Week 14 FX trading results

Earlier in the week, I experienced a drawdown of 33%. Since then my trading has at least stabilised, growing by whopping zero percent in the remainder of the week. I am content with this because in the past, before I started this blog, losses would beget losses until I would feel so wounded and filled with self-loathing that I would be on the verge of being physically sick. It’s a horrid feeling. This time around, I feel my constitution has been more resilient in the face of adversity. I am going to try and work my way out of this drawdown with patience. It will take time, but I will try.

I am giving myself a score of 7 out 10 for following my road map this week, but it’s worth pointing out that the score for Friday feels like my first 10 out 10 day. Today, I planned my risk parameters before entering a trade, and when the position moved against me, I exited for very small profit. I felt strongly about what I was going to do before I opened the trade, and after I closed out the position I had no inclination to get back in to the action. This is important, because I traded purely based on what I thought was rational, as opposed to trading off my needs and wants.

Cutting losses and letting your profits run 

With hindsight, the trade could have returned 4x the amount risked, because the price eventually moved in my direction, but that is not really of my concern. It does however, raise an interesting point about the adage of letting your profits run. Many traders say this is their greatest deficiency. In my opinion, however, the adage carries a large element of deceit, because we tend think about it with respect to those trades that got away from us (i.e. with the benefit of hindsight, after the fact). After the fact, we could also talk of the losing trades we never should have entered, the winners we never traded at all, and so on.

For the majority of successful traders, cutting losers and letting winners run is not ‘how’ they got successful per se, but it is almost a truism; that is, for many strategies it is the only way for them to be successful. It’s a bit like saying when bond prices go down, interest rates go up – they have to, because they are two sides of the same coin. When a strategy has a positive expectancy, merely amending it to allow winning trades to run higher isn’t necessarily the best approach, because it requires giving your trades more breathing room, and with this breathing room comes scope for your profit to be eaten in to. It’s about finding an optimal balance. 

It is important to allow one’s trade ‘breath’ in accordance with the time horizon of the trader – for example, a day trader will have a much tighter stop loss than a global macro trader – but merely adding a trailing stop to a trade because the trade ‘might’ continue to run in your favour doesn’t quite add up. I do use a trailing stop at times, giving my trades a slight chance to run, but I don’t want to give up a healthy portion of my profit after I have identified a good trade, executed it, and watched it move to where I expected it to move. I’m not saying there isn’t a psychological bias that makes novice traders take profits too early (there is quite a bit of evidence for this phenomenon). I just think that at every stage in the price action we have to ask whether we would enter in to the trade or not. That decision really should not be influenced by whether you already have the trade on in the first place.

6 responses to “Week 14 FX trading results

  1. I agree that this is also one of my biggest faults as a trader…..Riding a winner. I work at it all the time. Currently I am in a few long EM currency trades which have all gone belly up this afternoon. I suspect that things will look worse on Monday morning, but I hope not long after that. I am holdoing the positions for now.

  2. i agree with your thoughts on market cliches…they work unless they don’t

    congratulations on the way you handled this drawdown…hopefully, next week will be better


  3. I agree that letting Profits run is easy to say but hard to practice in real life. Just today I had met my daily goal before noon trading ER2. Once I reach my daily profit quota, I put in one final trade (usually 1 contract with a tight stop) and if it does not work in my favor, I call it a day. This has helped me make a little bit more on days where I am in tune (in the zone) with the markets.

    Today I was done with my daily quota by 11:30am and I decided that I was going to let the last position run as far as it wants. I put in a short trade and once it moved 1 point lower, I moved the stop loss to Breakeven and decided to leave for lunch. After getting ready I decided to take a peek at the charts and noticed a RSI divergence. Instead of leaving the trade as it is I closed it for a small 1 point gain and then left for lunch. Little did I realize that today was the day the market was going to tank in the afternoon. When I got back the market was down a good 7 points. I have noticed that there are many days where a entry in the morning and close at end of day has yeilded more points per contact than when I made several trades using multiple contracts.

    Anyway what I have come to realize is that if the market is showing strong bias, it might be beneficial to have a small position (perhaps 1 contract) without a fixed Profit Target.

  4. ‘they work unless they don’t’. John, you have summed it up perfectly!

  5. Sam – Your experience was not dissimilar to mine, in that we both ‘chose’ to forgo the potential for large gains, but in itself this is no bad thing. We only feel regret with hindsight, after the fact. People talk of the ‘benefit of hindsight’, but this is often not a benefit at all.

    There are days when we would have liked to have left our positions until the end of the day, but the question is whether this would actually increase our positive expectancy over the long-run. If we decide to make the trade off and increase the tenor of our positions and adjust our stops accordingly, we are buying an increase in expected return at the price of potentially deeper losses (per trade). For example, you say there are days when holding a position for the day makes more money than micro-managing several trades through the day. Even after accounting for the fact that trader’s are known to have a tendency to overtrade and excessively micro-manage trades, I think all that really matters is finding the point of highest positive expectancy for our strategies. We may find we are guilty of these flaws, but we may not. It may be worth while running a separate portfolio of full-day trades, or at least recording the results of these trades separately, so they can be compared against your shorter-term trades. This may help to identify your ‘sweet spot’ in current market conditions.

    (Lastly, I like your point about trading without a fixed profit target when there is a strong bias in the market. One area I find this can be useful is when trading cable (GBP/USD). It is sometimes evident that the pound is trading on a weak or strong footing, and this trend can last through the day. By shorting cable in these conditions, you can benefit from the negative sterling sentiment, but your positions gets an extra boost when EUR/USD falls (cable and EUR/USD have a high correlation). However, when EUR/USD is rising, cable can be very reluctant to follow suit on GBP -ive days.)

  6. Yup, John summed it up perfectly–market cliches work until they don’t. Brett Steenberger has recently commented on how commitment to a approach must always be blended with flexibility and awareness of what is happening realtime. It is ironic and curious that in the trading markets, which is the epitome of not being able to know any outcome with any degree of certainity is so rampantly full with ‘smart’, ridiculously simple, smug, and useless rules of thumb!

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