In this episode of Truth About FX, Walter talks about one of the biggest trading mistakes of all time: wanting to make more money quickly. What are the two mistakes most traders do in taking accelerated trades? And what are the solutions that you can make based on your system? You will also learn how the markets are correlated around the world… And is this a good thing or a bad thing for you?
Download (Duration: 05:45 / 13.8 MB)
In This Episode:
00:33 – still cautious
01:07 – mistake number one
02:23 – neural network
04:45 – best way to mitigate
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, “How can I become more aggressive? I have a strategy that’s sound and has excellent expectancy but I’m still cautious about taking trades.”
Walter: This trader is saying he needs to be in more trades. I think this is a mistake, actually. This happens a lot. This is one of those things that comes up when you start making money and you know you’re going to make money. The next question is how do I make more money or how to make it faster?
The real concern here is, I actually talk about this in the Next Level Trading course. If you’ve seen the webinar, you’ll know we talked about this. This is a big one. This is something that all traders run into when you start making money. It’s like, “Okay, what do I do now? How do I build it up faster?” Here are the two mistakes.
Mistake number one is: I’m just going to add more risk. “I’ve been risking 1.5%, what happens if I’ll risk 3%? Wow! If I’ve been risking 3%, I would’ve made this much. Wow! I really need to do that.” That is mistake number one.
Mistake number two is: What I needed to do is get more markets. I need to get a whole bunch of more markets. I’ve only been trading this strategy on 8 currency pairs, what if I were trading 28?
Now here is the issue with 28 and look, I trade lots and lots of markets, that’s fine. But when you have one strategy and you think that you are diversifying by looking at multiple markets, you’re wrong.
Unfortunately, that is not going to work because all of the markets are interrelated. Whenever you see a really strong trend on the USD/CAD and then you see one on the GBP/USD, why is that? Because they both have the USD in there.
It’s amazing how correlated our markets are around the world. From The Hang Seng to the New York Stock Exchange, to the ASX In Australia. All of these markets are so interrelated.It’s because funds are looking for arbitrage opportunities.
All of these stuffs are basically equalized. I know this because I actually did, I built like a neural network, which is just a fancy term for a bunch of correlations trying to create a trading strategy based on all the correlations of all different markets.
It was meant to basically give me a signal on the USD/JPY pair and so it was amazing to me. I found how everyday I had to put in the prices for all these industries and all these markets into a massive spreadsheet and recalculate the algorithm. It was totally painful and it should have been automated but I did not know how to do that. It’s an old software that I was using basically. This was like in 2007, so it was a while ago.
The point is they’re very related. What you really need here, instead of getting really aggressive or instead of looking for more markets which is just going to add more, it’s going to do the same thing. It’s going to add more risk.
Going for 1.5% per trade or 3% per trade, you are almost doing the same thing when you go from trading 8 pairs to trading 16 different pairs. The reason why is the pairs are correlated, the markets are correlated.
What you really wanted to do is get an uncorrelated strategy or what we call a complimentary strategy. If this trader is trading a trend trading system, try to find an end of the trend system or a swing trading system or a reversal system. That is what you want to do. That is what’s going to give you the most pain for your buck.
Why? Because, when one system is doing well, the other one might not be doing so well. It’s going to flatten your drawdowns. So, they’re not going to be as deep. If you’ll look to take more trades and enter more markets, your drawdowns will get steeper.
Same thing if you’ll add more risk. It’s just going to add to the pain and so, that is not going to help you. You’re probably going to be more likely run into issues and possibly even quit.
I would definitely really strongly suggest that you’ll look into developing another strategy. Maybe you have some, I don’t know but this is what I would do if I were in this situation. Because, I’ve been there and I know what it’s like when you’re right onto it. You know you’re going to make money but by adding more markets or adding more risks, all you’re really going to end up doing, yes you will see higher peaks in your equity curve but you’re going to see much more steeper drawdowns that you weren’t expecting and that is going to be an issue, I think.
That is what you really need to look out for and the best way to mitigate that is to add a strategy that is not related at all. So, if you are trading breakouts, go for a trend trading strategy.
If you are trading trends, go for some sort of reversion to the mean or end of trend or swing trading strategy. Do whatever you can to try and trade in a very different way. I know, it still has to make sense to you. A lot of traders, they’re just are drawn to a certain type of strategy like reversion to the mean or whatever but, it is really important that you understand what you are doing here.
Mathematically, you are flattening out your drawdowns and that is the most important thing you can do as a trader because that is where we make our mistakes. So, hopefully that will help.
Hugh: Okay. That’s cool. Thanks, Walter.
Walter: Thanks a lot.