In this episode of Truth About FX, Walter digs into the subject of trading without using indicators. And, what are the best ways to go about this? He also talks about the pros and cons of using indicators, and how this affects your psychology.
Also, did you know that there are three types of traders? You can learn which type are you and more in this episode
Download (Duration: 05:26 / 6.22 MB)
In This Episode:
00:32 – off from trading
02:09 – hit a spot
03:21 – fine tuning
05:12 – get-go
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. Today’s question is from a student and he asks: I’ve started using trading indicators and I failed. I took 6 months off from trading and now I’m trying to relearn trading without indicators.
So, I guess the question is how does he do that and what are the best ways to go about that?
Walter: That is fairly tricky. One of my beliefs is basically what happens with people is that indicators — I really don’t have anything against indicators, if you think you can use them, fine. The issue I have with indicators is that it makes it difficult for you to stick to one thing because you will do exactly what this person did.
Which is you trade for a while, you use the indicator or indicators that you’re using, and then you hit a drawdown, and then you blame it on the indicator, and then you pull another one out of the hat. You’re stuck in that cycle.
To me, that is the main issue with indicators. It’s not really that you cannot trade with them or you cannot make money. Of course, you can. I think also, if you’ll talk to some of the older traders, what they’ll tell you is that — and I am talking about older indicator based traders that used indicators in their system, they’ll you that — they don’t really need them.
They can tell what is going on their chart without looking at the indicators. They know that they’ve got a trade on or they should get out of the trade or whatever so this is what I would suggest for this person.
You’ve been trading for 6 months with indicators, it didn’t workout and now you are trying to relearn how to trade without indicators. There’s a couple of things you need to do. First of all, you need to look at what your beliefs are.
Most likely — and in the shownotes for this podcast , I’ll put that video down to show how to determine what kind of a trader you are but — the important thing to know is that you’re one of the 3 different types of traders.
You are probably either the type of trader like who likes to go with the flow and trend trade and follow a strong trend, or you are a reversal type trader where you look for the market to hit a spot and turn around there. You are trying to catch that reversal or you might be like a breakout trader where, basically, you look for the market to get really quiet and then when it gets really quiet you wait for that violent breakout for it to move.
Some traders are also kind of reversion to the mean type traders which is similar to the counter trend or the swing type trader but it’s a little bit different in that you’re just always watching the market fluctuate up and down and you try and take advantage of that.
I guess, really there’s sort of 4 different types of systems that you’re probably most drawn to. That’s not to say you cannot trade all 4 at some stage but in the beginning. When you are first starting out, you really want to align your system with your beliefs as closely as possible so that you do not leave it in a dust when you run into a drawdown.
That is what I would say. I would say that is the first step. To find out what kind of system you want and backtest it, use forex tester. and then get really deep into money management.
Figure out how you can trade that system without running into a drawdown that is going to make you go. “Okay, I quit. This isn’t working. I’ve got to find a new system”. That really comes down to fine tuning your risk management. That is going to come into a play when you know what your win rate is and your average winner and average losers and what the chances are in hitting a drawdown at x%.
All those sorts of things that you can use. You have to get the stats from your testing obviously but then you can plug those into a calculator that I’ve linked up down there in the shownotes for this episode too so you can work on that.
That is my suggestion. Find out what kind of a trader you are. The video down there below will help. Then test it, get your confidence up then use the calculator to fine tune your risk management because that’ll help you in avoiding drawdown.
Then from there, you really just need to work on your mindset and stick with it. That is the main thing. Does that make sense to you?
Hugh: Yeah, that is a great advice. Thinking your steps back also, maybe this person needs to reassess the workfield. Did the indicators really fail for them or did he/she go through the wrong process with it?
Walter: That is a great point and it could be exactly right, Hugh. It could be that it’s the money management failed him so he’s risking too much or he was changing his systems on the fly because the last trades went 400 pips so I’ve got to add a trailing exit to the next trade or whatever.
It could be a multitude of different things that happened but you are right. You do not have to blame it on the indicators but unfortunately that is what we typically do. We blame the system and then will throw it away.
It’s not just to say that he couldn’t he/she — I do not know who this is — he/she couldn’t use indicators in the future I’m just saying you are right. It could be a number of things but the important thing here, I think the main thing you need to take away from this is that you need to trade what you believe because if you don’t do that, then what will happens is your belief starts bubbling up and starts changing the system. You really want to align your system from the beliefs from the get-go. That way you will far ahead from the other traders who are just trying to copy someone else.
Hugh: That makes a lot of sense. Thanks, Walter.