Currency Trading 103

This will probably turn out to be more blog-like than most of my other entries. 

Computers have become wonderful things.  I’m sitting here  at 5:42 AM, listening to Swiss Radio Classic on the internet, composing this.

Well, I’m cooling off on currency trading.  I suppose it was inevitable.  It isn’t simply because the currency market shuts down totally on Fridays at 5 pm Eastern time, and doesn’t reopen until Sunday at the same time.  (I’m writing this on Saturday.)

No, it’s more likely that I’m disgusted with losing imaginary money.  When I see a down trend, and I sell short, the market usually instantly reverses and goes up.  When I see an up trend, or signals which say it’s about to go up, I buy, and it immediately turns down.  It’s all very frustrating.  What if I had a real account?  That would be real money going out the window.  One of the Forex dealers I signed on with was fairly honest, saying only about 23% of their clients make money – the rest lose.  One of the books I’ve read say it’s more like 10%.  So, the deck is stacked.  I’ve detailed the reasons in my earlier posts on currency trading. 

I’ve tried to keep a record of my practice trades.   I count 17 of them.  There may have been a few more.  Here are the won-loss counts:

  Win Lose
Long trade                           6                           3
Short trade                           4                          4

The counts look favorable, don’t they?  I do better buying into the market and waiting until it goes up before I sell –  the “long” trades.  I’ve only broken  even on “short” trades, (borrowing money from the dealer, selling that, and waiting for it to go down, so I can buy it at a lower price, give the broker back what I borrowed, and pocket the difference.  Short trades are a bit mind-boggling, but they’re normal with currency.)

So, I’ve made 17 trades, won 10 times.  What’s not to like?  The problem is, my losses are much bigger, on average, than my wins.  Let’s look at the same table, but this time, we’ll put in the money.

  Win Lose
Long trade                  $ 727                   $ 672
Short trade                 $ 218                  $ 765

In other words, a net loss of $492.00.  This doesn’t look so bad, until you recall that I made $500 in an “accidental” long trade,  where I put in a trade, promptly forgot about it, walked away, and came back much later to find the market had trended up sharply.  Take that away, and the total wins/losses are $445 and $1431.

For my 10 wins, I’m averaging $94.50 (including the $500 win – $44.50 without it), but on the 7 losses, I’m averaging $204.43.  What’s going on?  My money management and self-discipline are all wrong.  When I lose, it’s because I’m hitting the stop loss I put in, usually 20 pips away from the buy or sell price.  When I win, it’s usually because I’m watching the prices, and I decide to go ahead and sell and take a profit.

What should I be doing?  I imagine I should put in a stop loss for 20 pips off the price, put in a profit limit at 30 above or below depending whether I’m long or short, and walk away until one of the limits is reached, one way or the other.   Doing that way, if I guess right half the time, I’ll average about an 8 pip profit, the difference being the built-in profit of about 2 pips the dealer takes.  

An alternate strategy might be to not have a profit limit, but that usually fails if you walk away – I’ve tried that a couple of times, but had the market go way up, then come back and trigger the stop loss, costing me.

Believe me, currency trading, even with imaginary practice money, is not for the faint hearted.  With real money of my own at risk, I imagine I would faint most of the time.

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