In this episode of Truth About FX, Walter talks about the reason why winning trades take time while losing trades are faster at hitting the stop loss. According to Walter, it generally depends on your trading style and psychology. He also shares some useful points to get yourself away from over-analyzing and taking profits too early.
Download (Duration: 8:35 / 9.82 MB)
In This Episode:
00:39 – winners test patience
01:50 – rounding around
03:15 – getting blasted
05:28 – exercises to try
07:37 – trick yourself
08:00 – cognizant
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. This is a question from one of your students. This person asked: why do you think winners take awhile to reach the target while losers are quicker to reach the stop loss?
This person has a win rate of about 70% on all markets but they said they tend to observe that “Winners test my patience more than losers giving me a chance to analyze before I close”.
What do you say to that?
Walter: That is a great observation. I agree. Just this week, I had two losing trades and I woke up and one of them had gone 73% on the way of my stop and so I dumped it immediately when I woke up.
I sleep during the New York market. I live in Asia and I see the Asian market or I see them open, anyway, until they close, basically. I see the London open and then I pretty much go to sleep. If I stay up until 11 0’clock where I’ll see midday, basically, in Europe.
I do not see the New York open and when I wake up, it is basically before the New York close. I miss most of New York so what happened during New York this week was it took one of my trades all the way, 73% on the way of my stop, so I dumped it.
Then the next one, it just totally stopped me out, like overnight. That is typical. When you think about it, what is probably going on here with this trader is you are probably a reversal trader.
You probably take trades where you see the market rounding around and you think it’s made a high and it’s going to start falling or it’s made a low and it’s going to keep going up. That is probably the style of your trading.
If you think about it, it makes sense because if you think the market made a top and you are selling it and you are wrong, it’s going to continue on and it keep going higher. Then, what it’s doing is it is just resting there and it is going to blow through your stop loss.
Whereas, if it is turning around and it takes a lot for a market that is going in one direction to turn around. That moment has to shift, slow down, and then turn around and accelerate in the other direction.
Usually, if you are wrong, you’ll know straight away. If you are right and you have a good risk/reward ratio with your system, then if you think about it, if your stop loss is 200 pips away then your target is maybe 400 or 450 pips away.
It is going to take longer for the market to move 400 pips in you favor, 450 in your favor than it is for it to go the other direction and stop you out. That would be very quick. I think that is what is going on here.
Knowing that you are more aggressive with your targets than you are at your stop, that is one thing to think about it. Your stop is pretty close and your target is really far, and then if you are trading reversals, what’s happening is you are probably just getting in peak tops and bottoms, trending market and you are just getting blasted.
That happens to me. It is the same thing. I think the underlying concern in the question is: what do I do about over-analyzing? Perhaps, one way to do that is to journal. You can do a video journal where you can use Jing. I’ll link that up in the shownotes.
That software is free. You can use that to record your thoughts when you take a trade and then when you are managing it, moving the break even or whatever. When you exited, you can go back and look at the video, why did you take the trade? Why did you think that was the way to take profit?
To remind you that even though you’ve got more information now from the market, you really should be sticking to your rules here and not trying to take profit too early or reduce your risk/reward ratio, not trying to do funny things here.
To me, the only thing thing you should be doing when you are in a trade is you should be moving to break even or you should be pulling the plug on a really bad loser before it hits your stop.
Those are the only things. Taking profit too early, that is no longer a problem for me. What I do is, like today is a good example, I had trade that came within 20 pips, 24 pips or something like that of my target overnight. So, I woke up and wow in one of my direction.
Awesome, because when I sleep it was like in a drawdown 40 pips or something which is not allowed when you have like 3 in a pip stop. It was a drawdown and then I woke up and it almost hit my target. It was like within 20 something pips and so I moved to break even to 20.
I didn’t dump the trade. I didn’t get out of it because it was so close to my target because I know if I do that, I am going to reduce my average winner overtime. That’s the last thing I want to do. If I reduce my average winner overtime, I don’t care if this trade ends up hitting my stop loss and getting me out to break even now but I do care if over the next year or two, my average winner goes down.
That is really bad for the health of my account. Hopefully, that makes sense. I hope this gives you some insights to how you are trading. You probably already know that you are looking for reversals but it is something that I would say it is pretty normal.
It’s not something I’d worry about. I just worry about taking profit too early. That would be the biggest concern for me on this thing.
Hugh: Totally! If you have any exercises that people could try if they are taking profit too early?
Walter: That is a good one. One thing I would do is this: get a candle — let’s say that you are trading the four-hour candles. What you want to do is… Because what that means is you probably think, for example, in some cases that the market has gone toward your target and starting to turn around and go move away from your target and that is when you take profit early.
This is what I would say — this is a great question, I am glad that you asked it. Let’s say that you trade the four-hour chart — you can do this with the daily, weekly, one-hour, it does not matter — but let’s say you trade the four-hour chart. What I want you to do is whenever you have time to do this, take a screenshot of the four-hour candle every 15 minutes and save that.
Literally, hit the printscreen button on your keyboard and take that screenshot every 15 minutes. That means you would have… What is that? That’s four in an hour four times, so 16 of those. The reason I want you to do that is because that will remind you that when and you can actually take notes too.
When you take screenshot one every 15 minutes into the four-hour candle, right underneath that screenshot, right where you think this candles are going to end up being like “Oh, it’s going bullish. I think that maybe this is really going to be big bullish candle, right?”
Or something like that. You keep notes after every 15 minutes screenshots of what you think the end candle will look like. The candle that eventually closes and is printed on the screen and is done and does not change anymore, you are trying to anticipate what that is going to be.
This is really a good exercise because what you’ll find is that, oftentimes, the last — say, on the four-hour candle — the last 45 minutes, the last 30 minutes of the candle, it changes drastically.
What you thought of what’s going to happen before has totally changed and is no longer the case. This is something that I think will help you especially if you think that “This is a bad trade, I should’ve get out of it. I should’ve get my profit and run that sort of thing.”
I think using this exercise to see that the candles changed drastically and so you can, basically, trick yourself into waiting for the candle to print. That is one thing you can do. The other thing is just journal, keep your ideas in front of you, so go back and look why you take the trade, why you set that profit target.
Remind yourself that you need to stick to your rules here. You do not want to take profit too early. You can meditate and by meditating what, that helps you do — or self hypnosis, same sort of thing — that helps you become more cognizant, or you are able to step outside of yourself and see what you are doing.
You are almost like a natural observer of yourself, that is another thing to do. Any three of those things: meditate, take a journal, or use that snapshot exercise what the candle is. It’s a good way to see how the candle changes overtime.
Hopefully one of those might resonates with you.
Hugh: Cool! That is an awesome advice. Thanks, Walter.
Walter: Okay. Thanks, Hugh. Bye!