Big Wins & Small Losses Trading Forex
Monday, March 29th, 2010 Your Mental Game by TraderCiscoThis journey into forex trading amazes me everyday. It is the ultimate mental ‘road trip’ and I keep finding around each corner newly undiscovered gems that I can apply to my forex trading. Trading forex is about making money, plain and simple and if you are not making money trading the forex currency market it is time to make some adjustments.
The title of this article says a lot of my latest discovery, a statement so obvious that it should not have come as a surprise but it hit me in the face, the way seeing a mountain range for the first time makes you stand in silence. I have been leaning heavily on a trusted adviser, and he has mentioned this to me over and over, and it took a long time for me to ‘get it’ but when I did it really was a huge change for me.
You see my first ‘mentor’ guru, was all about string trading. His entire goal was based upon trading 50 trades in a row without a loss before you went live. Yes that is a noble goal, but to me it is a lot like teaching a bear to ride a bike, great for entertainment, but it has no value in the real world. You see I don’t trade so that I can wave some flag that says I traded 50 in a row, I trade to make money. Period. I tried for a long time to work it out to achieve a long string of trades and I have hit a few impressive strings. I’ve been over 20 in a row I think three times now. However the message and goal are flawed, because what it is teaching you is to keep a string going at all costs, even if that means moving or removing your stop just so your string remains intact, and yes one of the trainers told me this very thing. “I took my stop off because I am trading a long string and hey it’s only 300 pips on a small account.”
“Keep your losses small and your wins big and you will make money.” This statement broke the Myth of String Trading for me. Now that was a change of thought for me. My prior “guru” said have a stop of 70 and go for 10 pips. Oh yeah you can get 10 pips, six times in a row but when the 7th trade fails you are down 10 pips and you have LOST MONEY. Now I’m being selective AND using a small stop. So now if I’m in a trade and I use a stop of 5 to 15 pips and it fails, OK I’m out a very small percentage because I keep my risk very small. However the winners end up being very nice because I allow them to run beyond just a 1 to 1 return.
Let me illustrate:
If you have a 60 pip stop and make 60 pips are you happy? That would be a 1 to 1 ratio and most I think would be pleased. At this ratio your success rate would need to exceed 50% to make any money. Now what if you traded that same trade with a 15 pip stop? That would be a 4 to 1 ratio. If your risk was 1% on each trade how much would you make? On the first trade 1% but on the second trade your profit is 4%. My success rate on winning trades now only needs to be a little better than 25% to make money. No my goal is not to be correct only 25% of the time. My intention is to never be incorrect, however, when I am I am not overly concerned. I have a plan and a loss does not derail that plan. It does help to see how you can change your trading by just some small adjustments. I overheard a trader who trades large lot counts make this comment ”It’s nice to hear of people who make a lot of pips. I’m hear to make money.” Enough said. Sometimes I think we ask the wrong questions and when we do the wrong answers cloud what our real goal should be, making a living.
So what I am doing is allowing my winning trades to run, I’m not afraid of losses anymore. With proper stop management the winners overwhelm the losers and I am working toward profitable days, weeks, months, years.
Let me know what you think, I would love to hear your opinions, and if you are interested in my mentor let me know. I will tell you he is only interested in serious traders, not really set up for beginners. He is a professional trader with limited time as he trades London and does a little bit of training during the NY session. Just because you inquire, does not mean he will accept you as a student he has limited space and is not going to be used as an open book to just give up his set ups. He is there to help you refine your trading style not just copy his.
Thank you for reading and I look forward to you comments.
TraderCisco
scott@euodootrading.com
www.euodootrading.com