Strategy of losers

A year ago, I read a thread by downrivertrader which said the most important thing in trading was to trust your instinct. At the time I was trading simple S/R, pretty badly it had to be said, so I thought why not? I decided on a 1:1 R/R (in fact, slightly less than 1R to account for spread) and I would trade whenever my gut instinct told me to. Screw the rules.

I lost 10 trades in a row. The odds of that happening are less than 1 in a 1000. I was shocked and annoyed for a day or two (live account) before I realised how important a lesson that was. We are hardwired to screw trading up. I wanted to know why.

Why do losers lose? It’s a simple question, but to find the answers hasn’t been easy. Ignore the Mark Douglas bullsh*t, ignore the threads of why 95% of people lose (all guesswork and seriously uninformed), and to find the truth you’ve got to collate and analyse thousands of hours of Oanda open interest data, dozens of academic papers on retail order flow and combine with a dollop of lateral thinking.

The results are a mixture of the surprising and obvious. Some things I won’t reveal here, but the thrust of what’s important I will. And why? Simple really. By revealing what you know, it only encourages you to get to the next level, so it’s a mostly selfish endeavour . I’ve only very recently come to this conclusion; I always swore I’d never share any of this, so take it while you can. Before I do though…

The mythical 95%
We’ve all heard it, suspect it’s true, but no-one’s ever confirmed. I’ve heard the futures market is closer to 80% losers. And in FX, the closest I got to confirmation was meeting a UK bucketshop broker who reckoned it was about 80% (15% b/e, 5 % profitable and of that lot, only a handful were trading anything less than monthly (yes monthly) timescales). Not pretty. And of course that bucketshop isn’t necessarily representative of the wider market, but it’s a start. But I do have something to hang our hats on – a shocking stat that’ll make you think hard about which pairs you trade and why.

Believe and you still probably won’t achieve
“It’s the trader not the system”
“Most systems are successful it’s the trader that lacks self-belief”
“Look in the mirror, the holy grail is you”
Run come save me. It’s the Mark Douglas effect, who carelessly tossed out the notion that if you just follow the rules of most simple systems, you’ll come up trumps. No you won’t Mark, don’t be ridiculous. Most successful traders trading simple systems are profitable through their discretion. Discretion is just a set of rules you haven’t been able to articulate yet but by using discretion, you are not following your rules. Self-belief may take you a lot of places, but it won’t polish an otherwise unpolishable turd.

The best traders in the world
All this may sound negative – it’s not supposed to. Most retail traders don’t have a clue what they’re up against, statistically and the people on the other side of their trades. Not only do they have to contend with the bucketshop practices, but the wider market of professionals is constantly taking advantage of every fault of human nature that reveals itself in trading.
Which is why retail traders that are consistently profitable, not having come from a financial background are not only statistical outliers, they are, in my opinion, some of the best traders in the world. They sit at the bottom of the information ladder, they are exposed to the worst advice, they have to contend with some pretty poor executions (although getting a lot better it has to be said) and still come out on top. The only advantages retailers have is an open mind, and the absence of pressure to trade from a boss on high. Pretty weak edges - I’d take inside contacts, experience and a view of the order book any day of the week.

Onto the findings anyway. I’ll drop a one in every few days…

My kind of guy, I vouched for him 1st .

I like triphop (the music genre), and I like where this thread is going so I'll be checking in regularly!

Looking forward to some words of wisdom

nice

I like what i've read so far. Among a sea of misinformation throughout all the interet, judging from the posts in this topic, i'm sure trithop has useful things to say.

Ha! Nice one!

Good thread - Thanks!

Curse you Leon & PipMutt!! I was third.

I hope you get on with it quickly, Triphop.

Soon you'll be mired in posts from those who believe certainty of success is directly proportional to the number of cliches memorized.

Obviously you've done some research. Should be good reading.

Fourth!

Hope following picture will tell how people loose and how market play with emotion.

triphop, I'm definitely looking forward to your thread. Fantastic info so far. I'm subscribed.

That's gold!

Triphop, I look forward to your posts.

However, the probability of 10 consecutive losers is mathematically not that low, assuming a strategy whose %win rate you know. And I admit, that with a discretionary strategy, you can't really know that.

Can't wait to hear the conclusions you've arrived at!

Thanks for the support guys! I won’t string this out too much so let’s crack on.

Pricey – we can come back to it later but my experiment was based on ensuring there was a 50:50 chance of a win (ensuring spread is accounted for), like a coin toss. Probability of 10 heads in a row = 0.5 *0.5 * 0.5 etc. It reminded me of Taleb:
Question: if you throw 999 heads, what’s the chance of the next coin being heads too?
Answer: nearly 100% chance it’ll be heads because the coin is clearly loaded.

