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In trading errors can become very costly. But as a human, you get tired. You get a headache from time to time, and sometimes you might get sick or bored. The problem is human nature. We all think that we can do proper trading, right away.
If you had 1 hour to spend, how would you spend it? Would you like to improve your trading skills? Would you like to find a better broker? Or would you like to build a good trading system?
Some people do one or two trades a month and spend hours and hours, trying to find the right entry signal. Hope traders are the ones that don’t know what to do when the next crisis comes up. All the candles on your chart are relative visual representations of data. But your eyes might not be good enough. I once tried to develop a feeling for the market.
Yes, a feeling. Today I know that trading with a feeling is like driving on a highway, blindfold, trying to find out the right direction by listening to the car radio. A computer never needs to eat, sleep or leave the house, so it can trade 24/7 on up to 22 currency pairs at a time. When I started out, I had no idea what I was doing. So I listened to the free advice that the financial industry provided. For trading we need to define a building plan like we would build a house. We need to exactly define where the rooms are, where the door is, and how the house will look like when it is finished. Would a profit made by a random entry be a good thing to prove if an automated system works? When you trade a cent account, it is still real money and it is much more scalable. When it runs like on rails, you can also increase the risk setting.
In an automated back test we go with a fixed value, but in real life you would probably look at your account each and every day. The MetaTrader software comes with an example program for the MACD indicator. It is in the examples folder and it is called MACD Sample. If you run this MACD Sample program with the default settings for at least one year, it will make losses. One of the hidden costs for small accounts is the perceived profit that you think you can make with a bigger account.
Another hidden cost is that you need to give up human control and excitement for automated trading. You cannot change the trading weather because volatility and price movements will go up and down no matter what you try. But you can influence a few other things, like the set of the sail. Using an indicator includes that you will always have some false signals and you will always have some open positions that are caused by those false signals. A big loss might cause you to manipulate your system or even close the whole account because of fear or other unpleasant emotions.
Every decision comes with a cost. And that is also true when you think that you made no decision. I really enjoy the freedom that comes with automated trading. Brokers are a problem because they can change the rules in the middle of the game. I once used a broker that declared insolvency in January 2015.
So some people now might ask themselves if it wouldn’t be better to use an indicator that produces the exact same signals each time a backtest is performed. Well, it depends on how you see the world. If you believe that prices go up and down for a reason, you will look for a confirmation to prove that.