WHICH TRADING SYSTEM CAN I USE?

“Willingness to work on your self is the primary factor in a trader’s performance.” – Dr. Van Tharp

Hello:

Today’s article contains additional pertinent questions from existing and potential subscribers. The answers that accompany them (especially questions 4 and 5) reveal some great trading lessons; the fact you MUST accept as a trader.

1. Why not show me how to trade like you rather than just send me trading signals? – A. J.

Answer: Only my personal trainees are coached to trade just like me, although trading secrets are constantly revealed in my articles. My trading signals are about my open trades, position sizing methods, and exits. I try to make sure that my subscribers receive these in a timely fashion. Another great way of trading like me is to have access to my account(s) and see how I trade and perhaps, trade just like me. You can have a free access to my accounts through this link: http://www.fxinstructor.com/en/analytics/ituglobal

2. I see that when you send signals, sometimes the price action would’ve gone beyond the suggested stop loss or take profit. What should I do in this kind of circumstance? – K. W.

Answer: Late signals shouldn’t be taken. If a trading signal is sent and the current market price is too far from the recommended entry price, the trade shouldn’t be taken. The same is true of a time when the price action has gone beyond the recommended stop or profit target. If you miss a signal, other signals would soon be forthcoming. Note that pending orders also give you enough time to set some orders before they’re filled.

3. Why do you show your past trading results only on demo accounts instead of live accounts? – P. P.

Answer: Some people tend to emphasize the differences between real accounts and simulation accounts. With a reliable broker, the differences are largely negligible (aside the fact that some are real money while some aren’t) since both of them are traded with real market data. The factors that seem to accentuate the so-called differences are emotional rather than tangible. The idea of taking a simulation account as a tool for sharpening trading skills is ineffectual if the simulation account isn’t treated like real money. I’m a funds manger and I’m never allowed to display the account histories of my clients, because they prefer 100% anonymity. My trading results on both demo and live accounts are always similar. If you can’t survive on a demo account, then you shouldn’t deceive yourself about your probable survival on a live account. I give my subscribers access to my trading results and account histories on demo – in order to show that I do what I preach.

4. I signed up to your signals service based on the strategy you analyze in your articles. How come that I’m being given trading signals which are different than those anticipated? – S. M.

Answer: Yes, the strategy I analyze in my weekly trading update articles shows results in months – not in weeks. Trend following and directional systems experience occasional drawdowns: only to recover them later. But if there are a few losses in a row, a subscriber to a free monthly trial may conclude the system isn’t good. Since some of those who subscribed to my trading signals would conclude that my trading activity isn’t profitable because of a losing month, I decided to give them trading signals that make us evaluate results on weekly basis instead of monthly basis. Trading is a game of the mind. Please check some recent performances below and learn some lesson.

Forex Performance (Monthly performance in %)

2008

Jul: 0.00

Aug: 3.07

Sep: 2.68

Oct: -1.16

Nov: -0.95

Dec: 7.75

Total: 11.64

2009

Jan: -2.01

Feb: 2.41

Mar: 3.64

Apr: 1.49

May: 11.54

Jun: -4.30

Jul: 0.97

Aug: -2.36

Sep: 0.97

Oct: -3.27

Nov: -0.29

Dec: 1.73

Total: 10.05

2010

Jan: -1.80

Feb: -0.89

Mar: -3.54

Apr: -1.08

May: 3.39

Jun: -0.25

July: 7.27

Aug: -0.32

Sep: 7.13

Oct: 2.77

Total: 12.75

Grand total: 38.52

Alfa Commodity Fund (since June 2010)

Jun: 0.68%

Jul: 2.01%

Aug: 2.79%

Sep: 7.91%

Oct: 4.51%

Nov: 0.22%

Total: 19.32%

Lessons: The kind of trading results above may be too slow for impatient traders and gamblers. However, wouldn’t you be happy if your investment grows by nearly 40% in less than 3 years? The most important thing during a losing period is for a trader to suffer as little drawdown as possible, as evident in the biggest drawdown of -4.30% which happened on June 2009. If your drawdown is very small, then recovery would be very easy when the market condition becomes favorable. A professional trader may go thru consecutive losing months, as evident in the early monthly results in the year 2010. But he can recover at last and move ahead. He knows the most important thing in trend following is to keep losses very small and ride winners. He doesn’t abandon his strategy simply because of losing streaks. I seriously honor those who have the noble courage to display their losses alongside their profits. Haughty hypocrites would like to talk about their profits only; remaining taciturn about their losses. The performances above are from Thomas Stridsman. I put them in this article so that your eyes can be opened. Thomas, a well-known designer of trading systems, CTA (Commodity Trading Advisor), and funds manager, reveals this fact about trend following trading systems: “Please count how many losing trades it took…, because I took losers on the short side as well, before I jumped on the two winners I’m currently riding. Also note how much of the open profit I’m giving away before the systems let me exit the winner. That’s what trend-following is all about. You lose, lose, lose and lose more, and then – BAM! – one big winner makes up for it all and adds you the profits. But as if losing 5, 10, 15 times in a row wasn’t enough, even your winning trades end up losing. This is trend-following. You need to be comfortable with that or go do something else.”

