In this episode of Truth About FX, Walter gets asked about the “best start-up hack”. But the question is, does this really exist? According to him, the best hack is for you to set your goals. You will also learn some of the baby steps that will help you to slowly ease into finding your own trading strategy.
There is also this simple yet very helpful tool that you should never overlook that can help you identify your risk find out your win rate.
Download (Duration: 12:56 / 29.6 MB)
In This Episode:
00:57 – break that wall
02:13 – keep hammering
03:34 – do two things
04:19 – see your goal
05:31 – one thing at a time
07:08 – best student
09:32 – quickly ramps up
11:13 – doubled returns
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 asked, “I keep spending money on my education. So when am I going to start making money?”
Walter: I understand this. I get it. This is a concern that people have. Feeling like, thinking that, “Okay, it’s going to start working now” and it certainly depends on, everyone is kind of in a different stage in a different process. Some people pick up trading straight away within six months. Other people like me, take 4 in a third year’s to break through that wall.
It just depends but the big thing here when you’re feeling helpless, like it’s not going to get better, the big story here is, you don’t want to really compare yourself to other people. This is like a psychological hack. People often think, “Oh, I’m never going to run as fast as you’ve seen Bolt.” “I’m never going to be as good looking as that model” or whatever.
What you really need to do is, you need to compare it against you. You set out your goals based on you. If you’re a person who doesn’t have a valid trading system that you believed in and you get to the point where you’ve backtested enough and you have enough data for example on Forex Tester that you do believe in it, you’ve made a step. You’ve made a step towards your goal.
So, if you’ll just break it down into a little baby steps for example with this trader, I will say to her, “Look, number one is, do you have your strategy? If not, you need to work on it. Figure out what you believe about the markets and build it.”
Now, you have strategy. Next step: What your data say about your strategy? Like can you bond it through Forex Tester? Can you take 300 trades? Can you find out what it looks like? How many currency pairs can you run it through? Can you get 50 trades per currency pair on 20 currency pairs? That’s great. That’s a thousand trades.
Now, what does it say? What do these data tell you? Plug that into the Risk Calculator. I know I keep hammering on that. You can go to the link on that and plug your data in there. Find out what your win rate is, your average winner, your average loser and now you want to determine what percentage are you going to risk per trade. Assuming you are using that fixed fractional method of risk management and still avoid the major drawdown level that you don’t want to hit.
That is a big deal. A lot of traders go into trading — I literally got an email this week from a trader who basically lost his retirement account. He was like, “I wish I would have seen that calculator before.” I’m like, “I’m with you, man” I get it. I wish I have seen it before too.
He literally blew hundreds of thousands of Dollars away and he told me. He said, “If I had seen that calculator before I would have known that I was headed into those deep drawdowns. I wouldn’t have to go through that freak out period.” So that’s another step.
Step one, find out what you should be trading, what you believe in. Start testing it then start moving. If you want to go straight away from demo and go straight into a small money account, do that but the thing is, in every step you need to reward yourself and say, “I’ve made it.” Who cares about what other traders are doing. It doesn’t matter.
What matters is you’ve made those 3 steps to trade a system that you believe in on a live account. And so, everyone gets impatient. Everyone gets upset and wishes that it happened last year. I get it but the only way you’re really going to make progress is to do two things. Compare your progress to you and break everything down into small baby steps and just build up your confidence that way.
When you get stuck, you can ask somebody. Ask somebody. If you’re in the forum, you ask somebody in the forum or if you know other traders or just try and connect with somebody online. If you can find someone halfway nice on the free forums, do that. You know what I mean? That kind of thing.
I am always happy to connect the members in my forum to another trader so you’ll have someone to talk to every week. That’s really a valuable thing. So even just having that accountability partner, that can be the next step after you go live.
So you just break it down to these baby steps and if you can do that, you can see your goal. It’s so frustrating when you feel like, I want to quit my job. I want to be making an x amount of Dollars per month or per week or whatever it is and I’m sitting here. I don’t even have any Forex Tester data and that’s really frustrating.
So you just need to break it down to small steps, reward yourself as you go up the ladder and compare your progress to you, not to anybody else. Not to any Market Wizard or anything crazy like that. Just what you’re doing and then you’ll feel good about yourself.
Celebrate it. Tell your husband or your wife, “Look, what I did. Look where it’s going. This is awesome. It’s looking really good.” Or your trading accountability partner, whoever it is. Just talk about this and reward yourself as you make your way up the ladder. That’s really kind of the secret.
It’s not anything about mind bending. It’s just making sure the focus is on the right spot which is getting into that next step, that next level. Focusing on what you are doing. Celebrating your little successes along the way.
Hugh: Yeah, that’s for sure. I think also, it’s worth mentioning that in the beginning specially if you took a lot of education, sometimes maybe you try to do everything at the same time. Maybe you could talk about that like maybe you should just focus on one thing at a time and see that as a completion.
Walter: Yeah, that’s so true. You’re absolutely right. Sometimes I think, psychologically we feel like once we get this trading system, we’re set or once we read this book it’s all going to be laid out for us and we’re done.
I don’t necessarily think that is the case and so what happens is you’ve kind of, it’s really easy in the trading world and the brokers make it easy too for you to get shiny new object syndrome. Where it’s like, “Oh no! This one is better.” Or, “That system is better.”
