So, yet another disappointing week. I’m down $246 this time. There is just $159 left from my initial $520 account. Combined with the prevous account losses, I’ve already lost about 4% of my initial $10,000 risk capital.
As I told you previously, I found that I don’t like day trading. I want to focus on long-term trading. This time I tried to use my “adding to winning position” approach in long-term trading. I increased my risk limit to 1% of my total capital. There is no point in betting 0.1% on something that I planned to keep for weeks or even months.
So, I built long position on EURUSD looking at monthly charts. It failed in 2 days. Yet another attempt to build the position in the same direction failed at the end of the week.
Then I stopped and did deep analysis of all my trades since the very beginning. Here are some conclusions I draw:
1. I should not “add to the winning position” mechanically. While it can theoretically increase RR ratio, it greatly increases risks of entering into the market. When I add 10 levels at 20 pips each, I move average entry point about 100 pips from its perfect level. It means that I will get both less profit and higher loss when the price reverses, not even taking into account plenty of small losses from price fluctuations along the way.
There is nothing wrong with increasing winning positions, but all these extra entries must be treated as absolutely independent ones, with their own risks. I must pay even more attention when I add to the position than when I initially enter, because some amount of move into the positive direction increases the probability of reversal.
From the execution point of view, keeping track of multiple positions is hard and nervous. When you enter the market at the perfect point, you can move your stop to the breakeven level, then relax. But, when I’m constantly adding more and more, I’m always under pressure. I will avoid using this technique for some time, until I become profitable with solid separate positions.
2. Risks are much more important than any potential profits. My focus should be on minimizing risks, not on maximizing profits.
All these weeks I did everything to maximize RR ratio, even when it increased current risks. The idea was simple: if I trade like a slot machine against the market, I will be green at the end. The only problem is that it can take longer than I initially expected. Much longer 🙂
It’s not enough to minimize total financial risk in any given position like I did before. Yes, it was a good idea to start with just 5% of my total risk capital because other way I had a chance to lose it 4 times in a row. This time I should pay more attention to minimizing execution risks as well.
I understood that I should look at any trading opportunitiy in a different way: instead of looking for the best reward/risk ratio, I should focus on the ones with the minimum risks, even if their RR ratio is lower.
“Perfect setup” is not the one where I can make 500 pips with 100 pips risk. It’s the one where I can make 100 pips with 30 pips risk. And, when I finally made my target 100 pips, it may be a good idea to wait and see if the price can go even higher, to the same 500 pips as in the first example 🙂
3. Forex is a ranging market, not a trending one. There is no point in building long-term positions here. Taking into account intraday fluctuations, it’s hard to find a good entry point for longer-term trading. Nobody is accumulating Euro for retirement 🙂
For me it means that I don’t want to focus on the Forex market anymore. I decided to go into the stock market where I can keep positions from 3 to 30 days, at least. This time I no longer have a desire to become a day trader.
4. I need to analyze the market much deeper than I did before. I had a chance to avoid all these losses if I invested these 6 weeks not into trading but into harvesting and analyzing the data. Yes, I learned some good lessons but their cost should be much lower.
I decided to delay trading real money in the stock market until I become absolutely prepared. Taking into account zero leverage, high comissions and clear statistical requirement to build a portfolio to minimize “black swan” risks, I can’t experiment with $100-$500. I need to put all my $10,000 at risk this time, or I will not even cover transaction costs.
This time I plan to invest at least 8 weeks into learning and developing an analytics system which can give me mathematically correct real-time visual answers to all questions I can get along the way. Something like: “What is the corellation between two given stocks in 2017?” or “What will be the difference between 2016 and 2017 if I use this particular trading idea?”, for example.
Only after I get this system in place, I will practice trading demo for the next 8 weeks. The cost of mistake is too high for me this time to carelessly risk real money.
5. Yes, it sounds boring to not trade for 4 learning/development/demo months in a row. I feel that I need some minimum practice to preserve my internal motivation.
I found a solution that sounds good for me: I can start building my analytics system for the Forex market at the very beginning. Its core features will be the same for both markets, the only difference will be in data sources and some market-specific reports.
I expect to find some Forex trading ideas which I will execute using minimum lot possible, no longer trying to increase position size or to grow my account exponentially. Just as proof of concept, risking about $0.20-$1 per day 1-2 times a week. $159 left will be more than enough for this purpose.
But, even if I become a profitable Forex trader in the end, it doesn’t matter. I decided to go into long-term stock trading, I need Forex just to test and polish my system and ideas. It’s also interesting for me to compare statistical characteristics of Forex and stock markets.
So, in short, I will focus on analytics this time. I don’t plan to trade next week, or even the week after that. On the other side, I will share some interesting facts and stats I discover along the way. Maybe they can help those of you who decided to focus on the Forex market.