Forex Myth Debunked Series
Intoduction
I often heard or read about people saying that only professional traders can make money in the markets. When I say professional, I mean people who are trained and work for institutions, hedge funds or banks. Many retail traders failing to succeed in their early career will assume that this industry is an inside only business.
This is not only false but it is also counterproductive. Trading in our ear has never been more accessible and transparent. With tool all over the place to help you find your way. Don’t get me wrong, accessible does not mean easy, it means possible.
You do not need to be a professional trader working in a bank to make consistent money in the markets, you just need a system that you can consistently work with. Algorithmic trading offers you that and will even provide you data to demonstrate that it will.
In this article, I will walk you through some of the reasons traders fail, what professionals do and why a quantitative approach can play a role in making your trading journey a profitable one.
New To Trading?
If you want a structured foundation to trading before getting to know algorithmic systems, I put together the Essentials Of Trading course. You will learn the basic concepts, the markets mechanics and a kick start to algorithm trading.
The Myth: Only Professional Traders Can Make Money
This myth has several roots and is conveyed by many who have failed to an extent in trading the markets. Some think that the professionals will always win because they access to better data or better tools. Some just did not find the way to work in the markets that resonates with their way to think. Some of them are frustrated, especially when seeing so many advertisements promising insanely high profits at an unreal pace.
The Truth: Professionals Don’t Win Because They’re Pros. They Are Profitable Because They Follow A System.
Here is the hard truth. Professionals are not gifted at birth. Professionals are disciplined, hard working and most importantly they follow a system, by the book. No guesswork, no gut feeling, only action, or inaction, in reaction to the present data.
People who are profitable in this business rely on rules, probabilities, statistical validation and most importantly risk management.
So many beginner retail traders struggle to get that mechanics vs emotion right that it became common to hear people that only professionals can be profitable.
Why Algorithms Level The Court Up For Retail Traders
If you are unfamiliar with algorithms, you might believe this is a complex piece of AI running on a supercomputer, right next to the one predicting the weather. It does not have to be that complex, or even automated. Algorithmic trading is simply trading while following strict rules to enter, exit the market and manage the money.
Algorithms Remove Lots Of Emotions In Your Trade
I’m not gonna lie here, no matter how good an algorithm you have, even if everything is programmed emotions management will always be a part of your career. However, when you have a set of predetermined rules, that you know are statistically profitable in the long run, you have less chances of getting FOMO, fear or revenge trades. Your algorithm will always dictate you what your next action, or in most cases, your next inaction. It will not take a revenge trade as it will probably hit your stop loss while you sleep. It will not believe that roll is the best ever and overleverage the next trade. It will stay consistent.
Algorithms Will Set Your Risk Management For Success
One of the most, if not the most important part of a solid algorithm is certainly the risk management. When you set your rules up in a system you know how much money will be risked at all times, you know how many loss in a row you are likely to have and you know your overall win percentage will end up with a consistent profit.
A working algorithm will have a precise lot size for each trade depending on the stop levels. It will have stop losses in place, this is critical! It will not tell you to double up to make up for a series of 3 losses in a row.
Algorithms Turn Trading In A Repeatable Process
If you want to make money consistently, to some level of success, you need to be able to repeat what you have done over and over. By using the same rules on the same assets with the same tools, you can do that over and over again. It creates consistency. Don’t get me wrong, that does not mean you will win every trade for a specific setup as there is always uncertainty in the markets. It means you can recreate the conditions that are favorable to you.
Algorithms Make You Trade Like A Professional
Everyone can have their own way of trading and that is truly fantastic. People who trade like pros can however recreate the same thing over and over again, with the same conditions and the same statistical output. An algorithm is, in my opinion, the most efficient way to have a way of trading that is consistent, profitable and that will minimize the emotional investment.
A good algorithm will naturally feel like you’re a pro behind the wheel and your skills will only hone over time.
How Retail Traders Can Apply This And Start Trading Better Today
Define A Trading Algorithm
Include clear rules for:
- Entry.
- Exit.
- Stop Loss.
- Take Profit (If you prefer to use one).
- Indicators with their settings.
- Risk Percentage for each trade.
Backtest it
If you have the resources to automate it, do so, if not you can always simulate your tool on live charts and calculate the edge. Note the win rate, the payoff ratio, the maximum drawdown and the worst losing streak. These information will speak to you clearly as to know if the system works or not.
Forward Test
Now that you are confident your system is profitable, try it on a demo account with a robot-like consistency. Journal and note what is not going according to plan, whether it’s your own actions or the system has flaws. You will want to improve your system over time with better tools, or different parameters.
Live Trade
When you have demonstrated a consistent profitable equity curve, you can start trading live or with a prop firm if you prefer. You should always start with a smaller risk then your system previously worked with until you get comfortable using it in it’s entirety and without mistakes. This is when your psychology will be working against you. Stay sharp!
Conclusion
The idea of “only professional traders can make money” belongs to the same category as “Forex is easy money” except a little further in the new trader’s timeline. These myths are only existing because people conveying it are justifying their own failure.
The truth is that professionals are good at following systems, they don’t have a secret chart. A retail trader that has a good system will make money as well, for the same reason. You do not need a master’s degree in Forex, you don’t need insider knowledge and a retail trader’s system certainly will not be perfect.
Retail traders often fail because of their own psychology.
A good algorithm can certainly help you with that.
Your success is in your discipline!
