Going online for trading advice is perhaps one of the common practices amongst new Forex traders. As a matter of fact if you’re reading this post you’re doing this yourself right now. However the problem comes when you consider that many people with little or almost no experience in trading start to advice their fellow traders according to their own – and often very precarious – experience. Through the years I have been surfing the web looking at forums and articles written by other people and I have always found the same very bad pieces of adice which might – in my opinion – cost you dearly.
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Through the following few paragraphs I will share with you some of this “common advice” and why it is so detrimental for the journey of traders towards long term profitability. I will go through what I believe is behind these suggestions and why following them or taking them as “dogma” might make you take a few additional years or even fail at all to achieve your goals as a Forex trader. I will especially focus on some advice regarding algorithmic trading as well as some “tips” which are given for traders in general. These are the five worse pieces of “advice” I have seen online:
1. Success in trading is majorly psychological. As I have said on previous posts the realization that psychological problems are the cause of failure in trading is wrong. Whenever someone has fear or greed it is because of an inherent lack of understanding. Failure to control emotions is not the end-cause of why people fail in tradingbut it is a consequence of the true root cause of failure: a lack of proper understanding of how trading works. Following this advice and attempting to work on “emotions” is not bound to work as emotions in themselves are not the true cause. If you want to succeed in trading stop blaming your emotions, to eliminate them you simply need to increase your understanding. With understanding comes an absence of emotional disruptions in trading.
2. Algorithmic trading doesn’t work. People often say this with the argument that if any piece of algorithmic trading “worked” it would not be sold and that banks and hedge funds use incredibly complex systems that a retail trader could never use. The barclay systematic trader index shows more than 400 examples of individual commodity trading advisors and hedge funds who have got profit from systematic trading for the past 20+ years. Completely systematic trading with realistic profit and draw down targets with a proper understanding of the market works, there is no doubt about that.
3. Backtesting doesn’t work. This is another tremendously erred piece of advice you hear everytime on forums, spawned from the frustration of many traders who find that backtesting results never reproduce correctly on their live accounts. First of all, backtesting is an extremely important tool to evaluate the results of a strategy across older market conditions, however all simulations have limitations and it is entirely up to you to take them into account and generate accurate simulations. Yes backtesting doesn’t work if you don’t understand them and want to run systems that cannot be accurately simulated, but if you truly understand what is being done an code systems that can be reliably tested it is an invaluable tool.
4. Grids and martingales can work if you just trade with enough capital and reduce your risk. Let’s be clear about the fact that no strategy which doesn’t limit risk can work because eventually it will fail to work and the lack of a proper Monte Carlo derived worst case scenario will cause you to lose the entire account. If you truly understand trading and have run Monte Carlo simulations of these strategies you will understand that grids, martingaes and any strategy with an uncapped markt exposure will inevitably lead to account wipeouts in the future with no opportunity to make a profit in the long term.
5. Indicators do not work. Recently there has been a “wave” of people in forums who have discouraged the use of indicators tremendously. I have written several posts about this in the past and have coded many strategies that rely on the use of indicators for profitability. Indicators are nothing but mathematical calculations over price and if you truly understand the nature of these calculatiyons and their interpretations you can certainly succeed with their use. There is ample evidence that indicators can work to give you profit but you need to understand the CALCULATIONS behind them and know how to intepret this information. Remember that indicators never “lag” it is your interpretation of the information given by them which is “lagging”.
Long story short, take everything you read online with a grain of salt and always look for HARD evidence of things before setting your mind on everything. Always be willing to change your mind on adequate evidence and always perform simulations and evaluations to answer your questions. The true lesson here, as it has become evident to all those of you who read my blog, is that the KEY to success in trading is UNDERSTANDING. When you build an understanding about price action, the market, indicators, simulations, systems, etc you are eliminating psycholgy and learning to come up with strong ways to profit for which you possess adequate statistical information.
If you would like to learn more about my journey in systematic trading and how you too can code your own systems please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)
