Practicalities and philosophy of trading from a profitable trader

[goldmember1]

I realise that lots of people are getting impatient with the philosophy, but I think it is important. I did not post this on the trading systems/trading method subsection for that reason, and I hoped that this was the most suitable section for what I wanted to say.

The never ending retail trading cycle

I have seen a lot of people compare trading to a university course, and the figure of 'it takes 3-4 years to become profitable' is the most common one I have heard. It also happens to fit nicely with the length of a degree, and in many ways justifies to traders that they can happily not make money for 3 years. After all, the price of a college degree in the USA in 2010-2011 was $13 600 per year, or for a 3-4 year degree $40-50 000. Thus a retail trader can happily lose $50 000 over 3-4 years convincing himself that he is getting the equivalent of a college degree in trading. I don't have figures on how many are profitable after 3-4 years, but I expect because of the large failure rate of traders, that even after 3-4 years traders who are unprofitable remain unprofitable unless they start learning a way to trade profitably.

There was a very good post I read in 2011 from forexfactory which stated the standard journey of a retail trader - I will summarise it below:

1) Phase 1: novice phase - trades are placed at random, because of survivorship bias, the winning traders become enamored with the easy money since they made $100/200/1000 in a short space of time and decide to carry on trading, expecting the next day that they will make $100/200/1000. The losing traders fade off and look elsewhere (<1 month).

2) Phase 2: The winning cohort from phase 1 learns that their random trading technique is not consistent, or they attempt to match their previous efforts success and cannot manage it. They realise that a more systematic approach is required (0-3 months).

3) Phase 3: The traders stumble across a simple system they found on the internet/paid for on a course and think that this is the missing piece to their trading and learn it (1 month).

4) Phase 4: The trader executes the system, yet finds it is not providing the results they are looking for (2-6 months)

5) Phase 5: The trader goes back to the course tutor/forum where he found the strategy and seeks to improve the system (1-3 months)

6) Phase 6: The trader executes the system, with new suggestions/improvements yet still cannot get the results they are looking for (1-3 months). Depending on the character of the trader, he returns to phase 5, or advances to phase 7.

7) Phase 7: The trader tires of the system, takes a break and looks for a new system as in phase 3 (1 month)

Many people are locked into this cycle (lasting from 4 months to a year plus for a single cycle) for years because the systems that they try out are not successful. Because of the market for trading systems, there is a lot of fluff - most of the information I have read has serious holes in the logic, and most importantly does not work. A trader can lock themselves into this cycle for years and never come out until he actually happens to find a system that works, which may be never. Given how many 'rubbish' systems there are out there, the chances of an individual trader finding the 'right system' is very low. Lets say there are 99 bad systems out there for every 1 good one. The chances for a trader to go through the cycle to find a winning system at random is 1:100, and we do not have infinite time to go through 100 cycles to find it. What makes it harder is that "social proof and testimonials" for systems are frequently posted by the system creator themselves, naive traders, or traders that have invested too much time to let go.

The solution to break out of the cycle is to understand the system itself, understand why the market moves the way it does, why it is difficult to make money (and it is difficult), and why it is easy to lose. Again, this is more of the same from me about not blindly following a system or a teacher (which is why I am posting theory up).

 

[malaguti]

Hi, Malaguti, I actually I said I do trade, but I said I don't trade professionally.

then my mistake, apologies Goldmember...I guess I must have fallen asleep...death by a thousand words.

 

[tar]

Hi, tar, I don't actually have any problem in averaging down, Martingale, Kelly Criterion, Labouchère, hedging, or arbritage as long as they make money within an acceptable drawdown. I don't use these myself, but I recognise that there are many examples of traders on myfxbook that use them and make money. For instance this trader: Kondakov System | Myfxbook has lost 559 pips this year trading EURUSD exclusively. In the same time he has made $1.1 million in that time and is not in any drawdown at present and has been trading for almost 4 years.

This comes down to my first point of: the way I view trading is that it is about making money (and not losing it), not being a perfect trader. You can aim to try and get a nice win rate, a good pip win vs low SL pip ratio, but in the end I would prefer to have Kondakovs account and have $1.1 million this year so far rather than have a nice strategy but have nothing to show for it.

