Jim has made $30,360 net profit trading Forex since July – so why did his broker tell him he was doing it all wrong?
I’ve been preparing a reply to a question from one of my trading students, I thought you’d benefit if I share my thoughts with you on this one…
It’ll give you a deeper insight into the kind of results other home-traders are achieving and it could also help you navigate your way out of a nasty mind-fog if you ever find yourself in a similar position to Jim’s.
(I’ve changed his real name to protect his privacy)
Here’s how he describes the situation:
Jim uses 2 strategies…
The first is a EURUSD method. It trades the 60 minute chart and holds positions for between one and twenty days.
When he gets into a trade using this system he looks for 1:1 reward to risk on half his position and lets the other half run on, looking for a higher return of 2:1.
He did nine months of demo trading with this before taking it live.
He recorded paper profits of 4610 pips on his demo, and since he started trading with real money in July he’s netted 1836 pips on a single full contract ($18,360.00)
Pretty good right?
And he’s also got a second system…
This one trades USDJPY (he’s based in Australia so he gets good access to the Asia sessions in his time-zone).
He averaged 280 pips per month on his demo and traded this one live through August and September. He tells me he’s netted a further $12,000.00 cold cash with this system.
Now then, how many traders do you think would give their right arm for Jim’s results?
Quite a few I’d bet, so what’s the problem here exactly?
Well, as idyllic as Jim’s situation sounds… behind the scenes, he’s actually going through some kind of mental turmoil.
You see, he started attending webinars that his broker lays on for free as part of their training material. And then he got to know one of the presenters through the on-screen chat.
So as soon as he’d got his impressive live results tucked under his belt, he pinged a message over to share the good news (I think there was an element of approval-seeking at work too)…
But when the reply came back ripping his results to shreds, telling him it’s not how they (the broker) teach students to trade, he understandably went to pieces.
(Especially as this came from someone he’d been looking up to for the last six months.)
After they’d told him how his risk reward ratio was all wrong and how the ONLY way to trade is to be targeting twice as much as you risk, they got him to rework his strategies to try and fit around THEIR ideas – and now Jim doesn’t know whether he’s coming or going…
Here’s what he says:
“Now normally I wouldn’t worry about this and just go on trading. However, as you know, emotions play a big part of trading and now he has planted the seed of doubt. All last week I found myself second guessing and stressing that maybe he’s right and to be honest it’s really screwing with my head. I have spent a long time working on these strategies to get them just right and now I’m starting to feel like I’ve wasted my time.”
So apart from questioning the motives of the broker by offering free training in the first place – because think about it… they’re always going to promote a style of trading that benefits them in some way…
Here are three reasons to focus on strategies already PROVEN to work:
1) The beauty of trading is instant feedback
Want to know how effective a particular system is? That’s simple, load some funds into a small test account and get to work. The market will soon tell you if it’s viable or not.
If it’s a higher frequency method, you’ll probably know whether to pursue it further or pull the plug on it within two weeks. You’ll be able to tell in an easy way, by simply looking at the bottom line of your brokerage statement.
And that’s the beauty of this business. There’s a very transparent way of keeping tabs on your progress:
It’s all about the money. But not money at all costs…
You’ve got to consider your health too.
The key is to optimise your trading approach – tuning-up your performance, but not to the extent where you’re losing sleep, bottling out of trades, or feeling frazzled by stress.
Dial things back a notch from the stress-point and you’ve hit YOUR sweet spot. It’ll be different to other people’s so you shouldn’t allow yourself to be dictated to or feel like you have to compare your results to other people’s.
2) There is no one-size fits all in the market
There are only really four elements you need to consider when evaluating a trading system:
i) How much do the winning trades win?
ii) How much do the losing trades lose?
iii) How often to the winning trades win?
iv) How often does the system trade?
Now, the thing is, when you combine these four elements together in different ways you can come up with very varied styles of trading that can all produce good results
And think about it, if the ONLY way to trade successfully was to enter at a particular point and exit with a 2:1 reward to risk it would be impossible to trade, there would be no market because no-one would be willing to take the other side of the trade.
So whereas taking the 2:1 ratio is a well balanced approach, it’s not the ONLY way…
For example, one of the Bond strategies I used to trade was the opposite way around… when it took a losing trade it lost twice as much as it won on a positive trade.
But it won 75% of the time…
So admittedly, even though it was a bit of a poke in the eye to take a loss or two in close succession – and it’s not something everyone could handle – the money was always there if you held your nerve.
3) Don’t trust anyone’s opinion but your own
It might sound a bit harsh because there are plenty of well-intentioned people offering advice and opinion…
But in the end, you’ve got to take any piece of trading information you’re offered – whether it comes from me or anyone else – and give careful thought to its merit.
You need to decide whether to cast it aside as useless to you or slot it into your evolving personal knowlegde-base as a useful tool.
And if you’re keeping it, refer back to point one, put it to the test…
Remember, in the markets only one thing tells you what’s right and wrong and that’s the results you’re extracting for yourself!
Be Prepared: Market Moving Data Coming This Week (London Time – BST)
The US Government shut down and failure to raise the debt-ceiling increases the chances of a US credit default on October 17th.
Key data releases have been cancelled – no jobs numbers last week. Here are this week’s scheduled releases but please bear in mind some US releases are likely to be cancelled unless Congress comes to an agreement on spending.
Wednesday 9th October:
09:30 UK Industrial Production (GBP)
09:30 UK Manufacturing Production(GBP)
09:30 UK Trade Balance
11:00 DE German Industrial Production (EUR)
19:00 US FOMC Minutes (USD)
23:00 EUR Draghi Speaks (EUR)
Thursday 10th October:
09:00 EUR ECB Monthly Report (EUR)
12:00 UK Interest Rate Decision (GBP)
13:30 US Jobless Claims (USD)
14:45 US FOMC Bullard Speaks (USD)
17:20 EUR ECB Draghi speaks
Friday 11th October:
14:55 US Michigan Consumer Sentiment (USD)
So I hope you found my ideas from today’s issue useful, keep them in mind and remember to adopt a policy of clear-thinking when it comes to considering other people’s trading opinions and advice.