In today’s episode, you will discover the truth to why traders lose money with technical analysis and how you can avoid it.
So tune in right now…
Hey, hey, what’s up my friend?
In today’s episode, I want to talk about why traders lose money with technical analysis.
One of the most common reasons is this:
“It’s because technical analysis doesn’t work, Rayner. It’s bullshit. It’s crap. It’s a scam.”
That’s a pretty common one.
Let me ask you a question…
Let’s say you know how to drive a car. I think most of you watching this right now, you know how to drive a car. And just because you know how to drive a car does it mean that if I were to send you for an F1 championship, you’ll win the race?
I think you’ll shake your head and say, of course not.
Well, this is the same as trading. Just because you know a few technical analysis techniques doesn’t mean you can be a profitable trader. You need more than that.
So what do you need? A few things:
1. Your technical analysis must have an edge in the markets
This means your trading system or strategy must have a positive expectancy. What is positive expectancy?
Let me give you an example. Let’s say there’s a coin in front of you now. Every time head comes up, you win a dollar. Every time tail comes up till you lose a dollar.
In the long run, what happens? Well, that coin has no positive expectancy. You’ll just breakeven. Every time you win, you’ll win a dollar. Every time you lose, you lose a dollar. You’re going to be pretty much flat in the long run.
But now, let’s say every time you toss the coin and head comes up, you win $2. And every time tails comes up you lose a dollar. In the long run, what’s going to happen?
Well, you’ll make money from the coin toss. This is what I mean by having an edge. In that coin toss, clearly you have an edge over the other opponent and it’s the same for your own trading.
So your system must have an edge in the markets. And having an edge is not the only thing…
2. You must have proper risk management in the markets
Back to the coin toss example.
Let’s say you have $10 capital for the coin toss.
Every time head comes up, you win $2. Every time tail comes up, you lose a dollar.
and you have $10 worth of coin toss capital, how much are you going to bet on each coin toss?
You can see that if you bet $5, it’s going to be a matter of time before you blow up your coin toss capital. Because after 2 losses, your capital is wiped out.
You can see that even though you have an edge in the coin toss, but without proper risk management, you will still lose.
And it’s the same for trading. Just because your system has an edge in the markets, doesn’t mean that you can be a profitable trader. Because without proper risk management your edge is wasted.
So that’s the second thing, risk management.
You must have the discipline to follow the rules that you’ve set for yourself. You must have the discipline to be consistent.
So let’s say you know you should risk 1% on each trade and you have a system that makes money.
Maybe sometimes you follow your rules, that 1% risk management you’ve given yourself. And sometimes when you’re feeling good, you’re feeling confident. You risk 70% of your account on 1 trade. And if that one trade goes wrong, then it’s all wiped out.
So this is where discipline comes into play.
Have the discipline to follow your rules and stick your rules. When the drawdown comes, the discipline, to be there executing day after day without any deviation from your system. That’s discipline. And that’s what you need.
How to an edge in the markets and stop being a losing trader
So before I end today’s episode, I believe most of you are wondering:
“So Rayner, how do I find an edge in the market?”
Well, there are many ways to go about it and I’ll share with you what I think is the easiest way – that’s to follow the ideas put up by traders.
For example, there are books out there, that share with you trading systems that have an edge in the markets. And those trading systems can serve as a template for you to develop your own trading strategy.
Let me give you a few examples:
- Following the trend by Andreas Clenow
- Unholy Grails by Nick Radge
(I think Caesar Alvarez and Larry Connors wrote a couple of books on trading systems as well.)
Go and look up those books and look at the systems.
They already gave you the exact trading rules, the entries, the exits, the risk management, and of course, I don’t expect you to just trade it blindly. Take those rules, do the work, do the backtesting, do the research and validate whether those rules work or not.
If it doesn’t work, then chuck it away.
But if it does work, ask yourself why does it work? Are you convinced that it works? Does it have sound logic behind it? And if it does, are there ways that to tweak the system to better fit your own personality or your own circumstance?
Maybe for trend following, you don’t want to ride such a long-term trend. Can you reduce the length of the trailing stop loss to ride a shorter-term trend? And if you do that, what are the results of the system?
Once you’re comfortable with it then you can trade it live with a small account and see how the system fair in the real world of trading. If it fares well within your expectations, then you might consider scaling up to trade slightly larger. That’s how you go about it.
There is no shortcut here in trading. If you’re looking for a shortcut, this is the wrong show to be listening to. But if you’re looking for proven strategies and techniques, to help you level up your trading, then this is the place.
With that’s said, I’ve come to the end of today’s episode and I’ll talk to you soon.