How to Become a More Consistent Trader // Ep. 57

In This Episode

• Stop confusing consistency with win rate
• When you might want to pull money out of your account every day
• Why trading goals can be detrimental

Looking for More Consistency in Trading? Try This…

Consistency is a difficult thing to achieve for many traders. But why is this?

So we sit down to talk about about why consistency isn't everything traders think it is and how traders can think about it differently.

Sometimes you don't have to be as consistent as you think you should be, in order to be a successful trader.

Read the Transcript:

Walter:    Hi, Hugh. So we have a question from a trader and the question is: How do I become more consistent? I feel like I do not have the right entries for my trading system.

Hugh:    Why don’t you explain what you are talking about a little bit earlier?

Walter:    Yes, we were just talking about this offline. I think what happens is we as traders confuse consistency with win rate. So we feel like it's not good and I did this for a long, long time. I was always trying to get a better win rate.

Now, what traders think initially is you are going to find that through your rules, entry rules in particular. I think that is not, there is some truth in there. There’s definitely some entry rules that are not good. Some of them are really good, you know all that is true.

However, I think if you really want to tweak your win rate, the fastest way to do that is to work on your exit rules. So a higher win rate would be associated with a trailing exit that is super tight and really close to price. Also, a higher win rate would be associated with a hard target that is super easy to achieve.

So it is easier for the market to go, if you have a hundred pips of risk on your trade, is it easier for the market to go fifty pips or two hundred and fifty pips? Well we know, right? It’s fifty. So you can reduce your reward to risk ratio and that will up your win rate.

The problem is obviously, execution then becomes important. If you mess up execution, it is a bad, bad thing because it will really eat into those lower win rate strategies. So there’s losing, there’s winning trades that were making five pips. If they’re making four pips, that is a big deal for scalpers and things like that.

I think really, what we want to get at is the root of the issue here. For most traders, when they say, “I want to be more consistent” or they want a better entry, what they are really saying is that they want a higher win rate. I would ask, why do you want a higher win rate?

What is it that you want to do? Do you want to make money or do you want to pat yourself on the back and say, “I’ve got an eighty percent win rate?” Most traders want both. I’ve seen a few systems that have eighty percent win rate and 3R and all that but they trade very infrequently. Almost the defining feature of those strategies is that they rarely ever throw up a signal.

So I think in the end most traders can come around to this. The longer you trade, if you can work on yourself and get used to losing and understand that losing is a big part of the game, learning how to lose, especially currency trading, that is a big part of the game, if you can learn how to do that like stock trader I feel like have it easy.

Sometimes I think I want to come back as a stock trader. Maybe I should because you know they almost always just buy. Most of them don’t even think about it. I mean some do but most stock traders just buy. So the question is when do I buy? So that is just the question.

It is so different to currency trading but I like the currency market charts much better. They are nicer I think. Smoother and leave you gaps and stuff. So what do you think about this? Why do people say that they need a better entry or that they want to be more consistent? What is going on here?

Hugh:    I think a lot of it like you say is expectation. Another thing to look at is people want to win every single month or every single week. If they don’t do that then it is a failure to them but like you said some systems are going to draw down like two or three weeks in a row and you hit like a fifty percent a week then you make it all back.

So I think it is really about your personality. What you can tolerate as far as the draw down and then just the system that you are using. Do you have the right expectation for that system? Or, are you just trying to cram other expectations on a system that is not just going to perform that way.

I think it does come down to the mindset. The mental toughness. Can you come back from a draw down? I was talking to my trading buddy last week and he drew down like five percent. He was freaking out and I was like, “Dude, you’ve got this”. He came back and he made, you know he was only down done percent at the end of the week. He was like, “Yeah, I just needed a little bit of confidence.” So part of that is the confidence you have in yourself and in your system.

Walter:    Yes, it is amazing how quickly you know you can lose it and how important it is to have things in place that’ll enable you to build a backup like processes that you can use. I have a friend who traded the lower timeframe charts and he would consistently make money. Once in a while he will have a terrible loss.

The way that he did it was he would pull his money out everyday. So he never had a lot in his account. So when those big terrible losses came, you know a lot of that has to do with the way that he manages his risk.

There are things that you can set up like if you are in a draw down, do you just get away from trading or do you do a lot of testing on a strategy that you are having a question about. Present that to your logical brain and go, “Look, this is how this system has worked.”

