Forex Trading

[ChpBstrd]

Well the price alert triggered at 112.95 as it went against me and I exited with a $23 net loss. There it is. Now I'll wait for the next trade opportunity

The guy I know is a multi-millionaire who has made real money trading. He knows the business really really well. I reckon the stuff you read about is just a scam. Do you think George Soros trades with a stop loss. Read up on what happened when he shorted the pound. Paraphrasing but a whole bunch of people in his trading house or whatever sold their positions quickly - he held on and took their positions on as his own. I'm pretty sure he also lost a tonne of money not long after this because he picked the wrong position. That is the game that the professionals who actually make money play. These people are extremely rare.

I've traded and I learnt that the automated approach doesn't work. Being a successful trader is really really hard. It's significantly harder when you can't even view the game accurately. I honestly think that the standard approach is designed to rip amateurs like yourself off.

Two thoughts:

1) There are options trades where, for example, you can put $100 at risk and have an 90% chance of winning another $10 and a 10% chance of losing your $100 investment. The expected value is thus (.9)110+(.1)-100 = 89 which is less than the EV of holding cash, which is 100. However, for a true gunslinger with a gut instinct that the asset will make a directional move, the trade can seem rational, highly profitable market makers be damned! He will dip a toe in by placing a $1,000 bet. He will win 90% of the time. With newfound confidence he doubles his bet size and wins a few more times. This "experience" will convince the trader he is "experienced" and perhaps "good at" trading. He does some excel calculations and finds he will be a millionaire with just a few more wins in a row. He goes all in... and probably wins! At some point, however, the streak almost certainly ends in a total loss as the low probability losses add up.

Behaviorally, what is occurring? It's operant conditioning. The rat is pressing a lever and getting little rewards, and literally cannot stop pressing the lever because doing so produces a little dopamine hit on its own. But it's a trap. Similarly, a clever deer hunter will spread corn near his hiding place so that deer will frequent the area and overcome their fear of human smell. Market makers and casino operators allow their marks to earn little rewards very often so they can establish a behavioral compulsion and wipe them out with the long-run odds. 

2) If you flip a coin, betting double-or-nothing on heads each time, there is a 1 in 1024 chance you will win ten tosses in a row. If you start with a $1,000 bet, re-bet your winnings each time, and manage to win 10 in a row, you will have $1,024,000 within a matter of minutes. With this algorithm, ALL other possibilities than 10 heads in a row result in a 100% loss. The odds of that are 1023/1024 or 99.9023%.

Now let's say the forex/futures/options market has 100,000 active traders at any given time. How many would we expect to become millionaires using the algorithm and odds described above? The surprising answer is about 98 would be expected to win ten 50/50 trades in a row. The odds of the rest of us hearing one of those 98 brag about their skill at essentially coin-flip is about 100%. Some will write books. Some will start blogs. Some will go on TV. These are all behaviors that the 99,902 wiped out people are far less likely to perform. Besides, "How I lost everything" is a less interesting book than "How I turned $1,000 into $1,024,000" and will be purchased/printed/read far less often. The world magnifies the message of the winners and drowns out the warnings of the losers. Nobody is searching Amazon for "How to lose all my money."

In summary, trading is the perfect trap. Operant conditioning encourages the mark to take bets with a negative NPV. Meanwhile, the trap lets a lucky few traders win for a while so they can tell everyone else how easy it was to make millions of dollars from the trap.

[steveo]

In summary, trading is the perfect trap. Operant conditioning encourages the mark to take bets with a negative NPV. Meanwhile, the trap lets a lucky few traders win for a while so they can tell everyone else how easy it was to make millions of dollars from the trap.

I think some people are probably good at predicting the future based on currencies and some of those people may also be able to trade. By trade I mean have the instincts of when to get in and get out and to be able to hold a decent sized position.

The problem in my opinion is that you don't get taught either of those skills via the theory of trading. I actually think you get taught the wrong approach. You get taught that some indicator which is completely esoteric or some chart pattern is successful 55% of the time and then with the right money management (which is using defined loss and profit points and betting certain sized amount trades compared to your account size) will lead to long term success.

