In this episode of Truth About FX, Walter talks about trading naked using price action and is this something that beginners should dive into. And is it really possible to profit from price action techniques? According to Walter, if you don’t have experience yet, there are a few reliable books you can read that can give you a “feel” of pit floor experience. You will also learn about this one thing that you should NEVER do when it comes to listening to your beliefs and biases.
Hugh also shares his take on drawdowns and returns and why you should keep a good eye on these.
Download (Duration: 08:31 / 19.5 MB)
In This Episode:
00:35 – doubting the viability
01:57 – old bucket shops
03:28 – the path
05:02 – focus on your belief
07:23 – money is locked up
Tweetables:
Leverage your beliefs [Click To Tweet].
Get really good at one thing [Click To Tweet].
Control your drawdown [Click To Tweet].
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’re asking: I came across some of your materials and read your book. I’ve been trading forex off and on for a couple of years, while I’m profitable, I find myself doubting the viability of a pure price action system. I’ve been searching the internet for people who really made it using pure price action but I’m not able to find any of them.
I went to a several Greg Secker “Market Resist” books and I’m a little confused. Those people mentioned are absolutely brilliant people even though they’re not able to generate more than 20% annual returns.
What are the chances of an inexperienced retail trader doing well? Furthermore, most of the traders make use of a mix of fundamental, sentiment and technical analysis to create bigger trades. Aside from the liquidity advantage, is it really possible for you to, for retail traders to profit using pure price action techniques? It’s a lot.
Walter: Yeah, there’s a lot. So I would encourage you to go back and look at the traders in the Market Wizards and the New Market Wizards books that have the pit floor experience. Because, what they’re doing is essentially very, very closely related to what the price action traders do.
Admittedly, it’s probably not the same but they look at, so there are traders for example that can look at order flow. Sometimes, that’s as simple as if you read the old “Reminiscences Of A Stock Operator” book which is the thinly veiled Biography of Jesse Livermore.
He talked about how he can go into the old bucket shops so to speak where they would which are basically, today’s forex book or CD equivalent of the old bucket shops. What they would do is, what he would do is, he would listen to the ticker.
As the ticker increase in the number of trades that would go through, it was like a measure of volume and a measure of intensity and when Demarco was picking up his team. So, we would actually just watched the prices tick up and down and that is how he would place his trade.
Now, a lot of these guys on the floor, who had experienced on the floor then later moved to the office and run funds, those guys that were in the Market Wizards and the New Market Wizards, they’ve kind of take the same similar approach. Where they’re basically waiting for the price to get to a certain level and see what it does.
So that’s one issue and if you don’t believe that, you should definitely not trade it. That’s another take home message I want to really emphasize here. If you’re looking around and you’re saying, “Nobody is doing what I want to do or what I think I should do” then don’t do it.
If I look around, I don’t know a whole lot of people who are professional tennis players. Does that mean that I shouldn’t become or aspire to be a professional tennis player? No, not necessarily. It just means that I don’t know any.
And so it seems like what you’re trying to do is get someone to convince you that you should throw away your beliefs about the market and adapt someone else’s. I don’t think that’s the path. I think ,instead, leverage what you believe which it sounds like is to use technical analysis with fundamental analysis and trade off of that.
The third point I think that’s really a good one made years, if so and so with the big hedge fund and all the computers and the team of algo specialist and all that, Physicist, PhD’s, Physics PhDs and all these chaos theory guys, if they can only make 20% a year at best, how do I think I’m going to make? How can I do that?
Here’s the fact. The fact is when you’ve got $4 Billion to move around, it’s really, really hard. In fact, the biggest deal you’ll find with these private funds is they’re looking for more markets. They need more markets because if they’ll sink all of their money into testless stock or whatever, they affect the market. They’re so big.
So they’re always looking for more places to sink money into and they don’t get the leverage that you get obviously. They’d be lucky to get 3:1 leverage. Some of them are unleveraged.
You have incredible advantages as a retail trader. Yes, you can get screwed over by your broker. Yes, you can have things like your VPS goes dark on you overnight or you get capped over the weekend. All these things happen but those are the same things that can happen to hedge funds too.
So, what I would encourage you to concentrate on is find what you believe, focus in on that, test that. Don’t worry about asking me or anyone else to convince you that you should trade the way I do or anybody else for that matter. Just focus on what you believe which it sounds like there’s a mix of indicators and fundamental analysis.
I could be wrong but that’s what it sounds like and then from there, make sure that you get really good at it and just become an expert of that. Don’t worry about what everyone else is doing and remember that you have incredible advantages as a retail trader.
For one, you don’t have to give all of your money to your broker because you’re going to get leveraged. You’re going to get good leverage in most cases. So that if you have a $100,000 of trade, you might get away with trading $35,000 off of that. That’s a huge advantage because if your broker goes bust or goes bad, you won’t lose all your trading money. You’ll still have some leftover.
These things happen, of course. Brokers go bad and they go bust and you could lose all of your money. That’s what I would do if I were you. It sounds like you want to be convinced that I wouldn’t go that route. I would just focus in on what you believe. Find one of those Market Wizards that you really resonate with and try to work out something that or find a guru, somebody on mind that trades the way that you want to trade and do that.
I don’t think that this is necessarily for you. It sounds like Naked Trading doesn’t really jive with you, which is totally cool by the way. I don’t think that there is anything wrong with that. In fact, I think that you’ve better find that out now than later. So, that’s what I would say.
Hugh: Okay, cool. I think it’s also important to realize that those bigger traders have to, they have to worry about the drawdown more than the returns. I knew a guy who was doing like 100% a year but when he traded for a fund, he had to cut it down so that he only make like 10% a year. So I think that is something to take into consideration.
Walter: Yeah, you’re absolutely right. That’s how you get hired as a trader. The way that you get hired as a trader is by controlling your drawdown. That’s the secret. You’re absolutely right.
Here’s what the funds knows: as soon as they have a drawdown of 10, 15, soon as they get there, the withdrawal start coming in and maybe lawsuits or whatever. This is what happens. They know that.
So everything they’re doing is geared to trying to reduce that. You’re absolutely right. Now of course, there’s going to be some that are aggressive and there are a lot of funds where your money is locked up for x number of years or whatever. You’ll sign a contract when you put it in but still the depositors will try to get out f of that.
It’s always the case that you’re right. Drawdown is the number 1 focus of these funds and that’s necessarily the case. As retail traders, we can learn a lot from these because we don’t look at drawdown nearly as much as we should. In my estimation I think, we are always looking at the peak of the equity curve and we’re not looking at these little dips and valleys.
We should probably take something away from the private funds and focus more on that because we don’t do nearly enough work on that end and yet that’s the reason why we give up on strategies. Give up on trading altogether. I definitely agree with that, Hugh. That’s a really, really good point.
Hugh: Alright. Thanks, Walter. Thanks for the insights.
Walter: Thank you.
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