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Falling in love with a trade

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It’s very easy to get stuck in a trade. Perhaps you worked on the analysis for a long time and everything seemed to be lining up so perfectly that it just had to be correct. Once that trade goes against you it can be hard to accept that and stay in the trade as it goes even more against you. At one point you will be so invested in that trade that you can’t close it out as the loss would be too large.
This is why it’s so important to swallow your pride in these situations and just realize that you were wrong and take a small hit.
Have LEGENDAFX Trade For You
Lately, it seems like we’re coming out with something new everyday. The latest product from LEGENDAFX is Managed funds. These are designed like mutual funds, where funded forex computer systems do all the trading for you based on extensively tested automated systems. We’ve been offering the successful Sentiment Fund to clients for some time now, and we are now adding 2 new funds that are very exciting. The first is the European Currency Fund. It uses technical indicators to trade the EUR/USD and USD/CHF. It’s had a great run so far this year, chalking up 32.6% returns in January to June. Has your mutual fund done that? Mine certainly hasn’t.
The Sentiment Fund has always been interesting to me, because it trades based on market positioning. LEGENDAFX’s own proprietary positioning data is the source for its signals, and it has given a strong 4.74% return in January to June. I’ve talked to a number of people interested in this fund that felt it needed to be more aggressive, so we made the Sentiment Aggressive fund. This fund has just started trading at the beginning of the month. It uses the same strategy as the Sentiment Fund, but with double the leverage. We expect it to have about double the profits and double the drawdown of the current Sentiment Fund. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
The Rationality of Logic
It makes sense that things should make sense. I am the first to admit that there is a lot I don’t know. But there is a lot I’m ok with not knowing, mainly because I don’t need to. I don’t need to know why I’m kept alive by breathing air, why toast burns, or how swiping my access card gets our office security door to open.
But here is what I do need to know:
– When and why my strategy will make money.
– When and why my strategy will lose money.
Here is a typical situation. You code one of your strategies into a charting funded forex package that you have been using. It doesn’t do quite as well as you had hoped. So you tweak. It does a little better, but still not as well as you’d like. So you tweak again.
Eventually, you end up with a vastly different coded strategy to the one you started out with – usually a lot bigger and a lot more complex. You don’t fully understand why, but it does a lot better than the original, so you figure it’s better and use it. A month later you’re wondering why your account is so far down, and can’t understand where you went wrong.
Don’t get me wrong, tweaking isn’t bad. Neither is optimization. But here is the golden nugget:
“You MUST understand your strategy”
Having a strategy that makes money isn’t enough. You need to know why it makes money. You need to know why it loses money. And the environments for each.
Logic is your biggest ally in strategy development. If a strategy does well when the input is 4, but poorly when the input is 5, does that really make sense? It may, but you need to be able to reason out why.
A ranging strategy that trades during Asia hours may do better than one that trades during European hours. This may sounds strange, but markets are generally quieter during Asia hours, and break-outs are less likely, and thus are more amenable environments to ranging strategies. It makes sense and can be reasoned out.
This sort of logic needs to be applied to every espect of your trading strategy. From the time of trading, to the entries, exits and money management. I’m obviously excluding signal services and money managers, in which case you should be using due diligence to make your decisions. But, if you don’t understand what your strategy is doing, you may as well give your money to a monkey with darts to manage. Now that doesn’t make a lot of sense, does it?

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