Greetings traders.
This is something I've been thinking about a bit during the last two years since I began trading forex. Is the problem losers have finding a high expectancy system, bad psychology, or a bit of both?
Many of you are probably aware of the study which took 100 academics and had them play a betting game with a 60:40 win:loss ratio and 1:1 risk:reward ratio, the only thing the academics controlled was how much to bet. After each played 100 trials of the game nearly all had lost money. Obviously they lost due to bad psychology (tied into their money management decision making). I suspect with a say, 70:30 win:loss ratio, the majority would have made money, greatly reducing the requirement for good psychology.
If a trader takes completely random, long term (to minimize the effect of the spread), 1:1RR trades he should expect about a 50:50 win:loss rate. All he needs is an edge (such as trading with the trend and utilizing support and resistance) to tip his win rate to better than 50%. That is how simple I thought it was when I began. Now I believe that there are very few currently profitable traders who would be able to make a living only trading a system with a very small edge (for example 1:1RR with 50-60% win rate). The variability in forex is so high with ever changing market conditions and non-normal price distributions that the draw-downs would be too much, the system would be scrapped.
Many trading gurus and books I have read claim finding a system with positive expectancy is the easy part, the hard part is refining your psychology. Many experts also agree that discretionary trading is superior to mechanical trading as mechanical systems are prone to breaking over a long period of time as market conditions change. This creates a bit of a paradox for the discretionary trader. When we have a loser we must brush it off psychologically and be clear headed for the next trade. A trader with good psychology accepts that the market has a high degree of randomness and each trade has a good chance of being a loser. Discretionary trading however is a skill, and if you called a losing trade that reflects on your skill to a certain extent (more-so over many trades). If you called a losing trade there may be some good reason as to why it was a loser that you didn't see at the time (especially if you married the position). You can take this too far (especially if you don't like being "wrong") and start seeing reasons that aren't really there. I expect there must be a large amount of skill in determining whether to chalk the losing trade down to probabilities or discretionary skill which needs to be improved on (or an adjustment to the methodology to adapt to a change in market conditions).
How much of an edge does a typical professional trader have? Are most pro traders utilizing their good psychology to a higher extent than falling back on a high expectancy system/methodology? Is it some sort of mix between the two? Are there any pro traders who are skilled enough to consistently enjoy an 80-90% 1:1RR win rate, or is that not possible in the randomness of the markets?
I know most new traders go in search of the holy grail but in my opinion finding a high expectancy system/methodology is much more difficult and important than developing good psychology (despite what most experts are claiming). I also believe if you want a good discretionary system/methodology that suits your personality it is best if you develop your own, as 99% of what you'll find on the net is low or negative expectancy or not suited to you. This is not easy. In the last two years I've had many ideas for systems but only two appear to be consistently profitable and worth pursuing, and I dedicate a lot of time to trading education and research.
What do you guys think?
This is something I've been thinking about a bit during the last two years since I began trading forex. Is the problem losers have finding a high expectancy system, bad psychology, or a bit of both?
Many of you are probably aware of the study which took 100 academics and had them play a betting game with a 60:40 win:loss ratio and 1:1 risk:reward ratio, the only thing the academics controlled was how much to bet. After each played 100 trials of the game nearly all had lost money. Obviously they lost due to bad psychology (tied into their money management decision making). I suspect with a say, 70:30 win:loss ratio, the majority would have made money, greatly reducing the requirement for good psychology.
If a trader takes completely random, long term (to minimize the effect of the spread), 1:1RR trades he should expect about a 50:50 win:loss rate. All he needs is an edge (such as trading with the trend and utilizing support and resistance) to tip his win rate to better than 50%. That is how simple I thought it was when I began. Now I believe that there are very few currently profitable traders who would be able to make a living only trading a system with a very small edge (for example 1:1RR with 50-60% win rate). The variability in forex is so high with ever changing market conditions and non-normal price distributions that the draw-downs would be too much, the system would be scrapped.
Many trading gurus and books I have read claim finding a system with positive expectancy is the easy part, the hard part is refining your psychology. Many experts also agree that discretionary trading is superior to mechanical trading as mechanical systems are prone to breaking over a long period of time as market conditions change. This creates a bit of a paradox for the discretionary trader. When we have a loser we must brush it off psychologically and be clear headed for the next trade. A trader with good psychology accepts that the market has a high degree of randomness and each trade has a good chance of being a loser. Discretionary trading however is a skill, and if you called a losing trade that reflects on your skill to a certain extent (more-so over many trades). If you called a losing trade there may be some good reason as to why it was a loser that you didn't see at the time (especially if you married the position). You can take this too far (especially if you don't like being "wrong") and start seeing reasons that aren't really there. I expect there must be a large amount of skill in determining whether to chalk the losing trade down to probabilities or discretionary skill which needs to be improved on (or an adjustment to the methodology to adapt to a change in market conditions).
How much of an edge does a typical professional trader have? Are most pro traders utilizing their good psychology to a higher extent than falling back on a high expectancy system/methodology? Is it some sort of mix between the two? Are there any pro traders who are skilled enough to consistently enjoy an 80-90% 1:1RR win rate, or is that not possible in the randomness of the markets?
I know most new traders go in search of the holy grail but in my opinion finding a high expectancy system/methodology is much more difficult and important than developing good psychology (despite what most experts are claiming). I also believe if you want a good discretionary system/methodology that suits your personality it is best if you develop your own, as 99% of what you'll find on the net is low or negative expectancy or not suited to you. This is not easy. In the last two years I've had many ideas for systems but only two appear to be consistently profitable and worth pursuing, and I dedicate a lot of time to trading education and research.
What do you guys think?
