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BEWARE THE GOOD TIMES
It’s a wonderful feeling when everything seems to go right. Your trades are catching all the big trends, and the profits are piling up, with no end in sight. Nothing seems to be going wrong and your entry signals and exits are right on target. You just knew you had found the next best thing to the “holy grail”, and now you are thinking of increasing your number of trades to catch even more profits. Just imagine what the profits would have been if you had taken a pyramiding approach sooner.
Well, hold on now for a minute. Have you noticed that profitable trades have seemed to go in cycles in the past? Just the same as a series of losing trades? The market seems to work in this manner. Always has. Always will. The market behavior has a will of it’s own, and no one can predict when it will change. It’s only when it has occurred, that you are aware that circumstances seem to be shifting. This is reinforced by the fact that you are experiencing more losing trades and your equity balance is decreasing.
So, now what do you do? Increase your risk to the market? Reduce your risk and trade less? Subjectively pick and choose what trades to take? If the market is working to your advantage, what better time to increase the number of trades, and when the market seems to be working against you, what better time to decrease the number of trades? The problem with this scenario is that you will end up increasing your trades when the market turns against you, and when it does this, you decrease your trades. The end result is that you are likely to increase your losing trades and win your decreased number of trades. So you end up losing much more than you win. Result = go in the hole faster.
There is no system on earth that works well in all markets. Trending systems work well in trending markets coupled with good volatility. Work poorly in sideways and reversing markets. Systems that pick tops and bottoms work well when support and resistance areas correctly pick reversing markets, but work poorly in trending times.
Understanding this helps in making a decision of what to do when things are going well. Basically there are two approaches:
If you are trading just one system, then the best, by far, approach is to be very disciplined in your trading habits, and this also refers to the discipline of sticking with the same number of contracts through thick and thin. Don’t vary your number of contracts per trade. If you do have the urge to some sort of pyramiding scheme, wait until you have at least doubled or tripled your starting equity, and then be very conservative in how much you increase your risk.
Diversification. Trade more than one system, such as a day and short term approach. In this way, although you may lose with one system, this loss may be offset by a win with another system. Of course, when both systems win, you will improve your equity balance at a much faster pace.
But under no circumstances, arbitrarily increase your risk just because you have a spate of winning trades. Remember, the market can kill you tomorrow, as well as make you a small fortune. With this in mind, trade disciplined – take your losses, and bank on making more on your winning trades than your losing trades.
GOOD LUCK AND GOOD TRADING
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