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One of the best things a trader can do is run the strategy tester function in MT4 on any 1-minute chart. Ideally, you’d like the test result to be positive in the end, not because it will show you how to make money, but because of what it will teach you about the nature of trading.
The one minute chart, as I’ve said many times in the past, is an amazing hack that allows you to look at hundreds of trades over just a few weeks of data. So run the strategy in MT4 and watch the graph dynamically build itself in real time as each trade gets added.
One thing you will never see is a straight 45-degree line running from left to right. There are no regular paychecks in trading, What you will see instead is the equity curve rising 10% in an uninterrupted fashion only to drop back to zero and then below it. You may see that a few times during the lifespan of the strategy and every time that happens more than 90% of you will stop trading the system. Yet in the end, after a few months or a year or even a few, the system could end up being incredibly profitable.
All of us come to trading with an absolutely wrong model of how things work. Sure, we can imagine, one, two maybe even three losses in a row. But after careful study, hard work and discipline we imagine that we can eliminate those mistakes and embark on smooth consistently profitable money making adventure.
To borrow a line from the software business -- losing is a feature, not a bug. In fact, almost all great investors lose or underperform for long stretches of time. Warren Buffett underperformed the market by a whopping 54% in the late 1990s and has had several drawdowns of 40% in his career. Almost no one who tried to copy his trades would have stayed with him through the losing times and yet his long term record is one the best ever.
That’s why the single greatest lesson any trader can learn is not risk management, or strategy selection or market analysis. All of those are crucial to long term success but will be utterly useless unless the trader accepts the fact that stomach-churning losses will never stop.
Here, the Oracle of Omaha can be a useful guide. You can’t make losses disappear, but you can do your best to survive them. To that end Buffet offers two great pieces of advice -- don’t do stupid things and don’t overlever your trades.
Both Buffett and his investing partner Charlie Munger have always claimed that their success came not from making smart choices but mostly from avoiding the dumb ones. If you are running a system and a given instrument is only producing mediocre results -- continuing to trade that instrument on that system is sheer idiocy. There is no guarantee that any of the well-performing instruments will maintain their edge, but there is almost complete certainty that a poorly performing instrument in the past will cause you losses in the future. Sure, there are exceptions to the rule but that’s precisely the point. Strategies are about rules, not exceptions.
Still, the single best advice from Buffett is not to over-leverage. Leverage is the single biggest reason why most retail traders blow up their account. You can survive a lot of adverse market regimes on low leverage but you can’t survive even one mistake on high leverage. That’s why it’s worth it to always start trading with no gearing whatsoever by trading one times equity per trade. The natural leverage of multiple positions will be more than enough to keep you on your toes.