Forex Trading Strategies: Surviving is Winning
Surviving is Winning
When studying money managers, academics always note the presence of survivorship bias. Survivorship bias amongst many other things is the idea that if you flip a coin often enough any monkey can succeed at this job. Basically in any given pool of applicants a very small percentage can flip ten heads in a row and thus produce 10 consecutive years of good performance through sheer luck rather than skill. Survivorship bias is a real problem when it comes to evaluating the performance of investment managers and you should be keenly aware of this dynamic when you evaluate their long term records
However, when it comes to short term trading survivorship bias plays a far less important role as the law of large numbers quickly grinds down all the lucky participants into dust leaving only those who are truly skilled behind. Why? Simply put it is much harder to generate 100 winning days in a row than it is to generate 10 and harder still to generate 1000. FX which is a highly levered market is the ultimate Darwinian proving ground and those few who survive to trade it for more than several years with their original stake in tact are truly skilled in my opinion.
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In fact I would go so far as to say that surviving IS winning when it comes to short term trading. Amongst the hundreds of traders I’ve interviewed in my lifetime I’ve never met any successful trader who did not blow up his or her trading account at least once and in most cases three or four times before they finally mastered the craft. In fact it was only after they learned to preserve their capital that most of those traders started to succeed. That’s why risk control is so much more important than any trading strategy you choose. Woody Allen once said that 90% of success in life is just showing up. When it comes to trading the markets I couldn’t agree more. Hang out long enough and you will eventually discover a setup that you can exploit, but only if you have capital left to trade.
In this week’s video I lay out what I consider to be the inviolable principles of short term trading which boil down to a few simple rules.
- Always trade with a stop
- Never average down
- Stop trading for the day if you hit three consecutive losers
- Don’t take wildly asymmetrical risks (bet 50 to make 10)
Although they are simple these rules are incredibly difficult to follow. I have broken every one of them many, many times. In fact I can trace ALL of my failures in trading to disobeying these four simple precepts rather to any inability on my part to analyze the market properly. I would bet that for many of you the same experience applies. That’s why our true control of the market will come only when we learn to master ourselves. That’s the beauty of trading -- unlike most other professions we cannot hide our incompetence so we must learn to be responsible in order to succeed in the log run.