Is Your Trading Like the Weather?

Is Your Trading Like the Weather?

Is your trading profit and loss kind of like the weather here in Texas this winter? That is hot one week, cold the next, hot the next week, cold the next, and on and on and on? There are a couple of things that could contribute to these swings in the P & L.

This is a weird job - trading for a living. In every class I ask this question: "Who has had a job working for someone else where you get the same paycheck every two weeks? Where every 1st and 15th of the month you get a check for $1,000 or whatever it is?" Most hands go up. As far as I'm concerned, trading isn't like that. To me, trading is more like a high-end real estate sales job in which you may go a couple of months without a sale, and then a huge multi-million dollar home closes. That's when the big paycheck comes in to make up for the weeks of no sales. In my experience, trading is all about grinding out small winning trades to pay your bills until the big paydays come. When do the big paydays come? Good luck finding that out ahead of time! (Please don't send me emails about Elliott Wave or Fib time zones, thank you very much.)

Now, what could contribute to these streaks of profitable and not-so-profitable trading? The first that comes to mind is the psychology of the typical trader. After a few winning trades or winning weeks of trading, very often a trader's ego starts to get in the way. After nailing several trades in a row, I know I feel a bit extra confident as do many people I talk to! Once this over-confidence starts to creep in, many new traders will move their stops just a few more pips the wrong direction (a 90 percenter mistake) because they KNOW they will be right, or over-leverage their account (yet another mistake). This inevitably leads to larger losses, often negating the wins of the previous days or weeks.

This is why I believe a trading diary is a good thing for new traders to use as it is a reminder of how you were feeling after a streak of winning trades, and how you felt after the losses started to come. Keeping notes in a journal, or adding notes to a chart and then saving the chart as a .jpg, will help you move along in your trading career.

The second reason that your profitability may not be consistent is the marketplace itself. The Forex market is a great trending market, but it can also channel or consolidate for weeks at a time! Experienced traders will often trade these markets differently. Here is an example:

Notice the distinct difference in the yellow shaded areas versus the blue shaded areas. The yellow shaded is considered channeling or consolidating, while the blue is considered trending. Which area is it easier to make money in? Obviously, the blue! Letting your winners run in the blue shaded areas was obviously a good idea, while in the yellow shaded areas, your winners may not have even reached your second or even third targets.

Now, how can we get an idea of what type of market we are in, trending or consolidating? Let's take a look at a common indicator, the MACD (Moving Average Convergence/Divergence).

By looking at the MACD line vs. the signal line, you can see as they move closer together, the momentum of the move is weakening. As the MACD and signal line are moving apart, the momentum of the move is increasing. By studying this simple indicator, it can help you determine if this market is trending therefore, letting my winners run, or if the momentum is slowing and I should be more disposed to shorter term trades.

So, there are two of the reasons why your trading P & L may be hot and cold like the seasons - it's either you have changed, or the market has changed. The road to success in trading hinges on you being able to control yourself, and recognize the fact that the market will change from time-to-time.

About Rick Wright

Rick studied economics and psychology at Iowa State University, and entered into the brokerage business in 1992. He earned the NASD Series 4,7,9,10,24,55,63, and 65 licenses. He helped grow an online brokerage business which was eventually sold off. Rick has also held positions as broker, branch manager, and several VP positions in the brokerage business.Rick began trading equities in 1997, and was introduced to the Forex market in 2002. Currently trading from home in Dallas, Rick is also a frequent contributor to various TV and business talk radio shows.Rick's goal in class is to accelerate your learning curve of trading, instead of figuring things out with your own money. He will show you several examples of trading mistakes that he and others have made, which cost thousands of dollars in the past so you won't make the same mistakes.You will learn how to recognize the differences between long and short term trends, where to enter trades, and where to exit based on previous price action.