FOREX TRADERS trade some of the choppiest markets in the world, usually with no clue on how to profit. Here’s the difference in a nutshell:
Seasoned pros generally agree that EXIT strategies are what make you money. Entries considerations pale by comparison!
Why? It’s simple really. The market does what the market does. There is no pure trading edge that is going to churn out profits with a fixed probability. You heard me – there is NO SUCH THING as a strategy that is “90% accurate” or “50% accurate”. It’s just common sense – probabilities are in flux all the time. A successful strategy can fluctuate between being 20-30% accurate to 70-80% accurate. That probability can and does change on a dime, and can only measured historically. This is because markets change dynamically.
How, then, can we overcome this probability flux?
There is a story I have heard told of a trader who goes around a trading room asking everyone the same question:
“I have two strategies that earned exactly the same amount in the past. One has a very high probability, but poor reward for your risk. The other has extremely poor probability of success, but when it is right, hoo boy, it gives you huge returns! Which one would you prefer to trade?”
It is telling that most of the pros chose the second strategy, and most newbies chose the first one. Having survived the journey from newbie to pro, I can understand both stances. Newbies feel psychologically comforted taking small bites out of the market, even if they are pennies, nickels and dimes. Pros know that the price of this is always poorer reward, and when the probability flux roars against you and you get 10 losing trades in a row, you are going to have a hard time collecting enough pennies to pay for that losing streak.
With my coaching clients, I like to put it another way:
“Think about it. It is very easy for a strategy with 70% accuracy to drop to 30% accuracy. All it takes is a change in market environment. But, if you had 30% accuracy to start with, what is the worst that is going to happen? 10% accuracy? That will hardly put a dent in your portfolio. MORE IMPORTANTLY, think about what happens if the 30% accuracy suddenly jumps to 70%…you will make a windfall overnight!”
If there is such a thing as a Holy Grail in trading, the ability to survive probability flux with good reward for risk must be it.
Incidentally, this is why most people completely misunderstand the purpose of backtesting. Backtesting is NOT about trying to find the strategy with the highest probability…it is about discovering which strategy can SURVIVE THE FLUX OF PROBABILITY. The whole process of backtesting is one of discovery – can you discover a system that you can trade with minimal discomfort but that will allow you to survive the lean times?
Probability flux is why most traders will never find their “ideal” strategy in the whole of their careers. Period. Find a system that gives you good reward potential for your risk and the ability to REALISE that reward. (It doesn’t count if your strategy can give you up to 3 times the reward for your risk and then you close the trade out at a fraction of that!) Obviously, it is also important to find a strategy that you can trade with psychological comfort as well.
With best wishes for your trading,
Private Fund Trader/Head Trader Consultant
“We take your trading seriously. You should too. Make It Pay.”
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