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Lies Traders Tell You
1. Trade with a Positive Risk Reward Ratio
Of all the lies taught in trading this is perhaps the worst. Mainly because it sounds so reasonable. Who wouldn’t want to risk $1 to make $2? You only need to be right 40% of the time to win! It’s such a seductive pitch. Too bad it’s total BS.
Maybe that approach works on swing trading which is much more like a lottery type business model ( You catch one good trend and that can make your year). In day trading the positive risk/reward model rarely works. You need superhuman timing skills and it’s almost impossible to maintain your skill/luck over the long term.
What works in day trading is forgiveness. You need to give yourself lots of room to be wrong. You need to create more than one opportunity to resolve the trade profitably. And most importantly you need to trade with a very, very, very negative risk to reward ratio.
I know. One trade. JUST ONE LOSING TRADE! And you will blow a week’s worth of profits. Well yes that’s an extreme you probably don’t want to reach. That is probably too negative a risk to reward ratio. But one losing trade for two days of profits is actually quite doable. In my room I have guys who have gone two, three even three and a half weeks without hitting a losing trade. In the month June I managed to lose money on only two trading days banking 10% for the month, so it’s possible. The key to day trading isn’t cutting you losers short and letting your profits run -- it’s making sure that you can resolve each trade with either a profit or a scratch.
2. When You are in a Losing Streak the Most Important Thing to Do is Stick to Your Strategy!
Yet another platitude that sounds great when you hear it but crumbles under the pressure of real trading conditions. When you lose money the greatest damage done is not to your account, but to your psyche. There is nothing so fragile as a male ego (since 95% of traders are men let’s just focus on the lesser sex for this one). The moment you lose, you damage your confidence. I remember in the late 1990’s when I was trading stock index futures, I lost 18 straight trades in a row and stopped trading after that for more than 2 years. I followed all the rules. I stuck to my strategy and I basically wound up abandoning the markets because I destroyed the most important thing a trader has -- his sense of self.
So no. When you are on a losing streak the most important thing is not to follow your strategy. The most important thing is to win. If you strategy calls for a 10 pip take profit and you are 5 pips in the money -- take it. Do that two, three, four times in a row until you have your mojo back. Those trades do not matter. They are not part of your “sample”. You don’t use them to evaluate the long term statistical viability of your strategy. They are there for one purpose only. To make you a winner and to get you comfortable with taking risk again. Which bring me to my third biggest lie.
3. Strategies Matter.
Strategies do not matter at all. All strategies can be divided into two simple trades -- mean reversion or momentum. Everything else is tactics. Which is why the best traders in the world never really follow rules, but rather establish guidelines and constantly adjust against those parameters.
In my trading room we have a great mean reversion strategy. It works more than 90% of the time. Yet not one trader follows it exactly to the tee. Everyone has their own variations not only in tactics but in trade selection, time selection and currency pair selection. That’s why when people jealously guard their “secret” strategy I laugh. They may as well guard air -- it’s just as pointless. Share your ideas and they will only get better. Hoard them and they inevitably get worse.