Three Key Questions to Being A Better Trader

By Boris Schlossberg • June 21st, 2012
Boris Schlossberg

There are only three ways to make money in this business, be first, be smarter or cheat

Jeremy Irons Margin Call

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When you think about it there are only three ways to trade -- you can trade analytically, you can trade statistically or you can trade on inside information.

Hedge Fund girl is one the best analytical traders I know. She can pick up a copy of Entertainment weekly and tell you six months ahead of time that Hunger Games is going to kill it at the box office turning a loser like Lions Gate into a monster stock trade. She can make these unseen connections many times over which is why I have long ago given up trying to trade stocks and simply let her run my portfolio.

K on the other hand excels at statistics and can compile very thorough databases of economic information with a variety of correlation factors that usually provides her with an edge over the rest of Wall Street.

Although inside information is perfectly legal in FX, I have never had the privilege of having Ben Bernanke’s ear or knowing what the Mervyn King or Mario Draghi will do ahead of time. Over the years I’ve learned to follow “smart money”, so if the Russians are selling or buying I usually join or stand down but never challenge their position because they generally tend to be right about short term moves.

But generally, my own style is a combination of analytics and statistics. Having pored over thousands of hours of price data, I’ve been able to construct pretty robust models of how currencies will trade on an intra-day basis. However, models are models. They always lack context. One of the most valuable exercises you can do is look at that wonderful 45 degree equity curve you’ve just generated with a backtest and zero in on the drawdown periods. This is something that most traders do not do. They look at the great backtest results and just jump right into the system, more often than not to very disappointing results. That’s because winning trades do not matter. They take care of themselves. They key to being a successful trader is to assiduously remove as many losing trades from your system as possible. That’s where analytics come in. Basically you spend all your time asking -- why did the system not perform. What happened in the market at that time and is the current environment similar to that one?

The better you can answer those key questions, the better a trader you will be.

 

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Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

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