Just what are you all doing ??
Westpac Bank made the following trade recommendation the other day – as informed to us by Francesc in a blog - http://www.forexstreet.net/profiles/blogs/westpac-trade-recommendat...
I was immediately drawn to it as a “typical” investors trade – fairly inefficient – but looked upon as fairly safe and risk free. Nothing against Westpac – as far as I am concerned – they are as good as any bank.
I then looked at it further and thought – its not even that risk averse and if anything for me – not the type of trade I would encourage other retail traders to take.
In summary – its below average and as we might say in the UK fairly “naff”. Why you might ask have I the audacity to take on a major Australian Bank who employ top professionals and criticise them and all their trades inefficient and “naff”.??
Well the facts speak for themselves and I will point them out to you before going on to explain – why you as a retail forex trader can do so much better.
Our aim as retail forex traders – is first of all to make profit or money – and then to try and trade efficiently – so that we grow our account 100-300%+ per annum – but with controlled low risk - to not be satisfied with just 40-70% per annum – with good months and bad months with losses.
Do not accept it that this should be looked upon as satisfactory and having losing months is just part of trading – well it is if you are not prepared to be a “free thinker” and challenge the norm and the rubbish this industry churns out !!
This Westpac trade as a RR of only 1 ( no good- especially when you need a full day plus or 4 even to get a result) and they have even mentioned about adding more stake on when you are out of pocket 100 pips?? –
Can you believe it – that’s gambling - ie they are saying they know for sure it will go down lower.
Well actually what they are saying is that they feel the odds are more on their side - which even if they are there is still a 20 or even 50% chance that they could be wrong and price goes past their stop before falling.
So if you take this trade with the normal as advised 2% of your capital as stake - you might in 1 or 4 + days make a 2% increase – ie lets say a 70-75% chance.
Now if you are a swing trader are you going to take 2 or 4 or even more trades whilst you wait for this one at 2% stakes ?
Because if you are you are exposing yourself to what 4-8% of your capital in the market – at the same time.
That is bad – and if you say – no only 1% on each trade – you still could end up with 4%+ exposed – which really is a bit risky.
We understand traders with small accounts exposing even 10 -15% of their capital on their trades – but 7 bad trades in a row could blow their account – quite easily.
If you say – yes but you don’t have 7 bad trades in a row if you are fairly experienced with a win ratio of over 60 or 70%
Well think again – you can have a win ratio of even 75% and still have 10 bad trades consecutively - it is possible – rare – but ay- “black swan” events can happen and do happen quite regularly in this market.
So what’s the answer –
Well HFT gave the game away – but I don’t expect any retailer to be taking 5 or even 50 trades in a minute and put 5% on their account in that time.
If you want to make 300% + per annum – you have to take multi intraday trades ideally that finish in under 1 hour and with small enough stops to give you RR’s of 1+ and at least 2 a week over 5.
You don’t have to be in more than 2 trades at the same time – and you can even trade on under 2% stakes and still have the odd days when you will put 10% + on your account.
Please do not think you need to risk 10% or more of your capital per trade to get results – you don’t and I will prove it to you with just using 1.5% stake on multi trades – comparing it to even 3% ( double) with the Westpac Bank trade idea.
OK – 1.5% stake on trades and lets look at 300%+ per annum with just a 60% success rate and RR average of just 1.5 – not 4 or 10 – which you might have on good days.
The key now is a minimum 7 trades a day - 20 trades a day plus is pushing it – 4 trades a day not enough
Aim for 6 -10 trades on 2 pairs – but need not be simultaneous – that’s not really scalping – but all your targets need to be under 30 pips as well as your stops under 10 pips – they must finish in under a day and ideally under 1 hr – so you are nor exposed with more than 2 trades on at same time.
Now if we do the Westpac Bank – swing trades with say 2 complete trades a week - with a 65% success rate - - that means every month – we should have 8 trades and 5 win at 3% and 3 lose at 3% = 15 -9 = 6%
per month capital gain.
