Why bursting the bubble; discovering that there is no ‘Holy Grail’ of trading, finally leads to trader enlightenment
The term “Holy Grail” crops up regularly in trading discussions. The phrase has come to mean; the discovery of an infallible trading strategy and method that will lead to our trader unlocking a type of trading ‘code’, eventually opening a door leading to untold riches. The search for the Holy Grail is undoubtedly one of barriers to success our trader needs to overcome in order to enjoy a profitable career in trading FX, indices or commodities. It’s also a search that our trader needs to abandon, sooner rather than later, if they’re to enjoy success trading the markets.
But what words of discouragement can we deliver in order that our trader gives up their search? How can we deliver our message (in a way that still offers up hope for the future) whilst dismissing looking for a market ‘code’? It’s a tricky task but we’ll attempt it in this article…
If there was a ‘Grail’ it’d already be discovered by now and it wouldn’t be in our hands
This is always an interesting observation to present to new traders; they should consider the billions of dollars investment banks and other institutions have invested into quants, in order to develop trading systems. Yet somehow our Grail chasing trader believes they have the potential to develop and unlock a form of code that no one with a degree from Cambridge, Imperial or MIT has yet discovered, backed by billions and ‘state of the art’ technology. It’d be quite endearing if it wasn’t so naive. But this fact and comparison should make new traders sit up and take immediate notice that there isn’t an ‘undiscovered trading code’ that the greatest trading minds have missed.
When stubbornness fails
Being the stubborn individuals most of us are it’s often an impossible task to deter the new trader once they’re set on their personal crusade to discover the Grail. No amount of advice, or experienced rationalisation, will convince our new trader that no such market code exists. It is a journey that many traders have to undergo by themselves in order to come out of the other side stronger, bruised, but wiser.
One of the reasons the search for a market code is so prevalent within the industry is because the rational mind of the new trader finds it extremely difficult to accept that the market, particularly the FX market, has very little order to it. It is chaotic and random. We can’t predict with any degree of accuracy what the market will do next, the very best we can achieve is to follow price through our lagging (never leading) indicators, whilst using tight money management through controlling our risk and not allowing our emotions to trade ahead of our trading plan.
Why physicists and mathematicians can often make the worst retail traders
This awareness hits those from the backgrounds of maths, physics and statistics hardest of all, as these types of personalities and characters find it incredibly difficult to accept that there isn’t a mathematical solution to the market, beyond that which creates indicators, moving averages, or perhaps Fibonacci tools to be used on our charts. Giving up the search for order where there is none, is an incredibly difficult barrier to overcome for many.
Never fear losses, embrace them
But it’s this critical issue which prevents many traders’ from developing a career in the FX industry, as new traders can waste months (and in some circumstances years) chasing what doesn’t exist. There’s an overall underlying issue that causes traders to chase that Holy Grail and it’s one of the most corrosive issues in trading that must be overcome in order to succeed; it’s the fear of taking losses. The fear of taking a loss is a significant motivation in the behaviour of the Holy Grail seekers; this is why they’ll spend months and years chasing the rainbow in search of a code. It’s only when they begin to accept that losses are an inevitable part of doing business in our business that the search for a code stops and the concentration focuses more on money management/risk rather than a perfect system.
We’re hard wired into believing that winning is everything and the industry is at fault for doing so.
The myth we’re continually sold with regards to trading is that it’s a winners’ business, losers need not apply. We’re continuously bombarded with images and literature promising massive gains. The images will have a smiling Alpha Male, in an Armani suit, giving a high five across his bank of monitors to another perfectly groomed colleague. The retail industry couldn’t thrive if it posted up images of traders losing, climbing out of their bed at 5:30am as the alarm goes, in order to check the overnight session to see if it’s impacted badly on their positions, then hiding under the duvet wondering how to pay the bills at the end of the month. The industry concentrates on winners and winning, trying to sell an industry where you might be wrong 50% of the time yet still ‘win’ is an incredibly difficult phenomena to sell to new traders.
Looking for the Grail in the wrong place
As we’ve previously stated, attempting to convince retail traders that there is no Holy Grail of trading can prove to be an impossible task. In many ways it’s far better to take a step back, give the new trader a wide berth and allow them to navigate the initial painful journey they’re destined to follow. The market and the industry has to humble the new trader during that steep learning curve and no amount of pointing to the part in this article where we ask “why the Grail hasn’t been found by leading quants?” will alter the thinking that many new traders appear to be hardwired to endure.
The Grail may exist but not as, or where many visualise it. It may be in risk and money management and not the method
There is an argument put forward that a form of trading Holy Grail does exist, that there are countless profitable methods that do work time after time, and they can therefore be defined as a form of code to trade the market. However, the key to unlocking these methods and strategies lies in accepting the random distribution of winners and losers based on probabilities and risk management, whereas ‘Grail Seekers’ are chasing that perfect trading system.
All systems fail, if our trader can develop a system whereby they anticipate, expect and indeed embrace losses, knowing that a series of wins could now be even closer, then they’re on their way to developing their own Grail. However, accepting losses as an inevitable consequence is not only counter-intuitive, but very painful for many traders to accept.
Imagine for a moment that we asked a (nearly) new trader if they were any nearer to developing a Holy Grail method of trading the markets? And they replied “yes, but not as you’d imagine.”
I realise that if there is a code to trade the markets then it is more likely to be embedded, or found in risk and money management, rather than in the method. Out of the three Ms of; method, mind and money management, it’s the MM that in my opinion is key. Targeting a win loss ratio of circa 50:50, with R:R of 1:2, and by effective use of trailing stops and take profit limit orders, I can work to what I’d consider a code to ‘crack’ the markets. My overall strategy, despite only at best delivering a 55:45 win loss ratio, is still robust enough to return what I’d turn ‘Alpha’ returns. Could it be termed a Holy Grail? Perhaps it could be, it is a highly personalized code or Grail, but I doubt that any code exists that doesn’t accept that close on 50 percent of your trades have to fail in order for your system to be considered a success. And this is where myself originally, and many other traders will fail; we’re too busy looking for that 100% bullet proof system when no such system will ever exist.
I realise that if there is a code to trade the markets then it is more likely to be embedded, or found in risk and money management, rather than in the method. Out of the three Ms of; method, mind and money management, it’s the MM that in my opinion is key. Targeting a win loss ratio of circa 50:50, with R:R of 1:2, and by effective use of trailing stops and take profit limit orders, I can work to what I’d consider a code to ‘crack’ the markets.
My overall strategy, despite only at best delivering a 55:45 win loss ratio, is still robust enough to return what I’d turn ‘Alpha’ returns. Could it be termed a Holy Grail? Perhaps it could be, it is a highly personalized code or Grail, but I doubt that any code exists that doesn’t accept that close on 50 percent of your trades have to fail in order for your system to be considered a success. And this is where myself originally, and many other traders will fail; we’re too busy looking for that 100% bullet proof system when no such system will ever exist.
Those two paragraphs perfectly illustrate the mind set our new trader could adopt and adapt in order to prevent wasted time and money chasing what doesn’t exist. Those paragraphs, if adopted initially, will prevent unnecessary emotional and financial pain and cut out a desperate journey that new traders don’t have to embark on.
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