In this episode of Truth Abou FX, Walter unlocks a door on the best way to increase returns and trade consistently. Are you looking at the whole picture instead of just the tiny pieces? Walter also drops off some important methods on how to avoid dradowns in this episode…
You will also find here the best place to find the perfect broker for you.
Download (Duration: 03:56 / 4.50 MB)
In This Episode:
00:30 – where to start?
02:07 – fall all the way
03:23 – different systems in different markets
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, my trading method has been pretty consistent but I would like to increase the return in my system. Where should I start?
Walter: This is the carrot that the people look at and they forgot to look at the stick so this is all about risk management. This is about position sizing and I know it’s boring but position sizing is where you will find — probably once you find your system and you’re really bored with your system — digging into position sizing is where you’re going to find the biggest gains in your trading.
It‘s really the key to unlocking where you want to go. The answer to your question is essentially position sizing. You have a consistent system, you’re confident in it, sounds like it’s coming through to this question.
What you needed to is you need to work on your position sizing. Now, instead of looking at how to increase the returns, I would suggest that perhaps you want to look at how you can possibly avoid the drawdown that will send you into the poor house or into a mental state where you want to stop trading or where you’ll start thinking this, “the market have changed, my system does not work anymore.”
What percentage of drawdown would send you into that state? Most people overestimate the drawdown they’re willing to accept. Someone might say, “Well, I can take a 35% drawdown”. Maybe but I think, it’s probably closer to 20 for most people.
I remember, if you’ve got 200,000 in your trading account, a 20% drawdown that’s $40,000. That is a lot of money to many people. A 35% drawdown, if you’ve built your account upto $200,000, that’s $70,000, that is a lot of money to a lot of people.
That amount might be enough for you to freak out in watching your $200,000 account fall all the way down. It is something that you should definitely take a look at. Can you trade a $200,000 account down to $130,000 and still keep trading normally?
Most people would say no to that so go to the calculator at the bottom of this episode in the shownotes, click on that calculator and what you want to do is look at what kind of drawdown you’re likely to come up with as you increase your position size.
There’s a video there in the calculator that will help you use it but the important thing to get across here is that you can increase your returns on your system but you’re also going to increase your drawdowns when you move your position size.
The other thing you can do is you can add multiple markets. So, if you’ve got a system that is fairly robust and simple, you can add multiple markets to your trading. What that can do is that, it can smooth out those drawdowns.
So, when the AUD/JPY is in a drawdown, the same system is doing quite well in the GBP/CHF or whatever. These are the sorts of things that you need to look at. Multiple systems, multiple timeframes, multiple markets that will smooth out your equity curve.
It also allows you to take less risk per trade on those as you build up your portfolio with different systems in different markets that you’re trading. You don’t have to risk as much on those. That is something that I would look at too.
If you’re only trading 2 or 3 markets, maybe look at 10 or 15 if your system is robust enough to do it translate. That would be another way that you can do this. You can actually reduce your risk per trade but because you’re getting more trades and because their uncorrelated markets, what you’ll find is, you can smooth out those drawdowns too. That is another way to do that.
Hugh: Okay, cool. That’s awesome. Thanks for that.
Hugh: Talk to you soon.