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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.”
You see that picture below? That has been my main meal everyday Monday through Friday since November of last year. That’s about 150 days of eating nothing but salad and sardines. Net result? I lost five pounds.
That may not seem like much but I think this experiment in eating speaks volumes as to why most people fail at both trading and dieting. One hundred and fifty days of eating the same thing is a long time – yet that is what it took for my body to finally slim down. I am way past forty, my metabolism moves at a snails pace and changes in my biochemistry are radically different from my 17 year old son who would probably lose 5 pounds in a week if he was forced to eat like I do. In short I am a low volatility market and therein lies the essence of this story.
Whether it be diets or trade strategies how many times are we pitched the ridiculous notion that we can achieve success instantly with no effort or investment of time? Lose 10 pounds in 2 weeks on the bull-t, bull-t Miami diet! Earn 1000 pips in a month on my bull-t, bull-t new indicator that will catch every 5 minute turn in the euro!
It’s all nonsense yet we fall prey to it all the time because we want easy, quick solutions to all of life’s problems. But of course in real life bull-t diets and bull-t trading systems do not work. Is it any wonder that most people lose money in the market and almost no one can lose weight?
How many of you would be willing to trade a system for 150 days straight without any discernable profit? Yet in these low volatility markets that is indeed what must done. We all want instant gratification, especially when it comes to trading which appears to be such an instantaneous business. But in truth gratification in trading as well as in dieting is a grind achieved one small pip and one slow pound at a time.
There is one other thing I forgot to mention. I actually like sardines. I don’t mind eating them every day. That’s real reason I was able to lose weight. You need to find a set of behaviors that are acceptable to you so that you can remain on a consistent path to success.
If someone told me that the only way to lose weight was to eat cottage cheese, I would probably never hit my target. Similarly if someone tells you that “the only way to make money in FX is to trade for the long term” – and you are a person who gets antsy after being 20 pips in the money – ignore the guru’s advice. Like all such advice it is mainly bull-t. Find a day trading method that you like and keep doing it over and over and over and over and over and over and over again.
To master anything, you need to first like doing it and then do it for much longer than you think is reasonable before you begin to see positive results. That’s true whether you are trying to diet or trying to trade.