There is nothing more detrimental to a professional forex trading career than the inability to take a loss!
As risk managers always in search of talent through our FastTrack program, we come across this inexperienced trader specimen all the time.
Traders who cannot let go of negative positions typically have their days numbered.
Since this is such a big problem in the trading world, we will make some suggestions to effectively deal with the issue; but before proposing a solution, let's look at some common signs that indicate you have a problem with handling losses correctly.
3 Common Signs that Show a Trader has a Problem with Losing
An addiction with floating losses rears its ugly head in different ways. These are some common ones:
- A High Maximum Adverse Excursion on Many Trades. Maximum Adverse Excursion or MAE is the maximum amount of pips an open position goes against a trader before the trade is closed. For example, if a trader makes 10 pips on a EURUSD trade, but the position was down a maximum of 20 pips at one point in time while the trade was open, it is said that the MAE on that trade was 20 pips. The diagram below perfectly illustrates the essential concept of MAE:
Traders with this loss-anxiety disorder would let a position drop off a cliff if they had to – anything to avoid having to take a loss.As a result, many of the positive trades these inexperienced traders make have a relatively large MAE. Even though systematic traders who develop systems sometimes use historical MAE stats to determine where to set their stop losses, a repetitively high maximum adverse excursion usually spells trouble for the average trader that has not learned how to take a hit and is just one or a few trades away from destruction.
- Most or All Trades are Positive. Some of you might be thinking, "How could it be a bad thing if a trader makes money on all his trades?" It's really quite simple…99 out of of 100 times that we see a statement with mostly winners, it indicates that a troubled trader is at work; one that has been lucky to pull the stunt off so far and hasn't had a big loser blow up in his face…but there is always a first time! Look, nobody is perfect. It is just not possible, due to the chaotic nature of the FX market and probability, to win all the time. Even a win ratio of close to 90% is usually suspect in our book.
When someone wants to manage money at the pro level and applies to our FastTrack program as a proprietary trader or money manager with a perfect record of mostly winning trades, only one cliché comes to mind: "the calm before the storm!" That's when we typically run for cover.
So how does a trader pull it off then? How do they generate real statements border lining on Utopia, concealing the real risk behind their trades?
It's easy. Most of the times, they use the MT4 platform to create their work of art (request a demo of it here).
MT4, which stands for MetaTrader 4, is the most popular platform in foreign exchange trading. Unfortunately, it does not take MAE (see previous section) into account when calculating the maximum drawdown (max DD), a very important measure of risk. It only uses closed transactions to make this calculation. Consequently, a trader's statement may display a drawdown of 10%, when in fact the equity could have been down much more than that – before the account recovered and the floating positions at risk were liquidated.
- Habitual Praying while Trading. What?!?!? Praying?!?!? Is this about forex or religion? Don't worry…although this may sound funny, it is true. Please note that we are not against the use of praying by any means; but we don't recommend that it becomes the recovery strategy for your out-of-control losers. It's sad when you see so many traders in FX who are afraid to let go, praying and whining about their floating losses. Get real! Trading is about CONTROL, period! To become a pro, strict risk control is required. Trading and praying don't usually mix.
This is the first blog post in a three-part series on professional trading. The next post will discuss why stop losses in currency trading are so important and why avoiding the use of stops is the wrong way to go.
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