So you’ve been trading for a while? Are you making any money yet? Really?
If you are earning consistent gains in your account and have figured out a personal frame work to grow your account, then disregard this writing. If NOT, read on.
Looking at compounded account growth on a spreadsheet seeing how lucrative it would be to ‘lot up’ weekly and bypass small withdrawals seems like a no brainer. Why then do the vast majority never accomplish this?
Remember how here at the Forex365Institute we teach that trading is 90% psychological? Let’s look at a psychological effect that can take place if you are of the mindset that you are going to compound a small account. Take for example Trader A and Trader B.
Trader A makes his initial deposit. This is usually between a few hundred and a few thousand dollars. Game on. His account grows. At this size of account, he is trading between a $1 and$5 pip. He has an amazing month. He pulls over 200 pips. This nets him a profit of over $500.
He tells himself, ‘I am on my way to the big bucks!’
The next month the market ranges out for a few weeks. Trader A enters a slump and eats up most of his profits by trading aggressively on a lot size higher than month 1. He is fueled by the excitement of running up his account, and soon by the frustration of not repeating month 1’s performance. The losses are overlooked because, ‘Hey, at least it was the houses money.’ Months of this purposing follows. Friends and family ask about trading. He’s embarrassed. His subconscious mind starts to disconnect from the money he deposited initially, and worse, from the hope that fueled the journey to learn to trade.
A year goes by. Trader A has lost his enthusiasm, his confidence. Life is frustrating.
Trader B trades opens a $1000 dollar account and expects very conservative growth. 45 net pips/month is AMAZING to her. She easily achieves this and WITHDRAWALS her small profit. She takes her $150 dollars and treats her husband to a fun date, courtesy of her FOREX profits.
He encourages her to continue waking up early and is happy to help. The next month, she looks patiently for set-ups she trusts. Her account grows again. This time, she treats herself to a car detail. Now she is rolling in evergreen scented bliss courtesy of her efforts in FOREX. Her subconscious mind loves trading.
Trader A is looking on scornfully, because after all, he didn’t come here to make $150 a month. After a year of achieving her $150/month profit, Trader B receives a nice $5000 dollar tax return. She trusts herself completely to use this money to trade. Immediately, her profits go from $150 to $700+ dollars/mo. This affords her the ability to take a vacation and she hasn’t taken a vacation in years. Her friends want to know more about that FOREX thing. Life is good, and the future looks bright.
End of story.
The point of this story is not to tell you how to manage your money. It is however, something worth considering if you have been trading for a while and feel like Trader A. Maybe, just maybe, the tortoise who isn’t consumed by the greed of the lot ladder, is the one who ironically wins this race.
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Here is what happened in the markets this morning.
The complications of greed
Several weeks ago, a friend of mine was asking me how my trading was going. I told him that it was going well and that I was slowly learning to be consistently profitable. This guy is a very savvy businessman, and has had a lot of success of his own, but has no experience with trading anything. Nevertheless, I value his opinion.
I explained to him how pips and lot size work, and told him that I was basically trading 10-20 cent pips, making a few bucks a week on positive weeks. With this info he gave the most logical encouragement he was able to give. Based on what he knew and what made sense to him, and he suggested that I lot up. He expressed the idea that by doing this I would force myself to take trades even more seriously and that this would more than likely help me grow as a trader. Since I was relatively consistent already, I expected that I would also make some extra cash by lotting up.
This made sense to me, and honestly, I was beginning to feel a little bit like I was in a demo account since I was trading such a small lot size. So lotting up was appealing for this reason, and making cash would be icing on the cake! I took my friend’s advice and threw a couple hundred bucks into my trading account and began to trade larger lot sizes.
My experience with lotting up, and focusing on profit
As soon as I began to consider the idea of lotting up, I began to dream about the money that I could make. It made sense to me that my trading would become more precise if there was more money on the line. I couldn’t have been more wrong.
As I began trading larger lot sizes, I found myself making a lot of really foolish decisions. There were days that I lost a fair amount of money, and still kept trading, taking as many as 4-5 trades per session. I would lose in a trade, and then be upset by the fact that I had lost an uncomfortable amount of money in a trade, but I would still hold onto the belief that I could make that money back. It didn’t work out well.
I didn’t know at that time exactly what I was doing wrong. I tried analyzing my trades, to no avail, because it was simply rooted in trade management. I was taking too many trades and taking foolish trades, mostly based on the hope that I could get my money back. I wanted to get back what the market had taken from me. I suppose the expression is true “Want in one hand…” and… well, you get the point.
After analyzing and making rules such as “rate each trade on a scale of 1-10 before entering,” “wait at least 5 minutes between trades” and plenty of others, I was still losing trades. I would follow this list of rules for the first trade, but then I would get trigger happy and start taking all kinds of foolish trades. I had made a little progress by making all of these rules but I was still failing to recognize the root of the problem. Not to mention the fact that more rules equals more work.
It wasn’t until a few weeks later that something really clicked. I was talking to Steve, our director of enrollment at the Institute, and he told me something that stood out to me. He said “A new trader thinks about how much money they can make, while a professional trader thinks about how much money they can lose.” You can find this in a blog post he wrote titled “Money Management In Trading.” It is a great post and I recommend everyone read it.
