Strategy of losers

In my opinion the answers are straight-forward, but what is hard for people is to acknowledge their weakness and correct them.

I doubt it will help someone who doesn't trade well. I think instinct is simply a subconscious calculation based on our knowledge and experience. A poor trader probably lacks good instinct.

No, the casino maintains an edge anyway. The only difference having evenly-spread action would make is for smoother distribution of results (i.e. less volatility).

As for EUR being the least profitable, trading against the institutions etc, we all do our own thing and rarely actually compete against each other. There are edges for all different kinds of strategies, on all timescales for many types of traders. There's a lot of dead money in the markets.

Really appreciate the feedback from all of you here, thank you. I didn’t mean to leave this thread dangling for quite so long – I was in darkest Cornwall without broadband. Still, I got a 4-hour train journey to write up the rest, so I’ll finish off first then go through some of the posts…

3)Retail entries/exits are largely made from time & price alone
This might seem like a pretty bland observation, but to my mind it’s the most important. I’d go further and say most entries/exits are made from chart patterns. As with all of these posts, I’m not making any wild declarations over how winners trade, or suggesting anyone should do anything different. Is winning always doing the opposite of losing?
The other styles of trading that I’ve come across, and I’m doubtlessly missing some are all in FF in some form or other, some less than others:

1) Order flow
2) Technical analysis (patterns)
3) Quantative (deriving statistical probabilities out of historical data)
4) Sentiment (Oanda open interest, COTS)
5) Fundamental
6) Correlation strategies (eg using gold prices to determine AUDUSD)

Semantically, probably TA could be said to cover quant strategies, and sentiment part of order flow, but they’re distinct enough for me that they form quite neat areas of research.

This may seem to fly in the face of the fact that AUDUSD is the highest profitability and was in a clear trend but it fits in perfectly. AUDUSD was only 15% profitable – that’s 85% of the time punters were sitting in the red. And do you think retailers were mostly long/short over this period? No prizes for guessing.
Similarly, when EURUSD broke upwards through this year’s ranging summer, where were the retailers? Of course they were all shorting the market.

In this sense, retail positioning is a contrarian directional indicator but with a major caveat. It’s not quite as simple as always trading the reverse. Like the slightly dim classmate at school who never quite got it, dumb money keeps banging their heads against the wall by trading against the trend, but eventually does cotton on and joins in, but in doing so they handily provide the liquidity to the professionals who are looking to unload. Of course, if you add it to the problems described in 1), there’s every chance they’re leveraged up to the hilt too. Most recently, I read an article talking about bookies in the UK. They recorded the highest ever amount of shorts per point on the FTSE, right at the bottom of the market.

What we’re really talking about here is dumb money, and so to be clear, it’s not retailers that are moving or finishing a trend, or providing liquidity. They’re just indicative of dumb money. In reality, they’ll be replaced in the wider market with poorly performing hedge funds, companies hedging at extremes of price (thinking that they’re ‘managing their risk’, when really they’re performing a breakout trade at the end of the trend), and novice traders who have an unfeasibly large bank roll.

I can prove all of the above, but there are a few more parts of a losing strategy that I can’t prove because I don’t have the data, so take these with a pinch of salt:
Retailers I believe vastly underestimate the impact of the spread on their trading. Combine this with overtrading and you’ve a guaranteed recipe for disaster. Nothing new here but simple maths; the targets of some of the scalpers necessitate either incredibly high (80%+ ) strike rates, or using a very high inverse R:R, and probability eventually catches up to kick their arses.

So, if you’re ever asked why retail traders lose, the accurate answer is they trade with low risk: high reward until frustration or greed gets the better of them, then they scale up and let their losers run. They trade the least profitable pairs, they underestimate the cost of the spread and overtrade despite there being no pressure to, and they all happily trade against a good old-fashioned trend until it’s about to turn. And they love their charts.

Amen!

Porky:
I hear ya – I’ve run a journal for a around a year and half, and I think the post that was me at my lowest trading ebb was around a year ago. To be really clear, I ‘m not qualified to give you advice. Once I earn all my income from trading, then maybe, and even then you should question how long that’s been for.
But, I can tell you what I did. At that point I decided there were two options:
1)Persue this strategy that was just about breaking even in the hope that I eventually acquired some magical discretionary skills that’d help me become profitable. This is entirely possible; just because I didn’t fancy my chances doesn’t mean to say you can’t.
2)Look for solid edges based on cause and effect that could be traded without an iota of discretion

I opted for 2), but the choice as ever is yours.

Why are some pairs more profitable than others?
Brent, yes advertising for EURUSD must be partly responsible (it’s better than “Come trade the EURUSD, it’s rock hard”, and Porky’s idea of it being a scalpers first choice must have something to do with it. In truth I don’t know. But also market efficiency must play a part. A price inefficiency is least likely to appear in EURUSD over the other pairs because its market share of FX trading is so great. For the same reasons, GBPJPY should to be very different. As it’s a synthetic cross, bank traders can’t trade it on EBS or Reuters but instead trade through the legs (buy GBPUSD then buy USDJPY for eg), which is why the spread is twice that of other pairs. Price action has to be different for this reason alone.
It still doesn’t explain the differences entirely – over to you guys. And it doesn’t stop me trading EURUSD either...

A bit about discipline, Mark Douglas and instinct
Chicky, Porkpie, you picked up on my dislike of TITZ (Trading in the Zone, not tits). It’s because of all the advice I’ve ever read, or followed, this was the most useless.

He is so blasé about finding a simple system with an edge, anyone would think it was a doddle. He even goes as far to say that most simple systems are profitable if you follow the rules. Maybe I’ve missed a golden age of trading when using the first hour of a London session for direction could earn you big bucks, or when a simple MA crossover could make you rich beyond your wildest dreams. And maybe stocks are different from FX.