So say 10 months a year – you will have holidays etc etc – then that’s a result of 60% per annum result – or say 70% if you worked 12 months
Intraday trading – on less win ratio – ie 60% you will have –
Per week – 35 trades – 21 winners –at only 1.5% risk ( half) and RR of 1.5 ( still low) = 47.25%
14 losses ( yes 14 terrible) – at 1.5% risk = 21%
Net result per week gain of account with only 60% success rate = 26.25%
Lets say only 40 weeks in year worked – Result is a 26.5% x 40 = 1060%
So Bank way of trading – net result – ( after spreads – all figures are after 2 pip spreads)
60-70% per annum
Intraday trading – with a less success rate – and only half risk ( 1.5% against 3% )
1000% + per annum
Now please can you all understand why I criticise all swing and longer term trades – and do I make over 1000% per annum – NO – I don’t risk 1.5% stakes – mine are a lot lower as an ex accountant I am so risk averse ;-)))
Start changing the way you trade tomorrow – its not too late ;-))
OK it might take you another couple of years to get there – but your results will then be well worth the extra work and effort.
Meanwhile – my advise to intraday traders would be – ignore any bank trade – unless it can be achieved in under one session ;-)
Looking forward to hearing from all the doubters – and please pull the figures apart – if you can ;-))
Regards
Peter
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Comment by Marius Ghisea on March 10, 2013 at 5:15pm -
good point Peter
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Comment by Kurt Cash on March 10, 2013 at 7:25pm -
Hi Peter,
are you sure?
Per week – 35 trades – 21 winners –at only 1.5% risk ( half) and RR of 1.5 ( still low) = 47.25% ???
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Comment by Ray Richards (guru) on March 10, 2013 at 7:56pm -
Excellent points Peter. I think your point about the perceived chance of 7 consecutive losing trades is one that bears repeating.
A very cursory study into the laws of probability imo is required for any novice trader. The Law of large numbers is just as real as 2+2=4 yet human perception commonly distorts the law and leads to taking risks that the person is unaware of.
A good example is card counting in blackjack. There was a famous team of university students who managed to gain a statistical edge over the dealer by learning to count the cards shown and calculating the probabilities of winning hands by the number of certain cards remaining in the deck.
Even when executing the counting perfectly and only betting large when the odds were well on their side, they still ran into large losing streaks that were seemingly unreal yet simply the laws of chance playing out. If they had not started out with a large bankroll or hit that losing streak earlier when they first started, they might not have beat the house even with a statistical edge.
So one should never assume that a given strategy with a 70 percent win rate means the future results will fall neatly in line and that the next 100 trades will have the 30 losses spread out enough to never threaten your account. In fact keep in mind that the 70 percent figure probably hasnt had enough trades to count as a large number in the first place, a few thousand results are but a drop in the bucket.
In the long run you could lose those thirty trades in a terrible streak all back to back or perhaps enough little bad streaks that would not allow your account to recover in between and the laws of probability would not be shaken at all.
The distribution of those losing trades are not predictable so that is why you have to be adequately capitalized, use sound money management and never add to losing positions
The big banks are like the "house" and have very deep pockets to ride out the streaks that would vaporize your average retailers acct.
So thank you Peter for this sobering reminder for the retail trader. It is all too easy to get carried away with a string of wins and think losing a whole 7 trades in a row is a much more remote possibility than it really is!
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Comment by Peter jcp on March 10, 2013 at 9:44pm -
Hi Guys - Thanks for the comments and please don't think I want no retail trader to take investment like trades - because if they win - you can still add them to the pot - as the more the merrier if its helping to grow your account ;-))
Yes Kurt - 35 trades a week is certainly obtainable - scalper might do 70 -200 trades a week - but really I don't recommend that many if you get your targets and your stop size correct.
35 trades with 21 wins at 1.5% stake with a 1.5 % average RR is 47.25% - less then 14 loss trades at 1.5% = 21% - so net result - 47.25% - 21% = 26.25% per week.