Thats the key word : "within an acceptable drawdown." , but in reality averaging down and martingale strategies will make you money until you give everything back , unless ofcourse you have some sort of a SL in place then that may be different ...
As a side note re the guy you mentioned , i wouldn't rely on a data provided by a broker called "Forex MMCIS" ! .

 

[dusktrader]

goldmember, I think you're really onto something here with you're writings and overall thought patterns. I'm very interested to continue reading your philosophy, which is similar to mine (though I dont consider myself nearly as consistent as you yet, which is my primary goal at the moment).

In these times of market grinding, I find it incredibly difficult to sit on my hands and not over-tinker with my system. I do continue to study it and create endless scenarios with the data I have at my disposal, but in the back of my mind I have this nagging thought of 'what if I had it right all along, and we're just waiting for the next market thrust'?

I have become a rather huge fan of the philosophies of Michael Covel, if you may have heard of him (he has a great podcast I listen to on my commute, as well as several books). Even if you do not consider yourself a 'trend follower' I would still say his overall view of how markets and governments work is spot-on.

One thing I recently picked up on while studying his material is the concept of having a group of traders who you believe are similar to your philosophy, that you can use to validate your performance during various market seasons. For example, if you are a trend-follower, and you happen to have the myfxbook accounts to follow of several other trend-followers who you consider worthy... then that would be incredibly helpful from a psychological standpoint to be able to see if your own system performance was inline with theirs during a storm. For example if your system experiences a flat month, it would be validating to know that other similar traders were also flat. Likewise for periods of gain or drawdown. So I'm trying to figure out now how i can find that group of benchmark traders for my style.

Also, I wanted to mention that one thing that motivates me in times of 'blah' (like now for my system) are remembering that I'm only a handful of winning trades away from what I consider excellent success. I write about this frequently in my journal. For example, in times of smooth sailing on the seas, I see the account very quickly accumulate gold. In times of stormy turbulence, some gold gets thrown off deck, but hopefully not too much. I tell myself that I'm simply waiting out the storm and will be positioned to reclaim that booty once the tide shifts again.

 

[jungles]

no worries, i look forward to your posts

Hi Jungles, thanks the reply, I think talking about strategy first is the opposite way round of how I want to go through it. The fluff is important for understanding my strategy, if you want to wait then I will eventually get to it.

 

[goldmember1]

Thats the key word : "within an acceptable drawdown." , but in reality averaging down and martingale strategies will make you money until you give everything back , unless ofcourse you have some sort of a SL in place then that may be different ...
As a side note re the guy you mentioned , i wouldn't rely on a data provided by a broker called "Forex MMCIS" ! .

Thanks for the reply. I agree with you that you need an eventual stop loss it (I have seen that account hit losses, so I think he has hard stop, he doesn't martingale forever). I don't think Martingale type strategies are as efficient as non Martingale strategies but they do work if used properly with a hard stop based on pips/equity etc.

g
In these times of market grinding, I find it incredibly difficult to sit on my hands and not over-tinker with my system. I do continue to study it and create endless scenarios with the data I have at my disposal, but in the back of my mind I have this nagging thought of 'what if I had it right all along, and we're just waiting for the next market thrust'?

I have become a rather huge fan of the philosophies of Michael Covel, if you may have heard of him (he has a great podcast I listen to on my commute, as well as several books). Even if you do not consider yourself a 'trend follower' I would still say his overall view of how markets and governments work is spot-on.

One thing I recently picked up on while studying his material is the concept of having a group of traders who you believe are similar to your philosophy, that you can use to validate your performance during various market seasons. For example, if you are a trend-follower, and you happen to have the myfxbook accounts to follow of several other trend-followers who you consider worthy... then that would be incredibly helpful from a psychological standpoint to be able to see if your own system performance was inline with theirs during a storm. For example if your system experiences a flat month, it would be validating to know that other similar traders were also flat. Likewise for periods of gain or drawdown. So I'm trying to figure out now how i can find that group of benchmark traders for my style.

Also, I wanted to mention that one thing that motivates me in times of 'blah' (like now for my system) are remembering that I'm only a handful of winning trades away from what I consider excellent success. I write about this frequently in my journal.

