In this episode of Truth About FX, Walter drops off some useful tips for “rookie” traders on market approach, patterns, and finding the perfect system that speaks of who you are as a trader, your beliefs and lifestyle.
Walter also shares an interesting read that may shock you.
In this episode of Truth About FX, Walter talks about what he thinks forex would be like in the near future in terms of technology, government regulations, and trading education. He shares some of the reasons why forex traders would leave US, for example, to trade in Australia or Singapore and how business regulations in a country can affect that decision. Walter also taps on the subject of transparency and the reasons why top traders show — or why some wouldn’t show — their trades to online audience.
Hugh also reminisce his high school soccer coaches and how this story reminded him of an important trading principle.
Download (Duration: 06:49 / 7.81 MB)
In This Episode:
00:47 – cracking the code
02:15 – all or none
03:40 – choppy
05:35 – a lesson
06:18 – rookie traders
Do more backtesting rather than searching for the right system. [Click To Tweet].
Try and find a system that you are comfortable with. [Click To Tweet].
There are always weak spots for every system. [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! If you could go back and give yourself one piece of advice when you first started trading, what would that be?
Walter: I would probably say spend more time doing backtesting rather than searching for the right system. Or, I would say do not be so concerned about cracking the code of the market or trying to be right a hundred percent of the time.
So, what I did — when I first started full time in trading — what I did was I just read a bunch of books. I moved to a different country and I just concentrated on the markets. I ordered a bunch of book through all the library known.
I got into all these Gann books and all these different things and I end up settling on in price action. I learned a lot of different really cool approaches to the market. In the beginning, I was selling the Gan and I thought that if I could crack the code, you would know exactly where it’s going to go, this and that.
Later on, I settled on the more universal patterns that you see in different markets like the Bulkowski book, I’ll link those up in the shownotes for this episode. Those Bulkowski books are really cool because they highlight, for me, that there are repeatable patterns in the markets.
That set me off in the price action trading path. I would say the best piece of advice would be instead of trying to find the right system and jumping into the markets, why aren’t you try and find a system that you are comfortable with that makes sense to you then do a lot of backtesting on it.
Really bust your jobs on using forex tester to get it right and then at a certain point, you might move to a small live account. A lot of people think it’s all or none. They think “Well, I’ll just going to trade all of my trading money” or, “I am not going to trade. I am going to trade on demo”.
I think you should probably trade forex tester, then demo, then a small account, and then use your money in the real live trading account. That is the process that I would recommend. What about you? What would you say? What have helped you the most in the beginning?
Hugh: I would probably say the same thing. It is a really good idea to think that you could just learn one system and it can solve all your problems. Like you say, there’s a huge gray area there.
I think testing really does help you see what and how you might perform and how you like the system like assessing, estimating, like you are trying to point out. Is it compatible with you? Do you understand it? And, just doing a practice like any professional athlete, you want to get in a gym and shoot a thousand hoops or whatever or kick a thousand balls.
I think that backtesting is probably the best thing for that.
Walter: Like you say, when you are doing that practice, you’ll identify what the weak spot is. For example, if you’ve got some trend following system that does really well and the market just takes off, goes in one direction, it’s probably not going to do so well if the market’s choppy and really tight and consolidating.
Likewise, if you are a swing trader, you like the market to be volatile and make these swings up and down. But, if the market is trending, every time the market has a little bit of a pull back, you are going to think that it is a swing point and you’re going in and you’ll get blasted as a swing trader.
There are always these weak spots for every system. By running through it’s paces, spending time with forex tester, like you say, or in the gym — in the trader’s gym — what will happen is you’ll recognize what that is.
There is a really good book that I would recommend that you read. Again, I’ll post this under on the shownotes. What was interesting was… I think it is called “The Holy Grail” or something like that.
You can actually get it on the Amazon.com, kindle or whatever, it’s pretty cheap. It was interesting what these guys did. I think they’ve met on a trading forum. It was really interesting, the way the guy wrote it.
He explains all the personalities of all these traders who were involved and how each one brought a certain piece to the puzzle and they built the system out. They were convinced that they had the system, they’re going to make so much money.
The interesting thing is they actually did. In the beginning, they did do that and it was working really well. They tested it, back tested everything but here’s where they messed up: they forgot that when they did their backtesting time period, they were working with the EUR.
The EUR was in a really strong trend the whole time for six years. What happened was four or five years or whatever it was — it was in over the span of years — so what happens was they had a system that worked really good for a strong trending market.
Unfortunately, when they went live with it, the market was not trending anymore. They’ve wild money management rules and everything, it was just crazy but it was interesting to see it happen because they learned a lesson.
They learned a lesson even though they took a small stake and built it up really quickly. It ended up collapsing and they learned a lesson that “Yeah, we did all of our homework, we’ve looked at all the numbers, we’ve figured everything out”.
It’s almost like a curve fitting when you have that system that fits perfectly to the historical mount markets but won’t necessarily work on future market. That’s exactly what happened to them.
It’s a great read I’ll post the link under the podcast so you can you see on the shownotes if you want to get and read it. I’ve already spoiled and told the story but it is really interesting to see how easy it is to make mistakes.
These guys aren’t really necessarily rookie traders. They took the right approach, I believe. They just missed that one thing which was “Wow, we did all these testings in a historical market that was basically trending quite strong” and that was the one piece they missed. It’s a good lesson I think.
Hugh: Cool! Thanks for that. Talk to you next time.
Walter: Alright. See you, Hugh. Bye.