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Forget EUR/CHF – Here is How Everyone Really Loses Money in FX
One week after “Black Thursday”, the EUR/CHF debacle of course invites a huge amount of Monday morning quarterbacking with many experts only too happy to tell you what you should have done AFTER the fact. Still a few common sense ideas like having at least two or ideally three separate brokerage accounts, keeping your deposits small and periodically taking money out of the account are all good ideas.
Kathy and I wanted to go much further than that and actually explore new ways that we should be trading now. I think we came up with some very interesting ideas of how to adapt and we’ll be holding a free webinar this Tuesday January 27th both at 8AM and 8PM NY Time ( register here https://attendee.gotowebinar.com/register/3293104759417724930 ) to discuss them.
But this week I actually wanted to step away from the chaos of current events and take a look at the most common way that many of us blow up our money. The EUR/CHF trade was more like an Act of God clause common in most insurance contracts that recognize that it is impossible to indemnify against every risk. You can lead a very clean life and still get hit by a cab at a busy intersection.
But there are many risks in our business that are self made and perhaps none so pernicious as the allure of the martingale. There is no trader that ever lived who has not averaged down into a bad position multiple times. After all in a bounded market like FX -- the asset has got to rebound sometime, right? In this column, I’ve chronicled numerous examples of my own disastrous attempts to martingale myself back to even -- only to blow up the account again and again. In fact I would say that the first step to becoming a winning trader is to stop martingaling. I mean really stop. Ever. The traders who make money consistently learn to do that. Others remain inveterate gamblers, no different and no less pathetic than junkies.
However here is the best reason to never, ever martingale. I came across this comment on forexfactory forums and thought it was worth a share. (I am reproducing it as written)
“The thing is, if you never loose its ok, but when you do, the amount you loose double each time, and with only 0.01 (1cents) lots size you get pretty big amount, in short period of time…
In 15 trade you get 1966$ in loosing trade, just by using 1cents lots size…
Because you must add you loosing trade together…”
So in betting just one penny a pip after 15 losers in a row you will be down nearly 2000 bucks. How many trades at a penny a pip do you think you will need to make to recover that amount?
Think about that next time you want to double down endlessly. As Paul Tudor Jones once said, “Losers average losers.”