Hi from Andrea Unger. Myths of trading.
There are some sentences or myths often presented, sometimes comments under the videos, sometimes on forums and so on, and I just want to spend some words about some of them.
One of the most common is: psychology is 90% of trading success.
I discussed psychology in a previous video and I can state, from my point of view, that this sentence is not true.
Psychology is important of course, but what does it actually state?
It says that once you have a trading plan, you should do your best to stick to the plan, to do what you have planned, what your trading setups or whatever recommends and avoid to be overwhelmed by emotions and then make mistakes because of the emotions.
This is very true, but obviously, if your trading setup, if your plan is bullshit, you will lose.
You can be as psychological as you want, but if you have some rubbish in your head to trade, you will lose money.
It’s like going on a diet, if you want to lose weight, you have to stick to a diet and be very strong psychologically to lose weight.
It’s true, but if the diet says to eat padding at breakfast, at lunch and dinner and maybe also as a snack, I sincerely doubt that you will lose weight as you desired.
It’s a nice diet, by the way, but probably it will not produce the effects that you are aiming for.
So psychology is important, but in my opinion not to that 90% claimed in some part of the industry.
Another myth is about the importance of the exit setups on a trading system: exits are even more important than entries.
I don’t think so!
I personally don’t think so, I believe exits are important, but not more important than entries.
In my opinion, exits are there to stop a trade at the moment when the setup, the reason why the trade was opened, disappears, when that reason is no longer there, it disappears.
The reason it can disappear is when the move against the trade is too much, stop loss, when you believe that the impulse of the trade has exhausted to that level, take profit, when you believe that the effect of the setup lost importance because time went by, time stop, or when you believe that psychologically you don’t want to give back too many profits, trailing stop, and maybe some others.
In the end, you have reasons to close something that you opened and these reasons are still related to their entry setup.
I’ve discussed in some previous videos how some specific exits are linked to the entries setup, because of the type of setups, so the entries setup, in my opinion, still rules.
Exits are important, but to claim that they are more important, in my opinion, is only a way to depict as some magic in your development skills that is not there and you just want to show something that you want to depict as particularly clever, which is not, necessarily.
Another myth often discussed is about risk-reward.
I’ve already mentioned something about the risk-reward 1 to 3 in a previous video, where I stated that the necessity of a take profit which should be at least 3 times the stop-loss is absolutely not true.
In general terms it depends on the kind of strategy, of the type of strategy we are trading, in counter trading is a case where most often stop-loss is even larger than the take profit, so actually, it does not apply there.
Interestingly I was discussing yesterday with a trader in a hedge fund, a big hedge fund in the eyes of retail traders, like we are, a small hedge fund in the industry, it’s about half a billion euro under management, so it’s big from our perspective and small from others, but still important.
He said that a program, a strategy that could deliver a 10/15% a year, with a drawdown of 25%, would be well accepted by the industry, 25% against 10%.
I mean, in our ears we normally hear 10% gain with 3% drawdown.
So if the industry, I mean the industry are people who have money, people who are willing to invest.
Are these people so stupid to invest in something that delivers 10/15% annual in front of a 25% drawdown, or are maybe we the stupid ones who believe it is bad?
Probably the second is truer and it is.
The point is, that the strategy with 10% annual return and 3% drawdown, simply does not exist.
If it existed they would have billions under management.
It does not exist, so the industry knows that a product with 10/15% annual return and a 25% drawdown is a good product, because it is something that is possible and in line with some of the best overall products, provided obviously that 10/15% on the annual basis is really annual, I mean year, after year, after year, for many years, not 3 years or so.
So the strategy must obviously be promising from many points of view, but as said, the industry accepts something that is a bit against our imagination, about a scenario of a good risk-reward strategy, this is something which is very important.
What I want to say is that these are just 3 of the myths in trading and I recommend to be always very critical when you read sentences, claims, especially from somebody who maybe has not a proven experience in trading.
Most often sentences are there just to impress and this is obviously tricky sometimes, but you have always to analyze critically what you read, think about it, think and consider.
The only way to properly consider what you read is to study, to make research, obviously, and to be curious.
I always recommend studying because it’s the best way to build yourself as a trader.
That’s it, if you have myths and you would like to discuss them, please write them in the comments, maybe we shoot another video, discussing about those as I also discussed the 3 we commented here.
I am here, we see you next time, next video.
Ciao from Andrea Unger.