Forex Trading Articles

BIG DOGS DON'T HANDICAP

By Dick Thompson for Forexmentor
©2009, Forexmentor.com, October, 2009

Not too long ago a fellow trader proceeded to tell me about the continuous drawdown of his account. As he continued, I learned that he had committed himself to trading for a living, had given up his job and was working his way through his savings. The more I heard, the more I decided that this individual had either incredibly deep pockets, or he was totally nuts. I started questioning him about his methods, his practices and so on. I discovered that he essentially had not yet decided what style he was suited to; position trading, swing trading or intra-day trading. He had no fixed plan of trading either; he did not know which indicators, if any, to use, whether he wanted to be a trend follower, or what. Well, you get the picture. But the most upsetting thing was that he was trading with real money. Not only real money, but lots of it. He was trading over ten mini lots on each trade. When I challenged him on why he was trading with so much money when there were so many questions yet unanswered, he responded that he was in this for the money and that was the only way to learn. Of course that was his opinion and I told him that I strongly disagreed with him.

I set out to try to draw some analogy for him that would explain why he should abandon his path and undertake a planned attack; some way to preserve his capital while he learned the art of trading. I thought of brain surgery. But that involved damage to others when the inevitable failures occurred. I tried flying an airplane. But that didn’t seem right because I know that there are people who have flown without benefit of training – at least once! I finally hit on the idea of golf.

Golf is a game that, the more I think about it, has some similarities to trading. It is hugely psychological. The player is challenging not only the course, but the natural elements and his/her own mental concentration, as well as skill. We seem to approach it in a similar way, too. We are always looking for a tip on how to improve, some new grip or a new driver, or new shoes. We try lessons on how to improve our swing, our execution. It goes on and on. But how do we keep track in golf? How do we compare that to trading? Well, we could play against another player, say, for $500 per stroke? But in golf, each player is “rated” or handicapped. A handicap is a numerical measure of a golfer’s playing ability based on a given course. It is used to calculate a net score from the number of strokes actually played, thus allowing players of different proficiency to play against each other on somewhat equal terms. At this point, I realize that golf doesn’t quite work as an analogy for trading. Why? Because BIG DOGS DON’T HANDICAP.

This is really a serious issue. The market, the Big Dogs, are not forgiving. They will take your money and not look back. No empathy; no sympathy. No emotion. It’s just a job, a business. Take the dumb money and get on to the next trade. So how should we learn? How should we proceed as we tread the path towards becoming a trader? Here are my thoughts.

First, we must come to an understanding of what Forex trading is; what is the market, how does it work, how do you trade it (not the same thing as an individual trader’s methodology), what brokers do, how do their platforms work. All of these things can be found in free literature; library books, web sites, articles in magazines, etc. Here is a link to get you started. http://www.investopedia.com/articles/forex/06/interbank.asp

Then, how are we going to trade? What “feels” good? Do you know; or will this take some experimentation? If we are relatively new to trading, this will probably be a Biggie. I want to be clear here, I am not talking about a specific strategy but about our trading philosophy; will we scalp? Day trade? Position trade? How does our risk tolerance fit these schemes? Our psychological makeup? Again, there are many sources of information on this topic, especially the psychological component, which is so often given too little attention, if not dismissed outright. A great source for this topic is the book “Face the Trader Within” by Chris Lori.

Of course we will need to find our methodology for trading too and this is another daunting pitfall for the newer trader. We too often believe that there is a “perfect” system out there, a Holy Grail. It takes some of us a very long time to realize that this is bunk. No such thing exists. But, we must come up with something that works for us and this must be a methodology that is ours. It must be based on what we easily can see. And it must be clear in our minds such that we can state clearly just what we need to see in order to take a trade.

Ok. Those are a few of the things that we must do. They are by no means trivial, nor are they easy. Some of us can get there in months; others take years. Others never make it. But the message of this article is that we must proceed cautiously as we take this journey because we will only be successful if we have some money left when we get there! The Big Dogs don’t handicap. They take our money.

Here are some suggestions to help us. While we are exploring all of the issues that I briefly mentioned, we don’t trade with standard lots and high leverage. If possible, we trade in a demo account as long as we can stand it. And then, move into a live account only when we think we have something going that we believe has a chance of working; but then, we only trade live with Micro lots. Yes, I said Micro lots. Not Minis. A Micro lot is worth only 10 cents per pip. We can play around a lot with those and keep our risk low. Actually, if we are sane in what we do and trade them just as if we were trading minis, or even standard lots, that is, with good money and risk management consistent with our account size, money will become less of an issue compared to discipline and accuracy in following our trading plan. And that will go a long way towards preserving our mental as well as our financial capital. Finally, when we have consistent results, we can step up to mini lots, still with the discipline that we have perfected. And now we are on your way to becoming a successful trader.

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