Also knowing, I’ll put in the show notes the risk calculator for people who are interested in that. The risk calculator can help you too and you can go, “Of course, I have an eighty-nine percent chance of having a fifteen percent draw down”.

So once you know those numbers, a lot of traders do not know that. They do not know that they are on that path of a draw down because of the way that they’ve setup their strategy.

Hugh:    Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

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Walter:    So it is a bit tricky. Like what you are saying, it is true. It really comes down to expectations. I think management of the situation when it comes up because it’ll always come up. It will always come up where you are going to question, “What is going on here?”

To me the ultimate question for traders, is it the system? Is the system broken? Have the markets changed? It’s all the same question or is this a normal process? Is this a normal draw down? You can answer that.

Hugh:    Or, is it your mindset, right?

Walter:    Yeah, exactly. Is it your mindset? How do you know? Is it, “Okay, my system is broken. The market has run away from this strategy. It is not going to work anymore.” Like the classic would be if you had a mean reversion system and it is in a super strong trending market. That would be like you’re going to go, “Wow!” That would make you double in it and it will come back eventually but you know those are the times when you’re just going to go, “Woah!” Because you know, you’re going to take it on the head. If you are trading that market it is a runaway train.

It is really tricky to just disentangle it. My system is broken and the market has changed. Is it me? Am I doing something weird here? Am I not following the rules? Am I doing something off or is it just normal? Is it a normal draw down and I didn’t realize that my numbers work out this way? Which is why I mentioned the risk calculator because it can help you.

It has helped me a lot. It helped a lot of traders who are just trying to answer that question. Some of you do not realize how a thirty percent draw down is completely normal. They just didn’t have an idea, you know.

Hugh:    So what do you think of this idea of setting goals? Like I tell the people I work with to set goals at least for the year. That you kind of have this expectation of what to shoot for and what to expect in your trading or what to look for in your back testing.

What do you think about setting a monthly or a yearly goal? Is that helpful or is it more of a hindrance? What do you think?

Walter:    What I like to do is I like to split it up. So I have multiple accounts for multiple goals, that is how I do it. I have like a fairly aggressive small account and I have a medium and then I have a pretty large consistently blah account. So that is how I do it and the problem with goals, I think those are great.

However, here is the issue. I think we get stuck when we say, “Okay, I want to make ten percent a month” or whatever it is and then as soon as you have ten percent, you turn off the switch. What’s going to happen is your average over the year is not going to be ten percent because you’ve never allowed yourself, it is like a profit target.

If you have a two-R profit target, you're never going to go to twenty-R win. That is the same thing with the goal. I mean, it is not the goal that is doing it. It is the rule that when I achieve an X goal, I’ll stop.

I think that is the tricky part because that is going to pull down your average. So if you want ten percent a month and every month that you hit ten percent, you stop. How about those months when you lost one percent or three percent or you only made five percent? Your average is going to come down to six and a half or seven and a half percent so that is really the issue I think with goals.

I think you should reward yourself and all that, that is great. Especially for execution goals but in terms of returns I think the tricky bit is making sure that you do not cut the fat tails off of your distribution.

Hugh:    Yeah, you want the minimum not the maximum, right?

Walter:    Yeah, you can reduce risk and do all that stuff if you want it. Fine, whatever to maintain it. If you are risking three percent of a trade and then  you hit the goal for the month and you’re like, “Woah, I’ve got two weeks to go.” Maybe now you risk one and a half percent or something. You can do things like that. So what do you think about goals? I mean, what can you say?

Hugh:    I agree. I think it depends on the system also. If you are going to be a day trader then maybe a weekly goal makes sense or a monthly goal. But, if you’re going to be a swing trader then that is the kiss of death basically because you cannot expect a position trade or a swing trade to set up every single week.

So you might want to have a quarterly goal or a yearly goal and I think that is really important for backtesting. Like you said you do not want that to be your limit, you want that to be your floor that you are shooting for and then everything else is gravy because you are going to have some losing months.

Walter:    So you’ve got that distribution of months. If ten percent or whatever the number is your target for that account then you just know you are going to have most time is going to be over or under and then it will average out.

Hugh:    Exactly, cool. Thanks, Walter.

Walter:    Thanks!

Hugh:    All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

SHOW NOTES:

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