An acquaintance asked my conception about a trading speculation the other day. A friend had told him about Forex trading and was going to send him details of a principles guaranteed to make money.
In due course, he forwarded the principles report to me and called enthusiastically seeking my feedback.
It was a trend following principles with signals provided by cross over inspiring averages using 5 wee time periods. There were assorted filters, along with Adx, stochastics, long term inspiring averages, and bollinger bands. Everything but the kitchen sink!
There was no clear trade administration strategy, and no exit plan.
I asked my friend what his expectations were. He said he has put just ,000 into a trading account, so does not expect to start taking money out straight away. But if he can duplicate up his capital each month, he expects to be able to start drawing a good revenue after about 6 months.
I asked him if he understood the system. He said he had no prior idea that all these technical indicators existed and could be used to predict the market. He did not understand the mathematics behind them, but had been assured there is no need to. All he needed to do is use them.
It never ceases to amaze me how normally sensible habitancy believe that, when it comes to trading, they can set up a company returning 100% monthly on capital invested, and furthermore they can do it without uncut training, study or practice.
If you are looking at trading with similar stars in your eyes, then take a deep breath and get real!
If you were a fund boss on Wall street with a report of returning 30% per annum on invested funds over, say, a twenty year period, you would be a lionised hero able to name your own salary. But our novice forex trader is eagerly anticipating returns of over 1000% in his first year of operation, using tools he does not understand.
After two days operating this principles (fortunately on a demo account), my acquaintance had not seen any signals meeting all the criteria. He found it so boring that he had changed the time frame to 1 wee charts. In fact, unless he is fond of staring at a screen all day, he is better off trading a principles like this on end of day data. This is emphatically Not the kind of advent to use for day trading.
The other thing he needs to understand is that this kind of principles does not provide quarterly revenue like a job. Most trend following systems have a low proportion of wins, but those wins are much bigger than the more frequent losses. It would be easy to go for several months in a loss situation before getting one of those big wins that takes you into the black; not much good if you want to take out money every month to pay the power bill.
In fact, all trading systems have bad patches, so the cash flow from them is all the time lumpy. But if you want a reasonably steady income, you need a principles that has a positive anticipation and trades frequently. If your principles gives you two or three trades each day, then you will get through the draw down periods much faster. You will also find it easier to stick with your principles if it has a win rate of 60% or more, even though you will have to cut the big win/loss ratio to perform this.
As for the battery of technical indicators, try not to be seduced by them. In my experience, they are worse than useless.
If you are a longer term trader, you want to be in a trend (long or short). If one remarked at the chart does not tell you there is a trend, stick to your day job. Trends tend to move in a series of waves, like an incoming tide. Each wave pushes additional in the main trend direction, before pulling back a bit to fetch up for another push. The best time to hop on a trend is during one of these pull backs.
If you are a shorter term trader, particularly a day trader, you have to understand retain and resistance concepts, and build a trading plan around that. (Anyone who doubts the point of retain and resistance levels should search for the short term performance in any heavily traded market, noting how, every time a support/resistance level is approached, there is a frenzy of performance as bulls and bears fight for supremacy.)
The easy moral of this report is that you need to think of trading like any other business. You need to capitalise it properly, have realistic expectations, and build a sensible operations plan to extract profits.
Trading Warning - Have You Got Stars In Your Eyes?
