It's A Heart-Mind Game... Are You Ready?

But immediately you run into the 'Fooled by Randomness' problem. Most people don't have an understanding of how variable trading results can be.

Take a simple example 60% winners, average win 95, average loss 105 (Basically I'm using 100 but assuming 5 costs)
Expectancy is $15

So what do you expect after 10 trades? $150. But the standard deviation of this is $300. So 68% of the time you will get -150 to +450.

Go out to 100 trades - average $1500 but standard deviation is now $1000. So there is still around 5% chance of losing money over 100 trades.

So you have 2 problems. Firstly, you are inferring your statistics from a single instance of the past. Secondly when you actually trade your results will be markedly different your tests because of randomness.

Now this is getting interesting JZW,

To get some decent stats, one definitely needs a good data sample to start.

Have some questions here...for clarity sake:

So 68% of the time...should this be 60%

(Basically I'm using 100 but assuming 5 costs)...costs???

Have to work the numbers myself,but, if you manage your risk well, 5% chance of losing money over 100 trades is not bad.

There are people who are so "scientific" about it, they cut their losses and take their profits at a precise value so their numbers come out "right".

Thanks for posting,

FX4

IMO results have to be variable, they have to match market conditions. No point letting your profits run if the market is range bound or choppy, therefore take some quick profits. If I see the 4 markets I watch all moving strongly in the same direction I will let my profits run. Theory is very different to reality in trading as it is in any job - you can have the best education and training, but it doesn't mean you can 'do the job'.

So I should have said how I got the standard deviation numbers. Basically I just used Excel to do a simple Monte-Carlo. by creating a table 100x100 of random results. So I would not take the figures as exact.

I just wanted to point out that the expected spread of results is much greater than most people think.

Also the spread gets wider the lower the win%. So a system with 2:1 R:R and 40% wins (in fact this has the same expectancy as 60% win 1:1 R:R) has an even wider expected spread of results.

On the 5% chance of losing over 100 trades. True that your risk of an actual loss is small but the probability of making less than $500 is still significant. Also would you give up on your system after being unprofitable over 100 trades? Is the system broken or were you unlucky?

Then you have to consider the frequency of your system. An H4 system might only generate 2-3 signals a month (maybe someone who trades H1 or higher could provide some figures).

Putting those together you might find yourself trading for a whole year risking $100 / trade, making 100 trades and coming out $500 up. If you spend 2 hours / week thinking about trading you have made $5 / hour. Less than the minimum wage.

I see.

Now this part is scary... the spread gets wider the lower the win%.

Also would you give up on your system after being unprofitable over 100 trades? To me that depends on how much discretion is involved in that trading system...meaning how definitive are the entry and exit criteria that the system uses?

Your last paragraph puts it all in perspective.

Lots of good info. out there. You can actually make more by trading less frequently. Trading by the numbers to make millions...a whole other ball of wax!!!

Thanks again,

FX4

P.S. Might be fun to just run some numbers so traders can get the feel for the reality of this thing...the stats...and we know numbers don't lie! Not promising, but we'll see .

I believe this is one of the best threads on FF. I only pray it doesnt go the way of other beautiful threads before it. One sure way to achieve this is to dwell less on posting actual trades. I had already given up on FF until i stumble open this thread. Thanks, keep it up

Thank you. Greatly appreciate it.

I think it is the major missing link in successful trading. I will do my best to keep it going. This thread is NOT for posting charts for the sake of showing technical analysis (already have one of those) and there is a whole forum for that. Don't even want to see a static chart here. Don't think it would be necessary to make a relevant point; but, there are exceptions, so the chart exception and relevant point to the thread topic better be GOOD!!!

Glad you stumbled by and chimed in...

Take care,

FX4

I've attached a spreadsheet so you can play about for yourselves. There is a grid of random results (using Excel rand() function) 25 columns of 100 random results. Each column is a sequence of trades and at the bottom is the total for that column and the number of wins.

Below the grid you'll see 3 highlighted fields where you can change the input parameters. Changing any number or pressing F9 will cause Excel to generate a new set of random numbers and you'll see the various figures change.

Hopefully it will make clearer what the nature of randomness is.

That's fabulous JZW!!! Thanks a bunch. I will definitely play with it before Friday. Hope other visitors will too. Working on something else that I think would help traders with this heart-mind hurdle. Keeping it a secret for now .

Thanks again,

FX4

I have really taken time to look into my trading history. One truth that is very glaring is i make the most pips when i am grossly under-leveraged. But despite this, my major challenge in breaking through in this business is not because my trading system is faulty (no, infact my system is capable of generating 70/30 win/loss ratio) but the fact that i am constantly over-leveraged. Up to the time i write this, i have not been able to deal with this challenge successfully.

