Sticking With Your Methodology Through Thick and Thin

Filed under: Learn Forex Trading |

 

Screen shot 2013-02-18 at 10.35.04Given my current trading situation (that of a 6% gain in January and a 4% loss so far in February), I thought that it might be topical to discuss the notion of sticking with your trading methodology through thick and thin.

 

Once you have decided on a trading methodology and your trading parameters, and more importantly, are generally happy with your own trading guidelines and have used it successfully for some time (either by a demo account or in a live trading situation), you need to stick to that methodology and those guidelines through thick and thin. Constantly meddling and tinkering with your trading methodology is usually a recipe for disaster. Let’s go through an example of what might happen if you tinker with your money management.

 

Let’s say you begin risking 1% of your bank on each trade. Things go well, and you find that you have gained 20% on your capital. Confidence increases, and you raise your risk level to 2% of your bank per trade. Then, things start to get patchy. You lose 28% of your bank and are now carrying an 8% loss. Your confidence is shattered and you lower your risk level to just 0.5% per trade, not wanting to lose any more money. From here on in, things pick up and you end up at breakeven for the year.

 

Now, let’s take this same scenario, only this time, you do not meddle with your risk levels. This time, you gain 20% on your bank, you lose 14%, and then you gain 16%, leaving a grand total of a 22% gain. Not bad compared to the breakeven scenario. One trader meddles with their trading criteria, and the other holds firm, making two very different outcomes even though the exact same trades were made.

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