One of the most commonly quoted trading facts is that 95% of traders who dip their toes into the foreign exchange markets fail to ever make a profit from their efforts.
A somewhat staggering fact I ‘m sure you will agree and yet traders are still convinced they can ‘make it on their own’.
For this reason the benefits of mechanical trading strategies for Forex trading are typically overlooked.
Surely the trader can rely on his own wit and intelligence to out play market or is this simply a fallacy of the traders ego and self belief? Following this path of thought the trader must believe it’s easy to make higher profits than a simple rule based strategy could ever yield?
The honest and likely, more successful trader, will of course know the answer to this. Without a framework for trading it is difficult to profit from currency trading.
Let’s look at the reasons as to why it can be so hard to make consistent profits.
The first thing to understand is that most traders don’t fail due to a lack of systems and strategies to trade. In fact there are so many strategies for tackling the markets that it is often difficult to know which to choose.
The problem that most traders have is that they spend too much time looking for a good strategy. Of course there are good and bad strategies and it would be wrong to assume otherwise. However many are fundamentally sound.
The issues is that in spending time looking for the ‘holy grail’ what most traders fail to grasp is the fact that it is not the system that is the obstacle to them making profits. As a result their energy and focus always ends up being being spent on the wrong thing.
And here of course lies the fundamental flaw in attaining consistent and long term results.
The weakest point of virtually any trading strategy most likely to be the TRADER!
The Emotional Trader
Most people who fail at Forex put it down to the strategy or frequently, their lack of education. This is why so many only courses and guides to trading exist.
However the reason that some people succeed and make money from Forex while others don’t comes down to their psychological makeup.
Most people who have read a little about financial trading will have come across the concepts of ‘fear’ and ‘greed’. These can have a devastating impact on trading performance even if the trader recognises them and attempts to overcome their influence when trading their systems.
The reason that top traders are able succeed is that they are able to illicit the right response from these emotions , either consciously or unconsciously. They are able to subconsciously use them to their advantage which in turn drives their performance. This contrasts with the inexperienced trader who is likely to be completely unaware that they even exist.
The trader fears anxiety when the market moves against his prior analysis. Unable to accept his mistake and take a small loss he lets the loss grow until he cannot afford to exit.
Most individuals prove to be their own biggest enemy when it comes to performing at their trading desk. They prove to be the obstacle standing in the way of their own success and their potential for producing good trading results.
The natural human response is often at odds with what is required to become a good investor on Forex.
Addressing these psychological responses can be difficult. It is often hard for an individual to even recognize these flaws. If they not recognised they become almost impossible to overcome. However there are steps which can be taken to help improve the performance achieved.
The obvious answer to overcome these problems is to gain awareness of these psychological responses. However most traders are aware they exist but still fail to be able to remove eliminate the detrimental effect they have on their trading performance.
The benefits of using a mechanical trading strategies comes from their ability to help to eliminate some of these key issues.
Mechanical trading is often mistakenly thought to be automated trading however this is not the case.
A mechanical strategy doesn’t equate to having to be automated. It can even have an element of subjectivity in some of the filters. What it does provide however is a framework for trading. It is this framework which if adhered to, prevents the trader from deviating too far from the planned path.
Saying Forex mechanical trading systems will fail due to inflexibility of the strategy makes the incorrect assumption that a trader with no framework to their trading can profit
This trading framework can help to eliminate the emotional aspects of trading, a key performance inhibitor. The strategy framework provides rules and these in turn give rise to the discipline which is needed when confronted with unpredictable markets.
It is well recognized that most traders ultimately fail as they let emotions get the better of them. They open orders when they shouldn’t and take profits before the move has run it’s course. In both scenarios their emotions lead them to make counter intuitive decisions which only lead to the loss, rather than the accumulation of money.
In creating a mechanical based approach this can be largely eliminated. Strategies can simply be traded and become a simple process of rule based execution. Trading itself then is much easier and can even be likened to a simple decision tree type process. It can in effect become boring. But boring can equal profitable.
The caveat to this approach is that the trader must be able to stick to the rules of the system.
Mechanical entries and exists will help to remove the subjectivity from the trading process but only if the trader observes them.
Similarly, if defined entry and exit levels are used and strict risk controls are taken, then trading will only cease to be subjective and emotionally driven if the process is followed.
Think of it much like preparing for a 10k running race. Your ability to finish the race will be greatly enhanced if you focus and train according to a set plan. However having a plan is no guarantee of success if you don’t stick to it. Therefore even the mechanical trader still has to exercise discipline.
The temptation is always there to take risks and go for higher profits. This is particularly true of mechanical trading which can be uninspiring or even boring. However trading was never supposed to be interesting… only profitable!