Central bank of New Zealand The path to success in forex trading is not measured by
profitability alone. Those traders who become profitable have the challenge of consistency.
Can they do it over a sustained period of time? The duration of successful trading
also requires adaptability. Conditions change in the geopolitical world and its global
economic cycles that significantly impact forex. Those who are successful during periods
of global growth may not be able to use the same strategies during periods of
global stagnation. The key skill of identifying macro conditions comes into play to provide
early warnings to reassess trading strategies or choose different currency pairs. If
China enters into a slowdown, the forex trader will be very careful about going long on
the Australian dollar. If oil is trending up toward the $75+ level, the experienced trader
may start including the strategy of going long the Canadian dollar. If the trader observes
that Japan’s economic performance is showing growth and inflationary tendencies, those favoring carry trades will significantly lighten their leverage or turn to other pairs to avoid
equity volatility.
Becoming more successful in forex trading is also about being efficient. Two traders
may have the same performance record of profitability, but they are not equal in success.
The trader who has achieved the pip accumulation with less time is more efficient. Consider
two traders who have the same profitability but different win-loss ratios. One trader
wins 60 percent of the time, and the other wins 40 percent of the time. Which one is more
successful? By measure of profitability, they are equal. But there are huge distinctions in
other qualities associated with the trade. The 60/40 trader has a much wider freedom of
trading action than the 40/60 trader. The later has to win big and lose small—almost all
the time.
One thing that is critical on the path to success in forex trading is what happens
after the trade. Being able to evaluate trading performance and apply the new knowledge
gained about yourself will be essential to improving. The ability to improve depends on
the ability to evaluate.
Performance evaluation needs to avoid being overloaded with information that
doesn’t lead to improvements. Here are some performance evaluation measures that
traders should be able to have regarding their own trading history.
Measuring Performance
To help gauge your performance, the following objective measures should be used:
Win-loss ratio, standard
Win-loss ratio, adjusted
Average win
Average loss
Average duration of the winning trade
Average duration of the losing trade
Average stop loss distance from entry
Average profit limit
Measuring Emotional Intelligence
While it is conventional wisdom that emotions are not beneficial to trading, the fact is
that they are used by all traders. We are—in the words of Marvin Minsky, one of the
founders of the artificial intelligence field—an emotional machine. The profitable trader
is using emotions to his advantage. The new trader needs to obtain a high level of confidence
about how he or she trades. This is, in fact, a use of emotional intelligence. We
reviewed how to rank your trades by confidence level. The goal is to determine what kind of emotional trader you are. Are your winning trades hunch trades, or are they trades that
are taken on excellent setup conditions? The effective hunch trader is a very rare species
because hunches are hard to replicate. So it becomes important to know the following:
Distribution of wining trades by level of confidence
Distribution of losing trades by level of confidence
Compare your first 50 trades against your second 50 trades in terms of how confident
you were when you put on the trades. There is a natural shift in percentage of winning
trades being highly ranked setups versus hunch trades.
Measuring Performance with the Learn4x Trading Pad
Learn4x has created its own trading pad (Figures 18.1 and 18.2) that provides the ability
to have real-time trades in a simulated account. The pad, which can be downloaded at
www.learn4x.com/tradingpad, uniquely offers built-in analytics on trader performance,
allowing the trader to track the key performance results. The Learn4x trading pad is
independent of any Forex brokerage firm and receives the real-time prices from its own
feed supplied by Tenfore Systems, a world feed provider.
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