Tag Archives: consistency

Each quarter the US forex brokers who fall under the regulation of the Commodity Futures Trading Commission (CFTC) - which is most of them – report profitability figures (see the most recent tallies posted by Forex Magnates here). This has been going on since 2010, with reported figures back to 2009. On average, these reports have shown that just about 30% of active accounts (those doing at least 1 trade) make money in any given quarter. The CFTC put this reporting requirement in to provide a bit of transparency as to the reality of performance among traders, but in some ways they have actually muddled things a bit. Let me explain.

First of all, the broker-reported figures are for accounts, not traders. Granted, for most people that is the same thing. As I discussed in a recent post, however, some traders have multiple accounts and the evidence suggests that these are among the better performers. If that is indeed the case, then the broker-reported figures actually overstate how many traders make money each quarter. It’s not likely by a huge factor (probably just a couple percentage points at most), but it is one way these figures belie reality.

The second, and to my mind more significant, problem with these quarterly figures is they provide no indication of whether there is any consistency of profitability. As I documented in Starting to detail forex profitability data, this is something very important to keep in mind because the reality is that most traders don’t get the job done consistently.

According to my research, only about half of all accounts (keeping to the comment measurement of the broker-reported figures) had at least 1 winning quarter during the 3+ year period of my study. Of those who had at least 1 profitable quarter, only about 43% were able to follow that up with another winning quarter in the next three month period. That means we need to take the 30% figure mentioned above and cut it in half (and then some) to get at some sense of reality where consistent profitability is concerned.

Taking it a step further, less than half of those who were able to generate multiple winning quarters were able to produce back-to-back winners more than 50% of the time. That means even among those who are part of the about 15% able showing back-to-back winning performance there is very little consistency of performance.

If we were to continue extending the consistency question to include higher levels of repeat performance we would see lower and lower percentages. In other words, it’s only a small fraction of active forex traders who consistently make money. It’s a hard game to win. Keep that in mind as you decide on how you will approach it.

Last week’s webinar session featuring Currensee Trade Leader Taylor Growth delivered strong information on a “conservative” trading strategy and its pertinence to these current tempestuous market times. The concepts touched upon and insight provided could be quite useful to anyone involved in Forex, so I thought I would share some of what was revealed.

With a historical success rate in the high 90’s and currently up 1.5% this month, Taylor Growth seems to be doing something right. Tom Dawson, COO at Taylor Growth who spoke on the company’s behalf, attributes this success to a few key concepts: preparation is integral, you must consider multiple sources of influence like technology and the economy, and you need to have rules and systems you believe in.  Not long ago, the world of Forex was something new and uncharted – an environment he compared to the Wild West.

“There was a need for a conservative, careful, and productive company. One that was going to do a good job in producing real results that were accessible to people,” Dawson explained. He went on to say how it’s easy for someone with millions of dollars to achieve world-class results in Forex, but it’s a completely different story when you can only put 10K into the market, and that is why skilled traders are needed to help in attaining these results. Dawson finds solace in knowing that even though it may not seem it, there is in fact consistency in foreign exchange.

“One of the great things about Forex is that every month, companies all over the world have to move their money to do things like pay rent, etc. It’s the daily moving of this $4-5T that acts as a stabilizer bringing things back to equilibrium,” he explained.

By using range trading and understanding that over time, there will be various ebbs and flows in Forex, Dawson sees that no matter where a currency goes, it will usually always return back to its point of origin. This general paradigm of consistency is what inspired Taylor Growth’s goal of being able to achieve the highest risk adjusted return possible while producing smooth results – or, as Dawson put it, “taking the chop out”.

He explained how the use of Pattern Recognition when looking at what’s going on in the marketplace allows this consistency to actually be seen. It becomes apparent that there are repeatable, definitive patterns that occur, such as how the dollar is stronger and weaker at different times of the month. Taylor Growth has seen such a high success rate because they pay close attention to these patterns and base their decisions on them, which is something that’s hard for a computer to do.

Even with Taylor Growth’s scrupulous attention to macroeconomic detail, there will always be some degree of risk. Knowing this, he’s formulated a few ways he believes are the most secure for protecting investors from losses. Setting automated stops is not something Taylor Growth generally practices. Instead, when things start moving against them, they cut the trade themselves as a means of managing risk. By using a balanced combination of betting small, understanding which patterns are in confluence with them, and being comfortable with taking a loss when a trade moves within several hundred pips, Taylor Growth has achieved a historical success rate in the high 90’s. On larger trades, however, they do set hard stops to abstain from risking more than 1%.

