There are many figures published regarding the win loss ratio of traders. Some writers and publishers put the losing rate as high as 95%, certain brokers cite a 75% losing rate, others will suggest that it’s much smaller, at perhaps 50%. What is for sure is that you’d have to be an exemplary supreme human being to find our FX industry and from day make money without incurring losing trades, or suffering a drawdown.
Another stark reality is that, if you’re reading this and you’ve recently suffered a series of losing trades, a severe drawdown and or a margin call then take it from us that you’re not alone. We all experience one or all of those three phenomena, especially at the very start of our trading careers, when so much is new and there’s just so much that we have to take into consideration in order to make trading work for us.
For the many amongst us who consider ourselves experienced and successful traders it’s easy to look back at our early trading days and recognize where we went wrong and how, if we’d have had a mentor take us under their wing, we’d have probably cut our learning time down considerably, shaving months (if not years) off our overall learning process.
It’s this aspect that we intend to concentrate on with this article; what really quick remedial advice can we offer to turn around your trading if not today, but in a very short space of time? We’re going to offer up a handful of very quick remedies that’ll allow you to take control of your trading and immediately ensure that your losses are kept to a minimum as you come to terms with all the complexity involved in our industry.
Concentrate on the amount you’re prepared to lose, not what your gains could be
This couldn’t be a simpler message despite on the face of it appearing to be negative. Forget accounts gains of 100-200% year on year in our first year, we’re going to commit that in our first year of trading we’re not going to lose more than 20% of our account. However, we’re only going to place a percentage of our savings into that account, no more than 40%, so our loss is smaller and won’t be life changing in terms of an irrecoverable negative aspect.
Consider it this way, we have €20K savings and we’re going to place €8K into a trading account. But we’ll set a maximum drawdown of 20% on that €8K. Therefore our total risk will be €1,600 or nine percent of our original savings amount. Now none of us like to lose money, but risking only 9% of our savings isn’t irrecoverable and shouldn’t be too much of a life changing loss.
Right here we’re making a decision, later to be committed to our (never to be violated) trading plan, that hardly any new traders make. The majority fail to draw that line in the sand and apply any mathematics to the initial problems. And then we go further to limit our losses. We are going to only risk 0.5% of our €8K per trade, forty euros per trade. And if you feel that’s too much risk then half your risk, then if need be half it again and keep on going until your palms stop sweating and you enjoy the challenge.
Choose the right volume
One aspect is certain in this business and can be highlighted by taking the two extreme of the FX trading industry; HFT and position trading. The closer you get to HFT trading the more the odds and the FX industry works against you. If you take fifty trades in a day, have a 50:50 win lose day, but are paying a 3 pip round trip on each trade you’ll lose 150 pips on the day. Scalping, real scalping, is an incredibly sophisticated discipline that can only be perfected by banks and hedge funds experiencing nigh on zero transaction costs. The closer we get to that HFT boundary the more impossible it becomes to profit from this market.
Similarly position trading involves holding and financing costs that can severely impact on our bottom line. Therefore the obvious answer is that we should either day trade or swing trade and it’s no broker secret that this is where the majority of our clients make their money.
Accept our inexperience and stretch out our first account survival for as long as possible
We’ll probably lose at trading initially so we need to concentrate on making the loss as small as possible and stretch that losing period out as long as possible whilst we become conditioned to all the complexity within our industry. In keeping our losses small initially, until we’re confident that we have a winning strategy, we ‘buy’ one of the precious commodities available in our trading world – time. Buying time and simply surviving in our first foray into the FX industry can’t be underestimated as an essential ingredient to our overall success. Set down a timeline now, for example; “it’s going to take at least a year before I’m proficient let alone profitable, I need to make a commitment that I’ll stay that course”.
Read, read and read more, immerse yourself in fundamental analysis
We’d have to be incredible human beings to understand what moves our market without any background knowledge. It’s essential that we immerse ourselves in the fundamental policy and high impact news events that are decided and released on a daily basis. Know why a security moves and when, be aware of upcoming releases and never trade the news by attempting to predict the news or the reaction to it, always trade the reaction to the news.
Use stops, always and forever
No matter how tempted we are and how many times we may read the alternative view on various forums, we should never trade without stops, even if they’re what are often termed “disaster stops”. Without a stop in place when we enter the trade we’ve no idea what the risk is that we’re actually taking. If we are to risk only 0.5% per trade then we should be adjusting our position sizes and stop accordingly. And once in place we should never widen the stop because we see the market moving against us.
Run a demo account to test strategies, never go full in until it works over a consistent period
Whilst it’s tricky to attach a definitive number on the series of trades we should take in order to test a strategy on demo account before going live, or how much time we should spend on our demo strategy, one thing is certain; we should only move off demo to real trading once we are 100% certain our trading strategy actually works and we know it has a positive expectancy. And once we do move off demo why not half our normal risk until we witness positive results?
Conclusion
We’ve set out several pointers here to assist first time or fledgling traders control their losses and to lay down initial trading rules that should serve them well in the future. We may have indirectly shaved months, or years off a trader’s development though these initial mentoring tips of the trade. And if any of our readers would like to add to this initial list then please feel free to use the comment box at the foot of this article.
