Why Trading Forex is so Difficult - Randomness in the Markets: Clusters of Bad and Good Luck
It's always been my understanding, but it's quite difficult to make money if you're trading currencies or indices But you make that working very short time frames. Is that correct well I? Look at the Forex market on Daily charts for the for the trend And then I look at chart for entries yesterday I looked at a 30-minute chart because I had the time to focus on the 30-minute chart. I haven't got that today you're trading technically alone in the Forex Market and There's a lot of news around at one way the other way and your head rate suffers I think using vector based on the stock market good quality stocks You can get your hit rate up to 75 percent on the Forex market that comes down I don't care who you are it comes down significantly and If you speak to any institutional trader, they'll tell you that if your head rate comes down then what happens is that you get into these ghastly clusters of good and bad luck so To illustrate that do you ever go to the casino again, okay? If you play Roulette Yeah, okay, all right.Well roulette is red and black So if you look at under white ball yeah, which is the house edge okay? That's the spread that's a brokerage If you look at the scoreboard done at the bottom of the roulette wheel you know electronic score book Yeah, if you look you're going to see long runs of red run long runs of black okay, and it should be red and black red and black red and black but if life is not like that you get clusters of good luck and Clusters of bad luck your mother may told you that bad things happen threes Okay, that's because life is mostly random. Okay? I'm in Observations you get a cluster and those are 1/2 times 1/2 times 1/2 Okay, and your mother could only remember eight observations so she says that things happen in threes So in a 50-percent system, okay? You get a few s you the head right. That's one other - you should be right one order - you should be wrong okay.
What's the probability of two bad ones in a row? Okay, so 1/2 1/2 Okay, too bad none zero that means in a 50% system Every four trades your two bibles on a row into Goodwin's in a row now that means that if your hit rate comes done towards 50% and Many Trend-following traders would sell or granny for a 50% system most train following systems are less than 50% That in for trades you're gonna Bibles in a row now most people will give up two thousands in a row but gets worse What's the probability of three Bible 0? 1/2 times 1/2 times 1/2 Okay, which means that you get a cluster of three bibles in a row every eight trade you get a cluster four? Bibles in a row every 16 trades and you've got a of five bathrooms in a row every 32 trades Five Bibles in a row how good will you be in? executing your system with precision after five losses in a row Okay, that's the challenge in the short-term market as the hit rate comes down then these gasps these clusters of bad luck Start and of course a cluster of good luck you can have a cluster of good luck as well plus your good luck of course eventually more detrimental to your health in a cluster of bad luck because in a cluster of good luck you get a little thing between your ear called a pituitary gland okay, and it pumps all Sorts of Mutti Mutti Zulu Really medicine it pumps all sorts of into your bloodstream when you leave the gym after a good workout, you feel good yeah All right when I feel leave the gym after a good workout.
18 again Okay, and similarly when you have one good trade in a row two good trades in a row the old pituitary gland gets to work And it pumps your stuff into your bloodstream you feel good you become your phoric and when you become euphoric the definition of euphoria is invincible You start to forget about all those position sizing only risk half a percent. You say let's have a big bet When you have a run of good luck that euphoria takes over and most people in fact go bankrupt after run of good luck not after a run of bad luck because They think they're god and they forget about all those position sizing stuff and it's happened to me a few occasions that and if you're a risk manager the risk managers in the city are in fact coached into assessing the susceptibility of their traders to euphoria so that big problem and Anybody who's traded for more than 10 minutes will tell you this the big problem is getting your mind around the clusters of good luck and clusters of bad luck as the and Variably not if you've got a system with trend-following and the darn thing goes in to arrange the system doesn't work Many people say well don't trade a trend-following system when it goes into a range But you don't know the darn things in a range until it's been there for a while You can put all the ad x's of this world on mix your darn difference Okay, the market has to go sideways for a while before you know what's in a range? Similarly if you're buying support and selling resistance okay, and the market starts to trend well You're wrong so you can have lots And then there's the noise in the market that causes you to get stopped out and stopped out unless your stock losses are really good the market makers will pick them off all day and every day and The algos will have been what's left after the market makers the algos will have a go at so your head rate comes down and if you can be right in the Forex market 55 to 60 percent of the time you're right up there with some really good traders You can make a heap of money with a 50 percent system if you make three times more when you're right Then you lose when you're wrong times is and times is That means that in trades you risk a pound to make a pound So you've got a positive expectancy system, and that's great But handling with a winning system, that's right of the time of the time that makes a fortune paper most people will lose with that system unfortunately because these darn clusters Good luck and bad luck and if you're over 20 you must have had periods in your life where everything goes well and your Periods your life nothing goes well met a cluster.
They happen every facet of life, okay? I'm certainly if you get to over 50 and over 60 I have to say it to believe it If you get over 60 you've got really good years and bad years that's for sure What's the best week of trading then you've ever happened? coffee Ah the best one was oder. Doped is a copper trade that I did a lifetime ago I took the trader on while I was in South, Africa and I was here in London. I remember vividly checking broke I didn't think I had any positions because I was sure I've been stopped out of this copper trade before I left South Africa And I was going to what Celine dion that the royal albert hall, and was we talked about titanic a moment ago She I just got that titanic era. I didn't when that was 1999 long time 20 years ago, and in fact what had happened was I'd missed the stop and copper by a tick or two and The Copper price had ran up the page and we talked about it just ignored all those fed levels has just kept on going I'm When I opened up my brokerage account at a local spread better here when I opened up the brokerage account there was thousands in it Completely unexpected so I think that stands out as a wonderful trade yeah.
Yeah, that's great I'm not no even I don't know any right And I just let run it run up the page for weeks on end because I didn't think I had a position Yeah, you are one of the traders that get currencies ranked where do you think other go wrong? Well, I get currencies right 60 to 65 percent of the time thirty to thirty five percent of the time. I'm wrong And the reason that I'm still around all of these markets that When I'm wrong I lose a little bit and when I'm right add I Like to be three times bigger when I'm right that I'm when I'm wrong so I'm not consistent with markets Because of my ability to read markets better than anybody else and in I'm probably consistent in markets because I manage risk well And I am a conservative many of my friends to me David how the hell can you be a commodities kid in your most? Conservative guy in the world when I go to the airport I hire a car I always take the music your ass you want in one screen and you want the tire waiver I always take that and I take the zipper cover as well, and they say to me How can you be a trader and take risk? and the reason that I'm still around after all these years and people have come and gone is that I manage risk exceptionally well and The objective of doing business whether you're in the media business whether you're in stock market Or the Forex market the objectives are doing business is to do business at the least risk you.
luck and trading, trading the forex markets, forex trading
