The Forex market is constantly waving. It has periods of the uprising, moving down, and consolidations. Most of the traders use systems that perform better on the rising or falling market, but there are strategies that work perfectly on consolidating one. So, it’s like… The equity curve just follows the waves of the market. It means that you shouldn’t always stop trading when the price goes wrong.
A short theoretical intro
Let’s pretend that a trader has a system that works nicely during an upward movement, but he starts facing minor losses after the market starts consolidating. And it can consolidate much longer than be in movement. We can even see that there are more candles after a parabolic graph of candles that move. Consolidation usually takes more candles and time to play out. And our imaginary trader thinks that he should stop trading when the market goes flat. He sees that the curve changes to a downward one and it slowly eats the profit he has earned before. This process can last for hours, days and even weeks. Our trader decides to stop trading in order to get a break. He’ll think that the strategy has stopped working or something else has happened to the market, so he’ll remake it to be more suitable for the further work with upward trends.
Doing that would leave him without a chance of earning money when the next upward trend comes, and it always comes. It is inevitable as every system has its movement cycles.
Here is a chart of a system that performs quite strongly.
Looks nice, doesn’t it? We can even think that a trader with such profitability growth is the richest and happiest man in the world! But…
Look at the marked rectangles. These are flat phases that lasted for almost 6 months. The system performs at break even 6 months! I bet that most of the traders would go mad during that 6 months. Even if they have already made a fortune before. The most obvious decision is to stop trading when the system (as it seemed) stopped working. This is the most severe trading mistake. Anyway, I understand why people do that. 6 months is a very long time especially for a day trader, believe me, I know how it feels. Anyway, it’s not a reason to stop trading or changing your strategy. Try to stay objective and keep working as you have done it before.
Two main things to think about
One famous trader Peter Brandt said that he had long losing years. But after 4 years passed his system brought 40% annual profit. It’s difficult to accept but the things work in such a way. A system may remain losing for years, but still, work! All that can be done during such periods of Forex trading is thinking about two points.
- How have our setups played out?
- How well has the system applied to the market?
If the problem was in the first point, your system has to be adjusted to the market a bit. If the issue is to the second point, you should work on yourself and apply the system to the market correctly. Every system should be executed flawlessly and a trader is a key to this. So, if you see that your system starts losing, it’s not a cause to stop trading.
As I’ve said before, the worst thing you can do is to stop trading when you face minor losses. You can stop trading just before a new upward trend starts. The way to overcome the psychology is trading demo all this time and switching to the real money. Stop real trading after the cycle goes down and start it again just after it goes up. Still, staying on demo all the time is needed.
Sure, some element of luck is present in such type of Forex trading. The system may lose for a year or more, and I can give you a 100% guarantee that no trader will stay with it longer. I would stop trading when my system would show negative results all year long. Switching to another system is one more option.
Anyway, it’s always some element of luck in Forex trading. You can’t control the market but can test your strategy many many times to make sure it’s gonna work. Don’t forget about money and risk management too!
I can add that the worst thing that can happen is a protracted losing period. It happens in Forex trading sometimes. Maybe you even would get back to your daily work. Anyway, the downward movement may end and there will be an upward one. Think twice before stop trading at all. It may be a challenge, but your success is waiting around the corner.
Seeing the light at the end of the tunnel is the main thing in Forex trading. Don’t give up. Protect your funds and manage them along with your rules. If you can afford to wait till the conditions change, do it. This will be one more proof that you’ve become a professional trader who can stick to his system all the time.