By Thomas Ott September 19, 2007 Permalink

I’m closing in on my 1 year anniversary of trading Forex my $100 Forex Experiment. I did really well ($ wise) in the beginning of the year only to get smacked hard between May and June. I got discouraged for a few months and then started dipping my toes back into the markets in August. Since then I started rebuilding my account and I’m back to profitability. My yearly trend is still up after a nasty drawdown. I’m not at my all time high but I’m happy with the new trading plan I’ve been implementing.

The reason why I got hammered between May and July was because of what I read in an ebook titled “Bird Watching in Lion’s Country.” Although it has some good points, its explanation of what drives the forex markets is really good, the biggest mistake I did was stop using stop losses based on trading method expounded by the author.

The reason why the book first appealed to me was because I was constantly getting stopped out! I had too tight stops or placed them “just out of reach” of key support or resistance levels. Even though I loosened my stop criteria slightly, I would get hit 8 times out of 10 and watch as the market reversed and shot higher. The no stop loss method might work for the author but it didn’t for me.

So I went back to what I feel was the right trading method for me.

1. I started using a fixed percent of risk for my trading capital religiously;

2. I forward forecasted currencies 1 week ahead using my neural nets;
3. I placed trailing volatility stops using Monte Carlo simulations of currency volatility;
4. Always sell half when you can (at 1R), let the other half ride. Close it out when you hit 2 or 3R.

Item 3, using Monte Carlo simulations of currency volatility, was nothing more than calculating the odds of various % moves on a day to day basis. Once I knew those odds, I would place my stops based on the % moves from the currency’s current trading levels.

Doing that protected me from the typical daily swings and let me stay in the game. I made sure that I knew how many pips I had on the line because it would clue me into as what levels I needed to sell. Item 4, always sell half, also helped my bottom line by taking back my initial trading capital and pushing profits.

There you have it, my lessons learned so far. Forex trading isn’t all that hard if you can grasp the concepts of global interest rate differentials and the global economy; the hard (and profit hurting) part is not getting whipsawed out of your position or being wrong in your trend analysis.

Bottom line: In May 2007 my expectancy dropped from +$0.17 to -$10.71, June 2007 = -$13.45, July 2007 = +$1.14, August = +$0.50, and through September = +$0.68. I read the book in May and threw in the trash in June but I take full responsibility for my stupidity!

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