This is a story that I’m not sure I should tell. The reality is that the amount of risk that needs to be taken is huge, large drawdowns and excessive stress. I figured each person has their own right to their own agency and can decide what to do with what they read into my story here.
The following is not recommended.
I am trying to create a livable wage on a small account. I need to make about 2000EUR per month to live comfortably. I live in South Africa.
I have 20:1 leverage. I am taking 10% risk on each trade. Risk of ruin is very high, even with a huge winrate. The plan is to reduce this risk down to 5% then 2% and finally down to 1%. After that the goal is to be below 1% on each trade.
I have until 30 September to achieve my ends. This requires me to make a withdrawal of 2000EUR during October to pay for October bills. Thereafter I would still need money in my account to trade with.
The below is my August end of day equity as exported from my brokerage account.
My Targets are as follows (100% every 10 trading days):
1000EUR by 23 August
2000EUR by 6 September
4000EUR by 20 September
Due to the rule of 72 I don’t need to win every day to get 100%. Every 7 trading days it’s possible to double if I get one winning trade per day with a 10% win. The reality is that I will lose on some days. Other days I will make more than 10%. I’m basing my calculations off of my expected value.
Naturally this involves those all too common best case scenarios that people do on excel to calculate their ROI. Usually they don’t take into account the large drawdowns associated with large ROI and the reality of days where you just make nothing. Never mind the losing days.
To make matters even harder, I’m currently day trading the USD/ZAR currency pair, but I do hold overnight sometimes. This has a spread that is too large to day trade. If I second guess myself on trades or just plain get chopped up then these costs will run me out of business. I have to be decisive and hold fast to my idea but still ready to cut losses the moment the idea is invalidated. I focus on making quality decisions rather than many tiny decisions. This is tough because it involves a lot of waiting and potential boredom. The market doesn’t move all day, then suddenly all at once! xD
As soon as my equity is on 2000EUR I will then be able to switch to EUR/USD or GBP/USD to take advantage of the lower spreads. It will require some minor adjustments to my approach because those markets are much noisier than the exotics. I trade this pair because I can gain higher returns, not because I’m attached to my own currency. However this also entails higher risk.
The reality with an approach like this is that it will have large 20-30% drawdowns. That is very hard to stomach, especially when it is on the level of seriousness that I’m dealing with.
The Definitive Guide to Position Sizing - Van Tharp shows people by way of example that if you want really high returns there are huge drawdowns that you would need to take. Psychologically people can’t handle 20% drawdowns, maybe 10% but even that is hard to deal with and then trade smoothly afterwards.
Trading is very taxing on the mind and body. It’s of utmost importance that I protect my sleep and relaxation time. I must exercise, eat regularly and stay mentally balanced.
If any of these slip I can spiral down.
Keeping fear at bay is essential, it clouds the mind and warps reality. Fear causes profits to be taken too soon, losses to be avoided, revenge trading and position sizing that is too large for the strategy.
Mark Douglas - Trading in the Zone provides a great antidote. Accept that you will lose but win in the long run.
“I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.”
― Frank Herbert, Dune "
I protect my mental health in a number of ways:
I meditate daily. I spend time with people who challenge me but also make me feel welcome and accepted. We discuss ideas and support each other. I live with my brothers so I am not completely alone in my room trading and suffering in silence. The loneliness isn’t an issue and this helps tremendously.
I have hobbies, however all my hobbies are probability related. I play Magic The Gathering and Poker.
Poker is something that I’ve excelled at, the mental models from trading apply directly there too.
It’s much much easier than trading, by orders of magnitude.
The trouble is they all involve losing in situations where you have no control over the outcome. So if I’m struggling in trading I can’t necessarily do those activities. However they do help build mental resilience.
I find engaging in simple activities that are not so uncertain help a lot. Watching a movie, going for a walk and playing computer games. Especially mindless open world games where you can run around do simple things. This helps remove from the situation and often ideas come to mind as well as solutions for how to resolve trading questions I’m dealing with. Very relaxing.
Getting away from the computer helps.
I’m a voracious reader, this helps me relax too.
Why am I writing this out?
I’ve worked my entire adult life as a software developer. Resolving problems and thinking about solutions has been a constant in my life. Many times when thinking about something we found that we’d speak to a colleague to explain what we were doing and before we were done, we’d have the solution. We suggested putting a little fluffy animal somewhere for people to explain their problem to so they could find a solution without bugging someone. We never did that tho, we just bugged one another xD
You never know what someone might say that could help you, always worth a listen.
I’m laying out the groundwork of my undertaking. This is to help me work through the ideas.
In addition to the idea of me truly accepting what it is that I’m doing. Accepting the risk, so to speak.
I definitely do not recommend others to take my path, it’s far easier to swing/position trade.
Intraday trading is very hard, the market is noisy and is full of false signals. You can get led about by the market and lose all day and miss the big move or catch small ones and be blown out by spikes. You might zoom in and trade countertrend without even knowing it and then bam you get smacked by the move or you misunderstand a retracement as a reversal. Sure these can happen to you on higher timeframes, but they happen less frequently and you’re taking more time to make each decisions. So hopefully then you’re making quality decisions instead of reflexive and reactionary decisions.
Trading in the Zone - Mark Douglas
The Mental Game of Poker - Jared Tendler
Trading to Win - Ari Kiev
The 33 Strategies of War - Robert Greene
The 50th Law - Robert Green + 50 Cent
Mastery - Robert Greene
The Power of Concentration - Theron Q Dumont
Market Wizards books - Jack Schwager
The Definitive Guide to Position Sizing - Van Tharp
The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust - John H. Coates
My trading history in a nutshell:
Found out about trading in June 2011
Traded on and off with boom/bust cycles in my account, typically taking a break after a bust.
Studied many trading and psychology books
I achieved some levels of consistency in my trading after a few years but tended to get overconfident at later stages and blew up. This then spiraled me downwards and I ended up going backwards.
After a while everything clicked but it was only once I had taken the leap to truly commit to trading seriously.
I had to accept that I was a losing trader. In my mind I had some wishy washy ideas about how great my trading was but I was taking a single huge loss that would wipe the account. This is destabilizing to your ability to trade, both mentally and financially.
I looked at my data and came to terms with the reality that I wasn’t as good as I thought I was. Like Elder Alexander says, show me a trader who keeps good records and I’ll show you a good trader.
This was a huge wakeup call and I worked out the bugs and improved my trading immensely.
Look at reality, not fantasy.
Much later I started conversing with another trader and we’ve become good friends. We talk politics and trading. We have completely different trading styles and it’s great camaraderie. Especially in helping each other through the psychological difficulties of trading.
I used to use various indicators such as RSI and 50EMA + 200SMA and I was quite successful with them
Now I trade pure price action, I gauge retracements/reversals and continuation+exhaustion on a discretionary basis. I saw these same setups with the indicators and realized I didn’t need the indicators. They tended to create confusion and provided more information than I needed.
The key is to simplify and then simplify some more.
It’s complex to make something simple and simple to make something complex.
I have never once asked other people for their strategy.
I have never once asked someone what trade to put on. No tips, no rumours.
You can test and develop your own strategy. Only then will you have the confidence to trade it and risk your hard earned money on it.
We shall see how it plays out.
I will be posting my equity once a day here.