Sunday, June 21, 2009

Trading more or trading less ?

I decided to write this post because there is something that has always puzzled me in the world of forex trading and particularly in the world of forex automated trading systems. Why do people like and prefer trading systems that trade more often ? I have always found out that people are repulsed by systems that trade infrequently and they often like systems that are in the market more time and tend to open positions with much more frequency. To me, this has always been totally absurd and in the following paragraphs I am going to explain the reasons why.

Ok. So why do systems that trade frequently are in fact worse ? Mainly for two reasons. For one, systems tat trade frequently are paying a lot more in comissions. If you enter the market ten times a day you are paying 10 times the spread in broker comissions while a system that just enters one time a week would pay a lot less. Second, systems that enter the market frequently are often entering the market on lower probability trades. The market moves more or less randomly from the 1 hour and lesser timeframes so in order to get good signals on the one hour, for example, you need to take into a account either a large number of periods or have very robust volatility filters. If you do this, your number of trades automatically gets cut down. So in my opinion, there aren't simply enough high probability opportunities in the market to trade everyday, sometimes there aren't even enough opportunities to enter once every week.

Why do people prefer these systems then ? My best guess (which comes from talking to several new traders out there) is that people like, again, instant gratification. The fact that they can see a system trade and start putting money into their accounts rapidly gives them peace of mind, so to speak. They are more worried about getting resuts that same day from a system they just purchased that waiting a lot to enter high probability trades in order to have a long term profitable trading system. Ergo, they like systems that trade a lot because of their ignorance (no offense) . They pay much more comissions, have a much higher market exposure but they get to see their expert trade almost as soon as they purchased it. For me, this is another reason why people lose their money with automated trading system.

I am not saying that a system that trades infrequently is necessarily profitable (I have seen a few that are not) but all profitable systems I know usually never take more than 1 or 2 trades per week, sometimes even 10 trades a year, while I don't know a single profitable trading system that takes more than 1 trade per day. It is just a matter of probability, trade more and you pay more comissions and get lower probability trades. It is not about entering the market, it is about taking very long profitable trades with the highest possible probability. It is about taking the few good opportunities that come out.

If you would like to learn more about commercial and free expert advisors I have tested and traded as well as the god's gift ATR expert adviosr please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

2 comments:

Winter said...

Hi Daniel,

This article is well written. By the way, how is your testing with new batch of EAs coming along ?


Winter

Daniel said...

Hi Winter,

Well, unfortunately I have not been able to find new systems that match my expectations yet. It seems that I have become quiet selective with trading systems :), however I do expect to have something very good to show people by mid July (hopefully!). Thank you for your comment !

Best Regards,

Daniel

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