I came across a post on Baby Pips recently that I think does a great job of showing how sometimes a little more education and a different perspective on things can go a long way in our development as market participants. The poster in question had been trading for some time, but just finished going through a financial advisory training course. Now many financial advisors are little more than sales people. In this particular case, however, the particular course in question seems to have made this trader see the light in regards to his own trading. Here's some of what he shared.
Through my training and education, I’ve learned quite a bit a lot on risk management. Knowing what I know now, would have put me at an incredible advantage in this forex marketplace. I was far too aggressive in trading, as are many of you, and despite any warning from anyone you will continue to be so.
He's hit here on the reason so many new traders – and even quite a few no-so-new ones – crash and burn. Time and time again you hear from those who survive in the business that it was their discovery of proper risk control that finally put them on the right path. I talked about it recently in terms of leverage. No doubt I'll talk about it many, many more times in the future because the poster is right. It very often takes getting severely burned by risk to finally appreciate it.
My trading should have far more balanced. Taking conservative long term approaches with a large portion of my investment, while using a small portion of my investment to take a couple cracks at a home run.
This speaks a bit more toward one's overall investment approach than directly to trading, but it's an important point nonetheless. Remember that you need to Compare Your Trading to Your Alternatives.
I was afraid to take loses. I hated them a lot. Now I understand that it’s purely a numbers game. And if one can eliminate the emotions from the numbers, they would realize that a losing trade is one step closer to a winning trade, provided that they actually have an edge in the market place.
This is a really big one. The fear of losing money underlies a lot of foolishness in trading, like so-called "hedging" when a trade goes against us. The reality of the situation is that you can do very well with a relatively low win rate. And on the flip side, a high win rate does not guarantee results. For example, I saw figures on a group of retail traders indicating that 60% of their trades were profitable, but they were net losers. In other words, winning ain't all it's cracked up to be.
Scalping is stupid. It’s far too costly in relation to the amount of spread paid vs. the amount invested into the market.
Scalping is one of those approaches to trading which begs the question of return on invested effort. Is it worth the time? Also, is it mainly about the action? I've never been a scalper, though, so I'll leave it to others to answer those questions.
Most systems are profitable. However, they are over traded and dominated by fear and greed. Most traders will take a swing at anything that looks good. However, patience is far more important in this industry. Waiting for a high probable pattern is far better than taking a swing at 5 marginal patterns.
Can't argue with this. New traders tend to latch on to anything shiny and new that looks like it might be the holy grail, then dump it as soon as they realize it won't fulfill their dreams of limitless wealth.
You won’t get rich quick. For every story you hear of a guy that turned millions fast, it was either because he was extremely lucky, or that he was a liar. Your 100 bucks won’t make you 20,000 in a year. Sorry. But keep trying if you like. People can only win the Powerball lottery by buying a ticket. Just know that it’s luck you’re hoping for, and not skill and knowledge to dominate the market.
No comment required.
Overall, I was initially a losing trader that eventually learned to turn profits, however, I believe that perhaps those profits may have been short lived based on the fact that I still allowed my emotions to manipulate my trading and I was thinking short term and not long term. And I traded way too many pairs. Master one. Move on and then master another. I had no patience for any of that. I would rather take an entire year to master one pair before moving on to the next.
The short-term view is so prevalent in trading. Too few take a long-term view of their trading. If they did they probably wouldn't be nearly so stressed out and deadest on making millions this week, and by extension wouldn't be taking way too much risk and nearly ensuring their failure.
I’m humored by the fact that I once considered myself an extremely conservative trader, when I know see myself as wild and aggressive.
That might be a bit of hyperbole, but it makes the point. The idea of risk management is harped on over and over and over. Perhaps that's the problem. Maybe new traders hear it too often and become numb to it. Or maybe it's a lack of specificity or impact. Either way, it's up to those of us who seek to be educators to find away to make clear the importance of risky trading.