The Biggest Mistakes (and Best Changes to My Trading) I Made This Year
As you might know from reading this thread, I regard 2014 as my educational year in forex. I fully expected to make a number of mistakes along the way, and they proved to be exactly the kind of mistakes that everyone says you should not make. But having someone tell you that you shouldn't do this or that versus actually doing what they advised you not to do are two different things; your mom can tell you not to stick that fork in the toaster while it's plugged in, but actually doing it and then getting mightily shocked ... , well, you're even less likely to do that again ... .
So, here they are, my biggest mistakes and best changes I made to my trading in 2014:
Biggest Mistakes
1. Calling a Bottom or Top. Don't do it. Let the market do it for you. Naturally, you'll miss part of the move, but it's far better to do that than get caught on the short end of that stick. As if once wasn't enough, I called tops in a couple of different pairs twice in 2014 (once in GBP/USD, once in USD/RUB). Both resulted in big ass losses (although eventually GBP/USD did retreat substantially; were I to have stuck that trade out, I would have eventually profited, but panic set in).
2. Not Realizing that the Trend is Your Friend/Doubting Whether the Trend Is Going to Continue to Be Friendly. It is until it isn't. All trends end at some point, but follow it until it ends and then get out. If you have any doubts as to whether a trend might be ending, however, you shouldn't be entering that trade. Unusual consolidation, historical price highs/lows, etc. all lead to potential doubt.
3. Goofing Around With Discounted "Systems". At several junctures throughout the year, I have piddled around with various systems or methodologies that have been universally poo-pahed by experienced traders. Using directional grids is just one of these systems that I tried out. Sometimes they worked (for example, when I was trading in the direction of a solid trend), but sometimes they proved somewhat disastrous, with the disastrous aspects of them outweighing their benefits, at least if my balance sheet is being truthful with me.
4. Dabbling in Emerging Market Currencies When There Are Plenty of Lower Risk Alternatives Available. Don't get me wrong; emerging market currencies can be profitable in the right conditions. There were, after all, several junctures throughout the year that I was able to gain some pips from EUR/TRY, for example. Unfortunately, however, I got seriously burned on USD/RUB short. Trading EM currencies requires a different mindset, at least from my perspective, and isn't for anyone. Spreads can be monstrous; swaps, onerous; and the weird margin requirements a tough sell. Naturally, they have periodically looked attractive from a price movement perspective, but that attractiveness can also spell trouble from an exposure perspective if your open position is weighing on your portfolio's exposure. There are plenty of pips to be made in less volatile pairs ... .
5. Believing That I Could Effectively Trade the News (or Do Anything Else that Wasn't a Good "Fit" for My Trading Style). Truth be told: I suck at trading the news. I have tried Donchian channels (a breakout strategy), entering on the first 5 min. candle after the announcement, and various other shenanigans that have proved to be frustrating for me from a profitability standpoint. To a certain extent, I think it's simply that I lack the patience to watch the chart and wait for a proper entry. That's just me. The same thing, I think, would go for scalping. I like to scalp, but I don't have the patience or time to "plan my trades and then trade my plan" for the scalping strategy (finger trap) I would like to use in the vast majority of cases.
The Best Changes
1. Realizing that Signals, Etc. Are Inherently Unsatisfactory. Relying on someone else to decide to enter a trade is extremely attractive; what if, after, I could make money by virtually doing nothing? Unfortunately, signal providers can be good, but they are rarely good all the time; if you catch a signal provider with fairly good stats in a bad streak, you're screwed (it's easy to find statistically successful signal providers in, for example, ZuluTrade; you'll see the good stats and ... then you'll see all the thread comments about "What the hell are you doing?", "Why did you open that trade?", "Why are you settling for 2 pips?" -- in short, a virtually endless stream of criticism about how the whole signal is suddenly a piece of crap).
For me, I not only want modestly good performance; I want consistently modestly good performance, which for me means 3-9% per month. At the very least, I would think it reasonable not to expect a net loss over a four weeks of trading; heck, I'm able to get at least 0.5% or .25% in any given month ... . Aren't these guys supposed to be "experienced" traders with tested methodologies?
Well, you get the gist ... .
2. Realizing that I Suck at Single Point Entries. There are plenty of traders out there who go for "single point," "one shot, one kill" entries. They look for at least a 2-1 risk reward for their set-ups, fashion their entry orders, and then, basically, walk away from the trade. If they're right, they're right; if they're wrong as to the timing of that entry, they potentially stop out at a loss, and it is game over for that trade.