It would be no good aiming for say 75 or 120 pip targets - even with 40 -50 pip stops - as they would take too long to achieve an average 7 per day and still only be in one or max two trades simultaneously . Ideally you want 5 pip stops and 10-15 pip targets - so to find 7+ a day is easy - but I think 8-13 pip stops with targets of 20 -30 pips are still satisfactory and are achievable
Ray - yes agree with you - we are all delighted when we have say 20 or 25 winners in a row - which can happen when you are on a roll and all is favourable to your system - but similar - we just do not expect the 7 - 12 bad trades in a row - which I can assure you might or can happen on a traders journey over a few years.
Marius - I know you are "ace" at your method and make many great trades with a really high success rate - but I also think you are - (or could be) an "ace" short term trader as well - as some of your entries and exits have been worthy of a top scalper - ;-))
Have a good week to all of you
Regards
Peter
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Comment by Max on March 10, 2013 at 9:52pm -
Don't believe a word of what any analyst writes, maybe there's some other factors at play but I can't understand it either, they must be on seperate floors to the traders.
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Comment by Tahir Khan on March 11, 2013 at 12:06am -
Nice post. In depth and with maths to lay the plan out. My major or bigger accts I do only about 60-65% a yr but that's ok, since my requirement is only to make about 30% yr on it and I try not to take it easy on them and still exceed the required results. True every trader needs to have a plan backed up by his/her trading style. I though feel in the end it's a strong mentality of a trader that puts in apart from others. We all can have plans but sticking to it like someone stick a gun to you and makes you do the hard work is a BIG MUST..... Discipline and patience and these are road maps for a successful traders...
I end up hitting 3-4 trades a day on major accts doing small gains and closing them for the day. Smaller ones I end up hitting 10-12 an avg doing multiple pairs (avg about 5 different pairs) and make more on them.. Currently experimenting with a high risk high rewards smaller acct and this is only the 2nd month on to it.. up about 177% on it. Final avg will be done once we have 4 months on to it........
While preservation of once capital is the main goal of a trader ( i.e be shrewd with ur stop losses and let ur profit runs) this helps in getting more bang out of ur buck.
The idea to use your main portfolio in a gentle and humble way in this beast of a mkt and if urges are there to let oneself go bananas than best is to have a separate smaller acct where as I put it you can goof around... Atleast you won't be blowing ur kitchen money incase it goes awry.....
Don't mind me for I have copied paste your post and have kept it on a MS file for I like to read it from time to time......... A very good informative post indeed................
GL...
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Comment by Peter jcp on March 11, 2013 at 6:55am
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Hi Max and Tahir - thank you for your comments. I have always been concerned with what analysts write and suggest and I think they must be on separate floors to the traders totally;-). No problem Tahir if this post can be of further use to - although from what I gather I can see you understand the principle already and are well on the way to carrying it out.
Have a great week
Regards
Peter
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Comment by Luke Sierpniak on March 11, 2013 at 7:50am
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Intersting and true Peter, like Tahr said Discipline and patience, GL
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Comment by Tahir Khan on March 11, 2013 at 8:39am
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Things with the big banks and institutions is that they have wider stops and limits. They hardly leverage and can withstand wider bands.. Moreover, I simply pay deaf ear to their entries and limits for in short and simple that is not my trading style so I don't get carried away with it...
Money management done wisely keeps you out of harm ways when it comes to trading....
There is always money to be made. Just making sure we be around till than should be the priority.. Higher leverage higher risk.. so is the risk........ Gotta keep that staple to the forehead all the time..
GL...
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Comment by Max on March 11, 2013 at 12:11pm
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Hi Peter, you've probably explained before, but can you just say again, with your style scalping 1 or 2 pairs, you say minimum of 7 trades per day? What is the the kind of pippage on this? 7 trades all 20-30 pips, or what is the usual breakdown of over 20 pips and small scalps. Thanks
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