In this post Omar Eltoukhy explains why tripling his account when he first started trading forex was a VERY BAD THING! Over to Omar:

I wanted to discuss an often overlooked topic:  “Is it good to win a lot?”.  Yeah, you’ll find plenty of articles and education out there telling you how to avoid losing, but see how much you can find about avoiding winning………..not much.  Duhhhh right??  Well, just as I discussed about how winning systems can lose money, winning too much can be detrimental as well.  But how??  Let’s start with a trading story from my own experience:

When I began in forex, I plowed right ahead with a live account after very little demo trading.  After all, I had a bit of experience with equities and had done rather well.  I thought “how hard could this be?”  Keep in mind, I had always invested in equities using fundamentals and this was my first foray into purely technical trading.  Blew the account right??  NOPE………well, not right away.  In fact, I tripled the account in less than 2 weeks!!  Yup, my beginners luck made me think I was a born genius at trading and I would be a trillionaire by years-end.  But we know that didn’t happen right?

Instead, my winning gave me a very high confidence level in my own, ignorant trading.  And I continued to trade away, without learning anything else, and using ridiculous amounts of risk (which I didn’t even know I was using because I was such a noob).  Yup, I blew 80% of that account in one night!!!  Stacked orders all the way up on the Usd/Cad thinking it would have to turn around, and it DID NOT.  Yes, for those of you who know my disdain for that pair, it started with this one night in the beginning……  OOOOOOOOOOOOHHH I WAS MAD!!  But it made me finally take a step back and think about my trading, something I had not done AT ALL while I was tripling my account.

It seems obvious when we approach trading that we should focus much attention and education on learning how NOT to lose, but we rarely prepare ourselves for what might happen if we start WINNING ALL THE TIME, or a great deal of winning in % terms.  We dream of the day where the wins start coming in, but we seldom have a plan for what to do if we gain 50% in a week.  The problem with winning a lot quickly is multi-faceted.  The first problem is that we rarely learn much from our wins.  Yeah, we scramble to figure out what went wrong when we lose so we don’t repeat it, but we don’t often pay as much attention to the “nuts and bolts” of the trade when we make a big win……usually because we are too busy telling our spouses we will be rich soon, and simply basking in a gain that is no doubt challenging to come by.

Not only do we not learn much from our wins usually, but lots of wins have a big tendency to give us way too much confidence in our trading and leads to hubris which leads often to risking too much on subsequent trades.  And it always seems like when we make the “big bet” after winning so much, it inevitably loses.  Why??  The market was waiting for it??  NOPE, the market doesn’t care.  The law of averages.  If you go on a great run on a system that wins 80% of the time, you have eaten up much of the wins in the trading ratio and losses are more likely to happen.  Also, we stop looking for reasons NOT to take the trade and start fudging the rules to get us in more positions.  Since we are already up a considerable amount, we care less about how much we are risking and since we are potentially just risking profits anyway, we tend not to take the trades as seriously.  All these things can lead to a devastating cycle:

1. We start losing some of the profits we had already banked
2. We start taking more trades to get “back” to where we were
3. Commonly at this point we continue to lose, because maybe the market has shifted phase after a big move that favored our system and our system that was just raking in the dough starts losing.
4. We now see our profits evaporate away and we start to “revenge trade” and make even worse trading decisions
5. We watch our 30% weekly gain now become a loss and we either get into “gambling mode” or we simply throw our hands up, and think that the business of trading is rigged and no one can win
6. Our negative attitude affects future trades, and prevents us from really learning from the losses we just took
7. We avoid good trades in the future, which makes us even more angry, and we begin looking for another system, abandoning what was actually good trading for something new.
8. Repeat the cycle again

Yikes!!  So how do we avoid this peril?

• Just as with the losing end of your trading plan, come up with rules as far as wins go
  • Give yourself a maximum % gain for the session/day/week and once you achieve this figure, TAKE THE REST OF THE session/day/week OFF!!!
• Maintain a consistent risk % with every trade
  • DO NOT vary risk % based on how you are trading that session/day/week
• Try to learn from the wins and see why they were good
  • This is important to learn about which market conditions your system works well/not so well in
  • Pay attention to whether this was market related, or based on a good trading decision
• Learn to balance confidence with hubris
  • Know your system will provide wins, but do not start thinking you have the whole trading game “figured out” just because you went on a good run

Hopefully those little guidelines will help you avoid the potential pain that can come from winning too much, too quickly.  Speaking of winning…….let’s see if we can find some winning trades!!

Author: Omar Eltoukhy