Thanks for reading dusktrader, and I am glad that at least someone finds it useful. Covel is a turtle trader, though I haven't listened to his podcasts. I do not trade purely technically, so I have my reservations about the turtle system (I would not use it - it may work for some people). I'll listen to his talk about governments though on your recommendation and let you know what I think!

In terms of myfxbook I have spent a lot of time studying successful and non successful accounts and have already built an overall idea of what is realistically possible for retail traders. I try to trade within those bounds of realism (I realise that limits my gains) and I don't try to over-reach.

The importance of realistic benchmarks for the retail trader

There was a famous trader on another forum who claimed that he turned $10 000 into $1 million every year forex trading. He produced numerous videos and webinars and had hundreds of followers. Eventually he made a myfxbook after being pressured to do so and lost 70% of his account in 6 weeks and disappeared off the forum.

One of the greatest innovations for me in trading was the discovery of myfxbook, fxstat and mt4i. This gave for the first time a look into how other people were trading and what was a lie and what was actually possible. Internet forums are full of blaggers. If you go to bodybuilding.com you find that everyone claims they bench 350lbs, yet go to a gym and find that perhaps 1 person lifts 3 plates. In trading people aspire to make these make believe figures offered by penny stock traders or forex gurus who have no proof behind them. This is akin to the average guy thinking that everyone can bench 350lbs easily and actually end up getting crushed when he loads up three plates.

When you trade its important to have benchmarks so you do not end up aspiring to unrealistic figures and doing yourself a injury. Myfxbook, mt4i, fxstat give actual results so you know what you should be doing so you do not risk getting crushed by excessive risk and expectations.

I have done a lot of research on what successful traders manage to achieve - no matter what timeframe they use, what strategy they use, the figures of 4-8% per month for the most elite traders is consistent. This is disregarding accounts that have traded less than a year or have excessive drawdown. I therefore do not try and over leverage myself and go for 20% per month. If we take the bench press as an example again - if you knew that the biggest, strongest guys in the gym were lifting 300 lbs for repetitions and you had just started training, you would be a fool to overreach and go for 350lbs because someone on an internet forum had told you that was what he lifted.

In fact, the average guy would benefit from lifting 160 lbs for repetitions and working his way up. In the same way, I do not reach for the 350lbs or 20% because I know that no one achieves it, and that I am happy making gains lifting 5-6% per month since I know that is the realistic for what I want to achieve.

If you want 20% a month plus then you should study all the 20% month systems and see what drawdown they achieve. I do not think I am 'the special one' and will go where no man has gone before - I am a realist and if 20% a month for the best traders causes excessive drawdown, then I will probably have to take excessive drawdown to achieve it which is not what I want.

 

[jungles]

from my discussions with various professionals, anything over 150% pa, and the trader is likely (but not always) to be taking too much risk

too much risk = high risk of ruin

this is illustrated very nicely at forums such as zulutrade, where the returns are excessive, the risk high, and the lifespan of accounts invariably short

 

[D70]

Is there going to be anything other than hot air on this thread?
And when will you put your vendors badge on goldy?

 

[jungles]

what's for sale?

And when will you put your vendors badge on goldy?

 

[D70]

what's for sale?

Looks like complete and utter crap is for sale.

 

[jungles]

lets wait and see what the strategy looks like, his fxbk warrants it

Looks like complete and utter crap is for sale.

 

[D70]

lets wait and see what the strategy looks like, his fxbk warrants it

Come on Jungles. Seriously. 250% "return" ?
It's just laughable.

Apart from not sharing account size, number of trades, trade averages etc. The guy has had no drawdowns...... zulutrade here we come.

But ok, if you want to see the punch line. Let's play ball.

 

[jungles]

250% refers to the increase on original deposit.........he's averaging 76% pa if you look at "monthly analytics"

the other metrics you refer to are all shown at the myfxbk link

check the "drawdown" chart, not too bad, except for Jan 2012, questions??

the gain/loss under "trade history" is also admirable at -1.35% of account

sharpe is crappy!

Come on Jungles. Seriously. 250% "return" ?
It's just laughable.

Apart from not sharing account size, number of trades, trade averages etc. The guy has had no drawdowns...... zulutrade here we come.

But ok, if you want to see the punch line. Let's play ball.

