If you have read my blog for a while you may know that evaluating systems to understand draw down periods is one of my main concerns when using any automated or manual trading system. I have also written a few posts about the way in which the market limits the mass adoption of systems through the use of extensive and deep losing periods and I have also given people a few pointers - mainly based on true understanding of the trading strategies - so that they can survive these periods without simply using "faith" as a resource. However what I have found out is that the truth is quite simple : most people are simply very bad at losing and these makes them particularly vulnerable to fail in trading more than people who are "better" at surviving draw down periods. On today's post I will talk to you about the differences between good and bad losers and why people who do not become "good losers" are bound to end up failing in forex trading.
If you remember a few posts I wrote almost one year ago, I had started a project in which I attempted to train a few people to becomes successful at automated trading. As time has gone by (more on the progress of this project in a later post) I have noticed that their reactions to losing periods have been extremely negative and this often creates a quick aversion to the system they had been using. In general I believe that we - as humans - do not like losing very much and when this happens in trading we tend to look to change our system for another that allows us to profit without this bad side. Of course, most people believe that draw downs are inevitable but most believe that they can have extremely small draw down. Something which is also not possible.
This in turn leads people to get into systems that have very long profitable periods followed by extremely sharp and possibly devastating draw downs. This is why scalpers with large risk to reward ratios and martingales have such a huge fan base amongst new traders. These are systems that show very up trending equity curves with just "a few dips". New traders bite on this quickly because they don't like the feeling of losing and therefore they tend to lean towards systems that make them feel like "winners" most of the time.
This is disastrous since as time goes by and traders see how their accounts start to grow, they decide to take a bigger risk which ends up with a quicker wipe-out (for martingales a wipe-out will ALWAYS happen, this is a statistical certainty). Being a bad loser makes you tend towards systems that stimulate your "greed side" less than your "fear side". The market protects itself by making long term profitable systems fear based and unprofitable systems greed based, pretty clever indeed :o).
For this reason being a "good loser" is a vital part of successful trading and in fact this is a characteristic I have found all the profitable traders I know share. A draw down period doesn't cause them to evaluate or modify their trading systems and they never lean towards trading strategies which are obviously unsound, despite how "good" the simulations may look like (which at a closer look are most of the time flawed to some extent).
Chances are that if you are in the beginning of your trading career you are a "bad loser". If you tend to be happy with winning trades and sad with losing trades, making your emotions inherently tied with your trading results then this is a behavior you need to change as soon as possible if you truly want to become a successful trader. The bad part for most is that this journey is not easy and may be easier for those who can listen than for those who are stubborn about some trading paradigm that is simply not true.
As I have said many times, the solution is simply to gain a true understanding and - as I highlighted on yesterday's post - to acquire a business outlook over your forex trading experience. If you are trading a system you do not understand PERFECTLY and you don't have accurate risk, reward and worst case scenarios then I have to tell you that you have a HUGE probability to fail with its trading in the long term. A draw down period will come and you will fail to interpret if it is too deep or too long and you will promptly modify your strategy or change your system completely. Such a way of trading is very prone to failure and the way most traders approach expert advisor and manual system development in the beginning.
So if you want to succeed in trading, my advice is very simple : you need to become a "good loser", you need to understand that draw down periods (long and probably deep) are a part of the trading experience and that dealing with them is absolutely necessary to survive this game. However leaving through them with faith is bound to have the same devastating results and only TRUE understanding of EVERYTHING you are doing is bound to give you any long term successful results.
If you would like to learn more about what I have learned in automated trading and how you too can use automated trading systems to your advantage in forex trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
If you remember a few posts I wrote almost one year ago, I had started a project in which I attempted to train a few people to becomes successful at automated trading. As time has gone by (more on the progress of this project in a later post) I have noticed that their reactions to losing periods have been extremely negative and this often creates a quick aversion to the system they had been using. In general I believe that we - as humans - do not like losing very much and when this happens in trading we tend to look to change our system for another that allows us to profit without this bad side. Of course, most people believe that draw downs are inevitable but most believe that they can have extremely small draw down. Something which is also not possible.
