Both Warren Buffet and Bill Gates both agreed that Charley Morgan is the most intelligent person they know, charley morgan once said problems frequently becomes easier to solve if we turn them around in reverse.
Smarter than Einstein?
Inversion will help you solve problems.
Now, let’s use a little bit of inversion to solve our trading problems.
Around 90% of traders lose money, so the question we need to ask ourselves is WHY? What are these 90% of traders doing?
1)They buy breakouts and sell breakdowns (they are literally chasing the forex price around).
They all try to cut there losses short and let there winners run, so where are they let letting there winners run to? Straight out of there trading account( this idea sounds great in theory but it just doesn’t work in real live trading).
Greed cause them to size there positions way too big, have you ever heard the saying don’t over trade focus on the best setup’s and increase your size on the good ones great, yes their is something there to increase your position size during periods of better opportunity (all in) but don’t over do it or eventually you would be wiped out of the game (RIP Account).
4)They are afraid of reducing there position size because they might be reducing there potential profits, for example using 1.0 and a stop loss of 50 pips reduces your risk of losing but reduces your potential profits than using 2.0 and a stop loss of 25 pips and making unlimited potential profits. Now listen, unlimited profits potential is like a mystical creature.
Now, you see these four things most traders do, but why do they do them? Well some of them is human psychology: greed, fear and over confidence but most of it is because of what they were thought by forex education website/forex teachers or trainers. I know it sounds a bit hypocritical because am also a forex teacher myself, but the difference is they tell you what will make you spend money (Get Rich Quick !) unlike them i will tell you the TRUTH even if it is not what you want to hear.
Think about it, how feeling does cut your losses small and let your WINNERS run sound? Sure, it sounds great, exactly what you want to hear but anyone teaching this concept has either:
- Never traded real money before
- Or they’re just flat out Lying.
Now, that does not mean you need to have huge losses and tiny profits, if you are trading the right strategies this shouldn’t even be an issue.
Now, let’s use a little bit of inversion and flip these around and here is your new strategy:
Buy into weakness and sell into strength.
Why? because it is the exact opposite of what most 90% of traders do. You might be saying: if you are getting into a sell off, how do you know when the sell off is over? The answer is simple! You Don’t, nobody does, it does not matter whether you are Warren buffet or you are jemmy buffet, you don’t know if the forex market is going to go up, down, sideways or in circles and I believe that forex market swings are random for the most part but ultimately it is human emotions that drive the forex market moves, so just don’t fall victim to your emotions.
You are going to book your profits and be patient with your losing trades, with a high probability trading strategy almost all losing trades will become winning trade at some point if you hang in there.
If you’re cutting your losses small you’re going to choke out alot of good trades and if you are trying to let your winners run you’re going to be disappointed when they don’t run like they where suppose to (but why won’t you RUN?!you are surprise)
You’re going to keep your position sizes small. It will allow you to make decisions based on logic rather than emotion. The only way to be patient with positions is if you’re sizing your positions correctly, if they are too big, then the day to day fluctuations in your account balance would cause you to make bad decisions and acquire grail hair at a very young age.
Lastly, you are going to reduce your cost basis by placing trades with a defined profit strategy. These are strategies with limited profit potential and but they have a very high probability of success. Consistently reducing your cost basis would pay you far more than that one home run (massive profits) that you might hit.
Following these simple guidelines (1-4) would save you many headaches and a ton of money.
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Good luck in your trading endeavor.