🔔 How to be right and still lose money

Everyone knows that the secret to successful trading™ is being right more often than you're wrong.

Trading is about intelligence first and foremost.

If you're right more often than you're wrong, it's almost impossible NOT to make money, so what are you waiting for?

This could be you 👇

Peak sarcasm achievement unlocked 😎

OK, if you've been around the market for any time at all, you already know that being right or wrong is NOT the most important thing.

As Soros says:

FXCM did a couple of studies on this...

The first in 2010...

12 million trades taken and 'profitable' in EVERY pair except AUDJPY...

Yet, we know that 70-90% of retail traders lose money.

How can this be?

Ah yeah, THAT.

The negative expectancy that comes from taking bigger losers than winners.

There's a clear pattern in the data.

The average loser is approximately double the average winner.

So we have a strike rate of 59%, but a win/loss ratio of 0.5:1

Let's simulate that equity curve across 100 trades (2% risk per trade) 👇

Every scenario leads to loss...  

Let's widen the range to 100 scenarios and extend the horizon to 200 trades.

All roads lead to Rome RUIN (eventually) and they definitely don't lead to profit!

FXCM published this study in their 'Traits Of Successful Traders' guide and published it on their website.

They repeated the study in 2014/15 and upped the sample size to 43 million trades.

Predictably, it was a similar story...

It's now 10 years since the original study, and Traits Of Successful Traders is still on their website (together with all of the usual advice about cutting losers short, letting winners run and taking trades with at least a 1:1 Risk/Reward ratio).

But if everyone knows this by now, why do we still see these warnings on every brokers website...? 👇 👇 👇 👇 👇

Is it really all due to our precious and fragile egos & not being able to handle being wrong?

Clearly that's a part of it, but can't we just overcome that with some simple money management rules and processes?

Again... If that's all it takes why isn't everyone riding around in a Lambo?

There's got to be more going on.

Tim's Theory of Uncertainty

Ok, I need some charts to illustrate this, so here's EURUSD H1 back in May.

Area of interest on the chart at 1.1991.

The market is in a clear uptrend, overcomes the level after a couple of attempts, retests it from above, finds buyers and initially rallies to 1.2150. 👇

Then the market drives back down into the 1.1991 support level, finds buyers and a stronger 90 pip rally follows.

Market puts in a high at 1.12181 before starting to pull back...

Once that happens, what is a trader thinking?

Looking bullish.

Market wants to break out.

Look for a pullback to buy.

As the market consolidates and prepares for another attack on the level above, traders are buying those dips, anticipating the breakout.

What happens next?

The market pushes lower (through the blue line) and tests their resolve/stops them out.

Now what?

The market is right back in the middle of the range...

What does the trader think?

What happens next?

The trader gets caught again.

(On a really bad day they'll sell again at the 1.2181 level to average in...)

For now, let's presume they listened to Paul, and didn't average down.

The trader managed their risk impeccably but still got stopped out twice, even though the original thesis (looks bullish, going to breakout) was 'right'.

They got caught in the moment and missed the bigger picture.

So, it takes more than just money management...

The frustrating irony for this trader?

They could have bought at exactly the same price on two separate occasions and experienced the trade entirely differently.

Let's look at the chart again.

Buy at ✖ on the 12th > Spend two days in the box of uncertainty (in drawdown).

Buy at ✔ on the 14th > Proceed directly to go, collect $200 (barely any drawdown).

In this instance, the trader who enters at ✔ doesn't really get the chance to screw up the trade.

The risk is clearly defined and all things being equal, the boxed area should hold as support. If it doesn't, the trader can get out for a minimal loss.

There would be a clear signal & decision to follow.  

The trader who bought at ✖ and shorted at ✔ is now on tilt as the original trade idea comes to fruition.

They might be angry with the market, or angry with themselves.

It doesn't really matter how you slice it, angry people don't make good decisions.

What can traders do to counteract this?

How can they avoid the uncertainty, the anger, and all of the negative emotions that lead to the worst trading decisions?

Patience

Hard to improve on this from Trader SZ to explain patience 👇

Catalysts

Two main types.

Price action: Entering at the ✔ above is a good example...

Call it price action/technicals/order flow or whatever you want. When you break it down, it all means the same.

The market tipped its hat, buyers were obviously overwhelming sellers, and the market subsequently moved higher.

Fundamentals: Knowing what's going on reduces the feeling of uncertainty.

Understanding fundamentals isn't about being right.

It's more of a way to filter the information.

How/why is a market reacting to that data point, what's the overall picture for risk sentiment and what does that mean for this market over this time horizon?

It also helps you know what to dismiss as absolute nonsense (such as the Fed's RRP facility) 👇

As a trader, building better filters for the markets is one of the most important things you can do.

Nobody wants to end up as just another statistic...