Money Management The most important most neglected aspect of automated trading

It is funny how people in forums and people who program expert advisors in general seem to address the problem of finding a profitable system and making it profitable. It seems that most of the time, most of their time and testing is spent on evaluating the entry and exit strategies of the trading strategy. People seem to think that the actual money in the forex market is gained by getting perfect entries and exits all the time, or most of the time.

I have seen people in forums go around for months trying to modify their strategies to make them profitable, they will add filters, add indicators, change the rules, optimize the variables, the indicator periods, add volatility filter, to sum it up, they will do everything they can to further perfect their entry and exit strategies. To further worsen things, most of their efforts are concentrated in the entry to the market, which is the most trivial and unimportant part of forex trading systems (see more on this on my ebook).

I have found out that the most important part of a trading system is not the entry or the exit of the strategy, but the money management. What ? Many people will just be awed by this fact as this is hardly even spoke of and people always neglect its importance when they program an automated trading system. When people buy an EA, they dont really care about how the EA actually manages their money, which is, as I have already said, the most important aspect of the system.

Usually people will use a money management system that just trades a fixed percentage of equity or a fixed lot size. They couldnt do any worse. Trading like this only relies on your account balance, not on the market and any money management system that makes sense, gauges the market to know how much money should be invested. For example, would you invest as much on the stock market now as you did last year ? The answer is NO. Why is this the answer ? Because how much you trade depends on how the market is behaving, is it a "good time" or a "bad time" ? Your money management must depend on both your account balance and market behavior, this is the way professional traders manage their trades. They dont trade X percentage or a fixed lot size, those money management strategies are just naive and precarious.

As I have shown previously, I have been able to take several systems that showed no profit at all and simply by removing all the additional filters that had been added and adding a money management system that made sense I was able to make them profitable. This is something you should NEVER neglect and something in which your attention should be focused. A money management that makes sense will make a system that makes sense and that trades according to how the market actually moves.

If you would like to learn more about automated trading systems, how I evaluate them, test them and how you to can build and program your own long term profitable automated trading strategy please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

The Reality is Most People are Terrible Losers Are you a Good or a Bad Loser

If you have read my blog for a while you may know that evaluating systems to understand draw down periods is one of my main concerns when using any automated or manual trading system. I have also written a few posts about the way in which the market limits the mass adoption of systems through the use of extensive and deep losing periods and I have also given people a few pointers - mainly based on true understanding of the trading strategies - so that they can survive these periods without simply using "faith" as a resource. However what I have found out is that the truth is quite simple : most people are simply very bad at losing and these makes them particularly vulnerable to fail in trading more than people who are "better" at surviving draw down periods. On todays post I will talk to you about the differences between good and bad losers and why people who do not become "good losers" are bound to end up failing in forex trading.

If you remember a few posts I wrote almost one year ago, I had started a project in which I attempted to train a few people to becomes successful at automated trading. As time has gone by (more on the progress of this project in a later post) I have noticed that their reactions to losing periods have been extremely negative and this often creates a quick aversion to the system they had been using. In general I believe that we - as humans - do not like losing very much and when this happens in trading we tend to look to change our system for another that allows us to profit without this bad side. Of course, most people believe that draw downs are inevitable but most believe that they can have extremely small draw down. Something which is also not possible.

This in turn leads people to get into systems that have very long profitable periods followed by extremely sharp and possibly devastating draw downs. This is why scalpers with large risk to reward ratios and martingales have such a huge fan base amongst new traders. These are systems that show very up trending equity curves with just "a few dips". New traders bite on this quickly because they dont like the feeling of losing and therefore they tend to lean towards systems that make them feel like "winners" most of the time.

This is disastrous since as time goes by and traders see how their accounts start to grow, they decide to take a bigger risk which ends up with a quicker wipe-out (for martingales a wipe-out will ALWAYS happen, this is a statistical certainty). Being a bad loser makes you tend towards systems that stimulate your "greed side" less than your "fear side". The market protects itself by making long term profitable systems fear based and unprofitable systems greed based, pretty clever indeed :o).

For this reason being a "good loser" is a vital part of successful trading and in fact this is a characteristic I have found all the profitable traders I know share. A draw down period doesnt cause them to evaluate or modify their trading systems and they never lean towards trading strategies which are obviously unsound, despite how "good" the simulations may look like (which at a closer look are most of the time flawed to some extent).

Chances are that if you are in the beginning of your trading career you are a "bad loser". If you tend to be happy with winning trades and sad with losing trades, making your emotions inherently tied with your trading results then this is a behavior you need to change as soon as possible if you truly want to become a successful trader. The bad part for most is that this journey is not easy and may be easier for those who can listen than for those who are stubborn about some trading paradigm that is simply not true.

As I have said many times, the solution is simply to gain a true understanding and - as I highlighted on yesterdays post - to acquire a business outlook over your forex trading experience. If you are trading a system you do not understand PERFECTLY and you dont have accurate risk, reward and worst case scenarios then I have to tell you that you have a HUGE probability to fail with its trading in the long term. A draw down period will come and you will fail to interpret if it is too deep or too long and you will promptly modify your strategy or change your system completely. Such a way of trading is very prone to failure and the way most traders approach expert advisor and manual system development in the beginning.

So if you want to succeed in trading, my advice is very simple : you need to become a "good loser", you need to understand that draw down periods (long and probably deep) are a part of the trading experience and that dealing with them is absolutely necessary to survive this game. However leaving through them with faith is bound to have the same devastating results and only TRUE understanding of EVERYTHING you are doing is bound to give you any long term successful results.

If you would like to learn more about what I have learned in automated trading and how you too can use automated trading systems to your advantage in forex trading please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !