A trader recently took up our invitation to submit issues and doubts to Sam & myself and unfortunately this is the first situation where one blog post will not suffice. The trader in question has been trading for a number of years now, has had some success but has given it all back and appears to be caught in a vicious circle of self-doubt, lack of confidence, and is messing up his methodology as a result.

The trader granted us access to his MyFXBook account to see what is going on. To be honest, the only thing that’s evident is something the trader himself said: “I’m not in control of my trades”.

Trend Trading: Really?

The trader told us he is trying to trade strong trends with evident fundamental influences behind them. This sounds good…but then the very first trade at the top of his MyFXBook account is this:

The trader is selling an uptick. Fortunately, many other trades really were in line with the trend so this is definitely frustration showing up in the trader’s log, money being risked without following any rules whatsoever.

This very first example illustrates the trader’s current mindset…he really is out of control and needs to take a step back in any case.

Trade (Mis)management

Then we have other recent trades on USDCHF. Not one of my favourite pairs given the SNB’s foul play, but at least the trader was following a clear trend this time.

In these trades there appears to be no structure whatsoever, beyond a weak background trend.  The trader cut the trades without any real reason to..no previous swing high had been broken and especially in the second case, the market was doing nothing important. The trader evidently lacks a structure for managing his trades, and hence is being baffled by every wiggle in the market.

The same can be said with this NzdCad. The trader is following a downtrend but he is messing up the management. Multiple entries very close to one another (so essentially doubling down on the same trade without having any confirmation that the trade deserves to receive further allocation), and closing the trades basically after an intraday scalp – which may be fine for some traders but generally I’ve found that the only way to really massage the opportunity cost in retail trading is to roll positions over as often as possible.

By cutting trades intraday, profit potential is naturally limited in time (end of day) and space (volatility).

Once again we can see how a very strong uptick in Gold was messed up by this imprecise trade management. The trader seems to be looking for quick profits without flowing with the market. There are some great entries around the end of June, with the trader picking the absolute bottom of intraday retracements, but then the trades are closed prematurely.

Once again, my best guess here is that the trader lacks a proper structure for managing his trades, and as such is tempted to “take the money and run”.

What Watchlist?

On top of the inconsistent trade management and sometimes counter-trend trades, this trader seems to lack a precise watchlist from which to select his battles. He has traded a grand total of 47 instruments in the 2 year period we examined!

I’m totally in favour of diversification, by using the same model to attack various markets. But 47 different markets feels more like throwing darts at charts..throwing money at something that’s moving without having a firm grasp of what the market is actually focusing on.

The Way Forward: Structure and Self-Analysis

I can’t help but feel that the real source of this trader’s issues is a general lack of in-depth analysis of his own issues and trades. The trader is showing signs of errors on multiple levels, and incongruencies in his actions. For lack of a better word, it’s a mess.

  • If the trader wants to trade trends, then he first needs to establish a clear way to compare trendiness and select the strongest ones. Then, the trader needs to verify that this trend selection method does in fact provide a positive forward expectation: the markets tend to continue with the trend, and not reverse off the bat.
  • If the trader utilizes a fundamental overlay then he needs a clear method to identify the drivers and combine them with clear trends. The trader then needs to have a way to follow the narrative and evaluate whether the market is acting in sync with the drivers or not.
  • Then the trader needs to formulate a “bread & butter” trade setup. It must be tested and studied just like the other two components. It must be logical and based on a repetitive behaviour.
  • Then the trader needs to wrap a solid trade management vehicle around his entry. Nobody knows what will happen once the trade is initiated, but we need to have a plan that takes into consideration adverse excursion as well as favourable excursion. Knowing what to do in any case offers peace of mind.

All the while, the trader needs to keep in mind that quality trumps quantity. Then the trader needs to execute his plan from A to Z at least 30 times, and take note of the results. If the process remains the same, the records will speak to the trader and he will be able to identify the areas that need work.

But the first thing to do is take a step back and do something else for a while. This trader needs to detach himself from the markets, because he’s evidently emotionally involved to the point where he really doesn’t know what he’s doing right or wrong anymore. In these conditions it becomes impossible for anybody to clean up the situation.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.