No problem. I just tidied up something I had done for my own amusement some time ago.

By over-leveraging I suppose you mean the size of the position relative to your account size and not the amount of the leverage that is available in your account: example 200:1.

Seems to me that you are like most traders...want to make bigger profits...just a little bigger . That is the temptation to put on larger positions that may be "unsafe" for your account size. Also, trading smaller positions helps to keep our minds more logical and less emotional, thus giving us a better chance to come out on top.

A trading buddy called building their account "ant's work"...slow and steady. Maybe you can divide your monthly dollar goal into 20 (number of trading days), then divide it by the number of markets you trade. Somehow, work it so that it is comfortable, doable and fairly easy. Adjust your time factor to help you achieve it. You might need to do it in two months and not one. Base it also on what position size you are comfortable with. It's like working out in the gym. You start with 30 lbs. and when that no longer is a challenge to your muscles, you go up to maybe 45 or 50 lbs. When we trade live, we're actually developing emotional muscles. Work with it, then just be patient and consistent. Exponentially it will grow. Also using a spreadsheet daily to put in your results will give you encouragement as well as reveal any destructive patterns in your trading. For example, you may notice every three days you tend to have a "major" drawdown or be tempted to "over-leverage". Work with it and see how you can tweak it to fit you.

Let me add this here for the benefit of all: if there is a situation pressing us to make more (either of necessity or the new car or house we may have pictures of posted on our wall as motivation), it comes with its own built-in stress and hindrance to sober/sound trading.

Hope that gives you a starting point to solve that problem.

FX4

Thanks for the effort. It says alot.

FX4

Hello again traders,

Now we're moving on to Part 1B: Cutting Losses Short.

Hope you took the time to read Part 1A: Letting Profits Run. In case you didn't here's the link: http://www.forexfactory.com/showthread.php?t=335152 Post 14. In this post, I want to discuss some things that might help traders with Cutting Losses Short.

The only way to really cut losses short is to cut losses short. Well everybody knows that, but how is a trader to do it. Somewhere between the knowing and the doing there is a disconnect. If we can locate the spot and repair it, we might be in for keeping some real pips.

"Okay, so I know it, but what is the problem? For some reason I keep taking losses at the "ouch spot" way too often." For some who may not know, the "ouch spot" is the number of pips where it hurts you and your account so much, you just close the trade to keep from feeling any more pain. It's usually a move of desperation. At that point you have lost control (really given up your control). Sometimes it can get so bad, that you just sit there shaking your head while you watch the market eat up your account. You just don't have any more fight left. Usually after that kind of trade you want to forget you ever heard about trading... period. Some may get angry and want to throw the computer out of the window. Others swear that they'll fight back and get every dime, only to go back in and really get beaten up badly. So, the issue still is, why don't we want to take the loss.

We have been conditioned to think that to take a loss means we have accepted failure or defeat...but, there is an important distinction to make here. When you are forced to "take the loss" because it was so far gone, you have already lost control of the situation. That is a defensive posture. When you initiate taking the loss to preserve your capital, because price has begun to move in a way that is invalidating your entry strategy, you are being offensive. Offensive behaviour is a stronger position psychologically than being defensive. Just for the purposes of this discussion, I want to equate this kind of defensiveness with feeling like a victim. But there is another reason. We just don't want to fail. In this business losing money is equivalent to failing, and failure is emotionally hard to accept.

Now, if our goal is to make a profit, like with any business, we try to keep expenses to a minimum, otherwise, at the end of the month, there will be no profit. Taking a loss, from a position of strength (a business decision) demonstrates good management skills. Taking the loss is not to be taken personally: it is good for business.When traders take it too personally, they make the news, if you know what I mean. Taking the loss IS a good thing. Sometimes painful circumstances are life savers in disguise.

Next. If your trading method is 70% successful,, then you should expect that about 30% of the time, there will be losing trades. If you cannot accept that, but only see the 70% side of things, you're not being realistic or truthful with yourself. Accept the fact that there will be losing trades, but that does not mean that you lost outright. Losing one or two battles doesn't mean you lost the war, which is WHERE IT COUNTS!!! Don't sweat the small stuff! Taking the loss is small stuff and is already factored into your bottom line of profit anyway, which is why you are using that method. So big deal...just keep the losses you expect as small as possible, and you'll be adding dollars to your account.

Important point I want to make here. If you do not accept the fact that there is risk involved and that you will lose here and there, you might find yourself hesitating to take the trade. It's really not a big deal. Just think about it this way. When you buy something to drink, do you get every drop that you paid for out of the container? Hardly. Do you stand by the trash can regretting that you have to throw that bottle away and that little bit of liquid left in it? Would be surprised if you did. So, what's the difference...it's only money. Aha!!! IT'S MONEY!!!! There is a stronger emotional attachment there than to that bottle. So... it comes down to the value you place on it...remember that mini questionnaire a few posts back?

