trades that make us better traders. In other words, loses are the catalyst that enables us to hone our trading skills.

This article is ended by the quote below:

“Without a plan and money management the best setups in the world are useless.” – Dave Landry

Learn from the Generals of the Markets: Market Generals


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