Almost all people entering the world of day trading do so with great thoughts of wealth and easy money. 99% of these people will end up giving their hard-earned money to me and to other people who knew the game. Yes, this is a game that is extremely difficult to master and has endless dead ends. It may feel like you are a mouse in an endless maze. You can spend years running through the maze, working on endless ideas and methods, all of which lead to the same inevitable end … Losing money!
You might be wondering who is this guy writing this article? How he and others supposedly learned the secret of the game. I would like to claim that I have excellent intelligence, but that would not be true. Like Edison, the inventor of the light bulb, if you’ve done something wrong for long enough, lost enough money, and been beaten to the brink of failure, only then, if you muster up the fortitude, will you finally begin to see through all the exaggerated claims of failing systems and unshakable methods from your past.
The truth is that the sooner you stop looking for easy money, the sooner you will begin to understand why and how those who do win get an unfair advantage over those who do not.
The first acquaintance of every person with the game of trading always happens because someone was convinced that trading is easy and simple if you acquire the “correct system” or methodology from the guru of the hour. These marketers take your money relentlessly. They are system / methodology designers who understand exactly how to manipulate the various components of a system to suit every taste and temperament. How many times have you been told that you just need to find a system that suits you and your personality. This is half true, since no system will work for you for long if it is not consistently profitable.
Most systems sold on the Internet today explain the input setup clearly, but are so vague about the output that they are completely useless. I cannot tell you the number of systems / methods that I have personally purchased that are nothing more than our right to scam them in relation to advertising. Most of the systems have been tested and optimized to the point that they look incredible on paper, but they just fall apart in real time. People seem to be willing, even eagerly awaiting, to give away their hard-earned money to anyone who claims they have the key to easy wealth.
Now that you’ve been warned about scams and false claims in the industry, let’s discuss one of the main reasons most people lose money. This is the spread between the bid and ask price of entering and exiting the market, together with the cost of commissions, which add up strongly against those using techniques that try to scalp a small profit from the market. These costs can easily rob you of any chance of making a profit. Let me explain that when using the S&P 500 e-mini contract, the minimum tick size is 0.25 pips or $ 12.50. When you enter and exit a position, you are giving up 2 ticks or $ 25 plus commission on the spread. Let’s say you are using a method where you are trying to reach a 2-point target or $ 100.00 with a limited risk of only $ 100.00. Waiver of the spread and commission will cost you at least $ 30 per contract. This means that the position is already deep in the hole before you even start. The market will need to move and an additional $ 30 before you reach your target. In theory, in terms of price movement, the gain is $ 70 and the loss is $ 130. You should win almost 2 times for each loss, just to break even.
The first thing you must understand is that these costs cannot be circumvented. The only thing you can do is minimize them as much as possible. The only way to do this is to use only trading methods in which the profit targets are large enough to bring these costs down to a small percentage.
Cost of $ 30 and target profit of $ 100 = 30% of the trade value.
Cost of $ 30 and target profit of $ 300 = 10% of the trade value.
All things being equal, let’s say you discovered a method that has 60% accuracy after covering the spread (a very healthy system). The risk / reward ratio is 1: 1. (That is, the risk and reward are equal.)
Winner: + $ 100 Loser: – $ 100.
Winnings: 60% multiplied by $ 100 = + $ 60 minus $ 5 commission = + $ 55 profit
Loss: 40% multiplied by $ 100 = – $ 40 plus commission of $ 5 = – $ 45
This very healthy and complex system will net you an average of $ 10.00 per trade. Is it any wonder that most people fail. Because the system I am describing is much better than most available on the market today.
If you’ve been trading for a while, you know the saying “Let your profits grow and cut your losses.” This is the basis for many trend-following systems that have profitable trades that are much larger than their losers. However, this is done at the expense of the ratio of wins and losses. This means that the more profitable trades, the lower the percentage of profitable trades. Most of these types of systems have winners in the 30% range.
An example of this type of system:
Winner: + $ 400 Loser: – $ 100
Winnings: 30% multiplied by $ 400 = + $ 120 minus $ 5 commission = + $ 115 profit
Loss: 70% multiplied by $ 100 = -70.00 plus commission of $ 5 = -75.00 dollars Loss
This is another example of an extremely healthy system that brings in + $ 40 per trade on average.
The systems discussed above are hypothetical and considered best in class and cost millions of dollars to the system purchaser.
The bottom line is, don’t be fooled by false claims from system developers who promote incredible results and then offer their products to anyone willing to pay them a few hundred dollars. If they really had a system that worked the way it was promoted, they wouldn’t share with anyone, because in a few short years they themselves would be extremely rich without your money.
If a “hypothetical” system performance record sounds good, then it probably is. Don’t be the next person to be forced to give away your hard-earned money.
Let’s say you are really lucky to discover a decent system that has a positive expectation of profit in the long run. You still have a problem and it is serious. In the next article, I will discuss the next reason why you will inevitably fail. If you do not understand this next obstacle, you are as doomed to failure as those who still adhere to low-quality systems.