The effects of this paradigm shift
Realizing this key difference between new traders and professional traders has had many benefits. Many things that I was doing wrong began to almost fix themselves when I saw the bigger picture. Understanding this simple truth helped me to get to the root of the matter. It wasn’t that I didn’t know how to trade, or read the charts. It was that my trade management was horrible. Even though I was “able” to trade well, I chose not to due to the fixation I had on making money. I had become incredibly biased in my interaction with the market. I entered trades without thinking about what I could lose, always thinking “I know how to pull pips” and “I can make money.” The funny thing is that both of these things are true. But if I focus on those two things, I am forgetting that there is another element of trading that I have to keep in the forefront of my mind: the fact that I can lose!
After I began to keep in mind what I can lose by trading, and keep the dangers of the market in clear view (no longer obstructed by wild dreams of rolling in money) noticed myself not having to try as hard. I was almost not having to try at all to adhere to the list of rules that I had made for myself. Instead of forcing myself to rate each trade so that I would stay out of bad trades, I found myself staying out of low probability trades without even thinking about it. Instead of struggling with overtrading, I found myself naturally limiting myself to one trade per session, and often times going the whole session without trading. Once again, many of these big struggles that I was having were all corrected with my mindset. This mindset of thinking about what I can lose versus what I “could win” is closely related to something that I like to refer to as passive trading.
Well it’s 2016, and another year has gone by. New Years resolutions have begun, gym memberships are sky rocketing and everyone is motivated to become more fit, drop a bad habit, pick-up a new hobby, or set new budgets. Although I have never been convinced that the dawn of a new year gives you any advantage of actually accomplishing any goal, what I do believe is that by writing out your goal on paper and establishing a date, will give you a much better chance of completing it.
One thing I have looked at for myself in the past couple years is a specific Money Management philosophy in my trading. At the end of each year, I take stock of how well (or horribly) I have traded for the year and make sure that my strategy is sound and still valid. This is an exercise I wish I learned my first day trading because it would have not only made me more money, but it would have substantially mitigated a good percent of my total losses in my first year. So what I am going to share with you now is a very simple philosophy I follow that has helped my trading massively.
The difference between a new trader and a professional trader is this: A new trader thinks about how much money they can make, while a Professional Trader thinks about how much money they can lose. Do you see the difference? The moral of this story is that trading is risky, and although it is fun to think about all of the money you could potentially make, most new traders seldom like to think about the fact that one bad day of trading can cut their account in half, or how a misunderstanding in risk reward ratio can lead to taking far greater losses than positive gains. The market doesn’t care about how much money I have, what I lose or what I win. The market itself is pure and emotionless, but is driven by the emotions and beliefs of the people who participate in it.
This allows me to have a clear advantage over most traders if I can follow these simple rules while trading:
(I will explain these concepts now)
This is very simple math and this will keep you from not only having a really bad day trading, but also helps prevent you from biting off more than you can chew. It answers a very simple question of what lot size should I be trading? Here is an Example:
If I have an account balance of $1,000, then 5% of that is $50. So, if I am trading a lot size equating to $1, then a -50 pip stop out would reduce my account by 5%. This means that the most I am ever willing to lose on any one trade is 5% of my total account. Now I am not advocating take a -50, but you get the idea. The dollar figure and lots size is proportional to your account balance.
This is the mark of a professional trader and for me, this was a huge milestone in my personal trading. In order to understand what my risk and profit target is getting in to a trade I needed to really understand how the market works. When I can comprehend what I am looking at on my screen and I can say to myself (or anyone else) “this is good entry because….. and as a result of this I will know this trade is behaving when it does X and I will know it’s time to dump it if it does X,” then I am on my way to making some money in FOREX. This is how you make money. There is no luck involved. It comes down to being able to identify a trade set up and being able to pull the trigger. In actuality, this is the easy part. Let’s talk about where things really get hard…
If I am trading from a place of indifference all the time, why would I ever need to run a stop-loss? The answer is that we are a human beings and no matter how emotionally stable we think we are there will come a day where the market spins you out and makes you feel like you know NOTHING about trading. Any long time traders know this to be true, no one is immune from taking losses. The mark of a true professional is how clever we can be, and gracefully we can lose (I’ll cover this in the next section). To protect ourselves from ourselves, we need to preset a stop-loss when going into any trade that is automatically set the moment I click in. It is there to serve as a safety net to ensure that my emotions will not get the best of me in the event that things go wrong, which they will.
As I mentioned above when explaining the importance of a stop-loss, the next logical question is “what should my stop-loss be.” For me I use a 1:2 risk reward ratio. I will explain how this works. If my target PIP goal is 50 pips, then my stop should be set to -25. This way if I am making smart trades and my win Ratio is 50%, then I am profitable in my account. I’ll give you this analogy: If you flip a coin, you have a 50/50 chance of calling it correctly. Simple right? Trading should be no different and here is why: If I am only winning 50% of the time but I make 50 pips every time I am correct and lose on half that (-25) when I am wrong, then over a long period of time I am going to remain profitable in my account. This is what I meant when I was referring to losing cleverly and gracefully. Obviously, I don’t advocate blindly trading your account but I love the simplicity of this because you can become a profitable trader with a 50% win rate! Awesome.
An experienced trader trusts their methodology. If any strategy is going to be successful, you need to give it enough time to work. In the first year for me, it was all about gaining experience and trying not to lose money in my account. Every year after that has not become about how much money I can make, but about how little I am going to lose. My experience has shown me that the more I can depend on high probability averages (like a 50% win/loss rate on my trade) and trust them to be true, the more confident I become in the methodology. When a trader combines a sound methodology with experience, and solid foundation in Money Management and risk mitigation, then you are well on your way to becoming a Professional Currency trader.
Director of Enrollment