So, two things that can help are:

1. If you have the courage and do accept that risk is involved, practise taking losses so that you condition yourself to do it. A trading buddy suggested that one. Use micro-lots if you have to. Get over the emotional-psychological pain of it. After a while you should feel good that you can do it for the betterment of your trading.

2. Re-evaluate how you see money. It's only a tool. The problem is our security, peace of mind, egos, and our futures are tied to it, so when it goes, those things are threatened. Detach it! If not, you'll be like a rag doll in the mouth of the market and that market dog will detach it from you.

How do I take the loss? Based on your risk management plan, just do it. Once again it takes courage. Just can't get away from it. I think one of the scariest things people can try to do is parachuting (skydiving). I have heard of some very successful people who did something very similar to free them from all kinds of fears. After practising, there comes a day when you stand at the open door of that plane with your parachute in place and the time has come. Either you jump on your own, or your instructor might help you (might not be legal or allowed, just saying for the purpose of the discussion).

Bottom line: If you cannot or will not...it's a decision... accept the risk involved and take the loss (which is screaming at you via Risk Disclosure Documents etc.), here are your choices:

Hire someone who has the courage to do it for you, try a robot, or don't trade (unless you're really doing it for entertainment). Makes no sense jumping out of the plane if you won't even pull the chute. Pull the chute!!! If you keep letting the market do it for you, by you blowing up another account or giving back all the profits you just made and more, think seriously about whether trading is for you. If it is, then accept the risk by pulling the parachute. Otherwise, you won't be trading anyway.

Speaks to me too...we all have to deal with it.

Here's to better trading and increasing equity curves. All thanks to offensive risk-taking! Celebrate cutting those losses short!!!

It's ALL good.

FX4

P.S. A little long, but I think it is the hardest thing for a trader to do. Next I think we should discuss when and under what conditions to pull the chute. Maybe I'll be able to get to it on the weekend. We'll see.

I agree with this but it doesn't really explain the loop that most retail traders are in.

For most traders the story goes more like this...

Put trade on, watch it get stopped out and then watch as the market returns to their entry price so they could have got out at break-even. Knowing that they should be disciplined do the same again and again and again. Now 4 losses later they are determined not to have a 5th so the next time they cancel the stop as the market gets near to it. Market keeps on going and finally when their loss is 5 times greater than they expected they get out of the trade.

Now they are angry and frustrated but realize they need to be disciplined so they go back to step 1 of having a stop and getting stopped out.

Going back to my earlier point how unpredictable results can be. Imagine a system that had 40% winners and a 2:1 R:R.

Should be easy to make money trading that?

If you make 100 trades how many consecutive losses can you expect?

A little maths tells you that with 40% winners at least 1 streak of 9 losing trades would be expected. There is nothing unlucky in having 9 losing trades in a row, that is simply what you should expect.

Yes. This issue of "getting stopped out" or even using stops for that matter is a big one. I hope by now traders realize that the market hunts their stops. It's a paycheck for the dealer, AND they can see them. Don't think they can't. All they have to do is move the price to stop you out and keep going with the flow. If you are paying attention and know what to look for in the charts, you'll see when they do. Hope no one makes a post here arguing that they don't. Time to wake up!!! There's a whole lot more they can see about your trading too. Don't be fooled. Welcome to the war zone trading warrior .

What you have described is a method/system that is broken somewhere and needs adjusting. If it is broke (anywhere), it needs fixing.

Will be discussing that next...when, where and under what conditions to pull the chute...and pulling the chute can take a variety of forms. Remember, the bottom line is protecting or increasing your capital. That is what the war is really about, not winning a trade, but winning THE GAME.

FX4

Taking a poll in preparation for our discussion about stops and ways to protect your trading capital, or even increase it.

Here's the hot question :

If I am trading for example EurUsd, and I am long at 1.3926. Price is not going above the entry price at all, can I still make a profit or do I have to take a loss in my account.

The poll question is posted at the top of this thread. It is anonymous...your username will not be listed.

Will let it run through the weekend and tackle it early next week. Will probably introduce to issue of stops etc. then.

FX4

Getting your technicals right is the way to go. Once they are, the rest seem obvious.

Hi Traider,

Is your response in reference to the thread topic or the poll question?

Thanks for the input.

FX4

The thread's general direction. Emotion is less an issue for someone I would suggest once they read candles with clarity. And in essence, that is where the journey lies. The exact same candle can be one thing in one setting and something else in another. Being able to discern these subtle differences is the key.

Just my pennies worth.