How am I doing so far? Please critique

Hello all,

I became interested in Forex this past spring, when I went to a meetup of traders in my area, having never traded before. Initially I was turned off to FX because I thought it was a sham, but what attracted me to it was the low cost and easy access. I figured I’d give it a shot.

I visited the tutorial on this site, then I read a few books (Currency Trading for Dummies and Daytrading for Dummies are fantastic, I also have Schlossberg and Lien’s books). I read a slew of articles on investopedia. I was also very impressed by Larry Williams, especially what he had to say about money management, and I liked Mark Douglas’s “Trading in the Zone”. I’ve typically avoided forums and chatrooms because after visiting elitetrader its obvious there’s a lot of nonsense on there.

All this time I’ve been accumulating theoretical knowledge, including technical and fundamental analysis, while practicing trading. I’ve gone through the typical mistakes: trading without a solid plan, trading against the trend, adding to a loser, doing the martingale thing, chasing a trend, moving my stops, etc. I’ve started building a discipline, thinking in terms of risk management and statistics, and documenting my trades (with a critique on fundamental, technical, and psychological execution). I’m not yet profitable, but I am beginning to feel better about executing the trades even when they do go bad.

The main problem that I see is that I can’t seem to figure out what strategy to stick with, and how to go about properly developing one. Opinions differ on whether you should daytrade or swing. Swingtrading to me is not very satisfying, each trade takes days to work itself out. Daytrading on a 15 minute chart is interesting, but the risk reward ratio is a challenge when you add commissions and slippage. The closer in on the market you are, the more technicals matter, the further away, the more fundamentals do (the latter seems less predictable to me). The closer in you are, the higher your risk of getting your stops gunned since they are set tighter.

It seems to me the four hour chart could be a good compromise. I’ve decided that the wisest solution is to develop two different tracks for my system development – one is to develop a system that is trend oriented, another that is range oriented. It would also be good to know dollar oriented pairs and non dollar crosses (even though the crosses have a real nasty spread sometimes), so that I’m not constantly married to the dollar.

My thesis is to do one trade a day, no more. My thinking is that this will prevent overtrading and desires to get revenge after a loss, and will give me adequate time to reflect on why things went wrong or succeeded. I would do either a trend oriented trade or a range oriented trade, depending on the more promising opportunity. If I have a 1:1.5 risk reward after commissions and slippage, as long as I am right 50% of the time (10 winners, 10 losers each month), and I risk 2% of my account on each trade, I can average a 10% monthly return, which is what I want to learn to do consistently. I figure with this risk bracket, I would risk 40 pips in pursuit of approximately 70-80 pips.

So the big question here is how did you go about developing your strategies? I’m very weak in programming so it will be some time before I can do automated backtesting. However, I’ve already begun experimenting with manual backtesting in Metatrader. Do you learn one indicator at a time, backtest it, then look for another one for confirmation? What if you’re just price action oriented (i.e. fibonacci)? Where do you get your trading strategy ideas from, and how do you go about developing them? If a book that was published 2 years ago has a strategy, wouldn’t it be no longer valid because its something everyone knows?

I’d appreciate any critique on what I’ve said so far, and any suggestions you might have. I’m really committed to getting this to work and making that 10% a month goal. Thanks in advance!

I don’t see anything wrong with your approach.

Personally, after going through a similar learning process, I found that the thing that bothered me the most was that although I could plug in a variety of indicators and make a system, I really lacked an understanding of the indicators themselves and how they worked.

I am hard-headed; I need to see things for myself. I worked through a tutorial to construct step by step various indicators and saw how they behaved relative to price. It’s hard to explain in a few words, but after that my confidence grew relative to my understanding.

As far as whole system, I tested various strategies. I started with the ones I wanted to work, and ended up with the one that actually works, for me.

The work (1-2 years) I put into this work and research has paid off in that I now have a system that I’m confident in, even through drawdowns.

Thanks Pipso facto, you’ve already been helpful to me. This is probably one of the nicest forums I’ve ever been to btw…

So it sounds like the basic idea is to take an indicator, starting with the classics like the Stochastic and the MACD. Sit and watch what they do on the charts. Learn how they are calculated and what the theory is behind their operation.

I’ve already done a “what happens if I buy and sell every time it does this” approach and found that usually you don’t end up ahead or behind, so that’s obviously not a strategy in itself otherwise the whole market will jump on it and the party is over soon enough.

Then I guess you add discretionary filters, like

  1. When is news on this pair released? Is the market anticipating news right now and is quiet because of that? Maybe its better to wait after the news is released?
  2. Is it approaching a trendline?
  3. Are there significant round numbers that are going to be crossed, or past levels of support/resistance?
  4. What is the best strong/weak pairing?

Also, I always hear about something to confirm the initial indicator, but I often observe that an indicator like the MACD will contradict the Stochastic many times, and if you were to have that as your rule base, you’d get a trade only once in a blue moon, or not during the session when you trade.

