“Trading is a performance activity; as such you the trader face the same obstacles, hurdles and uncertainties common to all fields of performance and endeavor: on the one hand it’s you against the world, and on the other hand it’s you against yourself and your own demons.” – Steven Goldstein
There were thunderous counter-trend movements on Tuesday (September 6, 2011). The CHF (Swiss Franc) was suddenly weakened. When gold was rising and the EURUSD was falling, there was a great possibility that the latter would snap back; and vice versa if gold happened to fall. You could even see both the normally negatively-correlated EURUSD and USDCHF going up. The seemingly slow-moving USDCHF went up by more than 700 pips in a single day! The GBPCHF went up by over 1200 pips on Tuesday. Since then, some markets have been in tight consolidation phases, gathering strength for the next major move, either as trend continuation or reversal. If this was against someone who knew about risk control, his loss would’ve been insignificant. If it was in favor of someone who ran profit, his target would’ve been hit. This is another reason why one needs to conform to very small position sizing techniques and never risk big out of overconfidence or greed.
Risk control measures must be considered before trades are opened and after that. There’s no assurance that a trade that’s about to be opened would be a winner or a loser, yet risk management MUST make a difference. 5% drawdown is different from 50% drawdown, whereas a 50% drawdown is an indication that one needs to go for further training (since it’s obvious that one is not yet a competent trader).
A disciplined trader who makes 10% returns per annum may be thankful for the safety of his capital and the profit (whereas 10% profit is highly commendable on a big hedge fund). On the other hand, a greedy gambler won’t even accept 10% returns per month; though the gambler may have nothing to show for his long-term greed except huge losses and/or margin calls. Repetition of past mistakes sometimes occurs due to short memories.
The month of August 2011 had come and gone, but there are lessons to be learned. Some traders think that it’s 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’s nothing wrong with this conventional attitude, I’d like to point out that Forex markets always provide opportunities for wise traders irrespective of the month, but one needs to be flexible. “Awareness is curative,” says Timothy Gallwey. There’s no need to stick to the ranging USDJPY when the EURJPY is trending nicely. Why should one continue to suffer due to the irrationality of the EURUSD when the AUDUSD 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:
GBPCAD: From August 1 to August 19, this cross rose by over 800 pips. It also fell by over 500 pips from August 22 to September 1.
AUDCAD: This instrument plummeted by over 600 pips from August 1 to 9, and it later rose by almost 400 pips from August 10 to September 1.
GBPCHF: The price on this cross dropped by over 1600 pips in August 1 – 9; while it rose by roughly 1900 pips in August 10 – 29 before going southward by another 800+ pips in August 30 – September 5. You should know what happened after that: the price skyrocketed by more than 1300 pips within the following 4 days.
AUDCHF: This exotic cross moved southward by more than 1700 pips from July 28 to August 9. Then it rose by more than 1300 pips from August 10 to August 30, and dropped by over 500 pips within the following 4 business days. It has moved up by more than 1000 pips since September 6.
There are more examples like the ones above. The lessons that can be learned here are simple: a) It doesn’t 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’s 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 a wrong direction, then one must be stopped out with a negligible loss, providing that the position sizing is very small. d) If one is in a 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 2 different but reliable strategies may improve the overall statistics of a trading portfolio.
A quote from Boris Schlossberg ends this article:
“All strategies suck and all strategies are great depending on a certain market environment. What distinguishes success from failure is much more a function of your own behavior rather than the clever little algo you just produced.”
NB: Please watch out for my coming articles with these titles: ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple RRR – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Excellent Money Management Flexibility – Make the Best Choice!’ ‘Resist the Lure of High Risk – Part 3’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Advanced Gap Trading – Trading with Insane Accuracy,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses – Part 3 (Losses Aren’t Abnormal) ,’ ‘The True Holy Grail – The Long Sought for,’ ‘Suicide Trading Techniques,’ ‘Achieve Success through Sensible Risk-to-reward Ratio (An Interview with a Trading Enthusiast),’ ‘ Clarifying Some Issues – Part 5,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Overview of My Signals Strategies,’ ‘The Cost of Discipline,’ ‘Monthly Market Review,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Is It Realistic to Give Guarantees in Trading?’ ‘Monthly Trading Report (Augsut 2011),’ etc.
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