It's great if you can be successful that way, but it makes very little statistical sense to me. Wouldn't you want essentially four or five chances to get an average entry that was more on the money that the "single point" entry? Don't markets inevitably whip around from time to time, making the exactitude of any given single entry problematic?
3. Realizing that Stop Losses Can Erode Profitability in a Non-Single Point Entry Methodology or Where Advantageous Positive Swap is Present. I know, I know ... . Crazy not to use stop losses, right? SL's, I think, have a good role to play in "single point" entry methodologies where you're putting your entire position on the line in one shot. Even there, though, I have trouble wrapping my mind around one's wanting to take a stop-out at potentially one of the least advantageous prices available. I naturally understand one's wanting to cut short further loss, but wouldn't you want to cut short your loss at some other point than the point furthest away from your entry? Just sayin' ... .
Moreover, a large number of my trades take into account positive swap where there is an advantage to holding onto a position for the longest period of time possible. In those particular cases, I don't necessarily want to take profit too soon, and I certainly don't want the position to stop out when I am holding it, in part, due to positive swap associated with the position.
Lastly, and this is just purely anecdotal, it has been my experience that a good number of stop-outs result from impulsive price movement or "stupid wicking," after which substantial retracing occurs. It is enormously aggravating to have your trade stop out only to look at the chart several hours later and realize a retrace has taken place that would have hit your TP were you to have not had an SL in place. From that standpoint, my not using SL's is out of pure aggravation that this circumstance occurs from time to time. (I understand that there are studies that have looked at SL vs. no-SL setups that find that SL set-ups are more profitable than non-SL ones; however, these were systems that used "single point" entry systems).
4. Realizing that With a Multiple Entry System, You Don't Need to Let Winners "Run". I know that the standard adage is to "let your winners run; cut your losers short." With a multiple entry system like mine, though, you can have a little of both. I can naturally lock in modest profits on the legs I've got open in a pair, but I can also set up orders for additional entries to catch continuation should that occur.
5. Realizing that the Rule of "Not Adding to Losers" is a Load of Crap for a Multiple Entry System. Now I know that there is a thin, philosophical line between adding to a losing position in an effort to move your price closer to current market price versus taking multiple inexact entries in order to get a good, average entry price. Some traders consider the former rule as one should not be violated; the latter one an "okay" thing to do. My methodology is designed to get a good average entry that I can exit net profitable; that being said, it generally has the effect of moving my average position price closer to market price, making the position easier to exit net profitably. (If it makes people feel better about doing things this way, I feel dirty every time I add to a losing position .... ).
In an ideal world, I would only add to my winners, since all of my entries would be perfectly timed, but that naturally doesn't happen all the time or even a majority of the time (although I have read of traders saying that they can guess trend correctly 70-85% of the time using a 20 EMA and, for example, the color of the immediately preceding heikin-ashi). But the fact is that the market is not an "ideal" world; you take what it gives you ... .
6. Realizing that Smaller Is Better. I've probably repeated this a million times in this and other threads dealing with risk management, trade position size, and overall market exposure size. The basic rules of thumb are: no more than 1 x equity per position and no more than 10 x equity for total exposure. Naturally, even I violate these rules from time to time when I've got a series of trades going. Unfortunately, the fact is that if you adhere to these rules, your progress will be comparatively slow. You won't become a millionaire overnight, in a week, or even a year, especially if you're starting out with some pitifully small sum. You won't be making 1,000% per month like some of the Trade Explorers show. But ... you'll survive. You'll make mistakes, but you won't blow your account up, and you'll sleep far better at night with open positions since, even if one of those positions goes terribly awry, your account will be there tomorrow, and there will be no margin call.
Although I don't think this month (December) is really representative of these risk management practices (went a bit large on some positions and overall exposure creeped up to 15 x equity at one point), it does show that you can still be profitable without going totally overboard on per position/overall exposure ... . I remain amazed at traders who are able to do a "single point" entry for 20 times equity and not be on pins and needles every time they open their platform.
7. Considering All Your Open Positions as a "Basket". From time to time, I open my platform and, lo and behold, I am in net profit for all the positions I have open at that time. Naturally, there are losers in there, and there are winners in there, but the winners outnumber the losers. That may be the time at which to consider yourself lucky and close out all your positions as a net profitable "basket" rather than looking at whether each individual position is in the money.
* * *
Naturally, I am looking forward to a less "educational" 2015 (i.e., more profitable). After all was said and done in 2014, my "education" cost me about $1,701 (it was looking like a marginally profitable proposition toward the end of September, after which I proceeded to muck it up with a costly USD/RUB short carry trade).
I regard that $1,701 as my tuition ... , and am hopeful that my "degree" will pay off this coming year ... .