But I found discovering anything even resembling a useful edge is a long slog of think, research, find, experiment, question, test, dead end and start again, for literally thousands of hours. Sure, the outcome might be a dirt simple system, but the time taken to find it…

And his focus then is on discipline and following the rules. The Chinese water torture of trading is to take a crap system and make someone trade it day in, day out for months on end. And to get nothing but a slight loss in your account for your troubles. The implication that you just didn’t believe enough in yourself mate, those times when you didn’t follow the rules, that was self-sabotage, is not only insulting, it’s not true either.

Lack of discipline is the result of conflict between your subconscious instinct and your conscious thoughts. You don’t have trouble avoiding playing in the traffic do you? So why trading? Here’s my take. There are two issues: following the rules of your system, and crazy position sizing.

Every time you find yourself wanting to place a trade, but the rules of your system say no, it’s your instinct thinking that trade will make you money. If you allow yourself to take those trades, the problem will disappear (but your account may well shrink). But your instinct learns. And it learns until you’ve a rock solid set of rules that you’ll never break because you truly believe that the rules of your system are the best they can be. Seriously, what kind of life is trading if you’re constantly at war with yourself?
As for overleverage, this comes from the nagging belief that if you trade large you’ll get rich quicker. Nothing else. If you truly believed that wasn’t the case, you wouldn’t do it. However, a total cure was handed to me by losing a vomit-inducing amount of money. How I lost it was an amusing tale of sheer idiocy, that took me nearly a month to get over, but hand on heart, since then, I have never once wanted to go large on any one single trade.

I suspect Mark Douglas got to the point of a firm set of rules and then assumed that was a secret of his success, forgetting the journey he took to get there. I’ve rambled enough – if any of this chimes, read Psychocybernetics. It’s a great book, nothing and yet everything to do with trading, life and success. Just a warning mind – the last chapter is a bit David Icke, but hey, noone’s perfect

PS I haven't got another 4-hour train journey for a long time, that's me done a while!

He didn't suggest that.

Quotes from Trading in the Zone by Mark Douglas:

"Putting on a winning trade or even a series of winning trades requires absolutely no skill."

"No matter how much you learn about the market's behavior, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money. So if you are afraid of being wrong or losing money, it means you will never learn enough to compensate for the negative effects these fears will have on your ability to be objective and your ability to act without hesitation. In other words, you won't be confident in the face of constant uncertainty. The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try either consciously or unconsciously to avoid any possibility you define as painful. In the process, you will subject yourself to any number of self-generated, costly errors."

Cheers!

I know he didn't! I did. That's my take as opposed to his.

I nice interview with the author for those who may be interested.

Great book worth reading many times over!

Cracking, great find Brent, thanks.

I've been meaning to ask you, do you still use market profile?

Glad you like the link! Great that you mentioned Psycho-Cybernetics IMO.
I hope that many here will read it because I it really helps to keep a person on a constant path of forward moving self-correction.

I use the Market Profile theory, esp. as laid out by Steidlmeyer in Markets and Market Logic, all of the time. Basically, viewing the market as an auction process with a mix of different TF participants who shape its distribution. When I look at the charts I try to see how prices are distributing across its current range and where within the distribution the participants are coming in...esp. around large even prices. As far as having an indy on the chart to graphically display the distribution, I find them to be too much of a pain in the neck, too much of a distraction and basically unnecessary if you just look at the chart as a current distribution range.

Who know if that makes any sense to anyone. Oh well...

Great thread my friend!

All the best,
Brent

Douglas has a lot of success because the traders don't want to grasp the fact that their strategies are wrong. Why do the trader lose? Because they don't have an edge.
Douglas says: it is the mindset. Adjust your mindset and success will follow. I also heard that the mindset is 75% important, 20% is the system and 5% money management. This is BS.
If forex is a business you don't have to adjust your mindset. If you have a pizza restaurant and you want to have clients, do you adjust your mindset? No, you should provide better food, new receipts, nicer atmosphere than other restaurants. You improve your edge over the market.

ahaa, so what does that say about psychocybernetics, we are running around in circles here. We have gone from looking at some basic truths that saught to uncover some untruths, to psychocybernetics that takes you away from any reality of the markets which is what we were beginning to uncover. What next, how understanding the cosmos will explore the markets hidden truths?

I think it is healthy to rip apart theories of the market such as those of Douglas but I haven't seen anything constructive to replace it. I think you are right to make comparisons of the forex with other business but simply laying on a nice spread won't make the business successful. You can have the finest restaurant in town but if you have lousy money management you'll do no better than the greasy spoon cafe.


"PS I haven't got another 4-hour train journey for a long time, that's me done a while!"

.... ok cya!

Money management is important too but overrated. It means only to adjust your risk per trade accordingly, nothing more. It takes a few seconds before every trade.

Sorry, I don't know what psychocybernetics is. Maybe I'll read something about it but I don't like how it sounds.

Hi Porkpie,

A greasy spoon is always likely to be busy! I agree with your sentiment that its fine to disseminate and distil the untruths but they need to be replaced with 'truths' or at least the truth as you see it. Otherwise, what are you basing a trading decision on?

Oh no! I've opened up my worst nightmare, discussions on our own psychology rather than that of the crowd. In hindsight it was all my fault for raising the P book. It's not new age as some of you are fearing. Trust me, I hate woolly thinking, trading based on tidal patterns and star signs etc. I was trying to say that you should listen to your instinct and thoughts (as in, I wonder if x is correlated to y, does increase in a lead to decrease in b, I think it might so research it), not you should sit looking in the mirror and kiss yourself. In the context of this thread, I wish I hadn't.