This in turn leads people to get into systems that have very long profitable periods followed by extremely sharp and possibly devastating draw downs. This is why scalpers with large risk to reward ratios and martingales have such a huge fan base amongst new traders. These are systems that show very up trending equity curves with just "a few dips". New traders bite on this quickly because they don't like the feeling of losing and therefore they tend to lean towards systems that make them feel like "winners" most of the time.
This is disastrous since as time goes by and traders see how their accounts start to grow, they decide to take a bigger risk which ends up with a quicker wipe-out (for martingales a wipe-out will ALWAYS happen, this is a statistical certainty). Being a bad loser makes you tend towards systems that stimulate your "greed side" less than your "fear side". The market protects itself by making long term profitable systems fear based and unprofitable systems greed based, pretty clever indeed :o).
For this reason being a "good loser" is a vital part of successful trading and in fact this is a characteristic I have found all the profitable traders I know share. A draw down period doesn't cause them to evaluate or modify their trading systems and they never lean towards trading strategies which are obviously unsound, despite how "good" the simulations may look like (which at a closer look are most of the time flawed to some extent).
Chances are that if you are in the beginning of your trading career you are a "bad loser". If you tend to be happy with winning trades and sad with losing trades, making your emotions inherently tied with your trading results then this is a behavior you need to change as soon as possible if you truly want to become a successful trader. The bad part for most is that this journey is not easy and may be easier for those who can listen than for those who are stubborn about some trading paradigm that is simply not true.
As I have said many times, the solution is simply to gain a true understanding and - as I highlighted on yesterday's post - to acquire a business outlook over your forex trading experience. If you are trading a system you do not understand PERFECTLY and you don't have accurate risk, reward and worst case scenarios then I have to tell you that you have a HUGE probability to fail with its trading in the long term. A draw down period will come and you will fail to interpret if it is too deep or too long and you will promptly modify your strategy or change your system completely. Such a way of trading is very prone to failure and the way most traders approach expert advisor and manual system development in the beginning.
So if you want to succeed in trading, my advice is very simple : you need to become a "good loser", you need to understand that draw down periods (long and probably deep) are a part of the trading experience and that dealing with them is absolutely necessary to survive this game. However leaving through them with faith is bound to have the same devastating results and only TRUE understanding of EVERYTHING you are doing is bound to give you any long term successful results.
If you would like to learn more about what I have learned in automated trading and how you too can use automated trading systems to your advantage in forex trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !
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2 comments:
Good article. It highlights the effect psychology plays in trading. It got me thinking, is it harder to trade long term vs. short term because of psychological impact caused by draw downs?
As you have mentioned, when the draw downs do come, traders do jump from one system to another. If these short term traders do then move to a long term strategy, automated/mechanical or manual/discretionary, are they more or less likely to succeed?
Answers on a post card :)
Pete
Hello PC,
Thank you for your comment :o) It is indeed much harder to trade long term than short term ! There are many reasons why this is the case but psychological reasons are some of the strongest.
When you want to be a long term profitable trader you absolutely need to understand your systems and their draw downs since failure to do this will make you feel uneasy and that your "system is no longer working" when you face a losing period.
When a trader starts to move into long term profitable trading they face many challenges and perhaps the most important one is the first extended draw down period. Getting across that 100-400 day draw down period will be very important for a trader's long term success since - after this experience - they will be a LOT more confident about their systems and their knowledge.
To answer your question I would say that traders that do not make this change don't have ANY chance of being successful while the ones who do attempt to change to a long term mindset have a fighting chance (it is important here not to confuse long term profitability with long term/ short term systems both of which can -in theory- achieve success!)
I hope I have answered your questions :o) Thanks again for your comment,
Best Regards,
Daniel
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