I was desperate, I was broke and couldn't stand another day at that job.
I had tried, with no success, to trade equity options, only succeeding in crushing my initial account.
But... At Last! I had found my salvation in the Forex Markets... except for the malevolent force that could see where my stop was set and would move the price to just that point and after triggering the stop, send the price soaring through my no longer existent profit targets.
My solution? Don't use stops. (I actually read this brilliant plan in a trading book).
Over the last 10 years the EUR/USD has traded between .8346 and 1.6037 in a big channel proving that "It Always Comes Back".
From Feb. 2009 until Sept. 2009 I turned $650.00 into $5000.00 without using stops because... "It Always Comes Back".
In Sept. 2009, I again proved my strategy to be flawless... It Came Back, but not before I got the dreaded Margin Call. Another account in the tank
I think I've learned a lot since then but I know I can always learn much more.
This Trade journal is part of my journey back to sanity and a superhighway away from the job.
My goals in creating and updating it are:
Broadcast my thoughts, ideas and discoveries, hopefully getting clarity and objective feedback.
Receive guidance from those wiser and more experienced than I and,
Possibly be of assistance to anyone traveling down the same road.
In future posts I intend to describe my setups and the indicators that I use and try to explain why I failed or succeeded on my trades.
I invite any critique of my methods, am open to suggestions to improve them and I hope that they and/or I can be helpful to other traders.
I'd also like to discuss the "It Always Comes Back" strategy in more depth in future posts...
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It always comes back is a description of mean reverting tendency. Indeed mean reversion strategies are successfully used by a lot of traders, in particular for arbitrage, pairs trading, and non-directional strategies based on buying and selling volatility - for example selling of options.
The problem with mean reversion strategies - and any Martingale approach - is that the strategy will work for a quite a time, generating regular profits, showing off an excellent Sharpe Ratio as the standard deviation of returns and drawdowns remain low.
The suddenly, a black swan event will hit you, when markets shift away from the lognormal price distribution and generate a black swan. You will be wiped out.
I recommend reading the books by Nassim Nicholas Taleb: "Fooled by Randomness", "The Black Swan", by Roger Lowenstein: "When Genius Failed", and also have a look at the trading strategies of the well renowned trader Victor Niederhöffer, who blew up spectacularly several times, see links below.
Edit: I am not saying that Victor Niederhoffer used mean reversion strategies, I just wanted to show, how important it is to control your bottom line, and used the example of a well-known trader.
Myth Number Two : Stops Reduce the Profitability of Your Strategy
I have heard this quite often: Stop are providing an insurance, and as with every insurance, you have to pay for it. Quite a number of traders pretend that stops - although they will reduce the size of a drawdown - will always negatively affect your profitability.
First this does not take into account the increased leverage, which you may use, when using stops, but I do not want to go into money management to plead for stops. This is not even necessary.
If you develop a trading system, by using backtests, and walk-forward analysis, and if you have chosen a robust strategy not using too many degrees of freedom - not yet curve-fitted -, and if you then add a stop, then you may actually improve the overall profits, although the focus is on reducing the drawdowns.
If you challenge me, I would be willing to backtest a trading system using simple moving average crossovers and show that the system will show superior performance when stops are added, if compared to the simple crossover strategy, which is either long or short and does neither use a trailing nor an initial stop. The stops should neither be too narrow nor too wide, an optimum range for stops can be determined via the system test.
Please Go Ahead and Let Us Participate
But I do not want to stop you from your endeavor. Please go ahead and show where it leads to, if you do not use stops. It will work for a time, and then your account will be wiped out by an event that only happens once in 300,000 years.
Also some guys are simply lucky. I just remember some short stories from W. Somerset Maugham - it does not often happen in real life. Maybe your luck will save you from disaster.
Last edited by Fat Tails; February 23rd, 2011 at 11:44 AM.
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In one of my books (don't know which one) this technique was described.
They advised to open 2 accounts at separate brokers, one go long and other go short, for example 2x $50.000 with a big leverage like 1/100, don't look at it, and come back after 6 months to take the profit.
I guess you could do it with 2x $1000 accounts and try it out. Use the 1/100 leverage and see what's happening.