If that’s the case, you just need to pair it back and that maybe just focusing on one system. One trader that you identify with and just going for that. Whoever that is. Doesn’t matter who it is. I don’t care who it is.
Find that one sort of road map and follow it and just do that as best as you can. One of the things I’m fascinated by is how it seems to me, it’s so interesting. The people who end up doing really really well at this, oftentimes they’re like — I am talking about the guys I know. The traders that I know. There are certainly other traders out there that I don’t know and have nothing to do about it but the traders that I know, who do really well oftentimes — what they do is, it’s almost like they’re the teacher’s pet.
Like, they’re at the front of the class and they’re always asking questions and they’re always kind of just following everything. I’m sure they have their own tweak on it, on their strategy or whatever. How they test or what they look at, that’s fine but it’s almost like, they’re trying to be the best student possible. They’re just going with it. In a lot of ways, it simplified it so much.
It reminds me of when I took this trading class. My friend was getting me into forex trading and he said, “You should go and take this class.” So I went took this class. It’s like a week-long class.
He was saying when he took the class, he had already traded lots of different instruments but he have just started getting into the currency. He was telling me that, there was a guy in his class and he said, “Of all the traders in the class, there was one guy in this class who was the best trader, it was looking like and he said the reason why was because the guy wasn’t very smart. He just did whatever the teacher tell him.
I was like, that’s brilliant. Sometimes you can get in your own way. He’s like, “This dude, I’m telling you, man.” He’s like, “Hey Walter, he wasn’t very smart” Like he’d look at me and go, “Oh this guy has got no chance”. He said that was the best guy and he was doing his best because he was just, whatever the teacher said, he was like, “Okay” and he just did it. Price goes up, I buy. That sort of thing. It’s so interesting. We can overthink these things sometimes and so I think there’s something to be said for simplicity too. Just focusing in on one thing.
Hugh: Yeah, it’s true. It’s funny. I spoke to a guy once who used to teach — I think it was high school kids,– trading. They were just paper trading or whatever but he said a similar thing where the kids with the worst grades in class were the best traders.
Hugh: I don’t know but I guess there’s one more robustt that I kind of see where this is also, had seen by other traders at least. It’s like, when you’ve tested one system, it’s profitable but not profitable enough. So what is profitable enough in your opinion?
Walter: What’s your outcome like? What are you looking at?
Hugh: I guess, a lot of people look at it like, they’ve backtested a system for 10 years and it returns 20% and they were like, “Oh, 2% a year isn’t going to do for me.”
Walter: Right. I will put a link in the show notes for this episode. The compounding thing is amazing. There’s a couple of things I would say. One is if you are like making 2% and you’re compounding, you’ll be surprised at how quickly it ramps up. Number two is, you can certainly take that strategy and change the risk on it. So, change the position sizing.
What happens if you take that same strategy and let’s say it has a profit target. I don’t know if it does or whatever but has a profit target. The market goes 50% on the way to the target, you take another position. Maybe half the size, the original positions move to breakeven or whatever. Sometimes those little tweaks like that, they can make a huge difference in that.
We were talking about this before. What if you have a winning trade with the strategy and you take the winnings from this individual trade? Take those winnings, add that to the normal risk that you have on the next trade. If it’s a winner, what do you end up with?
If it’s a winner, you’ve really multiplied your winnings on the second trade because you’ve added more risk because you’ve added those winnings from that previous winner. Plus the normal amount that you’re risking on any given trade. If it’s a loser, then you’ll look at your last trade, your previous trade as a breakeven result and the current trade as a loser.
Looking at this is a big deal because if you have a… Let’s say, you have a 2R strategy or every 1% you’re risking, you make 2%. That first trade, you made 2% so what are you going to risk on the second trade? You’re going to risk 3%. If you win on the second trade, you make 6% because you’re risking 3 plus — remember, plus — you’ve already made 2% on the last trade. So you’re making 6% plus you’ve made 2% on the previous trade.
In two trades, you made 8% instead of making the normal 4% that you make. You literally doubled your returns. Now, the downside of that is normal if you have a win-lose situation, you would have made 2%. You would have lost 1%. You would have been up 1% but in this situation, you’re down 1%. If you win on the first trade, lose in the second one.
These sorts of things can completely change the equity curve of your strategy. Just by doing that. So I would definitely look into ways of improving the winners. That’s really where the gold is.
People get stuck on the trying to prove the entries and filters and all that. That’s usually not the most fertile area. It’s usually somehow adding to your winners or making those winners bigger. That’s usually where you’re going to get the biggest bank to your buck.
Now, in this situation, I don’t know if it’s true that they’re making 20% over 10 years if that’s like 1 market or whatever. If it’s one market then obviously the simple answer is what happens if you trade 37 markets? You know what I mean? That sort of thing. It just depends on, if that’s true then that’s all you get out of 37 markets then definitely look at position sizing.
Try to answer this question, how do I make my winners bigger? That’s really what it’s about. If you can go down that road, I think you’re going to have to find some really interesting ways of doing that.
Hugh: Okay, awesome. That’s a lot of great information. Thanks, Walter.
Walter: Thank you.