It There a Path Forward?
Yes, but let's be clear first. The mental fallacy common to most traders of all markets is that they think they're consistently above average or that the statistics do not apply to them. While it's a common tendency to think you're smart enough to avoid the common pitfalls, a better approach is to develop an environment that makes it nearly impossible to fall into the traps that have nearly subdued those that have gone before us as well as develop an ongoing mindset that tries not to out-muscle the market.
The rest of this article will develop a few strategies that can be employed that will help you develop an environment, both mentally and with your broker, to not get steamrolled.
Changing the Environment
You've learned how the same light that draws many traders into the FX market is often akin to a bug-zapper that provides both the attraction and trading-death of it's newly drawn customers. That bug-zapper like light is low margin / high leverage trading capability which often draws clients in with a low balance. This creates a vicious cycle where traders with low balances and possibly low market knowledge look for home-run trades where they attempt to make the return on one trade that a Hedge Fund is satisfied making in a year.
Consider this quote from FXCM CEO Drew Niv in 2011, who noticed a direct correlation between profitability and account balance,
"“Profitability is skewed downward by the many micro accounts of the company. These micro accounts, which can be opened for as little as $50, are less profitable than averaged-sized accounts because the traders take their accounts less seriously and tend to “go for the moon.” Conversely, FXCM accounts larger than $10,000 have profitability that are double the average.
Part of it is likely due to the natural selection of profitable averaged-sized accounts surviving and becoming large accounts.”
There are two easy environmental changes you can make that are going to be more important than trying to learn from the mistakes of others and not tread down their path based on willpower. The first change you can make is to ask for an account with higher margin requirements. This will force you to not try and "make a killing" on each individual trade and instead keep your expectations well managed. A good broker will do this for you because it's a simple switch in their back office. The second environmental change you can make is to trade with a larger balance.
The difference between a trading with a small balance, less than $10,000 and a balance of that amount or larger is substantial in my personal experience. Once I had a larger balance to trade with, I was able to worry less about making huge gains on a small balance or treating the FX market like a casino and think more about consistent small gains while managing risk. Changing your environment has long been a practice for improving your situation in life, as Mark 9:43 states, "If your hand causes you to stumble, cut it off. It is better for you to enter life maimed than with two hands to go into hell, where the fire never goes out." Likely, amputating your limbs isn't being recommended as much as relying on a supportive environment more than willpower.
Changing Your Mentality From The Majority
We've seen that the majority of retail FX traders celebrate the low minimum deposit and margin in hopes of making a killing on a shoestring. However, this desire has yielded 30% quarter on quarter profitability on average, which isn't great. So now we must ask, what changes can be made by you after the environmental concerns above have been addressed?
First, manage risk in the knowledge that 70% come away lighter in the account at the end of the quarter. In order to join the minority that end the quarter with a large account, one but not the only way to make sure you're less likely to be part of the poorer minority is not letting trades go against you. The way I've done this is through getting out a trade as soon as my technical view is invalidated.
Second, focus on the low hanging fruit. Low hanging fruit from a trading perspective is a trend that has a clean weak currency continuing to lose vs. a strong currency. Over the last 8 months, we've seen EUR consistently weak and USD consistently strong dropping over 20% from the May 2014 high.
Last, expect the unexpected. When traders build their strategy they often think they have an edge that will allow them to consistent withdraw money from the market. However, this breeds a harmful environment where a trade going against them can be seen as not reacting to their analysis yet as opposed to understanding that the market is bigger than them and should be feared as a lot of money can be lost when you hold a trade with the market moving against you.
There are no guarantees in the risk-filled environment of currency trading. There is however, changes you can make to put the odds in your favor. First, change your environment by speaking to your broker and adding more than the minimum required. Minimums are for marketing and are inversely correlated to profitability. Next, change your mindset so that you trade knowing that most lose money and in order not to lose to much, you must be impatient with losing trades while keeping an eye out for the low hanging fruit in the market.