Posted by: Bevan | March 31, 2012

The Next Plateau

Rereading the excellent fourth section of Ed Ponsi’s book Forex Patterns & Probabilities has reminded me that its probably worth revisiting my goals as a trader. Anyone who has been successful in any endeavour will know that setting a goal firmly held in the mind is the beginning, and the cornerstone of success. I’ve been sitting on a plateau for quite a while now, and the time has come to look higher and more clearly define what the next step should be.
In reflecting on how far I’ve come in almost five years of trading, I have not achieved what I expected at the beginning. I’m not worried about that though, as those expectations were set by educators and are possible only for a tiny elite, either through pure luck or shear genius. Indeed it is difficult to distinguish the two! The expectations I had then were to try and achieve small but deceptively simple goals like 15 to 20 pips a day trading the Forex market. The incredible power of compounding would result in millions within a few years.
That hasn’t happened, and I don’t know many (well any really apart from some of those in the Market Wizards series of books) real traders for which it has. Producing those kinds of results on such a consistent basis has proved beyond me thus far. So what have I achieved, and why am I still in the game?
The most important lesson I have learned is that money can be made in the trading game. This might seem trivial, but in fact a huge volume of traders drop out after a year or two because of failures and losses. They fail to persist and work on the reasons for their lack of success, blaming the markets or others and abandoning trading as either impossible or too hard. This is why the brokerage and spreadbetting industry has to spend a fortune encouraging new clients into the markets each year, and why trading education is such a massive industry.
With that knowledge in mind secondly was finding the ability to identify and exorcise my trading demons. It is no great insight that the main reason people wash out of this industry isn’t through picking the incorrect entry and exit points, risking too much or whatever else. Those superficial causes are almost always due to psychological flaws. The market seems to draw these out in the same way that too much alcohol often reveals people’s less pleasant side! For me my sins were a desire for excitement, the thrill of quick and easy money. Secondarily I had a short attention span, flitting from idea to idea and failing to show any consistency in my approach. Once I had identified these I was able to tackle them head on. I decided that mechanical trading would enforce the discipline of making decisions based on price action and risk management principles. Secondly trading on a longer term basis meant that not only would my chances of survival be much higher, but that I would avoid the temptations of excitement seeking that short term trading produces.
I spent a year trading Alexander Elder’s Triple Screen approach, then at the end of 2009 moved to trading a trendfollowing system which I discovered through Futures Truth magazine’s Top Ten lists. I’ve been able to stick at this system, enlarging my portfolio of instruments in the UK but unfortunately having to reduce them somewhat in moving back to New Zealand and trading CFDs.
I have achieved very satisfying returns from my trading. It has enabled me to buy a few tangible items like a car and permitted my account to grow healthily. Although the last few months has been challenging (I am now in a 28% drawdown) I am confident that a trend or two will materialise and make back my losses and achieve new equity highs. I made a conscious decision to push my risk factor when I began trading again in late 2011 so that I could trade a wider variety of instruments, and accept that my returns will be more volatile as a result. My portfolio is tested and I have an idea of what kind of variability to expect.
Instead of being defensive in this situation, I need to look at the next plateau – how will I take this business forward to the next level? I have decided to add two new instruments for every 15% gain on my account (into new equity highs) until I have made a 50% gain. It will be interesting to see how long this takes! The system I trade can potentially make those returns in a year or less based on my previous experience, if the market allows it. Trading the additional instruments will add potential returns and soften the variability in performance both through diversification and also because I will maintain my risk per trade at the same dollar value. By the time I have made the 50% gain I will have gone from risking 4% per trade to 2%.
At this point I want to add a longer term system to my portfolio. I have my eye on several options here – ATS3200, Trend Harmony, Dollar Trader, Ready-Set-Go, WaveRider and The Aberration Strategy. I’ll continue to watch how they react to changing market conditions in making my selection. I would love to add a short term system as well however my lifestyle and work commitments makes this difficult.
Hopefully by this time next year I will have implemented some of the new instruments, and might be closer to adding a new system – we’ll see what the markets give or take from me this year!

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