Secondly, I also wanted to share my ideas on money management and account protection. I remember we discussed in an earlier thread the 2% rule based always on current account equity, versus the fixed 2% from the starting number rule. I tried to think of a blend of both, and here is finally what I came up with:

Using the 2% fixed rule, it takes 50 losing trades to blow your account. Since I’d like to trade once a day, I would do the following:

Each month, if I lose 20 trades in a row, my account will be down by 40% (starting size $1000, 20 losers brings it to $600). After the 40% drawdown, I would base my 2% risk on my actual account size, in this case $600. Then after another 40% drawdown, I adjust the risk again to the current account size (2% of $360). With this method, I have the benefits of a slightly faster recovery if my account gets a string of losers, without permitting myself to get quickly toasted.

I also think that after four straight losses (four days of losses in my case, since I’m aiming to trade once a day), I should switch to demo for a while, or to a different strategy.

Finally, any thoughts to share on how to organize the trading day best?

Hi TonyIommich.

If I may suggest, as you seem to have a good grasp of concepts:

  1. Don’t try to figure everything out at once.

  2. Take a basic indicator like a MA and plot it, on a spreadsheet, right next to the price. You don’t have to learn programming; you can just take Excel and download price data for any instrument, enter the formula for the MA in all cells and see what happens.

Perhaps select the price and moving average cells and select Graph in the Excel menu and see what it “looks” like visually.

  1. Tinker around with the variables in the MA equation, see how your inputs affect the results. Understand that all indicators are ultimately derived from the price input. All indicators are but a particular expression of the price (the only input).

  2. Once you have an entry/exit indicator, you can add the formula for the ATR to help adjust your trade size based on recent market conditions.

Once you have an intimate grasp of these concepts and how they can help your trading, you can move on to the more advanced concepts you describe and you will have an easier time understanding them.

It doesn’t matter. Pick one and stick. If you want to win FOLLOW THE INSTRUCTIONS. DO NOT ALTER ANYTHING. If you risk 2% of your account per trade, you will have to lose 50 in a row to bust. Are you that unlucky? You owe it to yourself to stick with a method for at least 50 trades before you analyze or evaluate anything. Now, can you FOLLOW INSTRUCTIONS EXACTLY AND PRECISELY 50 TIMES IN A ROW?

Thanks for the tips…

The toughest thing for me right now is to develop a systematic approach towards strategy development. I keep getting pulled in different directions, there are just so many things to look at: trendlines, price patterns (double tops, head and shoulders, cup and handle, etc), candlesticks, fib levels, floor pivots, moving averages, and then a slew of oscillators and other indicators. Then there are the fundamentals that need to be taken into consideration. I’ve sort of tried a piece of each, but I think I need to narrow things down somewhat.

I often run into this issue when trying to place a trade - that looks like a double bottom on the one hour, but the stochastic is overbought. But hey, on the 15 minute chart its oversold! But higher timeframes take precedence. But what if I want a quick scalp? This could be a 38 fib level going up, or if you take it from this angle its a 68 fib level going down. There’s good US economic news going on, but that has been playing the dollar down lately (except today, surprise surprise!). My problem is that I need to find a way to systematize everything, and always form a solid thesis upon which to act.

I decided to take the next eight months of my life off and just do this fulltime, ten hours a day. I really want to be sure once I start this, I’ll be ready to most effectively use my time.

Stop by the FOREX STORE. I think you’ll be glad you did.

Hi Tony
IMHO keep things simple, you seem to be pulled about with to many indicators. There are some excellent systems available on this site with people trading them and discussing live in forum. Find a system that fits you and stick with it as you become more experienced you will find tweeks that suit your style
best regards
Dave

Thanks. My big question is this - if there is a profitable strategy, and someone posts it on the internet or writes an article about it, or publishes it in a book, isn’t that system pretty quickly going to become useless if it is successful? How often do you end up changing your systems in this case?

Hi Tony
there are many successful systems but not one to fit everyone. it depends on what suits you. Are you a scalper, day trader , swingtrader or position. When you trade your system will evolve and must do so , the market changes and you must change with it.

Tony, having done something similar to what you’re about to do, I recognise the same set of questions I had. Nothing about what you’re doing strikes me as wrong, you need to plough through all the sh*t before you find anything useful.

You have to obviously question advice from everyone, no matter how well meaning, including mine, but I’ll say this:

  1. Follow your instinct as to what you need to read, learn, try and experiment
  2. There are virtually no non-discretionary systems out there in public worth their salt for the very reason you guessed
  3. Most public systems suck
  4. Question every common perceived wisdom, including your own statements in that first post.
  5. Discipline is a function of your belief in a system’s ability to generate profits. A problem with discipline is a problem with your system. You either need to do more research/backtesting or change the system. Don’t go down the torturous following a crap system blindly route. You’ll waste valuable time
  6. A favourite quote I’ve shamelessly inherited: psychology is a crutch for those who don’t know what they’re doing.
  7. R:R is badly misunderstood. Changing their parameters can never make a bad system good.