5. You’re advocating small returns per month or so. But there are often winners that emerge from trading competitions with very high returns in a short period of time. What could you say about this? – R.B.

Answer: Please answer this question: Who’s really a trading expert, someone who accumulates hundreds of percentage in a short period of time, or someone who’s been surviving on the markets for years? In a trading competition, those who make most returns are chosen as winners, whether they make most money or most pips. Most of these competitions are usually short in duration (whereas a short period of time isn’t enough to determine the validity of a trading strategy). A winner of a trading competition is thought to be a champion on the financial markets, whereas risk management is given a little thought. Honest-hearted traders and funds managers that cherish the value of patience and risk management don’t seek that kind of recognition. I’m personally interested in demonstrating how I survived on the markets on a long-term basis instead of showing how I make huge profits over a short period of time. A scalping system which works well in a ranging market may fail in a trending market: a trend-following strategy that works well in a trending market may fail in a sideways market.  When such a system is used in a period that’s only favorable to it, it may make the user appear like a guru. One trading system was used successfully in one trading championship – with flying colors. The amazing results from the championship were displayed and people rushed madly to buy the system. Majority of them later crashed and kept their mouths shut. The odds of long-term survival with high-risk trading (like 5% or 10% per trade) are astronomical.

Felix Albus (who’s now a successful trader), won a decisive stock trading competition and thought that he knew what he was doing. He was celebrated and rewarded for his supposed ingenuity. Little did he know that his victory was out of sheer luck. He invested $20,000 which belonged to his granny and lost almost all the money. Then it dawned on him that he was a real novice! He later learned about what it really takes to be a successful trader and his life was transformed. There was one trading challenge about 3 years ago, in which the top winner made over 1200% in one month. Other winners also made hundreds of percentage within the month. There were aggressively crazy advertisements about those top winners and the trading styles they used. Even people who didn’t know anything about trading acquired those strategies, only to re-sell them to other novices like them. No-one cared about their highly risky position sizing. But some time later many people had gone mute about these ‘magical systems.’ People often make a mistake by thinking that they could always trade with insane accuracy. I heard of somebody who promised a profit of 175% to his investor on monthly basis, but no returns ever came. He’d run away! It became clear that his mindset was shaped by those incurably tricky marketers who show [doctored] gargantuan profits. Many a trading strategy is bought because of very high returns in a short run; only to experience a huge drawdown with it. You see, anyone can make money in any given period – but long-term consistency is the most difficult part.

I know how much sly marketers contributed to my harsh experiences during my novice years. I always believed them because I lacked the knowledge about trading truth. If you’re to accept the words of sly marketers as fact, you must prepare to face the possibility of 20% drawdown per trade if you target 20% profit per trade. You must believe that it’s possible to avoid losses in trading, despite contrary time-tested evidence shown by reality. You must believe that a trading system or a piece of software is a Holy Grail, despite what those who’d been trading before I was born are saying, that the Holy Grail is money management. Which course do you want to take? When you mind goes in sync with the truth about trading, you’ve taken a giant leap forward in your personal evolution as a trader.

This article is ended by Thomas Stridsman’s quotes:

A. “As I’ve stressed so many times already, the (trading) systems aren’t the secret, money management is.” – brackets mine

B. “Stop might or mightn’t be affected in the worst possible way. There’s no way to tell from one scenario to the next. One has to understand that there’ll always be times when certain systems just don’t perform that well and suffer through those times. There’s no way round that. Using…the other risk limiting ideas… should give you the confidence to take the drawdowns, knowing that after rain comes shine and your system will start performing well again. I almost said the system should start performing as “they should” again, but that should be wrong because they shouldn’t and won’t be profitable at all times. That’s just so.  There’s no way around that. No one can cover all the bases and as a trader you need to come to grips with that thought.”

C. “We have to understand that for something to work and make money isn’t necessarily the same thing. So if a system can work and lose money, how do we know if we can trust the system in the future? The answer to that is that we don’t trust the system per se, we trust our research.”

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Email: amustapha@fxinstructor.com

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

And my past articles are also available at: www.ituglobalforex.blogspot.com

Yahoo! Messenger ID: saazalmu

NB: There is risk of loss in trading, but it is possible to be a successful trader.

©2010 FX Instructor Forex Blog - For Traders, By Traders. All Rights Reserved.

.