Pipsqueaks #34: Tell Me A Story…

A constant refrain I hear from my nine-year-old daughter, typically at bedtime, is “Daddy, tell me a story…”. Of course, she knows her daddy has lots of stories. You don’t get to be a certain age without learning a thing or two, or having lots of experiences to share. During my time spent Forex trading, I’ve had the opportunity to speak with quite a number of traders, and I’ve heard lots of stories. Unfortunately, most of them weren’t good stories; that is, I get to hear stories about people’s experiences losing money. Lots of money. So I pondered just why is this? Well, let’s look at three scenarios to see why this happens and examine what can be done to help mitigate situations like these.

My first scenario looks at the newbie trader who, having little to no ability to read charts or create forecasts in a financial market, but wishes to participate in trading, and so signs up with a signal service to provide trading leads. A lot of newcomers succumb to the notion that “signals” equal “orders” or “guaranteed profits”. They will gleefully and blindly take any trade from a generated signal, typically with a larger than appropriate position size, and will likely end up blowing up their account. Why is this? Surely if you pay for trade signals they should be good right? Of course to succeed here, one needs a proper understanding of what signals really are, but more importantly, how to take the trade. Failure to understand both concepts here will ultimately result in failure. Let me explain.Pipsqueaks 34 Tell me a story

Trade signals, regardless of where they come from, always originate in some sort of market strategy, the goal of which is to profit more than incur loss. It typically numbers games – let’s say you have a strategy that wins 65% of the time. In order to ensure some level of success, one needs to trade consistently and continuously. No dabbling just here and there, you need to be consistent. Occasional dabblers will get burned. Does this mean you take every trade? Short answer – no. You should avoid certain market conditions, such as big news releases or major financial announcements that can cause a spike in the market. You should take into account prevailing trends in the market and try not to trade against them. But for the most part, if you stick with a strategy, even if the strategy is as simple as taking signals, then for the most part you need to consistently take them, and you should be on the prevailing side of the numbers. Also never jump into a trade blindly. Look at the market conditions, and enter when they are right. Many signals originate after a large move in the market, which is almost always followed by some kind of pull back. So be patient when the signal arrives, and enter appropriately. This is why I usually encourage people new to trading to start out in demo, then demo some more, and then after that demo some more. Demo until the signal taking become second nature. Demo until you demonstrate to yourself that your demo trade taking actually makes money, as opposed to losing money. Demo until you can do this in your sleep. Then go live. Trades small. Place trade position sizes so that if you do incur a loss, it’s small enough so you don’t care. Keep your trading so that you’re risking no more than 1 to 2% of your account size. This hurts a lot less than losing half of your account overnight, and yes that can happen, even with the best signals. More on that in the next scenario.

Now let’s look at the trader who, having been disappointed at the results from his current trading strategy or signal service, flits from strategy to strategy, or signal service to signal service, looking for that panacea of trading where the only make money and never lose a dime. This type of behavior will only result in the loss of an entire account. I cannot stress enough the importance of certain concepts in trading. My list would top off with the concepts of consistency and patience. And if one is trading prudently, that is, risking no more than 1% to 2% of a live account (or even better working with a demo until consistent profitability is established) then, the likely result would be an increase in account size, versus the inevitable clobbering one’s account will receive when trading inconsistently or irresponsibly. If you pick a method or strategy to trade any financial market, you really need to stick with it. If it’s a good strategy, your reward (over time) will be a profit. That’s what trading is all about. And for the most part, the retail traders who are successful (the ones who don’t lose money) are typically making fairly consistent positive results, which usually play out as lots of modest profits, with comparatively few modest losses. Those looking for that big win will typically get a big disappointment. Remember, it’s always better to make $10 profits couple of times a week and lose a few hundred over one or two trades. Something new traders will learn, if they stick to their guns, is that demo trading coupled with low risk transition to live trading, builds confidence to the extent that they can, once they go live, prudently and successfully scale up their trading to a level that they desire. Jumping into quickly with a live account and betting the farm will, ultimately lead to BIG disappointment.

My third scenario involves the new trader who knows better than people who’ve been doing this for several years. A former fellow worker of mine from a few years back, was bitten by the Forex bug. Yes indeed, he was going to make his fortune currency trading. I told him he would find this interesting and how he could set up a demo account with a broker and practice trading Forex markets. And he did just that, but with disastrous results. Okay, this was a demo account so no harm no foul. So he reloaded his demo account and blew it up again. This only inspired him to start trading a live account, which resulted in his wiping out his entire account. Disgusted, he angrily informed me that “the markets are rigged”. Well, perhaps they are or perhaps they aren’t, the essential reality is that retail traders are small fish in a very big pond – all we can do is ride the coattails of the big players and make a bit of profit in the process. In my opinion, there isn’t an evil wizard hiding out on Wall Street in an office trying to destroy my buddy’s account. It’s wasn’t necessary, as my coworker did a good job of destroying his own account. He knew better than anyone else who gave him advice, and reaped the appropriate reward. So when experienced traders advocate to only trade in demo, don’t be greedy – just practice until you get it right.

Happily, none of this needs to be the norm. If you’re new to trading, there are lots of resources for you to draw from to learn how to trade and receive the proper advice, mentoring and learning that you will need to become a really professional trader. Slick Trade is a great place to start, especially those just starting out trading Forex. For those who become Sapphire member is in Slick Trade will receive access to learning materials, trade signals, expert advisors that you can run on your own charts, as well as help from other members just like you. So why not give it a try? You’ll be glad you did.

That’s all for today have a great week and, as always, thanks for reading!

JC

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