1)Inverse disposition at normal leverage, disposition and increased position size after sequences of 2+ wins/losses
The disposition effect is the tendency for punters to hold on to losing trades for longer than winning trades – giving rise to the oft-quoted “cut your losers short, let your winners run”. Simple. So, presumably all the losers do the opposite right? Wrong.
The average punter does exactly what they’re ‘supposed’ to when trading. They cut losers short, and let winners run in the main. But, once they either have two wins in a row, or two losers in a row they change into a gambling beast. In fact, it’s a pretty steady curve – the longer the sequence of wins or losers, the more pronounced the effect.
Once the disposition effect takes over, they increase the amount per trade, and change their risk parameters. In simple laymans terms, retailers have a small risk to a large reward until they win or lose a few trades, and then they ramp up their position size, and let their losers run.
You can see this in other areas of life too. Go to a casino and watch blackjack and roulette players. When they start getting excited or frustrated, their position sizing goes out the window. Watch out for the swearing, angry punter as he suddenly decides he’ll regain all his losses in one foul swoop. Of course, sometimes he does. But more often than not, he doesn’t. Then there’s the punters on a roll. The deck is hot right? Double, treble up, it’s house money anyway. And oh, never mind, we’re back where we started.

In itself, this is useful information. Next time you win twice or lose twice, raise the warning flag – the stats say you’re about to do something stupid.
But more interestingly, I’ve found this is true in the wider market sense. The easier the profits are gained (straight up trends), the more severe the shakeout of longs/shorts that is required to turn a market trend. Or to shake out the weak hands, if the trend is to continue.
If you’re thinking laterally about this, you’ll realise that the polar opposite of this is taking small profits with a poor R:R most of the time, and then only ramping up position size when you can draw in risk (your SL) when you expect a longer-term trend. It’s not a million miles off FTI’s strategy.

You won’t find this advertised by your broker. What percentage of time do you think retailers (en masse) are winning more than they’re losing? Would you expect it to be similar across different pairs? To figure this out, I took 9 months of position data from Oanda, and divided it up into neutral (winners and losers roughly in balance), losing and winning.

For the EURUSD, retailers spent 0.5% of the time in profit, 12% running at or near b/e and 87.5% losing. Nice work eh? Ever get the feeling you’re in the wrong business? Looking at other pairs:

EURUSD: 0.5% profit
EURCHF: 1% profit
USDJPY: 6.5% profit
EURJPY: 8.5% profit
GBPUSD: 11.5% profit
GBPJPY: 12% profit
AUDUSD: 15% profit.

In other words, AUDUSD has been 30 times as profitable for retailers as EURUSD in the past 9 months.
What is it about price action that makes trading one pair harder than another? Sure, in the case of AU there’s been a clear trend, but EY, compared to EU? Why so different?

And I nearly forgot to mention - which pair is most commonly traded by retailers, accounting for about 1/3 of all open interest? Why, it's EURUSD of course.

Nice thread Triphop. If I may ask where did you get those figures? I only trade 4 pairs and only EURJPY is on the list.

Great stuff Triphop.

I think I am where you were a year ago.
You must be hiding somewhere in my office because your strategy of losers was a description of my trading for over a year. Have you been spying on me?
I have spent hundreds of hours now studying the charts trying to figure out how it is that I constantly pick losers. At one point I thought about just taking my best guess and then purposely going the opposite way. But then which way is the opposite of your final choice?

Very interesting stuff on the pairs comparison.
Regarding the EU and the little time traders spend in profit there, I would think that is due to the lowest spread available. That makes it a favorite of scalpers and short term traders. For those, a large spread is nonstarter. And once in profit (any profit) the goal has been reached. It is also quick to take those profits back if you don't close your position.

I think I am past the point of being a constant loser but it is still a struggle to get ahead. It is so much easier to lose than to win. Breaking even with slight gains is where I am at.
I can't help but feel that the answer is so just around the corner. If I have come this far there must be way to get farther. I am still at my charts many hours each day trying to learn. Here is some of what I see so far:

- S/R's work great on EU until I place an order based on them, then they break.
- The Aussie and CAD are more fundamentals based but they will do the opposite that the talking heads on the news say they will.
- Most of the rest are all correlated to these. If you trade them you might as well just trade the related one with the lowest spread because they will all move together.
- Indicators just tell me what I already know.

Triphop, if you can help me get past this hump that I can't yet see over I would be beyond knowing how to properly thank you. You seem to understand something here that is still beyond my grasp.