Author Bio

As if yesterday’s funding announcement wasn’t excitement enough, Team Currensee is pleased as punch to present a Webinar with popular CNBC and Fox guest analyst Bob Iaccino this Friday, February 26 at 8:00am New York time.  Bob is going to talk about the business of Forex trading – not business as in being a professional Forex trader, but business as in being businesslike in your Forex trading, no matter your level of expertise, interest or financial commitment.

Please join us  for this unique opportunity to hear Bob Iaccino discuss his trading philosophy and take your questions live. Bob will teach you about:

• The behavioral psychology of Forex trading
• Defining a “good trade”
• The trap of being “right”
• Writing and using a Trading Plan
• Understanding loss as a business expense

Webinar: Currensee presents Bob Iaccino and “The Business of Forex Trading”
When: Friday, February 26, 8:00am US Eastern time (1:00pm London, 9:00pm Singapore)
Cost: $10 Blog special: $7 – seats are strictly limited
Register: on EventBrite

BONUS: all webinar registrants will receive a free week of Bob Iaccino’s Daily Trader Webinars, a plain English daily guide to Forex trends and trades.

See you at the Webinar and on Currensee!

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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.

Author Bio

The other day I started reading Curtis Faith’s new book Trading From Your Gut. Faith was one of the original Turtles. A few years ago he wrote a book titled The Way of the Turtle about his experience as a Turtle and discussed trading system design and development at length (see my review). On my daily commute this morning Faith was speaking very directly on the subject of win rate and good trading. This is something I’ve commented on before myself, but is always worth speaking to as it trips up a great many traders in their development.

Here’s the deal. Developing traders, and even sometimes more experienced ones, get overly hung up on being right and having a high win %. This comes from two primary underlying causes. One of them is the fear of being wrong. The other is the belief that they need to have more winning trades than losing ones to be a profitable trader. Both are problematic and will cause issues.

The Need to be Right
The need to be right is something which kills traders. As Faith puts it, the whole being right thing is for forecasters and prognosticators, not for traders. Those who fixate on being right end up making bad decisions – ones that can blow up their account. They are the traders who hold losing positions way too long in hopes they’ll come back because they can’t handle the idea that they were wrong and will be forced to take a loss. Of course that often leads them to eventually panic at some point and bail on a trade at exactly the worst possible time (as many stock investors did in March 2009).

The need to have a high win rate also encourages such silly trading behavior as “hedging” in the forex market. I’ve heard many traders justify doing so as allowing them to stay in the trade so it can eventually turn back in their favor. They seem to be ignoring the fact that all they’ve done when putting on a “hedge” is lock in their loss. Like I said, poor choices – ones based on emotion rather than rational decision-making.

Odds and Expectancy
Then there are those who think that in order be a profitable trader you must have more winners than losers. Of course this is true if your winning trades are the same size as your losers. If, for example, each trade will either be a $100 gain or a $100 loss, then you need to win more than 50% of the time to expect to come out ahead in the long run. It’s a straightforward mathematical relationship. If you win 51% of the time then the expectancy for your trades is $2 ($100 x .51 – $100 x .49), meaning that on average you would expect to make $2 for each trade you do.

We can use the same math to demonstrate how you can also be profitable in the long run with a much lower win rate. Let’s use 25% as an example.

Keeping the same $100 gain/loss as above, we come up with a -$75 expectancy ($100 x .25 – $100 x .75). Not good. What if we change from a 1:1 winner-to-loser ratio to a 5:1 ratio, though? Let’s call that $500 for the winning trades and $100 for the losers. Running the figures we get an expectancy of $50 ($500 x .25 – $100 x .75). Not bad at all.

In general terms trend trading methodologies are the ones that tend of have low win % but high winner/loser ratios because they have a lot of small losses thanks to whippy, trendless markets but relatively large winners. Other systems go the other way, with lots of small winners and only occasionally a loser, but a big one.

