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Thinking in terms of the long run when trading, we will also talk more about thinking in terms of probability and not
prediction.The majority of new Forex traders do not start by thinking in terms of compounding their money over many years, instead they think in a much shorter time frame. They normally have unrealistic expecatations and try for returns that are pretty much impossible to sustain for any length of time. They also trade in such a way that is emotionally very difficult to sustain for very long, usually less than a year, because they trade in such a way that creates many emotionally draining highs and lows. Read more on how to avoid emotional trading.
Trading is a business, one that you can do pretty much anywhere in the world with a laptop and maybe a cell phone. Not only can it be done for a living, it also is a wonderful way to keep up with global events, this is especially true with currency trading. Because of all the benefits currency trading has, including the potential for compound equity growth, it makes sense to think sooner than later how you will keep trading for many years to come. Even starting with this approach will help a trader to start to think differently about trading and risk management. A steady return of 20-30% will compound an account in fairly short amount of time. However you need to stay in the game and use prudent risk management so you don’t have to start over with nothing.
So if you earn on average a 10% return, your account will double in 7 years. If you earn on average a 30% return you capital will double in 2.3 years. So if you start with only $5,000 and can earn on average 30% a year than you will have almost 1 million $ in 20 years. Trying to make 200% or even 500% a year will greatly increase your chances that you will blow up your account, and either quit trading or need to start over. Because of the time value of money this turns out to be a huge cost in terms of long term compound growth! Therefore it’s best to be prudent and trade on the onservative side, especially if you are a fairly new trader, until you are using the markets money & trading with consistency. Practics for better risk management and equity growth Before you start to trade our system, or any system, think how much you want to risk per trade and decide how much drawdown you feel you can comfortabley handle. After you decide on this then divide that risk level by 2. For example if you feel you can risk 1% per trade and risk a 15-35% drawdown than divide the 1% by 2 so you are only risking 1/2%. This is a prudent way to trade when choosing your own risk toleration level.
Remember the majority of traders fail because they underestimated risk levels and leverage their account too high. In trend trading probabilistic thinking is especially important because often a small number of trades make up for much of the profit for the year, which is impossible to predict beforehand which ones they will be. Our focus in not on individual trades (data points), instead we look at the ditribution outcome overtime of many trades (data points). This is why long-term thinking and thinking in terms of probability go hand in hand in trading, and especially trend trading. Keep in mind, far more important than any technical indicator are the fundamentals we have just covered. They were: Leverage/Position Size, Trading with a Plan, Risk-Management, Consistency, and Thinking in Probabilities & Long-term Outcomes. Until you practice these fundamentals consistently you will not trade successfully regardless of which technical indicator or trading system you use. |