As you might know from reading this thread, I regard 2014 as my educational year in forex. I fully expected to make a number of mistakes along the way, and they proved to be exactly the kind of mistakes that everyone says you should not make. But having someone tell you that you shouldn't do this or that versus actually doing what they advised you not to do are two different things; your mom can tell you not to stick that fork in the toaster while it's plugged in, but actually doing it and then getting mightily shocked ... , well, you're even less likely to do that again ... .
So, here they are, my biggest mistakes and best changes I made to my trading in 2014:
Biggest Mistakes
1. Calling a Bottom or Top. Don't do it. Let the market do it for you. Naturally, you'll miss part of the move, but it's far better to do that than get caught on the short end of that stick. As if once wasn't enough, I called tops in a couple of different pairs twice in 2014 (once in GBP/USD, once in USD/RUB). Both resulted in big ass losses (although eventually GBP/USD did retreat substantially; were I to have stuck that trade out, I would have eventually profited, but panic set in).
2. Not Realizing that the Trend is Your Friend/Doubting Whether the Trend Is Going to Continue to Be Friendly. It is until it isn't. All trends end at some point, but follow it until it ends and then get out. If you have any doubts as to whether a trend might be ending, however, you shouldn't be entering that trade. Unusual consolidation, historical price highs/lows, etc. all lead to potential doubt.
3. Goofing Around With Discounted "Systems". At several junctures throughout the year, I have piddled around with various systems or methodologies that have been universally poo-pahed by experienced traders. Using directional grids is just one of these systems that I tried out. Sometimes they worked (for example, when I was trading in the direction of a solid trend), but sometimes they proved somewhat disastrous, with the disastrous aspects of them outweighing their benefits, at least if my balance sheet is being truthful with me.
4. Dabbling in Emerging Market Currencies When There Are Plenty of Lower Risk Alternatives Available. Don't get me wrong; emerging market currencies can be profitable in the right conditions. There were, after all, several junctures throughout the year that I was able to gain some pips from EUR/TRY, for example. Unfortunately, however, I got seriously burned on USD/RUB short. Trading EM currencies requires a different mindset, at least from my perspective, and isn't for anyone. Spreads can be monstrous; swaps, onerous; and the weird margin requirements a tough sell. Naturally, they have periodically looked attractive from a price movement perspective, but that attractiveness can also spell trouble from an exposure perspective if your open position is weighing on your portfolio's exposure. There are plenty of pips to be made in less volatile pairs ... .
5. Believing That I Could Effectively Trade the News (or Do Anything Else that Wasn't a Good "Fit" for My Trading Style). Truth be told: I suck at trading the news. I have tried Donchian channels (a breakout strategy), entering on the first 5 min. candle after the announcement, and various other shenanigans that have proved to be frustrating for me from a profitability standpoint. To a certain extent, I think it's simply that I lack the patience to watch the chart and wait for a proper entry. That's just me. The same thing, I think, would go for scalping. I like to scalp, but I don't have the patience or time to "plan my trades and then trade my plan" for the scalping strategy (finger trap) I would like to use in the vast majority of cases.
The Best Changes
1. Realizing that Signals, Etc. Are Inherently Unsatisfactory. Relying on someone else to decide to enter a trade is extremely attractive; what if, after, I could make money by virtually doing nothing? Unfortunately, signal providers can be good, but they are rarely good all the time; if you catch a signal provider with fairly good stats in a bad streak, you're screwed (it's easy to find statistically successful signal providers in, for example, ZuluTrade; you'll see the good stats and ... then you'll see all the thread comments about "What the hell are you doing?", "Why did you open that trade?", "Why are you settling for 2 pips?" -- in short, a virtually endless stream of criticism about how the whole signal is suddenly a piece of crap).
For me, I not only want modestly good performance; I want consistently modestly good performance, which for me means 3-9% per month. At the very least, I would think it reasonable not to expect a net loss over a four weeks of trading; heck, I'm able to get at least 0.5% or .25% in any given month ... . Aren't these guys supposed to be "experienced" traders with tested methodologies?
Well, you get the gist ... .
2. Realizing that I Suck at Single Point Entries. There are plenty of traders out there who go for "single point," "one shot, one kill" entries. They look for at least a 2-1 risk reward for their set-ups, fashion their entry orders, and then, basically, walk away from the trade. If they're right, they're right; if they're wrong as to the timing of that entry, they potentially stop out at a loss, and it is game over for that trade.
It's great if you can be successful that way, but it makes very little statistical sense to me. Wouldn't you want essentially four or five chances to get an average entry that was more on the money that the "single point" entry? Don't markets inevitably whip around from time to time, making the exactitude of any given single entry problematic?
