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One day you might come back from a trip and notice that there was an electrical power outage. Now what?
Bad drawdowns look like an unavoidable crash. And I think this is one of the main reasons why people close all trades at the worst possible time.
How much risk is too much? Bigger is not always better. That is especially true for position sizes.
A system on rails is something that has an equity curve that is right below the balance curve. Most of the time, trading is like the weather. The fact that the sun is shining in the summer doesn’t mean it couldn’t rain.
Traders get paid for risk. They buy and sell something to make a profit.
I think a trader needs to grow with his account and I always encourage people to start with a demo account. When you see that your equity is going down in a steep curve, it might be time to use the brakes and avoid a crash. Most people trade two big position sizes on two big accounts. I prefer to trade indicators like the bollinger bands with standard entry settings. My first profitable system worked with the bollinger bands entry.
So probably this is the reason why.
All the tests are very time consuming. But I think it is worth it. Profits feel better than losses and that might cause greed and fear. Then it gets emotionally dangerous. You don’t have to expect that one trade might make or break your system because you do hundreds of trades.
You could make a rule for the take profit, the stop loss, the number of allowed positions, the equity drawdown that you want to allow and several more things that might come later. I prefer the equity stop. What is an equity stop? Basically, it is like a trailing stop that is not position based, but based on the account equity. Do you now understand why I think that automated trading is the best thing since sliced bread?
You can’t predict the future, but you can always do several tests for the last eight or ten years.
Guess what the price is doing. Basically, the price can do three things it can rise, it can fall and it can move sideways. So why is it so hard to predict the right direction?
Most traders think that bad things will not happen because if something worked yesterday, it should work tomorrow.
If it took you so much time to learn how to drive, walk, read and write, why would you think that learning how to do automated and profitable trading could be done within three or 4 hours? Depending on your broker, you might already have seen bonus offers to trade as much as possible in a very short time. Why do you think they do it? My computer can do the trading for me.
I can’t understand why so many people refuse to use this kind of blessing. But you are free to make your own choice. If the traffic is slow and you are too fast, you might crash into the car in front of you.