In this episode of Truth About FX, Walter digs into probably one of the biggest mistake even professional traders make. Are mistakes made because of worrying about entering in the right direction or the inherent human need to always make the right decisions? Walter shares some sharp points on proper execution and avoid placing your trades in flames.
Download (Duration: 05:09 / 5.90 MB)
In This Episode:
00:31 – right direction
01:11 – horrible death
03:12 – basic framework
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Somebody wrote in and they asked about entering a trade. They said they’re having trouble entering in the right direction. What do you have to say about that?
Walter: To me — and this is going to sound as a smart-ass answer — but I actually think that it is not the real issue here. I think the real issue is wanting to be right. Know that you can make a whole lot of money in the markets and people have done it literally for decades by being wrong more often than being right.
I would’ve kind of reassess that, for one thing. Now, there certainly are trading systems that enable you to be right more often than wrong and you can do that. The problem with those trading systems however is that you really have to be sharp in the execution side of things.
If you’re not very sharp on the execution side of things, then you will die a horrible death and you’re account will go up in flames. Here’s the thing, there’s a couple of ways to do it. This is what I would say.
Couple of ways to approach it. One is work on your beliefs about being right. You don’t have to be right more often than not. You just have to make a lot of money when you’re right, that’s number one.
Number two is it is possible to trade for a high win rate system. But, typically those are like the ones that have an inverse risk/reward so you might be risking $2 to make a $1.50 or maybe a $1 to make 80 cents or something like that.
What that means is if there’s any sort of a flop bop in your execution or if your psychology is a little bit off and you can easily get into a nasty drawdown because you’re not really making that much when you do win, so I would encourage you to reassess your thoughts about being right all the time.
Here’s one way to do it. You can flip a coin — I’ve been encouraging traders to do this for years but I actually heard this. We heard this at the Conference. I think Goncalo mentioned it. He said, “Flip a coin and take some trades and see if you can work your way out of them and make money.”
I’ve basically said a similar thing where I said, “Look, setup your risk/reward high like 4 to 1. Risk a $100 to make $400 and flip a coin in your entries and see if you can take 80, 90, 100 trades and see if that makes money for you.”
It doesn’t work when you cut your stop loss at a 100 pips and your target is 400 pips away. I think you might be surprised. That’s the biggest thing here. I know a lot of people, they want to be right and I was the same way.
I used to trade with a really kind of a close to a 1 to 1 reward/risk ratio when I first started trading because I fell into the same trap of wanting to be right instead of wanting to make money.
That’s what I would encourage you to do. Examine why it is that you feel like that way. Why is it that you feel that you have to be right? Because you don’t have to be right.
You really don’t have to be right to make money doing this. You just have to take advantage of those times when you are right. That’s the basic framework I think that you can adapt and that’s probably much more healthy way for most traders.
Hugh: Yeah, for sure. I think you guys are going to be talking about that in the forum. How to get like high win rate, a really big R wins, just to have like smaller moves.
Walter: Yeah. We’ve talked about this, you and I, off the record and I know that you’ve been doing some testing in this area. It takes quite a bit to break through that problem of losing so many times and stepping back up to the plate. This is a baseball analogy.
You come back up even though you’ve struck out, you struck out, you struck out. It takes a lot to come back up to the plate and try again but I think it’s worth it. When you see those huge jumps in your equity curve because you’re trading 18 to 1, 17 to 1, 22 to 1, those sorts of trades are the ones that’s just going to make you want to throw a party for everyone in your block.
Hugh: Yeah, exactly.
Walter: It’s awesome. I would just encourage you to think about adapting it a different framework. If you don’t want to do that, you need to be like the kind of person who went through the military or played collegiate athletics. Someone who is very disciplined and has that sort of that ingrained, “I want to walk into your room and see that the quarter drop out like bounce off a bit” sort of thing.
If you’re that kind of person, maybe you can do it. I’m definitely not that kind of person but if you are that kind of person, you can be a scalper and you can make low reward to risk ratio trading work for you but you’re just the outline. Most traders aren’t built that way so they have to do something else.
Hugh: Okay, it’s a great advice. Thanks, Walter.
Walter: Thank you.