Yet another big losing week, I’m down yet another $82 on $520 initial account.

Why so much if I decided to limit my daily risk to $2?

I followed my risk management and trading rules for the first 3 days of the week. Every day I entered the market exactly according to my plan. The market was slow and moved nowhere at my entry points, so I just exited when losses reached the predefined daily limit.

Tired from these empty entries, during which I accumulated about $8 in losses, I decided to test yet another approach – decreasing distance between entry levels, so that I need much less price movement in order to get the same profit as before.

As I told you, I managed to compress distance from 50 pips to just 20 pips, then to about 10 pips which enabled me to get the same lot size in just 100 pips, not 500, as its initial version. The losses became smaller, too, because I lost not 50 pips per failed level, but just 10.

So, this time I decided to compress it even further, to 5 pips. I did it at the end of the third trading day, being disappointed with bad entry points from my previous approach.

It’s funny that I managed to make 2 good entries in a row, making back all previous weekly losses. Motivated by these quick and easy results, I decided to take a break and do something big next week.

So, next day I started with a feeling that it will be quick and easy to use this approach. I didn’t even bothered to analyse the market, but just entered it randomly and started to accumulate positions, taking plenty of small losses because I tried to compress levels from 5 to 2-3 pips.

This ”work” got all my attention, so I didn’t look at my account balance for some time. I was sure that these small losses I get will not amount to something big at the end. I felt that I can easily get them back after I build a big position before some good market move.

At first there were minus $10, then $20, then $30. At the same time, I built about 20 pyramid levels which gave me up to $20 per every 100-pip move, so I felt safe. I accumulated about $40 in unreleased profit at about $30 total released loss. Still positive, yes?

The funny thing was that it represented just 300-pip move where just 100 pips back may kill half of my unreleased profit. It finally happened, so I got $30 losses with just $20 unreleased profit. Too little to close, that’s what I thought at the moment 🙂

The price went back and forward, I accumulated even more losses. If it just bounced back to my first entry point, I would just take the loss and go away. But it constantly gave me a hope to get back to the same level and even higher. I reminded myself that potential profits are so big that they can easily cover all losses I got so far.

For example, if price moved for 500 pips, I had a chance to get $100. At 1000 pips – $200. So, my $50 risk still looked like a good deal 🙂

I continued to accumulate losses, waiting for the price to go higher. At some point I got tired and closed the position, getting back $16 at $50 total loss. You will laugh, but the price immediately went higher, to a point where I had a chance to be more than breakeven for the day.

I decided that the idea was solid, I just closed the position too fast. I decided to give it yet another try, this time building the position with the patience in my mind. But, this time price just moved up and down for several hours, never giving me a chance to see even $20 of unreleased profit.

I gave up on $82 in losses. After final analysis I found the reason why I missed. It was just pure luck that I earned some money with this approach the day before.

The reason was simple: with 4-5 pips spread and 4 pips comission I used 10-15 pips wide stops, adding to the winning position every 2-3 pips. So, when the price went back, I got about 20 pips of losses for every 2 pips of distance. It was 10 times more than in all my previous experiments. From a statistical standpoint, I played an absolutely losing game, 10 times worse than entering the market with a full size at the very beginning, which I decided to avoid at all costs.

I still like the idea of adding to winning position, I should just do more maths and testing next time 🙂

So, I decided to stop trading until the end of the week, because I clearly reached all possible daily loss limits. Instead, I focused on looking for good entry points. I’m disappointed with my previous news-based idea because it rarely plays out as expected. I feel that it was pure luck that I got good results in my first trading week.

Here is what I decided to try at the very first iteration of looking for entry/exit points:

I noticed that the market always goes against me when I’m absolutely sure. If I was right 50% of the time, there is nothing I can do about it, it’s just random. 100% wrong means that there is something big there. It’s not that I’m the unluckies person on Earth, it’s that we all look at the same charts, read the same news and make the same trading decisions. These crowd-initiated decisions make the market move in a counterintuitive way.

I feel that trying to analyse the market manually will lead me to the same crowded places. I did read trading forums, chats and public/private analysis/predictions for enough time to see that they are far from being statistically strong.

On the other side, I don’t want to build a statistics-based trading robot because this way I will go into yet another crowded place as well. From my observations, more than a half of Forex players either try to develop yet another MetaTrader expert or pay somebody to code it for them. From what I read recently, quants get into the same trap I told about a week ago: when something is automatable, it loses efficiency and margin to a point where it becomes obsolete.

I want to combine the best from both worlds: calculate and visualize market stats, automatically find some setups, but let me make final analysis and decisions. This way I will both develop great tools and evolve as a trader.

I started to work on pattern recognition/analysis engine inside my simulator to calculate odds and find better setups. One of traders I followed in the past called this approach ”working as a slot machine against the market”.

I’m writing this report after I finally got first positive results. What I have got so far doesn’t find entry points yet, but just dynamically estimates probabilities and RR ratios, optimizing and visualizing them live. It alone protects me from about 80% of bad short-term setups. What looks like a great opportunity when looking at the raw chart alone rarely pays out as expected 🙂

Yes, these first results are still statistically insignificant, but I feel that there is plenty of room for optimization and experiments.

I plan to polish this idea in the simulator first, using statistical pattern analysis as a model for finding entry and exit points, then trade it in a demo account until I see some profits at the end of the day, only then I will return to trading live account. As usual, I plan to trade as I have just $100, independent of my current account balance.

On the other side, I don’t want to stop trading real money because I lose motivation when simulating or trading demo. So, I will trade real account on the next day after I get any demo profits according to my trading system. And, if I get my limited losses in the real account, I will trade demo the next day again. Taking into account potential losses at $3 per live trading day, it’s a reasonable price for my motivation 🙂

I don’t expect the next week to be profitable, but I will definitely avoid costly experiments this time. I can’t even call what I did this week an ”experiment”, it was clearly a mistake. On top of that, I violated my own risk management rules, so I have no excuses.

While it’s easy to promise to follow some rules, I feel how hard it is to actually do it. It takes some time and experience, you can’t just ”learn” or ”understand” them. You need to be beaten hard to feel what they actually mean.

I feel great, by the way. While I got yet another losing week in a row, I’m still happy that I didn’t take much bigger risks at the very beginning. I missed a chance to lose all my money twice in two consecutive weeks.

Instead, my current losses are just 1.5% of my total risk capital for this venture. At this loss rate, even if I will make these huge and costly mistakes each and every week, it will take about 3 years to get rid of it. Plenty of room to learn 🙂

So, I will continue to trade small, following my core rule ”adding to the winning position only, by doubling weekly profits” when I finally get some.

As I can clearly see and prove with my account balance, the most important part of trading is risk management. I don’t expect that my current idea will be the final one, but I have a chance to try more until I stick to something that actually works. Yes, I’m profit-negative, but I’m still in the game 🙂