We love science fiction novels and the book "Containment" by Christian Cantrell has a great definition of Occam's Razor:
We couldn't have put our own philosophy of how to become a great trader more precisely.
Good trading to you all, Evelyn & Mindy
Part A: Question Everything
When you begin learning anything new, it's natural to seek out mentors with greater experience. We've all begun our trading careers this way. But have you noticed that there's something about Forex that seems to draw out all the snake-oil salesmen, marketing mavens and charlatans? We think it's because there's too much easy money to be made in teaching. Sad, but true.
We've certainly been 'had' many times in our quest to figure this Forex business out. In fact, we got to the point where we decided that we no longer expected to learn a complete trading system from anyone we studied with – but if we could walk away with one new gem to add to our own understanding then we would consider ourselves lucky.
If you've been trading a few years, you must certainly have gotten to the point where you too share our philosophy about Question Everything, but if you are new to trading, may we suggest you speed up your learning curve by adopting this mind set now. The sooner you do, the more of your money you'll save – but more importantly, the faster you will come to realize that you must rely upon yourself and your own analysis to make any headway as a trader. The more you rely on someone else's strategy, trading system or trade calls, the more painful your path to ruin will be.
So what's the very first thing we recommend you begin questioning? Start with your essential trading strategy... in this way:
Part B: Look At The Losses
Every strategy that's out there has plenty of winning trades. Have you ever thought about it? It wouldn't have been developed as a strategy if there were not times it worked. And particularly when a mentor looks back at historical charts, it's very easy to 'cherry-pick' examples of their method working. Try it yourself - it's easy. Make up any strategy you like, however kooky - and you'll be able to find examples of it working in the market.
The true test of a strategy is better revealed by looking at the losses. In other words, if you follow the rules of a strategy exactly, how often does it fail?
We counsel our Smart Tool users to keep a careful record of their losses, as losses often teach us more than our wins do. The Trade Log makes this easy to do. Set up a custom parameter called "Reason for Loss". We have identified four principal reasons why a trade fails, though you may want to identify other ones for yourself:
- We ourselves have made a stupid mistake. Maybe we acted impulsively, or went in just before a big news announcement because we forgot to check what time it came out, or had the wrong chart open, etc.
- (Pardon our French...) Shit happens. Maybe you're in a trade when an earthquake hits or the prime minister unexpectedly steps down . The market might suddenly move hundreds of pips against you without warning.
- You followed every rule of your strategy and the market did not perform as you expected it would.
- You were just barely stopped out before the market went in your trade's direction. This happens if you use stops, and you're a fool if you don't. So... oh well.
Your setup editor might look like this:
Then when you input each trade (whether manually or using the import wizard) go back into the losses and use the dropdown menu that you've just created to assign each loss to its reason, like this:
Then switch to the Summary view in the Trade Log and compare where your losses are coming from. If Stupid Mistakes are the biggest reason, that's good - because it means you can easily do better as you gain experience and become more focused and disciplined. If Just Barely Stopped Out is your main reason, that's also good, because it shows you that your stops are too tight. Loosen them up a bit and you might be in great shape. If your main reason is Shit Happens, maybe you're trading at the wrong time of day or night. But if your summary looks like this shown below, with the majority of losses having the reason Strategy Fails that should be a big red flag for you.
This is an example of how the Trade Log can help you quickly and easily extract INFORMATION out of RAW DATA. In the course of taking a lot of trades over a few months, it would be hard to see these kinds of important trends and do your own analysis without using a Log.
We've made a really fun cartoon movie that we posted to You Tube where we discuss this concept in more depth. If we've caught your attention and successfully encouraged you to Question Everything, we think you'll enjoy spending 5 minutes watching it too. Click here to watch it now: