There was a new thread started on the BabyPips forum under the title I blew it again. It presents a very common story for developing traders. Even the folks in the Market Wizards books have stories like this. I present it here with my comments for the benefit of those who are either not forex traders or not members of that forum.
Ive been trading for over a year now and in my first 8 months i must have blown my account(large accounts) atleast 3 times. All the mistakes that is humanly possible to make, i made them.
See #7 on my list of 8 Ways to Limit Your Trading Education Tuition.Â
Last August i started to become more disciplined and was starting to break even. Just towards the end of the month, i got into a winning trade by pure luck. It was one of those chronic(1 sided fast moving) moves, i pyramided my way and stuck with it for almost 160 pips netting me a 40% gain. I was on top of the world. Sure by this time my account was very small and the gains were lightyears from making up for what ive lost since i started, but on record this was the first profitable month i had ever had. I saw the power of what letting your profits ride could do.
I’d need to see the specifics for a proper assessment, but a 40% account gain on a 160 pip move sends up warning flags that the trader is playing much too big. Letting your profits ride can definitely be a very good thing. It’s the pyramiding which makes me nervous here.
Come following months, i not only lost all my profits, but reduced my account to a third of it’s size. I was chasing the euro on it’s way up. On hindsight i find that my fundamentalist nature tends to get in the way. The Euro was rising from 1.18 all the way to 1.42. There was no fundamental reason why this should happen, because the debt problems had not disappeared over night and i kept shorting it and kept getting stopped out.
This speaks to how complicated trading any market on a strictly fundamental basis can be. Timing is critical. And in the case of forex, it’s not enough to have an opinion on one currency. You need to have it on both parts of the currency pair you seek to trade.
All this while, despite all my repeated mistakes, losses and margin calls, i always felt that i would figure this out one day. I started reflecting on what ive been doing all this while and came to a eureka moment. IF, since the time i started trading, i had done the exact opposite of what ive done all this while, i would have doubled my original account. I went through my transaction logs and saw that i was continually taking very small profits and taking very large losses to the point that a single loss could wipe out all my profits and account. I told myself, if i could just invert this one point, i should in theory make money.
I think it’s safe to say that most of us have some kind of eureka turning point moment in our trading. My personal one was when I stopped listening to what other’s were saying about the market and doing my own analysis and strategizing.
I started using strict stoplosses of 1-2% of my account. I still did not have any system for entering my trades, one time it could be a moving average cross on any 5min, another it could be 3hr timeframe or even based on gutfeel. But i always used a stoploss of 1-2% and never added to my losing positions. If a trade went in my favour for over 20-30 pips, i did not take profit, instead i added on and moved both my stoplosses such that i would break even on net if it retraced. As you can imagine, 75% of my trades were losing trades, maybe 20% breakeven. But once in awhile i would get into a big move and coupled with pyramiding, i would make a huge profit. In about 1 and half months, i doubled my account. I was still losing most of my trades but the drawdown was so small and managable that a single big move would cover that and give me a new equity high.
This speaks volumes about how important the “live to fight another day” approach is in trading. You can take a lot of losses, if they are all small, and still end up profiting when the trades work out. Of course it’s best if one has a consistent strategy.
This week, the market was extremely choppy. It would drop 30-40 pips then rally 50 pips then drop 60 pips. Using my strat, i was getting slaughtered. For the past 2 days i suffered a total of 10% drawdown. But i was sticking to my rules. Today however, i shorted the euro. I knew that regardless of Portugals auction results, it would tank, ive seen the market do this before. If the auction was bad, it would tank, if it turned out good, it would still tank being a typical case of buy the rumour sell the fact. Coupled with the fact that i had been on a very very long losing streak(15+ losses) and being so sure, i started adding to my losing position. But i did not move my stop. Just when it looked like the price was starting to turn, it shot up again and I got stopped out in the European open. Next rule i broke was reentering with the cumulative size of my previous positions. Just before the auction results came out, i got stopped out again.
Bad things generally happen when one breaks there own trading rules.
Then suddenly the euro started to tank. This made me absolutely mad, I was right all along but got stopped out just before the news release. It is perfectly all right to be stopped out when you are wrong and the price went against you, but being right, going through the agony for the entire day watching the price move against you plus the heavy position(cos of adding on) and then getting stopped out and watching the price go in your direction was too much for me. I shorted the largest position i could. For awhile i saw the price go my favour, but i wasnt even nearing my day’s starting balance after my losses earlier. Then the price started to retrace beyond what i would deem a retracement and i took what i could. It was a small profit but i was still down for the day. THen it started to tank again and i broke another rule, i got back into the trade with max position. Well it went against me and i did not close it early enough for fear of seeing it tank as soon as i closed it.
Trading angry and trying to get revenge on the market can be a total dissaster, as we can see here. You trade too aggressively, and at a certain point you may completey stop caring. When things go wrong in those sorts of situations they just feed right back into the self-destructive pattern.
Now im sitting here with my account at 75% of it’s size it was couple of days back. Thoughts of giving up are starting to come on my mind. I havnt felt this low since my last margin call. At the rate i was losing this week, i felt that even if i did not break any of my rules, i would still slowly lose everything. I still don’t have a criteria for entering my trades and my strategy works only when i get in early enough(Anything less than 70-80 pips, i usually only break even). But pyschologically my strategy is not sustainable. Losing/breaking even for 95% of my trades during a long losing streak is something i have shown to be incapable of handling.
This sort of self-analysis is a very important developmental step. It’s kind of like an addict admitting to their addiction. Realizing you have a problem is the first step in correcting it. Once the emotional impact of the big loss fades a bit, the trader will be able to take from the good elements and start building on them as he did when he shifted to the 1-2% risk rule.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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