Trading: Myths and Facts – Part 4

Ace trader Tudor James said that the trader should not be a hero. We should not have an ego. We should always question ourselves and our ability. We should never feel that we are very good. If we do that, the consequences may be grim. Traders should talk in terms of probabilities and caution, not with brazen impudence and guarantees.

We must be humble in our trading career – permanently humble. Pride is very dangerous to our long-term survival in the markets. A skilled surfer humbly knows his size and strength relative to the ocean, and respects the waves. A skilled trader, likewise, knows his size and strength relative to the worldwide marketplace. There is no place for over-confidence. We should always use discretion and common sense in our trading careers. We should always acknowledge and learn from our errors: trying never to repeat them.

This is the only way to become better at trading. Trading mastery is an ongoing process; a journey of a lifetime. We shall discuss more facts in this series.

Myth #7: Institutional Traders Are Far More Competent Than Private Traders

Fact: Trading success has nothing to do with any trading system under heaven. You do not become a successful trader merely by predicting the markets correctly. The markets are not predictable. You just have to be a humble trader who is trying to do the right things on the markets. And you have to work hard to become a better trader.

Popularity has nothing to do with skills on the markets, and neither does formal education. Someone talking on a popular financial program may be having serious problems trading successfully on his own while an unknown trader may be making consistent profits in his own living room.

A top trader is not necessarily smarter than we are; he just has access to a colossal fund. Top traders also lose, though most of them survive losing streaks. The only difference is the hugeness of their accounts. I heard of a rogue trader in Europe who lost billions of Euros, while I know a humble trader who manages $5,000 successfully. Someone is not a wizard simply because he has access to a huge fund.

If someone makes 20% per annum on $1,000, who would call him a great trader? But if he makes the same 20% on $10 billion per annum, why would you not call him a great trader? $2 billion is a great amount of money. If you had $1 million to play the markets, you could be very much comfortable if you are making only 1% per month. But if you funded your cent account with $10, no-one would even take you seriously if you boasted of 50% per annum, unless it was 50% of $50 billion.

You see, great traders do not necessarily double accounts to be called “successful.” Although some of them risk too much of the funds they manage, and you know the possible consequences of that. For them, only a small percentage profit will make a big difference.

But most traders do not have a great amount of money. You might want to fund your account with $100 and make 10–20% on a daily basis (if you have been trained to be a suicide trader). So this is where frustration comes in; we want to trade with a small amount of money and live a big life. You would not appreciate 10% profit in three months if your account is small. Please let us have a rethink!

One renowned trading coach declares: “From my market research and other sources, I know how a number of ‘market wizard’ caliber traders function. They have good systems with positive expectancy. But those systems are not much different than the kind of systems the average person can get. The difference between making a fortune in the markets, as most of them have done, and average performance is simply one of position sizing. Great traders apply great position sizing to good systems and have the discipline to carry it out.”

A hugely successful trader was reported as using mathematical models in making trading decisions. One would first think the models are his secret, but when I delved further, I saw that he usually uses 1:2 or 1:3 risk-to-reward on swing trades. Honestly, this good risk-to-return ratio (RRR) is also part of his secret.

Now let me emphasise a point: institutional traders are never more skilled than professional retail traders. They merely have huge funds to trade with, and that does not make them better than somebody who is trading consistently profitably on a live micro account started with $1,000. The one who started with $1,000 may even be far more competent than the one managing millions of dollars. One quail is not taller than the other; except the one that stands on a ridge.

When people want to choose a trading mentor, they feel that the mentor must be rich, without thinking whether the person actually made his money from trading. They look down on skilled traders who are not yet extremely rich.

Myth #8: Trading Is Too Difficult in the Month of August – It Is Better to Stay Away from the Markets

Fact: Some traders think that it is very difficult to make money in August of every year. One top trader even declared that the month of August has always been his worst trading month in his entire career, and as a result of this, he usually takes a month-long break every year.

The month of August appears to be difficult because most market makers are on vacation, thus forcing many disciplined professionals to stay out of trading until the market makers return. While there is nothing wrong with this conventional attitude, I would like to point out that Forex markets always provide opportunities for wise traders irrespective of the month, but one needs to be flexible.

Awareness will continue to be curative. There is no need to stick to the ranging USD/JPY when the EUR/JPY is trending nicely. Why should one continue to suffer due to the irrationality of the EUR/USD when the AUD/USD is moving in a predictable manner? In a difficult month like August, a highly versatile Forex trader would do well by considering trades only on pairs and crosses that are trending well.

Let me give you a few examples of instruments that trended well in the month of August 2011:

• Example 1: GBP/CAD – From August 1 to August 19, 2011, this cross rose by over 800 pips. It also fell by over 500 pips from August 22 to September 1, 2011.
• Example 2: AUD/CAD – This instrument plummeted by over 600 pips from August 1 to 9, 2011, and it later rose by almost 400 pips from August 10 to September 1, 2011.
• Example 3: GBP/CHF – The price on this cross dropped by over 1600 pips in August 1–9, 2011; while it rose by roughly 1900 pips in August 10–29, 2011 before going southward by another 800+ pips in August 30–September 5, 2011. After this, the price skyrocketed by more than 1300 pips within the following four days.
• Example 4: AUD/CHF – This exotic cross moved southward by more than 1700 pips from July 28 to August 9, 2011. Then it rose by more than 1300 pips from August 10 to August 30, 2011, and dropped by over 500 pips within the following four business days. It has moved up by more than 1000 pips since September 6, 2011.

There are more examples like the ones above. The lessons that can be learned here are simple:

• a) It does not pay to continue suffering as a result of zigzag movements on popular pairs/crosses while other less popular pairs/crosses are trending nicely. Remember that your goal is to survive in the markets and ultimately make some gains, not necessarily doing what is popular. Some of the successful traders I know look only for the instruments that are trending well.
• b) The best thing is to ride a trend for as long as possible or until the maximum trade duration expires. This is one of the secrets of effective traders.
• c) If one happens to be in the wrong direction, then one will be stopped out with an inconsequential loss, provided that the position sizing is very small.
• d) If one is in the right direction, one must let it run until one’s target is possibly hit. The key to survival will forever be this: Make more money in good markets than you lose in bad markets.

One way of handling the quirks of the markets is to use proper strategies to take care of breakouts and sustained trend movements. Sometimes, a combination of two different but reliable strategies may improve the overall statistics of a trading portfolio.

Conclusion

What, though, if you are not currently using risk control methods? Is it possible to change your trading style? Would your past mistakes hold you back from your future success?

Consider the fact: Some market wizards were formerly gambling, naïve, irrationally emotional and undisciplined. They chose to change their trading styles, and they reaped great benefits. Today, thousands of traders throughout the world have made a similar choice. They have freed themselves from dangerous trading styles and have experienced the benefits of bringing their conduct in harmony with safe trading principles.

Author: Mustapha Azeez
Originally published: January, 2012.

Reproduced with kind permission of: TRADERS’ media GmbH