My early mistakes in trading
While I am waiting around, I thought I would share some thoughts on early mistakes in trading. Others are welcome to participate! Other people may find completely different mistakes than me, or argue my points...
1) Not trading with stop losses.
This is a very common strategy that is employed by signal providers and new traders, and also the number 1 piece of advice that is bandied around. This is no doubt the number one mistake in trading. It seems pointless - giving up money to market for no reason - its easier to wait for the price to come back around right? Without a stop loss during a ranging, or consolidating, or whipsawing market, you can make a lot of money. You have amazing win rates (because you can't lose) and you are making 2-3 winning trades per day. At 20 pips = 1% or so, you can making 2-3% in a day. You will have occasional days where the price escapes from your range where you can't make money = so you are talking 10% in a good week. However when the price shifts the wrong way significantly by 100 pips you cannot make money unless you average down. So you may get occasional 10% weeks followed by dry spells.
However, if you look at the market behaviour, every 4-6 weeks, the price likes to move 300-500 pips, and every 12-16 weeks price moves 800-1200 pips. That means you will very likely be shifted out of position 15-20% drawdown every 4-6 weeks, and 30-50% drawdown every few months - that is with a 1% = 20 pips. Basically you will end up in a vicious circle of making money and then losing it every few months, and you will not be able to trade unless you average down. What I am trying to say that trading w/o a stop loss is unsustainable trading, and will stop you from trading a proper strategy.
2) Averaging down losers
Averaging down losers is a pointless exercise and really compounds the 'no stop loss' strategy. You can get out of the situation where the price escapes the other way from your position, and get back to break even, by increasing risk. However, this also mean when the price inevitably makes large moves you will suffer an increased drawdown. That means a 500-800 pip move at 1%=20pips averaged down twice means a 30-40% drawdown every 4-6 weeks. A move of 800-1200 pip move would mean a 60% to 100% drawdown with a double drawdown. Averaging down more than twice could make even small moves take out your account.
3) Opting for a 1:1 risk reward ratio
If you backtest any strategy you will quite quickly show that your strategies will run through losing streaks and winning streaks. I have not come across any strategy that backtests a higher than 70% winrate. If you factor in break even +1 trades, and the spread, I found that most strategies barely hit 50-60% for hitting the take profit as opposed to the stop loss. Thus a 1:1 ratio on trades will take a long time to get a decent increase in equity. Factor in those times where you miss triggers on trades, the mistakes you make, closing entries because of news etc, then you are more likely to lose long term than win.
Overall, I found that once you find that you MUST trade with stop losses, you MUST have a 2:1 take profit/stop loss ratio, there are precious few opportunities in the day to trade successfully, and it becomes much more of a challenge.
I have seen many debates on SL vs w/o SL trading. w/o SL trading argue that they close the trade when they see that trend is changing. So as long as there is a trend in favor of trade, they keep the position open.
If a trader was able to tell when a trend was changing then they could make a lot - not seen one trader who was reliably able to do that. Trends also don't switch from up to down, but consolidate and inch their way up or range about - I wonder how the no SL camp argue that.
I strongly agree with your friends. many traders are making a mistake and he was devastated. a very basic mistake is that he is not able to use a disciplined money management in trading. many traders to profit quickly. really is not going to bring a change in him.
i guess all back to the trader how to trade with good, it doesn't matter they use stop loss and no, and as long as they know what they do and safe for their trading because they have some reasons or options to overcome unwanted condition, all is okay..do you know why, there are many traders got some loses although use stop loss, and their SL was always touched by the trend and it was just a way to make slow for MC, so i want to tell you that i seldom use stop loss, all depend to the condition if only i want to leave my orders walk alone, and everything is good..i have been trading for more than 4 years ..
I believe that losses always come into the way of success and we must mange them in quite professional way we can limit them to some extent if we apply proper stop loss and take profit. If a trader learn from his mistakes than he will not met with the same mistake again and again this will save his money.
One on one risk reward ration is very less the professional are maintaining it on 8/10 because this give real profit and if a trader lose more that means he will have less in his pocket.
Game is not over Till it's Over
Well either you have a stop loss, automatic or manual - there is a defined stop loss that is activated by some criteria and not a hit and hope method.
When we choos 1:1 risk reward ratio than we get nothing into our pocket the best ratio that porofessional follow that is 8/10, I believe that one trader should not move for live trading untill he formulate a strategy on the demo and practice that strategy and get 8/10 with that for at least three months. Than he may not lose on real account.
Game is not over Till it's Over
There is a difference between actual risk-reward ratio and risk-reward ratio calculated before entering a trade. Before entering a trade, we should enter with a ratio of at least 1:3 or maybe 1:5. Actual results then depend on strategy.
The actual risk reward ratio and risk reward before a trade should not be any different - why should they - if they are different you are not following your strategy.
In start every trader met with the same mistake that he did not use stop loss he think that if market move in the opposite direction than it will return after few pisp but at that time he did not know that if there is a reversal that i might not reverse for months and his account may not suffer with this type of move and margin call will be there.
It's always better to use stop loss.
Game is not over Till it's Over