Even for those with no real issue with being “wrong”, however, low win rate systems can be a challenge. They are subject to lots of big equity swings because the high number of losers creates lengthy drawdowns. Those can be very hard to ride out, especially for someone who hasn’t developed confidence in their system.

Focus on Good Trades
The bottom line is that you should be focused on making good trades not on making winning trades. Good trades sometimes lose money, but if you keep making them within the scope of a positive expectancy system or methodology you’ll end up ahead in the long run. Getting caught up in trying to make winning trades will almost certainly end up leading to disaster.

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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.

Author Bio

I was recently asked by a trader who said he’s been trading for about a year now about taking his trading to the next level. He said he found a system that suits his personality and that although he’s made a few mistakes, he’s been able to be profitable for the past three months with a 5%-10% monthly rate of return.  As I’m sure you realize, three months isn’t that long and nobody can tell the future. He wanted to know about maintaining his performance and moving up to the next rung on the latter, wondering about the comparison to athletes in terms of how much time they spend training.

The first thing I want to point out here is that he’s found a trading system suitable to his personality. This is key. It’s probably the one thing new traders don’t understand about being able to reach a level of sustainable performance in the markets. This is why they end up bouncing around from system to system because they don’t see the performance they expect, oftentimes wasting a ton of money along the way. If you’re system doesn’t fit you, then at some point the conflicts are going to create problems. It might mean ignoring trading signals or taking trades that haven’t been signals. It may mean putting on trades that are too big or too small.

Trader Training

Now, as for the comparison of trading to athletics, it’s certainly often made. I’ve done so myself. There are some differences in this context, however. Much of what athletes do with their constant training is to maintain or improve their physical attributes. Clearly, that isn’t something traders really need to worry about. It’s not like clicking the mouse is physically demanding, after all. The other side of things in terms of working to develop new skills and/or refine existing ones is relevant, though.

Taking the physical element aside, athletes work a lot on getting better at what they do in a few different ways. The most obvious is training – practice repetition. I don’t think I’m going too far out on a limb to say that someone with a solid system like the trader in question here probably doesn’t need to practice using his system. What he may need, though, is the other side of what athletes do for development. That includes things like reviewing their performance on video and getting input from coaches. Performance review is definitely something which can help traders.

An important part of any trader’s development is monitoring their performance on an on-going basis. At its most basic level that means making sure you’re doing what you’re supposed to be doing according to your trading plan. If not, then you know you need to work on that as a first priority.

Another aspect to reviewing one’s performance is to look at how their system is doing in terms of expectations. Is the system making the trades it’s supposed to be making and/or avoiding the ones it isn’t supposed to make? If not, then the question of why needs to be addressed.

This is not to say that skill development isn’t a part of trader development. Experience will certainly make you a smarter trader over time, but there are other things which can be done along the way. Learning new methods of analysis can be part of that equation. Doing trading system research is another possible path, depending on your needs and interests. It’s almost always worth at least exploring ways you can improve things like risk management and market analysis.

Stepping Your Trading Up

As for taking it to the “next level” is, I’m inclined to lean against focusing on the rate of return itself. More important for just about everyone is making incremental improvements to following their system, avoiding errors, and the other sorts of things mentioned above. That will often translate into higher returns, but returns aren’t necessarily the most important consideration. Sometimes better trading means lower drawdowns and/or a smoother equity line overall.

In fact, taking it to the next level can mean a number of things which don’t relate to rates of return at all. It could mean trading with a large account. It could mean expanding the number of securities and/or markets you trade. It could be shifting to more advanced trading strategies, like employing options. The bottom line is that the next level is what you decide.

Suggestion

The advice I would provide in a situation like this one is three-fold. First, three months really isn’t enough to judge your performance quite yet. A bit more time should probably be given to have really good measure of things. Second, do regular performance reviews of both personal trading actions and how the system has done relative to what would be expected. Make any adjustments required. Lastly, once any performance issues have been cleared up and sufficient time has passed to properly judge things, if things are comfortable I would consider reevaluating your investment level.

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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.