3. Realizing that Stop Losses Can Erode Profitability in a Non-Single Point Entry Methodology or Where Advantageous Positive Swap is Present. I know, I know ... . Crazy not to use stop losses, right? SL's, I think, have a good role to play in "single point" entry methodologies where you're putting your entire position on the line in one shot. Even there, though, I have trouble wrapping my mind around one's wanting to take a stop-out at potentially one of the least advantageous prices available. I naturally understand one's wanting to cut short further loss, but wouldn't you want to cut short your loss at some other point than the point furthest away from your entry? Just sayin' ... .
Moreover, a large number of my trades take into account positive swap where there is an advantage to holding onto a position for the longest period of time possible. In those particular cases, I don't necessarily want to take profit too soon, and I certainly don't want the position to stop out when I am holding it, in part, due to positive swap associated with the position.
Lastly, and this is just purely anecdotal, it has been my experience that a good number of stop-outs result from impulsive price movement or "stupid wicking," after which substantial retracing occurs. It is enormously aggravating to have your trade stop out only to look at the chart several hours later and realize a retrace has taken place that would have hit your TP were you to have not had an SL in place. From that standpoint, my not using SL's is out of pure aggravation that this circumstance occurs from time to time. (I understand that there are studies that have looked at SL vs. no-SL setups that find that SL set-ups are more profitable than non-SL ones; however, these were systems that used "single point" entry systems).
4. Realizing that With a Multiple Entry System, You Don't Need to Let Winners "Run". I know that the standard adage is to "let your winners run; cut your losers short." With a multiple entry system like mine, though, you can have a little of both. I can naturally lock in modest profits on the legs I've got open in a pair, but I can also set up orders for additional entries to catch continuation should that occur.
5. Realizing that the Rule of "Not Adding to Losers" is a Load of Crap for a Multiple Entry System. Now I know that there is a thin, philosophical line between adding to a losing position in an effort to move your price closer to current market price versus taking multiple inexact entries in order to get a good, average entry price. Some traders consider the former rule as one should not be violated; the latter one an "okay" thing to do. My methodology is designed to get a good average entry that I can exit net profitable; that being said, it generally has the effect of moving my average position price closer to market price, making the position easier to exit net profitably. (If it makes people feel better about doing things this way, I feel dirty every time I add to a losing position .... ).
In an ideal world, I would only add to my winners, since all of my entries would be perfectly timed, but that naturally doesn't happen all the time or even a majority of the time (although I have read of traders saying that they can guess trend correctly 70-85% of the time using a 20 EMA and, for example, the color of the immediately preceding heikin-ashi). But the fact is that the market is not an "ideal" world; you take what it gives you ... .
6. Realizing that Smaller Is Better. I've probably repeated this a million times in this and other threads dealing with risk management, trade position size, and overall market exposure size. The basic rules of thumb are: no more than 1 x equity per position and no more than 10 x equity for total exposure. Naturally, even I violate these rules from time to time when I've got a series of trades going. Unfortunately, the fact is that if you adhere to these rules, your progress will be comparatively slow. You won't become a millionaire overnight, in a week, or even a year, especially if you're starting out with some pitifully small sum. You won't be making 1,000% per month like some of the Trade Explorers show. But ... you'll survive. You'll make mistakes, but you won't blow your account up, and you'll sleep far better at night with open positions since, even if one of those positions goes terribly awry, your account will be there tomorrow, and there will be no margin call.
Although I don't think this month (December) is really representative of these risk management practices (went a bit large on some positions and overall exposure creeped up to 15 x equity at one point), it does show that you can still be profitable without going totally overboard on per position/overall exposure ... . I remain amazed at traders who are able to do a "single point" entry for 20 times equity and not be on pins and needles every time they open their platform.
7. Considering All Your Open Positions as a "Basket". From time to time, I open my platform and, lo and behold, I am in net profit for all the positions I have open at that time. Naturally, there are losers in there, and there are winners in there, but the winners outnumber the losers. That may be the time at which to consider yourself lucky and close out all your positions as a net profitable "basket" rather than looking at whether each individual position is in the money.
* * *
Naturally, I am looking forward to a less "educational" 2015 (i.e., more profitable). After all was said and done in 2014, my "education" cost me about $1,701 (it was looking like a marginally profitable proposition toward the end of September, after which I proceeded to muck it up with a costly USD/RUB short carry trade).
I regard that $1,701 as my tuition ... , and am hopeful that my "degree" will pay off this coming year ... .
Fireworks are fun ... as long as you don't blow your fingers off.