Post Tagged with: "forex"

Forex Trading: When does Luck Matter?

Forex Trading: When Luck Matters

I hate to use a gambling analogy when discussing FOREX trading. But it is just so appropriate.

Most experienced FOREX traders would be offended if you compared them to a gambler, as well they should be.

There is a distinct and extremely important difference between a responsible FOREX trader and the typical gambler. The difference is expectancy. In this case positive expectancy.

Positive expectancy means the “game” you are playing, if played long enough, will yield positive results.

Negative expectancy is just the opposite. If a “game” with negative expectancy is played long enough, the outcome will be negative.

Casinos are built on games of negative expectancy (from the gambler’s point of view, not the casino owner’s). Most gamblers know this but hope to get lucky.

No FOREX trader in her right mind would play a game, or follow a trading strategy, with a negative expectancy.

This is the fundamental difference between the responsible FOREX trader and the average casino gambler.

Actually, the casino owner and the FOREX trader have much in common. They each find a handful of games with a small positive expectancy.  And then they play each game whenever possible.

The casino owner (or FOREX trader) knows that the outcome of single game (or trade) is unknown. However, the outcome of many games (or trades) will eventually meet its expectancy. In this case a positive expectancy.

The job of the casino owner is infinitely easier than that of the FOREX trader. In a casino, the odds are fixed, the number and quantity of variables are known.

In the FOREX market, the variables are constantly changing. And the reasons for the changes are not always clear. (I’d like to say that changes in the Market are at times senseless, but who am I to question the market? The market price is always correct.)

The only responsible way to trade the FOREX market is to exercise a trading strategy with a proven positive expectancy.

One of the best ways to implement a trading strategy and verify its profitability (or positive expectancy) is by using a mechanical trading system, like an Expert Advisor.  Also, an easy way to consistently execute a trading strategy is to run an Expert Advisor.

So, if a trader has a strategy with a positive expectancy and a platform to consistently execute the strategy, when does luck matter?

To the well funded trader: never.

To the under-capitalized trader: in the beginning.

Remember this  fact: the outcome of any one trade is unknown.

Actually, the outcome of a string of trades is somewhat unknown. For this reason, the starting-capital-challenged trader must pay close attention to the statistics of their trading system.  Especially the amount of the maximum loss and the number of consecutive losses. These statistics are used to determine the system’s maximum draw down.

The value of the system’s maximum draw down dictates the minimum starting account balance. To begin trading FOREX without knowing your maximum draw down, or to knowingly under fund your account based on the draw down, is well, trying to get lucky.

Trading

Fail-Forward Forex

Failing Forward on the Forex Market

25 years ago I failed college algebra.

Actually, I got a D. This is not technically failing, but since you needed a C average to get into the engineering school, it was not good news.

Now getting a D in college algebra might not be the end of the world for an art student, or a business major, or even pre-law, but for an engineering candidate it was devastating.

You see, the list of “required courses” for an engineering degree did not even include college algebra.  You know why?  Because it’s so basic, so trivial, they assumed you already knew algebra if you were even considering engineering as a major!

Seriously, it’s not even a pre-requisite.  It’s a pre-pre-requisite.  (I’m not making this up. Pre-calculus is a pre-requisite, and college algebra is the pre-requisite for pre-calculus!)

So, needless to say, I was depressed.  But I didn’t give up.  I’m not even sure why I didn’t give up – stubbornness – or maybe just refusing to fail.

When I look back on that experience, it reminds me of a saying I came across just the other day:

“Failure is not the opposite of success,  it is a step towards success.”

In this case, it’s true.  I learned from that failure. Among other things, I learned to never take a math course early in the morning again.  Ever.

I’m serious.  8:00 AM is just way too early for my brain to be solving equations.

Anyway, I really like that saying.  And I think it applies perfectly to Forex trading.

Let me tell you right now: If you are not ready to fail, then Forex trading is not for you.  Don’t even try it.

You and I (and every other trader) are looking for the same thing. To build that ultimate trading system that never loses and just wins, wins, wins.  The so-called “Holy Grail” of trading.

But if you think it’s just gonna happen without coming up with some seemingly great ideas, falling in love with those same ideas and then systematically destroying them, well, you are dead wrong.

And let me tell you, destroying those ideas hurts.

It really does.  Because you think your idea is so clever and it makes so much sense and it’s based on rock-solid logic.

Then you implement it and it fails horribly. Ouch.

But where would you rather be?  Still dreaming about an idea that’s bound to fail?  Or would you like to have failed-forward and be working on your next idea?

Whatever tools you use to build your Expert Advisor, make sure you can move quickly from your idea to implementation.

As sadistic as it sounds, the faster you can crush your ideas, the faster you’ll move toward success.

NOTE: I should clarify, I don’t believe there is such a thing as a “Holy Grail” trading system and I don’t really search for one, but I do continually try to improve my systems to make them as good as they can be.  And yeah, the holy grail system is fun to dream about.

 

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