One deterrent of automatic stop losses Dawson touched on was the way they can react to a Flash Crash.

“Problems can arise when a market is thinly traded at a particular time and if it moves up or down 200-300 pips, you run the risk of losing the trade because of the stop, even though you were correct. If the stop weren’t on, you would have eventually won the trade,” he explained.

The webinar was concluded with a Q&A session that touched on topics such as stop hunting, among others. Our next webinar will be taking place Wednesday, May 9th 2012, 12:00pm ET / 6:00pm CET where CEO Dave Lemont will reveal five secrets of investing in the growing Forex market - sign up here.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

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A couple weeks ago Tim Bourquin posted 5 Uncommon Rules of Wealthy Traders at TradingMarkets. The rules were commented upon by zentrader in his 5 Unique Rules of Trading  post, which is how I came to find them. I wouldn't really call these rules so much as observations, but they are still worth addressing. So, without further ado, here are Tim's "rules" with my thoughts about them, specifically as they related to Forex traders.

1. They plan every single trade. EVERY SINGLE ONE.
This is a very simple restatement of "plan your trade and trade your plan". If you don't have a specific strategy defined going into a trade, one based on your larger trading plan, you are gambling. We traders are not in the business of gambling. We are attempting to apply a methodology with a statistical edge over a large number of trades to allow that edge to create a positive return. That takes planning and consistency.

2. They stopped trying to pick tops and bottoms years ago.
Here we have a reflection of the fact that no one can know for sure what the market is going to do at any given point. Even if you are right about the market making a turn, shifting out of one trend and into another, chances are you won't get the timing exactly right. You have to realize that and account for it in your risk management. By that I mean if you're strategy relies on catch market turns you probably need to either play with wider stops or be prepared to take a few small losses before that turn actually comes.

3. They are patient with winners - and ridiculously impatient with losers.
This third observation is basically "cut your losses and let your winners run" stated in another way. I definitely won't argue the cutting of losses quickly side of things. If the market doesn't act like you anticipated, and you don't get out of the trade, then you're hoping it turns around. Hope is not something you want involved in your trading at all. Remember, you can always get back in.

As for the letting the winners run, that depends on your system. Some systems have specific profit targets and not abiding by them could be problematic, just as in systems which relying on letting the market run it would be counter-productive to have a pre-defined exit point. Regardless which way your systems works, make sure you don't suddenly decide to change path in mid-trade. That goes back to #1 above.

4. They trade one market. ONE.
I'm not sure I can totally agree with trading only one market. If you are a short-term trader, then that certainly makes a lot of sense. And in the case of Forex trading, it might even be down to trading just one pair. Generally speaking, the greater the focus you need on the price action in real-time the fewer pairs you want to be trading.

As you get out the time span curve, though, adding in additional pairs and/or markets may make sense. For example, the Turtles traded numerous markets because that was the only way they could ensure a sufficient number of trades to make their system worthwhile. That's really the key - the number of trading opportunities. You need them to be sufficiently large in quantity to allow the probabilities to work in your favor. For example, a swing Forex trader may want to track a several pairs (probably with different characteristics) in order to make sure they get a fair number of trade signals. How many depends on the demands of your system and the potential for having multiple positions on at one time. If you are a position trader, you may not only want to watch all the major pairs and crosses, but perhaps also equities and bonds.

5. Their benchmark for success is anything but money.
As for this final observation, I agree wholeheartedly. The money focus trap is a big one for new, low-capitalization traders especially (a large portion of the retail Forex community). It leads them to take on more risk than they should. After all, when you only have $1000 in your account your gains or losses are only going to be so big in nominal terms. It's hard to get excited about a $100 gain, maybe. If you focus on other metrics, such as % return, however, things become much more meaningful. That $100 gain becomes a 10% gain, which tells you something much more important. Also, a $10,000 gain is much less impressive on a $1,000,000 account, for example, than on a $25,000 account. It's about not getting caught up with nominal amounts but with the performance of your trading according to the metrics which make the most sense.

Well, that's what I think of these five rules/observations. What are your thoughts? Anything not included here that you think should be in the top five?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.

 

 

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