In this episode of Truth About FX, Walter lets out some tricks on how to have confidence in your trading system so you can get the best results. He talks about the Cycle of Doom, unraveling the psychology behind your trading beliefs and how this can make or break your trading system. You will also learn about this guy who won a trading contest and the unique way he was able to turn a $10,000 into $1.1 Million. All of these in this episode of Truth About FX Podcast.
Download (Duration: 05:30 / 12.6 MB)
In This Episode:
00:33 – stellar results
02:01 – fancy candles
03:21 – risk point of view
04:43 – risk algorithm
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. A trader writes in and asks: I have trouble sticking to and believing a system. I tend to drop a system as soon as I start and it shows a less than stellar results. What should he do?
Walter: This trader is basically looking for like a “cycle of doom” — that’s what I call it — where we find a system, we get excited. We trade it for a while, we hit a losing streak and then get not very excited. We think it is broken or the market has changed and then we kind of give up on it and move on to something else.
We’ve all been there. As traders, we are all quite familiar with this. The key here really is to start with your beliefs and build confidence. If you can do those two things, you are going to be alright.
What do I mean by beliefs? Do you think the best trades on the chart are those when the market hits a certain spot and then totally turns around and goes the opposite direction?
Do you think the best trades on the chart are when the market gets really, really quiet, doesn’t really go anywhere and then, boom, violently breaks out? Or, do you think that the best trades on the chart are when the markets really trending in the direction, looking really strong in one direction — up or down, doesn’t matter — and then you just kind of want to ride that trend and keep milking it for what it’s worth?
If you can figure out where you are — obviously, there are other systems. Like, if the markets in a box and then there’s a range-bound, you could assume that it’s going to hit the high of the box and then turn around and hit, go back down and hit the low of the box. If you like that sort of trading, that is another style. But, really, there aren’t that many systems.
You can slap lots of indicators and fancy candles and all that sort of stuff on the chart. You can use Heiken Ashi in forex indicator or whatever. It basically comes down to that. What sort of things do you really like that makes sense to you and then build it up from there.
Once you decide what you like and you build your system on basically what you think is obvious in the markets, that’s really the question. When you look at the charts, what is obvious? If you can get a grip on that, don’t listen to me or Hugh or anyone else on YouTube or whatever, just what do you think?
What is obvious to you, what is like a no-brainer? You look at the chart and you go, “Of course, it’s going to do this.” “Of course, it’s going to that. I would definitely take a trade here”. Once you got that, you go into the Forex Tester, you do your testing, you get your data and then you’ll know. “ Well, it seems to work” or, “It was working okay but it seems like my winners aren’t big enough.”
Then maybe you go back and do some more testing. You adjust your exit so that you go for a more aggressive target. Knowing that you are going to lose on the win rate but at least that more aggressive target allows you to get bigger winners and maybe that will get you to a point where you are more profitable and more comfortable or whatever it is.
I think that is the key. It is to start with your beliefs, what is obvious to you. Build up your confidence in the tester and then start looking at your data from a risk point of view. Like, “Am I making enough?”, “Are my drawdowns too ugly?”
You can also go to the risk calculator. I seem to talk about it in every episode but I will put a link in the show notes for you where you can go there. Once you’ve got your data, you can mess around with the risk calculator. Figure out how can I set my trades so that I don’t hit that terrible drawdown which will make me jump into the cycle of doom again.
The two pieces are you are trading something that you really do not believe in so it is easy to give up or you are trading at a risk level that sent you into a drawdown that is so bad, you just can’t bear it anymore.
Remember our friend from the futures world, Larry Williams? He won a trading contest and the way that he won it, a lot of people have noticed, he had actually a 90% drawdown. The famous story for Larry Williams I think was 1987 where he took the $10,000 account up to $1.1 Million. That record still holds at 11,000%.
What people don’t know is that it was actually 2Million. He got up to 2 Million or just below it and then fell back down to 1.1 Million like a 45% drawdown when he won the contest. He also went up to 900 grand and then fell back down to 100 grand.
That’s the kind of thing. He understood what his risk algorithm was going to do to his equity curve and he kept trading. A lot of traders wouldn’t trade for a 90% drawdown or even a 45% drawdown. That is something to keep in mind.
Once you know what your risk is and what is likely to happen by using the risk calculator, then you can mentally prepare yourself for it. The other way to do it is, of course, to say “I don’t want to have a 20% drawdown.” You backward engineer it so that’s unlikely to happen.
Hugh: Okay, very useful. Thanks, Walter.
Walter: Thank you.