 

[D70]

250% refers to the increase on original deposit.........he's averaging 76% pa if you look at "monthly analytics"

the other metrics you refer to are all shown at the myfxbk link

check the "drawdown" chart, not too bad, except for Jan 2012, questions??

the gain/loss under "trade history" is also admirable at -1.35% of account

sharpe is crappy!

I see. Had to click on his name to get to the details.
Ok, looking better. I'll hold out.

 

[scholfield]

looking forward to him putting some 'meat on the bone', as it were.
Interesting reading, of which I can relate too.

 

[goldmember1]

Thanks to jungles for pointing out to others how to read the myfxbook link.

I'll take a little bit of an aside to reply to posts here as a few posters seem to be wanting an instant buy at X, sell at Y strategy and seem angry that I am not posting it. I'll also note that I did not post this thread in the 'trading systems' section for a reason.

What I am trying to emphasise that traditional concepts behind buy at X, sell at Y strategies do not provide very good returns, and many vendor systems are non profitable. I have tested numerous trading systems using forex testing software, and the profitable ones give returns of 10-30% per year at 1% risk, double that at 2% risk obviously, with similar drawdown (% gain per year = drawdown). A few also have nasty provisos such as having to watch 15 minute charts 24 hours a day. I will come onto the various systems that I have tested in future posts.

I am making a point that traditional retail ways of thinking are detrimental to profitable trading. I intend a lot of my posts to be my opinion on traditional trading methods and why they lead to retail traders losing profit. So if you view what I am posting as a what not to do, as opposed to a what to do, then I think you can see my point of view.

I post during my lunchbreak, so I am limited in time in writing lengthy posts, and can't write everything that I have learned over the last 2 years in a day. I also am posting this on my own volition, and want to post my thoughts in a logical order. Although a few people might want me to skip to the end, unfortunately for them I am writing this though my choice and in the way that I think is the most useful to the reader (and how I wish I read it when I first started). This is opposed to how some thread teachers post up a couple of cherry picked charts with some lines drawn on it with the annotation "this trade made me 200 pips". If you think that is more your learning style, then you won't find much value here.

As for being a vendor, I am not selling any signals or anything like that. I am not a zulutrade provider, and don't wish my current trades/liquidity to be copied because I am trading my own money.

If I eventually post 1000 decent posts and I lose my job, I might package it up as an ebook and sell it at $5, but I doubt anyone will deny me that (except Magaluti perhaps) since its all my own writing (I don't have any plans to do so at the moment). And you can read it all on the thread anyway. Hopefully that will placate a few people and I'll return to posting more tomorrow.

 

[cablemonster]

I post during my lunchbreak, so I am limited in time in writing lengthy posts, and can't write everything that I have learned over the last 2 years in a day. .

so you have been in the game 2 years and you are giving lessons. You sound young son. Wait until the market has knocked the corners off you then you can get started

 

[Martinghoul]

I am really looking fwd to hearing some detail about the actual methodology. Or, to quote Elvis, if I am not mistaken, "a little less conversation, a little more action"?

 

[freestyler39]

Boy, and I thought the ppl on FF forums were pushy... It's like watching a gang tackle. Let the guy take his time. It's his thread after all. If you don't like it, then don't follow it anymore. Simple. What's with all the attitude and suspicion? So far I haven't read anything that warrants this kind of behavior. So he's not spilling his exact trading rules, what did you expect? Would you? Go buy Don Miller's new book for $20, and see what kind of "trading insight" you get for your money (hint: not much at all).
Point is, take it easy guys. Let the man speak at his own pace.

 

[Mr. Charts]

Boy, and I thought the ppl on FF forums were pushy... It's like watching a gang tackle. Let the guy take his time. It's his thread after all. If you don't like it, then don't follow it anymore. Simple. What's with all the attitude and suspicion? So far I haven't read anything that warrants this kind of behavior. So he's not spilling his exact trading rules, what did you expect? Would you? Go buy Don Miller's new book for $20, and see what kind of "trading insight" you get for your money (hint: not much at all).
Point is, take it easy guys. Let the man speak at his own pace.

....and from a few lines later in that Elvis song,
"A little less fight and a little more spark"
would make t2w a better place.