My experience is that your pick of which direction the market is going to go will always be extremely difficult/impossible to get right consistently. No indicator or chart pattern or whatever can take the direction picking away from you. You just have to accept it's a gamble because you are predicting the future. I agree you should think about it. I'm suggesting that you think about it a little harder and try and get it right. To get it right you have to think about real fundamental issues - US trade policies, US interest rates, the rest of the world interest rates and then check the charts and see where the market is. Even though you do all of that you will still get it wrong. You also don't take positions every week or something like that. It's a well thought out process. If there are no positions you like available then don't trade.

My experience when it comes to the actual trading part including money management is that you have to be able to hold that position. So you look at your downside and think I can handle a big movement against me. You aren't betting say 10% of your account. You are betting the whole amount. This approach immediately takes away the stop loss approach that OP suffered from within this thread. Then you pray that position goes your way and you let it ride. If it goes against you hang on for dear life and try to not take that loss.

It's not a consistent earner. It can get you big gains and some big losses. You also have a chance to actually be profitable

The amateur ala the OP takes a position based on some indicator he thinks will work but it's basically just a esoteric idea that works randomly but at a really low success rate. You then back up that position with a stop loss that is way too tight and doesn't give you a chance. So you get thrown out of the market and you take your loss. Slowly but surely your account goes to nothing. The reason this happens is that you've been sold a dud product from the whole industry. You have basically no chance of picking the direction well and because you are using their trade often approach with tight stop losses you get shaken out of the market before you can actually get a profit.

[BicycleB]

Two thoughts:

1) There are options trades where, for example, you can put $100 at risk and have an 90% chance of winning another $10 and a 10% chance of losing your $100 investment. The expected value is thus (.9)110+(.1)-100 = 89 which is less than the EV of holding cash, which is 100. However, for a true gunslinger with a gut instinct that the asset will make a directional move, the trade can seem rational, highly profitable market makers be damned! He will dip a toe in by placing a $1,000 bet. He will win 90% of the time. With newfound confidence he doubles his bet size and wins a few more times. This "experience" will convince the trader he is "experienced" and perhaps "good at" trading. He does some excel calculations and finds he will be a millionaire with just a few more wins in a row. He goes all in... and probably wins! At some point, however, the streak almost certainly ends in a total loss as the low probability losses add up.

Behaviorally, what is occurring? It's operant conditioning. The rat is pressing a lever and getting little rewards, and literally cannot stop pressing the lever because doing so produces a little dopamine hit on its own. But it's a trap. Similarly, a clever deer hunter will spread corn near his hiding place so that deer will frequent the area and overcome their fear of human smell. Market makers and casino operators allow their marks to earn little rewards very often so they can establish a behavioral compulsion and wipe them out with the long-run odds. 

2) If you flip a coin, betting double-or-nothing on heads each time, there is a 1 in 1024 chance you will win ten tosses in a row. If you start with a $1,000 bet, re-bet your winnings each time, and manage to win 10 in a row, you will have $1,024,000 within a matter of minutes. With this algorithm, ALL other possibilities than 10 heads in a row result in a 100% loss. The odds of that are 1023/1024 or 99.9023%.

Now let's say the forex/futures/options market has 100,000 active traders at any given time. How many would we expect to become millionaires using the algorithm and odds described above? The surprising answer is about 98 would be expected to win ten 50/50 trades in a row. The odds of the rest of us hearing one of those 98 brag about their skill at essentially coin-flip is about 100%. Some will write books. Some will start blogs. Some will go on TV. These are all behaviors that the 99,902 wiped out people are far less likely to perform. Besides, "How I lost everything" is a less interesting book than "How I turned $1,000 into $1,024,000" and will be purchased/printed/read far less often. The world magnifies the message of the winners and drowns out the warnings of the losers. Nobody is searching Amazon for "How to lose all my money."

In summary, trading is the perfect trap. Operant conditioning encourages the mark to take bets with a negative NPV. Meanwhile, the trap lets a lucky few traders win for a while so they can tell everyone else how easy it was to make millions of dollars from the trap.

Wow! @ChpBstrd, terrific post.