Dr. Corvin Codirla outlines three trading elements that beginner and intermediate investors typically do poorly, leading to inconsistent performance. Then, learn a three-pronged approach that will improve your trading consistency, and help you avoid these three common problems.
Use This 3-Pronged Approach For Consistent Trading Results
Want consistently profitable trading results? What’s holding you back?
From the response to my Deep-Dive survey, as well as years of experience in the Fund industry, the biggest challenges to trading success for beginning and intermediate investors are these three elements:
• Fear of Loss
• Unrealistic and unhelpful expectations
• Lack of Discipline
Over several articles on VantagePointTrading, I’m going to lay out for you a simple and practical framework that will help you avoid the common confusion and frustration that hinders the progress of new investors.
I’ll also share with you the three secret weapons used by the most successful investors to ensure they stay on track and generate consistent returns.
But first, I want to share a story from 2006 that affected my trading partner at a large European hedge fund.
At the time my trading partner had been trading his trend following strategy on the US and European futures markets for just under a year. On the back of the market downturn in May 2006, many people got stopped out of their positions.
In theory, with the big trends of 2005 the situation shouldn’t have been that bad, since most trend-followers walked away with profits.
2005 had been a great year, and everything looked rosy into April / May 2006. That meant his capital allocation was ramped up at the start of 2006 by senior management. This is what a lot of traders and investor do…they ramp up their position size, trying to make even more when times are good.
Ironically the ramp up in capital happened in March ’06, at the height of the market. You can imagine what happened next. He lost all his profits in a very short amount of time since he was trading a much bigger position size. The outcome: his capital allocation was drastically reduced for the rest of 2006.
Being a pro, he continued trading right through to the end of 2006, and did okay. On paper, percentage-wise, he was up double-digit returns for the year! But in real dollar terms, with the reduced capital, he never managed to come out of the hole. His losses on the larger amount of capital were too great to make up even with good returns on a smaller amount of capital.
The factors that led to this outcome were:
• Fear of Loss: “let’s cut his capital before he blows out anymore P&L!”
• Unrealistic and unhelpful expectations: “Given 2005, he’ll keep printing money, so let’s just ramp his capital up!”
• Lack of Discipline: “There’s a market wobble, let’s go running for the hills!”
It’s identical to the experiences retail traders have, and the reason beginning and intermediate traders end up on never-ending losing streaks. They always do the wrong thing at the right time, or the right thing at the wrong time. Or possibly the right thing, but with the wrong position size. You get the idea.
So what could have led to a different outcome? Simple. A three-pronged solid foundation upon which to make correct decisions.
Prong 1 – Understand The Factors Your Strategy Is Based On
All markets, including Forex, have underlying Factors that drive profitability. These Factors are based on strong underlying economic and behavioral reasons.
And they aren’t secret! Just look at the big players: AQR or Bridgewater (both hedge funds managing more than $100 billion!). They keep on publishing their research and trading methodology, and keep on being profitable.
Their success is based on the premise that as long as you understand a few factors that contribute to long-term consistency, and continue to trade these factors, you will be profitable. And what’s the advantage of this approach: it removes the FEAR.
How? Because you all of a sudden understand why things work the way they do, and you have confidence in your approach. Once you have a solid method, and you practice it and get consistently profitable with it (can be done in a demo account), the fear begins to melt away. You are focused on process instead of emotion. My model for trading is based on: Value, Momentum, Yield, Short-term reactions and Market surprises. These are the factors I believe shape market movements. I understand them and feel confident trading based on them with my methods. I discuss a few of these factors in Three Principles for Successful Investing in Forex.
Prong 2 – Know Your Method’s Tendencies
If you don’t measure your progress you won’t have any progress to measure!
If you don’t know who to compare yourself to, and how to measure yourself, you won’t be making progress. Even worse, you’ll end up beating yourself over the head for not attaining goals that most likely are completely unrealistic!
One of my students in the FXMasterCourse community has been knocking it out of the ballpark since the start of the year, multiplying his account value several times over.
After four months he encountered his first sizeable loss, 10% of his account. He freaked out. So we sat down and measured his historical performance: 300% return, with an annualized Sharpe Ratio in excess of 2!
Was his 10% drawdown to be expected? Yes! Absolutely. The stats all pointed in that direction.
Was it his system that let him down? NO!
Once you realize that the markets are mostly random over the short-term, these hiccups are nothing more than natural occurrences. It’s like breathing: you can’t breathe in without breathing out. Similarly, in the markets you can’t win without losing.
It’s not about the losing, it’s about knowing if your loss is abnormal. Abnormal losses are what you have to pump the brakes for, but if a loss is normal that is just trading and you keep trucking with your strategy.
Prong 3 – Be a Pig At The Right Time
Knowing when to run for safety is not enough. That’s only part of it. You also need to know when NOT to run.
Here is where the marriage between risk and money management really happens; where the magic of making money takes place.
In the words of George Soros: “It takes courage to be a pig. It takes courage to ride a profit with huge leverage.” Most people can’t do it, because they don’t know how markets move, and therefore don’t have the confidence or the right method for riding a profit.
That leverage Soros is talking about (mental leverage, as well as the ability to handle monetary leverage) comes from having a strategy based on why markets move (using Prong 1) and how much you can really risk (Prong 2).
You can cut your losses all you want, but at some point, if you want to make money, you need a method that keeps you in your winners. Sometimes you need to a be pig.
The Tipping Point
The magical moment comes when you reach that critical point where you start to combine these three Prongs together to extract the most value out of the markets.
By Dr. Corvin Codirla
You want to get to that tipping point sooner rather than later, Dr. Codirla has created the FX Master Course. This is the strategy he used to bolster his hedge fund into one of the top performing in the world, receiving a BarclayHedge Top 10 Award for Net Return in Currency Trading. This strategy has a 30-year history of consistent investor returns (charts are unleveraged; returns can be magnified with leverage).