I was going to write about some thoughts today about learning from mistakes… and I had a really cool analogy which I might fit in at the end… but I spotted something that makes my blood boil on one of my rare visits to another websites forum which ties into something similar.

There is a current hot topic about trading a break out or a predefined 2 hour segment of the day (In short the start of the US trading session)… not just any breakout but a bracket… this is placing a buy order above and a sell order below the identified range… and set a XX pip trailing stop loss and hope for the best. Those are actually the rules!

Works great on an intraday reversal (on a daily bar chart you will see these as hammers shooting start outside bars) but what about all the other days of the trading year? In the last few weeks we have seen several of these types of days which is unusual in itself in my opinion.

Now what most new traders do when “something new” catches their interest is just look back over the last few days or few weeks on maybe  one or two pairs and what they will see is that this strategy is the best thing since sliced bread. They will go all glossy eyed over the winning trades and the massive movements that they see and think… “This is easy money”

What a serious trader or prospective trader will do is take it one step further and look to see what the LONG TERM life of this potential new strategy is and not what this has done in the last few days.  

Take a look at a daily chart yourself how many intraday reversals do you see these usually easiest to see as hammers shooting starts outside bars do they happen enough to make it a regular trading pattern on a day to day basis?  I think not!

While all things go in cycles and my general view on technical analysis is that all things work some of the time will this strategy still make you daily pips in the long term? No.

Today as I’m writing this strategy will have worked an absolute charm and made quite a few pips, but how many people actually traded it today… not too many by looking at the forum in question.

What is going to happen tomorrow?

All these inexperienced traders will be trading this so called strategy as it has made money today. I foresee them being sorely disappointed. They might then also try to trade this for a few days, maybe a week or two all the while watching their account erode, guess what they ain’t going to use a demo account as this is such a “hot” and “sure thing”… “just look what it did yesterday for the proof”.  This is like taking a tip off the “bloke down the pub” because a “friend of his” knew “someone” that was talking to an employee of xzy company about a sale he had made some good commissions on. So of course that company must be a good one to invest in!!!

So now that my rant about some of the rubbish that people “think” is good without out actually checking the facts is over, the cycle of new trader generally speaking is something like this… and Ive watched a lot of people doing it and caught myself doing it early in my own trading career.

Find an entry strategy/method back test it for a few days/weeks… looks good, “I’ll give this a go”

Watch it in real time for a day or two… “This is making, easy money. Why I’m I just watching it? Tomorrow I’ll live trade it”

Tomorrow comes, live trading starts… they are all excited, might even get lucky for a day or two, on a good trade, might have missed one… “I’ll get them tomorrow” and them your up a few dozen or more pips.. “Great day. Easy!”

Then the losing/mixed trading cycle of the strategy happens and continues for the next few days/weeks… “What I’m I doing wrong? This was so easy” and so the decision to stop trading happens (or the decision that that strategy didn’t actually work in the first place is made and so they stop trading it)

And so the newby trader stops live trading licking wounds and reassessing the strategy making sure the rules have been understood, watching the strategy unfold.  At this point they might see a few more potential losses and think “what a good decision to stop” and then the next several days are spent watching the winning cycle of the strategy profit after profit is seen, confidence is built and “if I had stuck with it all those losses would have been returned to me, I’ll start trading again tomorrow”

So the new trader continues this cycle of watching a winning phase, trading a loosing… and maybe getting lucky in the overlap of cycles but on the whole watching equity erode out of the live account and “if I had just stayed with it from the start, I’d be making a lot of money and kissing the day job goodbye!”

Consistency in trading is a big key with the application of a strategy when you find one that suits your personality or from sticking one a strategy rather than jumping around from method to method.

Of course all the above assumes that the strategy in question is well rounded and not only includes “just and entry method” but also an exit strategy and trade/money management.

Ultimately have a well rounded and complete written trading plan that you have faith in, that is back tested AND forward tested before you commit your hard earned money on the markets.

Don’t fall into the trap of stopping and starting a strategy, realise that you don’t have all the key components or jump from one strategy to another with every new day.

Trading is one of the few if not the only business in the world that allows you to practice before committing real money to the markets. So you can make all those mistakes and learn your new profession on a demo account.

Don’t just jump on the first hot strategy that you see or are told about, test it, see if it works for you, and find the proof for yourself.

Have a well rounded tested trading plan; know what you’re going to do, when you’re doing it and why you’re doing it at ever stage of the trading day.