Quote from oldtime:
for instance, one time, not a single pair had reached it's profit target, yet the account was up almost 10%, so I just closed everything out.
Sometimes I worry. If you're willing to endure a 12% drawdown but you'll take a 9% profit, hows that deal going to work out for you over time?
Same with spread trading. A lot of people get lured into it because they feel they now no longer need to worry about outright direction. But after you do it a while, you still have to decide when to enter and when to exit, so even though it's a spread, it's still a trade just like any other trade.
So same thing with trading a portfolio. Instead of many little trades, it's now just one big trade, but you still have to decide when to close and how to get in.
This post helps get at what I think is one of the fundamental roots defining risk.
Suppose you are taking a flight from Atlanta, GA to Los Angeles, CA (USA). You experience "drawdown" from the moment you take off until the moment you land, as your whole body is at risk of plummeting to an untimely death anytime in between. But you hardly ever consider this worse case scenario because you are confident that the method of transportation (how you are getting from point A to point B) is fundamentally sound. In this case, the fundamentals is that the aircraft will sustain enough lift to carry itself from Atlanta to Los Angeles without losing the lift in between
Where am I going with this? There will always be drawdowns in trading. This is nothing to be afraid of. The amount of the drawdown is not important. What is important is that your trading strategy had enough funds necessary to cover the expected (and unexpected) drawdowns experienced. If it doesn't, then the account blows up. Just like if the plane was unable to handle the expected (or unexpected) turbulence, it would blow up. It's that simple.
Once you get to your destination, you barely give the plane ride a second thought. Your back on the ground (risk = 0%), yet now you are closer to your destination and you get on with your life. The same is true when you closed everything out at 10% gain. Your account is now flat (risk = 0%). You move on to the next trading opportunity. In fact your overall risk has
decreased, because now you have more money to play with. That may be a little difficult to understand at this stage.
It costs margin and spread just to put on a trade. Plus you have to give some trades time and pips to move if it moves "unfavorably" You already know this. So why run from it? Why not embrace it? Especially if you understand that it is impossible to know which way the market is going to go before the fact. Drawdowns are temporary. But pullbacks are always just around the corner. One way to take advantage of this is to strategically add positions to our drawdown. Then you could break even or profit quicker on the retracement.
[warning: prepare for disappointment] trading with individual stops / profit targets are pointless unless it is part of your overall strategy. Using profitkeeper will allow you to trade without stops and trade without fear. It looks on the only thing that matters:
equity increase.
So to reiterate, you may benefit from the beauty of diversification, but it still comes down to classic money management and trading.
Exactly. Although it is not diversification persay. Simple cost averaging will do the trick. Most people are familiar with the term martingale, but it seems to bring about a negative stigma with it. But you don't need that level of aggression to still benefit significantly from cost averaging. although if you understand the power of using position sizing instead of stops, combined with an accurate entry method, you can really get some interesting gains.
Profitkeeper EA is used on the metatrader 4 platform. it is available in the first post. if you are having problems downloading it, send pm with email or go to awarenessforex.com to download.
