As one’s account grows in size, a drawdown of 2% is proportionate as account equity increases, but the value of that drawdown is not: e.g. 2% of 100k = $2k, whereas 2% of 10k = $200. Even though they are they are identical in proportion, we all know being $2k in the red is far more devastating than $200, just as the euphoria of being up $2k is that much greater than $200. Money management should remain consistent, but the psychological impact that extra zero exerts on us can be very disruptive.
So, how about looking at and concentrating on account equity expressed in terms of percentage rather than equity value? How would that change your capacity to remain rational despite the changing size of your PnL? Wouldn’t you be less risk averse with larger numbers if you expressed any change in equity as a % of account value instead of concentrating on the amount?
If you’re “trading for a living” and have the practical necessity of looking at the actual value, this may not be possible. Or maybe it is. All the better if your expenses are satisfied with a spouse’s income, etc.
Yes I agree with that totally. Although on demo, when my trades where up to say $50 per pip, I was able to switch the profit column in MT4 to display the pip count instead of the dollar amount. So instead of seeing negative several hundred dollars, I only saw negative several pips, which psychologically kept it in perspective.
Andrew and Sweet PIp ; I agree with that a few good traders I know don’t place trades on the platform they veiw for charts. They trade just the action this takes away the constant views of lose and gains and keeps them focused on what is actually important the price action on the charts. So many of us make desiscions based on emotions even when we know better and have a great startegyn to follow. So anything to keep us level headed is aplus… Almost if not all brokers Entry buttons are undockable and can be used as a seperate unit… Just a thought… Ken
I think if you’re trading PA, then the changing markets won’t affect you very much. Just learn how to adapt to changing volatility (which you have to do anyway). The changes that screw some people up involve major trend reversals, ie. the Euro’s long-term uptrend was broken last year, so a lot of people were buying when they should’ve have analyzed the situation and either went short or stayed out of the market. Also there were massive changes in the interest rates of nations, so many trends supported by carry trading broke down as well. This is where it pays to have at least a casual understanding of the fundamental factors affecting the currencies you trade.
For myself, I target 6% a month on average. Right now I’m working and trading full-time, trying to get my account up to 100K so that I can quit my non-trading job! I’m happy with my modest target, things are progressing much better than I ever expected when I started this crazy venture
Edit:
One more thing, I agree having someone else providing a consistent income is a huge psychological support. I am in that position, but since I’ve never liked relying on other people for money, I have my own back-up plan in place. I intend to maintain a separate bank account with 10% of my trading capital, which I will use for living purposes in case I have a Negative trading month. This keeps me from further drawing down my account from having to withdraw living expenses. Since I assume I will make money most months, I will be able to repay the money to this 10% account soon after from trading profits.
I agree with this. If you are on a strategy which you know will work but start becoming scared of the large absolute values of your profits and losses when your account size starts getting bigger then you are diminishing your own returns. Trust in the winning strategy. I know a good TED talk that seems appropriate here but I’m not allowed to post links. Search Dan Gilbert and see his talk on “mistaken expectations” on TED. See his “why are we happy?” talk while your at it for a digression.
Originally Posted by SanMiguel
Couple of points in here that I have also read in books are most traders also have 1 member of their family in a stable permanent job.
There don’t seem to be many traders who do this for a living by themselves.
Wouldn’t you say you have to have a backup plan?
Wow! that rung bell San Miguel.I think a lot of sole proprietors can relate to having one family member(wife,or girlfriend)to lean on especially getting of the ground.I owned a company without that luxury iam single but of the 6owners one two man shops i knew, 5 of them leaned on there spouses at some point.There is no safety net when you decide to trade fulltime are start your own bussiness you cannot file for unemployment if things blow up.I learned never to put all your eggs in one basket keep a part time job until the money your making from trading forces you to quit the other job.;)Wouldnt that be nice:).
I make a mill every 14 years at the day job and still struggle to make ends meet. and with 30 years left in this world I need 2 mil to retire and not work anymore
(I know when I’m going to die because my birth certificate has an expiration date…LOL)
so anyway I wouldnt quit my day job unless I had at least 1 mill in the bank and making at least 75k per year from fx trading, until then fx trading is just a second income in addition to the day job. But of course I’m still a beginner like a lot of people here so fx may not pan out, we’ll see.
I think fx requires a certain kind of mentality to be successful, you have to be very analytical, It’s kind of like playing poker in that if you sit down at a table for 30 minutes and don’t know who the sucker is, guess what, it’s you.
with fx you either get it or you don’t and if you do then you know you do. and if you don’t get it then you may not realize that you dont get it.
It’s the same way with programming, you can tell who gets it and who doesnt
My biggest worry is that the market will change. However, my strategies are base doff price action and candle patterns so should it make any difference?
People say markets range 70% of the time but does that just mean 1 pair or the market of all the forex pairs together?
It would be terrible to trade forex for 2 years successfully and then something changes forcing you to lose money and then your CV would look rubbish for job applications as you effectively did nothing for 2 years.
As long as you understand that markets will behave differently over time, and you are ready to adapt and react to these changes, how could they “force” you to lose?
To be honest, I don’t even see the market as trending or ranging anymore. All I see now are support and resistance levels, which the market will either break through or bounce off of. My job as a trader is to identify these S&R levels and then use my analysis to see if the bounce or the break is more likely to occur.
My advice to you would be to analyze different timeframes. What appears to be consolidation (rangebound) on one TF might actually be part of a strong trend on a higher TF. Or a range on a higher TF might be composed of many strong trends on a lower TF. Like I said though, I’m looking at the market as an independent series of bounces or breaks at key levels, so I never see the market as untradeable. As a trader you have so much power to adapt, by changing your stops, or your targets, or the pair you trade, or the time of day you trade, or the timeframe you trade. If I had to give my opinion on why so many fail, it’s because they FAIL TO ADAPT, and there is lots of rubbish promoted to new traders that discourages adaptation and encourages “robotic” methodologies that just do not match the true reality of how this market trades.
“To be honest, I don’t even see the market as trending or ranging anymore. All I see now are support and resistance levels, which the market will either break through or bounce off of. My job as a trader is to identify these S&R levels and then use my analysis to see if the bounce or the break is more likely to occur” …
My thoughts exactly! Just started trading forex for about a month on demo. Like most newbies started with indicators and found them very frustrating. Over the last 2 weeks I’ve instinctively focused on interpreting price action through candlesticks, price patterns & S/R levels then guess what … I’ve been consistently profitable. I initially felt guilty since I was not faithful to the trade signals from indicators and wondered if my strategy would backfire later … nice to know others are consistently profitable trading price action.
There is a professional trader who had sound advise he trades equities and futures.He is testing forex trading, before actually using live money.He must be able to double is capitol 4 times in demo before going live.I think if you want to build a foundation you need to diversify, this trader only uses less 10 percent to trade.He brakes down his profits into longterm investments(position trades),day swing trades,savings,rainy day fund, lately gold silver after living expenses are taken out.Again i will revert to author John Carter who said at a seminar if you want to make a living daytrade, swing trade,if you want to become wealthy postion trade(long term).I know this is a little bit of subject but when i get to that point of being a successful trader i also thinking about becoming a investor.That when i will know i am successfull.
