The Secrets to Forex & Why You're the Wrong Type of Loser (pt.1)
This is a 'many-part' educational series to help turn smooth brains into folded brains. The series reveals the true power of the social and psychological factors shaping markets. This is abstracted from 7,000 hours of research in markets and finance and is a synthesized thesis between my research, John Boyd's work on strategy and adaptability, and David Bohm's theories on emergent behavior. The endstate for the reader will be vastly improved risk management, and novel methods for reducing uncertainty.
Part 1: Why 85%+ of Retail Traders are the Wrong Type of Loser
The true holy grail of markets.. the risk-free rate of return asset, doesn't exist (even perpetuity coupons aren't risk-free). Risk or uncertainty permeates all aspects of our reality. Managing risk is a fundamental component of all business, law, politics, military affairs, sports, etc. It is essential to any form of competition (which markets are). Virtually every element of any strategy employed anywhere involves risk management. It's more than just money... its everything; your relationships, your happiness, your experiences. Your ability to manage risk and uncertainty will positively correlate to your future quality of life.
Why?
Because we can't see the future, but we live into the future. Thus, no matter your wealth or political power, uncertainty is still your master. Fear of uncertainty drives your psychology, the psychology of other individuals, organizations, and even nations. And what these entities do, affect you. Even at subconscious levels. Those that fight uncertainty, do so at varying levels of competence. In the world of derivatives, and for our interests its sub-class: forex, speculation against uncertainty shapes most of the price discovery experience visualized on your favorite candlebar chart. What happens on your chart on higher timeframes is the result of speculation; even those with carry trade positions are still speculating about rates and central bank decisions. The only people who aren't speculating are insider trading, which is illegal. It's illegal to not speculate...
Make no mistake, in the world of speculation, those that fight the best battles, are the ones who fear uncertainty the most and go to the greatest lengths to conquer it. But we already determined that you can't conquer it, you can't see the future. So what does a 'best battle' or 'meeting halfway' even look like in trading?
What do you call a loser that doesn't always lose?
Let me stop for a second.
You're probably thinking: 'this is obvious, no one wants to lose money, everyone is afraid of what they don't know, the future is unknowable, etc'
'How does this help me make money?'
First, you need to understand what you are in this game called Markets.
In this oddly balanced game, those with the most to lose often have the biggest say. And vice versa. You are the vice versa, the retail trader. Retail traders comprise 4 categories that often overlap, ie: people who usually do not have a professional background in investing/trading, or a professionally relevant education, or professional connections as a major client or data access, or a high networth. Your competitors are the opposite (they are all those things and more): the winners, the market makers, the whales, the money printers, the ones with the biggest say, the old money, the 'smart' money, whatever cringy title you want to give them. Commercials/institutions/fund managers/portfolio managers/pension managers/etc.. These guys are speculating about the future, just like you. But their speculation is what shapes price discovery and market movement, YOURS DOES NOT.
This means that whatever you think the market does or should be, DOES NOT MATTER.
The only thing that matters, is what these commercials/institutions think. That's it. If they think that this head and shoulder on the 4h EURUSD matters, then it matters. If they think the moon cycle this month matters, then it matters. If they think communism is good for business, then it matters... etc. It's exactly as irrational as you might think. Now, with their fiduciary responsibilities, they do have to justify their picks. So moon rune interpretation is usually off the table. But guess what. These guys, despite their immense wealth, their research teams stocked with specialists with PhDs, and all the instant access to prime data in the world.. they still lose. They lose all the time, and they lose big. Eye wateringly big. The vast majority are barely winning 60% of the time, if even that... That's why many are offloading into 'less competitive' money-making opportunities; like underwriting, checking accounts, or alternative investments. Competition itself is too much of a risk for their uncertainty appetite. You have to applaud their level of greed.
But to stay on target. Whether your technical system is profitable or not is often a factor of the fitness of your indicators with whatever strategy the commercial is using to execute entry implementation (or combination of models or commercial strategies). And when a few of their models/strategies are losing, it makes it even harder to win at this game (or in those instances, your system might win, whilst you rejoice at the amazing ability of your moon cycles to predict the future).
But let's back this up, did some of you notice something off? 60%~ ... That's actually not bad. A trader who's experienced at losing (and yet making a profit in the long run) would kill for an average position win rate like that. Instead of thinking, "how do I avoid losers entirely" Stop wasting whatever brainpower you have. Start thinking, "how do I minimize my losers?" The losing positions are always going to happen, no matter your system. All edges fade, and even a mythical system that won 90% of the time will weaken over months or years. But if you learn to master the art of 'losing,' the overall win rate of your positions can AFFORD to be low. In many cases, it could even be less than 50%, and you could still make a living as a trader/investor. The best and brightest, the commercials and institutions, are barely going 60%. What makes you think you can do better?
Does it mean all hope is lost?
Not even close. It simply means that you need to focus less on your directional/positional bias strategy (the winrate), and more on your risk management strategy. You have to become the right type of retail trading loser, the 15%~ or so that retail brokers survey as profitable. These guys are losing 40%, 50%, 60%, even 70% of the time, and some of the them are still making big money. It's counter-intuitive but they are the guys winning at losing, and turning that into a living. Your ability to survive losers.. to adapt to uncertainty, is the first secret and the most important step into the weird world of profitable derivative trading.
Okay, so you might be thinking: "Again, obvious. Isn't that just 2%? Isn't that just low margin? Only trade Majors? 100 pip SL?"
If those were the first things you thought, then we still have a very long way to go. Fortunately, this is just the introduction.
