I recently received a mail requesting I explain the improvements I made with my trading in the past 12 months. If you didn’t see it, I recently created a video to launch the NGFX Blog and stated in the video that I had learnt more in the past 12 months trading than I had in the past 5 years.
So what did I learn you might be thinking? Basically I approached trading from a completely different angle. For the past 5 years my trading had focused on consistency, looking to perfect entries and minimizing losses.
The changes I made came after I reread my favorite trading book – “Market Wizards.” When I first read it many years ago, I found it very inspiring. But I was reading it with a limited trading knowledge than I have today. This time, the book offered so much more than the first reading.
First and most important point I got from the book, was The Wizards really wanted trading success more than anything. To them, trading was an addiction. Did I really want trading success more than anything? Tick that box. I did! I am still after all these years very much addicted to trading. I couldn’t think of doing anything else. I still wake everyday and look at charts before anything else, even making coffee (and that is saying something because I am addicted to that also).
Secondly, was the fact the Wizards all had vastly different trading styles, yet they all were highly successful. If 95% of traders fail, what are these guys doing different? It appeared to me they focused more on profits than anything else, the higher the profits the better. To The Wizards, losing trades are part of the game, by focusing on big winners allows losers to be absorbed into the winners. Makes sense when you think about it. Focusing on losers probably means you will manage to have, well, more losers. Everything I had been focusing on in my trading seemed irrelevant in the discussions of the book.
Thirdly, many of The Wizards track records, while overall incredibly impressive, all showed periods poor performance. Even though many had made more millions than most of us could ever imagine, the Wizards were willing to accept negative years or negative multi-month performances. I was someone who was always looking for consistency.
So maybe I had my focus wrong? It was time to put these discoveries to the test, change my focus to winners vs. losers, accept losing periods and not be concerned about consistency.
It is no secret I am a huge fan of trading simulation or back testing. I opened up Forex Tester and got testing. If you want to make changes to your trading and test theories quickly, this is a very good way to go.
I started with the EUR/USD pair on a 4 hour chart. I didn’t change my entry techniques from what I had done before; I just focused on letting things run by trying different trailing profit methods. Immediately I was able to see dramatic changes in the results. Sure there were periods of losing, but the winners when left to run truly made a difference. The winners made the losers look insignificant.
I started to mix things up a bit. I tried different tests, entering the same type of trade, but using different fractals. For example what if I enter trades using a 4 hour price action change of trend, and then what if I did it using a daily change of trend, then what if I did it using a combination of the 2. What happens if I do it over multiple pairs and years of data?
I made money on all the tests and lots of it. It didn’t really matter what I used, if I let the winners run, they all made money. By focusing on allowing winning trades to run, I always made money. Once again were times when my entry methods didn’t work and I had a string of losers. However in the long-run, given the opportunity these losers were soon absorbed by the winners. Also, nothing really stood out as been the best way to enter trades. There were moments when every type of trade entry I tried had its moment to shine, therefore proving that different trade styles can all be successful if trades are left to make as much profit as possible. Hence reminding me of how the Wizards all had different trading methods but were all successful.
When I tested a particular strategy on the AUD/USD pair, I experienced what it was like to see a decent period of losing or draw-down. The first 6 months of 2010 were shocking! I didn’t even make a winner. Instead I suffered a string of losers and break-evens. The second 6 months however, resulted on some of the best trading results I had ever seen. In fact the first winner of the year wiped out all the previous losers. From there the trading went into orbit! By the end of 2010 the AUD/USD had made over 3000 pips profit. It was very satisfying to experience this after reading about it in Market Wizards.
The tests went on to prove that I had been focusing on the wrong aspects of trading for a very long time. Thankfully with the use of simulation software, I was able to identify these improvements quickly and apply them to my live trading.
This is where the next big learning lesson came. It wasn’t long until this new approach to trading worked, and I found myself up handsomely across multiple pairs on a live account. I let these trades run. They ran and ran, and ran. I found myself in a zone I had only dreamed of.
What I never factored in however, was the impact it had on my emotions. With simulation, you can see how profitable your trade was in a matter of minutes. In real time, those minutes are weeks. It made me realize there is an emotional risk factor in this approach to trading. The higher the profit you aim for, the more risk there is of a trade amounting to small profits or break-even, therefore leaving a lot of profit on the table. I remember been up 1500 pips one day across multiple pairs, only 750 the next, 2200 the day after that. This was a place I had never been, didn’t know existed. An emotional roller coaster, a new trading experience I was going to have to get use to.
With a combination of further testing and live trading, I have very much got use to this way of trading. I believe you just have to live through it a few times for really see the benefits.
Now as an aside, many of you will be wondering why I just didn’t take profit when well up, and re-enter on pullbacks, right? I tested that theory too, and to my surprise this approach doesn’t work. The overall results were not as impressive when I left the trades to run. On many occasions, price didn’t even pull back and when it did, didn’t give a confirmation for trade entry. In fact reminded of something I read in the book. Many of the Wizards were asked how much luck was involved in trading. Now after experiencing what I have, I believe a little luck is required in trading. You make your own luck however. You get yourself into that profitable trade and sometimes it’s a little luck such as a favorable news release that helps turn the trade into a hugely profitable one.
In summarizing, the last 12 months have been incredible. I really do feel I see the markets now in a totally different light. I have a new approach to trading and one that through further testing and enhancement, can improve even more. By focusing on winners and profits, I trade with a lot more confidence. When I find myself in highly profitable trades, it provides an amazing feeling, one I have never had in trading before. Part of me does wish I had discovered this sooner. A bigger part of me wishes many of the 95% of traders to have failed did too. I think many people were incredibly close to make it trading and the changes I have made could have been the difference to them making it as traders too.