Do you know what type of trader are you?
In this episode of Truth About FX, Walter dives into creating your own strategies and why copying from the “gurus” might be your biggest mistake. He digs into understanding your risk profile, the Cycle of Doom, and building up your confidence.
Download (Duration: 07:34 / 8.7 MB)
In This Episode:
00:37 – face the challenge
01:45 – two things to understand
03:03 – risk profile
05:25 – break it down
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. We’ve got a question from a reader and this person asks: “I’ve been through about or over 500 indicators and price trading systems.” Now, this person faces the challenge of creating strategy with these tools and don’t know where to go from here. They’re not profitable yet and they’re pretty frustrated. What would you recommend?
Walter: This is a good question. It sounds like this trader… What’s going on here is, essentially, he’s or she’s lost confidence. It’s because of the Cycle of Doom that I’ve talked about where you hop on an indicator or strategy for a little while until it goes bad and then you hop on a new one. That sort of thing.
What’s happening here is I believe, if you read between the lines of the question, it says, “I can’t build my own strategy so I’m looking for gurus to try a different strategy.” What’s happening is this trader is shifting responsibility from himself to the gurus.
It’s like, “Okay, I’ve learned what I can and I can’t make it work so I’ll rely more on what other people do.” In my estimation, that’s a huge mistake. I think what’s going on here is not the right thing and there’s basically two things that this person needs to understand.
One is, what type of a trader are you? Do you like to follow the trend or do you wait for the end of the trend? Do you like trading when the market is consolidating in a box and just go up and down in a channel or something like that or you want to trade it from one end of the channel to the other or one of the box to the other? Or, do you like when the market is really, really, really quiet because you know it’s going to break out and just go crazy sooner or later?
You have to decide what type of trading do you do. Do you trade range-bound markets? Do you trade trending markets with the trend? Do you like to see the collapse of trend or do you like to trade breakouts? There are so many different ways to trade even though we all give them fancy names and every guru says, “I invented it.”
There’s really a few different ways to trade. What I would say is look and decide how you want to trade. Find the strategy that makes the most sense to you. You can build more later but find the one that really resonates with you and then you need to work out your risk. I know it seems like in every episode I’d say go to fxjake.com/risk. We’ll put it in the show notes here for this episode.
The fact is it might not be the strategy. When you say I can’t make it work, it might actually be what’s happening here is the strategy does work but because of your risk profile — and when I say risk profile, I’m talking about not about you or your personality profile but I’m talking about the risk profile of the system that you’re trading which is probably unknown to you because as it is unknown to most traders because you don’t know what kind of drawdown you are going to hit.
And so, for example, if you think you’ve hit a 20% drawdown, the system is broken and you’re trading with the risk profile that makes it 99.9% certain that you’re going to hit a 20% drawdown then it doesn’t matter the strategy that you’re using.
So please go to that page, fxjake.com/risk, put and plug your numbers into the calculator and figure out. Backwards engineer a way that you can avoid giving your win rate, giving your average winner and you average loser. Once you have all those numbers, you can plug them into the calculator and figure out the type of drawdown that you can avoid.
I believe that that’s probably what’s going on here. You probably come across some strategies that you can probably trade for a long time because they make sense to you and shifts the responsibility back on to you.
You have to take responsibility for your trading and for what you need to do which is basically figure out how am I going to avoid that back breaking drawdown. That’s what I would do. Don’t worry about the gurus if they tell you something cool. Fine, maybe it’s cool, maybe it’s a bunch of bs.
Go back and test it in Forex Tester or however you test your strategies and make sure that it is true. And then, once you have, go ahead and take that forward but then again you’ve got to get your risk profile down. Otherwise, you’re just going to keep running into this problem over and over again where it doesn’t matter how many indicators or strategies you’re using. You’ll end up in the same place which is just in a drawdown and then later, you’re going to freak out and say, “Oh my gosh! I’m in a drawdown. The system doesn’t work anymore or the market has changed.” It’s a never ending cycle.
Believe me, I know how bad it sucks. I’ve been there and the key is to build up your confidence based on the strategy that you believe in and to work out your numbers that you do not hit that terrible drawdown level. That’s it. If you can do those two things then trust me, it gets easier.
Hugh: Cool. That’s great advice, Walter. Just to review because basically a trend trading strategies countertrend which is like range bound markets and then breakout strategies, right?
Walter: Yeah. I would say if you really want to break it down, you could say there’s swing traders, there’s trend traders, there’s the end of trend traders which are kind of like those people who are just keep waiting trying to pick the end of the trend because they know it’s going to move really strong after the end when the trend is over.
And then, there’s range-bound traders that love those tight ranges because they have something to rely on as support and resistance where there’s a channel or a box or whatever. And then, there’s the breakout traders. So, if I really have to break it down, I’ll break it down into those five groups.
Hugh: Oh, I see. What would be the best way to figure out or to focus on the one that you like the best or would work the best for you?
Walter: I have a video that I can post in the show notes for you but basically it’s as simple as looking at charts. What you’ll notice, I have it in the video from where you can go through it and just go. The question is basically, do you see a trade here?
What you’ll notice is that you continually see trades in a certain type of chart. If that’s the case then we know, “Ahh! You’re an end of the trend trader. You’re always looking for the end of the trend.” You see the strong trends and you don’t think, “Oh, I want to jump in that trend.”
You’ll think, “Oh! That’s a bubble.” It’s a bubble. It’s going to totally collapse. You know when it collapses, it’s going to go really fast in the profit and you’re going to make a lot of money but that’s because how you see it.
The key I think is to probably watch the video, I’ll put it in the show notes for you to find out what styles of the chart is the one that you really really like. What’s the one that you keep looking at over and over again and go, “Oh wow, that’s a great trade.” If you’re not aware of what that is, that video might help you.
Hugh: Okay, cool. Great. Thanks for that, Walter. That’s very helpful.
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