About a week or two ago I was sitting in front of the Oanda forex MT4 platform and suddenly a few questions popped into my head 1. What if all trading teachers, gurus, etc are wrong? 2. What if leverage is a good thing? 3. Is it possible to beat the system? 4. Why do most retail forex traders fail.
Lets start with number 4. IMO the reason most forex traders fail is because they jump into trading without experience. When babypips says traders should demo trade and test trading systems before starting a live account most people do not follow this. Another problem is most trading systems only work with certain types of market conditions. A lot of indicator (or otherwise) based systems will work in trending markets and completely fail in ranged conditions.
Going off of the information provided above can we base a trading methodology on the fact that most systems work great only part of the time?
At this point I started on a obsessive 5 day search of the net for anyone trading high leverage (500:1, 400:1, 1000:1 etc). The result of this search was a ton of different trading journals posted to a number of different forums. Most of which were complete failures. While sifting through the winning traders journal/thread’s one person stuck out more than rest. His (forexsaint) idea was to have a “free account” start with $100 (or some fairly small deposit), high leverage, and trade that account to say $1,000. Once the final goal of $1,000 is met withdraw the original deposit plus some profits and keep going. From this point on the forex account is now free and you’ve actually made some money which should reduce the stress of trading.
Side Note = $100 to $1,000 might sound like a huge profit but with high leverage such as 500:1 this can be done in 4 trades with 50% risk or less.
Here’s a chart explaining
Assuming 20 pip stop = 1/2 account or margin call and 40 pip TP doubles however much is risked (these numbers could be changed to anything 50/100 100/200 etc.) Please take into consideration which pair you trade determines the margin requirement. I trade usd/jpy which happens to work perfectly with this for example other pairs like eur/usd, gbp/usd have higher margin requirements which will offset the scale a bit.
$$$-----------------# Lots------------Leverage
-
$100
-
$200-----------------0.25----------------500:1 Risk $50 of $100
-
$400-----------------0.5-----------------500:1 Risk $100 of $200
-
$600-----------------0.5-----------------500:1 Risk $100 of $400
-
$1,000----------------1------------------500:1 Risk $200 of $600
$900 profit + $100 original deposit in 4 trades for a total reward of 9x.
Can you win 4 trades in a row 1 out of 9 times? How about if a few losses occur throughout the sequence? win, lose, lose, win, win, win, lose, win, win, win. This progression nets the same result a 4 wins in a row it just takes a little longer.
What about losses? Well it works the same as above except in reverse halves.
Starting from $100 -
- $50,
- $25,
- $12.50, <- 3 losses possible reload new $100 level
- $6.25
So as long as your trading log doesn’t have a accuracy of lose, win, lose, win or lose, lose, win all the time this should hypothetically work.
The next step would obviously be to figure out how accurate your trading system is. Can you consistently pull off 40 pip with a 20 pip stop or 100 with a 50 pip stop?
Lets get back to question one. Generally every teacher or self proclaimed guru advises to never risk more than 2%. [U]The problem is not how much you risk it’s how often the trading system is correct.[/U] For example lets throw out a ridiculous example. If trader A’s system wins 100% of the time would it not be a good idea to risk 100% equity every trade?
So if every trader aspires/achieves to be better than break even why not risk more? Obviously this isn’t for newbies and it isn’t for traders that haven’t already found a system which works for them. It is about maximizing profit per risk in $$$ not pips.
Another opinion of mine would be to only trade this with completely manual trading systems like support/resistance, supply/demand, price action, or candlestick formation. After you’ve mastered these technique/s on any one time frame you’ll have an understanding of how many pips to risk for how much reward and when things are not going well it’ll be possible to reduce losses. The point is to know the system and know how price reacts when and why.
[U]Assuming a total bankroll of $900 it is possible the above trading [U]theorycraft[/U] could totally blow up in ones face with 27 losses in a row and no strings of winners. ($100 risk each run 3 losses per $100 x 9 =27) How likely is that to happen if you already know how well the system works from months of live trading at low risk? [/U]
[U]Better yet how likely are you to make several $100-900 runs before a insane streak of losses (27 over all net negative losses or more with a few wins mixed in)? [B]It’s all about probabilities[/B] [/U]
Even a trader risking 2% per trade would be devastated after 27 losses.
[B][U]
This is positive and negative progression working together as one.
[/U][/B]Anyways this is enough typing for today. Hope you all enjoyed this theorycrafting session.
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