Taking Responsibility For Losing Trades
All traders experience drawdowns. All traders experience losing trades. However, naked traders take responsibility for losing trades. Indicator based traders often blame their indicators for unsuccessful trades (e.g., “the MACD looked like it was going to cross here,” “my indicator did not load correctly,” “maybe I should change the settings on my indicator because the market has been choppy lately,” “that moving average crossover was a fake out—whipsawed on that one,” etc.), but the naked trader does not have this excuse. There is no scapegoat when you are using market data (price action) to take trades. Trading with price action, that is, the actual price on the chart as the basis for all trading decisions, means that the naked trader has no excuse for losing trades. This is extremely liberating for many traders.
The indicator-based trader also has the added advantage of an indicator to blame when things go awry; the naked trader can blame no one but the market for losing trades. This is a subtle but very important difference point of reference for the naked trader. All trading involves an aspect of luck. All traders experience a lucky streak of winning trades and an unlucky streak of losing trades. Without the crutch of indicators, naked traders are more likely to take responsibility for their trading results. Perhaps we should take a close look at this idea of trading responsibility.
If you decide to trade a new trading system, you may have put the system through a screening process. After spending time testing the system, you have convinced yourself that the trading system is worthwhile and will indeed make money over the long run (at this stage your research may far exceed the effort that 90 percent of forex traders put into their trading research). If, after all of your research, when you start trading live you see the first seven trades turn out to be losing trades, you may be discouraged. What would you do? Perhaps you decide to maintain trading the system, and you suffer through an additional three more losing trades. After 10 consecutive losing trades what would you do? Would you stop trading the system?Would you create a new rule to filter out some of losing trades that you have experienced? Would you decide the trading system is no longer profitable, and give up on trading the system? There are many possible explanations
for the reason why the trading system failed after you launched it into live action. Maybe the market has changed. Maybe the system no longer works.
Perhaps the 10 losing trades were just an unlucky streak. Your decision, after faced with the 10 losing trades, will place you into one of two groups: the terrible-system group or the bad-market group (only naked traders can avoid these groups). If you are unsure about your group, pay attention to what you think about the next time you have a string of losing trades, you will quickly learn which group is yours. Terrible-system traders, after a string of 10 losing trades, blame the trading system. Terrible-system traders will say “the trading system is not working anymore” or “this trading system must be modified to get it back on track.”
Terrible-system traders decide to modify or give up on the trading system after a losing streak. Often, terrible-system traders will suggest adding another indicator or otherwise slightly modifing the trading system to help filter out some of the losing trades recently triggered. The other strategy employed by these traders is to give up on the trading system. “The system is broken,” they say, or “This trading system worked well before, but now it is breaking down, all systems have a shelf life, and this trading system has expired,” or “the system may have made good profits in the past, but it simply doesn’t work anymore.”
If you find yourself saying something similar, you are probably a terrible-system trader. If you are constantly changing trading systems, particularly after a losing streak, you are a terrible-system trader. All terrible system traders blame the system when finding profits becomes difficult. Bad-market traders take a different approach. Bad-market traders analyze the losing trades after a drawdown and instead conclude that the market has changed. Bad-market traders can come up with many reasons that this market is structurally very different from before, and may be heard muttering things like “the Bank of Japan’s intervention has changed the market,” or “things have changed with the Euro since Spain went bankrupt.” The precise reasons may vary, but the essence of the argument remains the same. Sometimes the bad-market trader will use subtle arguments such “the market is too volatile,” “there is not enough volume today,” “my broker is unable to execute my trades fast enough.” The latter argument hints at a common scapegoat for the bad-market trader—the broker.
Bad-market traders are often identified by their willingness to engage in broker conspiracy theories. The fact is that dishonest brokers are found out, and forex traders will eventually abandon the dishonest brokers. Word spreads quickly, particularly among intelligent, Internet-savvy traders with high-speed Internet connections. But for the bad-market trader, the broker offers the perfect excuse for a failing trading system. Bad-market traders place blame on the broker or the market, and thus have a reason for abandoning a losing trading system.
Many bad-market traders engage in fundamental analysis, but not all fundamental traders belong to the bad-market camp. The interpretation of economic data and engaging in fundamental analysis is often an opportunity for bad-market traders to further their argument. These traders will decide to give up on a trading system after a series of losing trades, just as the terrible-system traders decide to abandon a losing system; it is only the reason for giving up on the system that varies. The terrible-system trader places blame on the system, and the bad-market trader is convinced the market has fundamentally changed. Both bad-market traders and terrible system traders will end up searching for an entirely different trading system.
Interestingly, the difference between a terrible-system trader and a bad-market trader is often conscientiousness. The conscientious trader is usually the bad-market trader. This is because the conscientious trader will spend time testing and ensuring that any trading system employed is viable before risking money in the market. The end result of the system testing is confidence in the system for the bad-market trader. For the bad-market trader, the experience of a drawdown is quite harrowing and unexpected, because the trading system has been tested and seems viable; if the system cannot be wrong, the market must be “wrong.”
Our terrible-system trader is unlikely to have spent the same effort testing the trading system. The terrible-system trader probably found the system on a forex Internet forum, purchased it from an Internet marketer, learned it from a friend, or perhaps heard a circle of forex traders discussing the system in hushed tones at a party. The terrible-system trader may be trading a profitable system, but without spending the time testing the system, the terrible-system trader is unlikely to hold the system in high regard.
So how might you avoid falling into the terrible system or bad-market ? What might you do to change your fate? You may want to carefully consider adopting naked trading. Trading naked means trading without indicators, and removing indicators from your chart will make it difficult to adopt the attitude of the terrible-system trader. Also, if you decide to trade naked you will be trading on price action or the market movements. You could blame the market for a string of losing trades as a naked trader, but that would be a bit like blaming the river for being wet.
Naked traders find trades based on market movements, so, unless the market is moving “incorrectly,” there is no such thing as a bad market for the naked trader. Naked traders may only blame losing trades on poor execution (the trader’s fault) or poor luck (sometimes you flip a coin seven times and it lands on tails every time). Naked traders may find that trading without indicators is extremely liberating. Traders around the world have found that adopting naked-trading strategies means letting go of a trade. There are no indicators to give false signals, there are no settings to tweak; there is simply the market price and the trading decision. Naked traders have a true advantage because the focus of the trade is the current market price. There is no better indicator of the sentiment, attitude, or exuberance of the market than the current market price. Naked traders make the current market price their indicator.
In fact, for many naked traders, the current market price is a bit like a biofeedback machine. I certainly look at the market price as biofeedback. A biofeedback machine will allow you to tune into the physiological changes in your body, in the hopes that you can better control your physiology. For example, if I am an anxious person, and I am always suffering from stress, I can hook myself up to a biofeedback machine. The machine will alert me if I become anxious (blood pressure increases, heart rate increases, etc. would cause the machine to produce the sound) by sounding off an alert. I can then pay attention to the sounds of the machine and use relaxation techniques to decrease my anxiety. The machine simply alerts me when I need to recalibrate my physiology. Over time, I should be able to wean myself off of the biofeedback machine and reduce my anxiety on my own, without the aid of the biofeedback alerts.