Best of luck to you.

Thanks again to all who have contributed…

So basically, here’s how I see this working…

  1. Set out the parameters of the system you want to build.

In my case, one trend oriented, one rangebound. I am shooting for a 40 pip risk to 80 pip reward, which after commissions and slippage should work out to just over a 1:1.5 risk reward ratio. I am interested in having one opportunity a day, if possible. I want to risk 2% maximum on each trade. If I consistently get 50% of the trades right, at this rate a 10% profit per month is realistic.

  1. Study things like moving averages, stochastics, MACDs, RSI’s. Get to know the common indicators. Notice their relationship with the price on each pair. Start thinking of how you could trade each indicator.

  2. Start putting together system based on my observations and backtesting.

  3. Start forward testing my system on a demo account and see if the results meet my profit and risk parameters.

  4. When I feel confident enough, I start trading cash.

Now, obviously at some point the system may not function well. How do you determine when a system is likely failing versus it just being a regular “drawdown” period? When do you stop and reassess, how do you define that point, and how do you reassess?

Again, any input appreciated…

Tony, sure you wanna know?!

  1. 10% a month isn’t realistic starting goal. You’ll be an outlier if you break even. Be realistic - there is no easy money in this market.
    40 pips to 80 pips… any reason why you’ve chosen these? Based on which pairs, based on what volatility, and an R:R based on hopes or market conditions? At this stage, keep it fluid, no need to think that far ahead.

  2. Why? You’ve already assumed they can help you trade, based on… ?

That’s odd.

Why wouldn’t it be?

As others have said, if you find one of the working systems, stick to the rules ardently and follow sound MM principles, 10% + a month is entirely achievable.

I’ve just completed my first live month and closed out at considerably more than that. Aiming for 2 successful 2% trades per day. The systems I follow work, have good R/R ratios and I now know what i’m doing with MM.

So much FUD spread on these sites. Yeah, be cautious with Forex trading because it’s a very unpredictable beast which can ruin you if you let it but don’t let people convince you that sensible and well achievable goals like 10% per month are not attainable from the off. They are but it’s all dependant on your discipline.

Mystic, let me tell you that if you trade a [B]full year[/B] with 10% a month and reasonable MM with a decent sized account (£10k+) you’ll not only be around 200%+ up on the year with compounding, you’ll be in the top 0.1% (based on a UK brokerage of near enough 10000 clients) of retail traders.

If you also provide auditable statements, I can put you in touch with a prop trader too who’d be very, very interested in your progress.

Possible? Of course. Likely? Hell no, even with the discipline of a Buddhist monk.

Aim high sure, but don’t be disappointed if you ‘only’ finish in the top 1%.

Why isn’t that possible? Why can people trade up $100 to $10,000, and $10,000 to $100,000, but suddenly there’s a ceiling? Nobody can seem to answer this question.

Most people who claim they have traded $100 to $10000 or $10000 to $100000 in a short time frame are talking out of thier behind… to say it politely… lol… how are you to know if they are telling the truth or just bragging nonsense??

Yes it has been done, and who knows maybe you are one of those guys that can do it…

I would be highly sckeptical of someone who makes such claims…

Egos are a part of every trader and nobody likes to fail.

Cheers

Personally, I think the only person who has a motive to lie about their returns is someone who is trying to profit off of such misinformation. This usually falls under the guise of those who sell systems, trading signals, want to start a trading consulting business, or those who want to manage other people’s money. If you’re in the first three categories and lie you may get away with it, if you’re in the last category you might end up on the receiving end of a lawsuit.

Outside of those with alterior motives, if I’m Joe Trader with an anonymous handle on an FX forum and I say that I produced 200% annual returns when I didn’t, what benefit is that going to give me? Maybe a 15 year old might get their rocks off pretending he’s the next Paul Tudor Jones, but most mature adults don’t stand to benefit from that.

I’ll be honest, right now I suck. I made and gave back profits, and fortunately since I was smart to always trade on microaccounts, the most I donated to the market was $58 ($33 of which was free money I got in a trading account) from $75. That’s a negative return of 77%. I’m honest because I want to learn how NOT to suck, which is why I am here. If I were to lie and said I did very well it does me absolutely no good.

I frankly have no idea where this rule came up that says 20-30% a year is some major glass ceiling, and that you’re lucky if you even get there. I think if people think that way, they’ll limit themselves to what they can achieve.

I’m not sure where that 20-30% came from, most likely from trading stocks and what not.

I know that really the sky is the limit on your ROI, it really just depends on your appetite for risk.

In my opinion you need to learn more about traders psychology and internet behaviour in general. Start by typing “e-peen” into google.

In terms of improving your trading:

  • Money management
  • A “strategy”, which gives you “an edge”
  • Discipline to follow it