See you next week for part 2: 'time as the dominant parameter, fair value, and the 'center of gravity.
Part 1: Why 85%+ of Retail Traders are the Wrong Type of Loser
The true holy grail of markets.. the risk-free rate of return asset, doesn't exist (even perpetuity coupons aren't risk-free). Risk or uncertainty permeates all aspects of our reality. Managing risk is a fundamental component of all business, law, politics, military affairs, sports, etc. It is essential to any form of competition (which markets are). Virtually every element of any strategy employed anywhere involves risk management. It's more than just money... its everything; your relationships, your happiness, your experiences. Your ability to manage risk and uncertainty will positively correlate to your future quality of life.
Why?
Because we can't see the future, but we live into the future. Thus, no matter your wealth or political power, uncertainty is still your master. Fear of uncertainty drives your psychology, the psychology of other individuals, organizations, and even nations. And what these entities do, affect you. Even at subconscious levels. Those that fight uncertainty, do so at varying levels of competence. In the world of derivatives, and for our interests its sub-class: forex, speculation against uncertainty shapes most of the price discovery experience visualized on your favorite candlebar chart. What happens on your chart on higher timeframes is the result of speculation; even those with carry trade positions are still speculating about rates and central bank decisions. The only people who aren't speculating are insider trading, which is illegal. It's illegal to not speculate...
Make no mistake, in the world of speculation, those that fight the best battles, are the ones who fear uncertainty the most and go to the greatest lengths to conquer it. But we already determined that you can't conquer it, you can't see the future. So what does a 'best battle' or 'meeting halfway' even look like in trading?
What do you call a loser that doesn't always lose?
Let me stop for a second.
You're probably thinking: 'this is obvious, no one wants to lose money, everyone is afraid of what they don't know, the future is unknowable, etc'
'How does this help me make money?'
First, you need to understand what you are in this game called Markets.
In this oddly balanced game, those with the most to lose often have the biggest say. And vice versa. You are the vice versa, the retail trader. Retail traders comprise 4 categories that often overlap, ie: people who usually do not have a professional background in investing/trading, or a professionally relevant education, or professional connections as a major client or data access, or a high networth. Your competitors are the opposite (they are all those things and more): the winners, the market makers, the whales, the money printers, the ones with the biggest say, the old money, the 'smart' money, whatever cringy title you want to give them. Commercials/institutions/fund managers/portfolio managers/pension managers/etc.. These guys are speculating about the future, just like you. But their speculation is what shapes price discovery and market movement, YOURS DOES NOT.
This means that whatever you think the market does or should be, DOES NOT MATTER.
- Your fibonacci, does not matter.
- Your head and shoulders shampoo/pattern, does not matter.
- Your sup/res lines, do not matter.
- Your moon cycles, do not matter.
- Your RSI/MACD cross, does not matter.
The only thing that matters, is what these commercials/institutions think. That's it. If they think that this head and shoulder on the 4h EURUSD matters, then it matters. If they think the moon cycle this month matters, then it matters. If they think communism is good for business, then it matters... etc. It's exactly as irrational as you might think. Now, with their fiduciary responsibilities, they do have to justify their picks. So moon rune interpretation is usually off the table. But guess what. These guys, despite their immense wealth, their research teams stocked with specialists with PhDs, and all the instant access to prime data in the world.. they still lose. They lose all the time, and they lose big. Eye wateringly big. The vast majority are barely winning 60% of the time, if even that... That's why many are offloading into 'less competitive' money-making opportunities; like underwriting, checking accounts, or alternative investments. Competition itself is too much of a risk for their uncertainty appetite. You have to applaud their level of greed.
But to stay on target. Whether your technical system is profitable or not is often a factor of the fitness of your indicators with whatever strategy the commercial is using to execute entry implementation (or combination of models or commercial strategies). And when a few of their models/strategies are losing, it makes it even harder to win at this game (or in those instances, your system might win, whilst you rejoice at the amazing ability of your moon cycles to predict the future).
But let's back this up, did some of you notice something off? 60%~ ... That's actually not bad. A trader who's experienced at losing (and yet making a profit in the long run) would kill for an average position win rate like that. Instead of thinking, "how do I avoid losers entirely" Stop wasting whatever brainpower you have. Start thinking, "how do I minimize my losers?" The losing positions are always going to happen, no matter your system. All edges fade, and even a mythical system that won 90% of the time will weaken over months or years. But if you learn to master the art of 'losing,' the overall win rate of your positions can AFFORD to be low. In many cases, it could even be less than 50%, and you could still make a living as a trader/investor. The best and brightest, the commercials and institutions, are barely going 60%. What makes you think you can do better?
Does it mean all hope is lost?
Not even close. It simply means that you need to focus less on your directional/positional bias strategy (the winrate), and more on your risk management strategy. You have to become the right type of retail trading loser, the 15%~ or so that retail brokers survey as profitable. These guys are losing 40%, 50%, 60%, even 70% of the time, and some of the them are still making big money. It's counter-intuitive but they are the guys winning at losing, and turning that into a living. Your ability to survive losers.. to adapt to uncertainty, is the first secret and the most important step into the weird world of profitable derivative trading.
Okay, so you might be thinking: "Again, obvious. Isn't that just 2%? Isn't that just low margin? Only trade Majors? 100 pip SL?"
If those were the first things you thought, then we still have a very long way to go. Fortunately, this is just the introduction.
See you next week for part 2: 'time as the dominant parameter, fair value, and the 'center of gravity.
