ForexSpirit

After reading the full Jacko’s Forex House of Pleasure and Pain thread on Forex Factory over the weekend I have some serious pondering to do.

Before I divulge what is preying on my mind, let’s take a quick review of Jacko’s trading method:

He trades the long-term trend in only one currency, which is currently EUR-USD. He only trades in the direction of the long-term trend. Both of these points are identical to my own current trading methodology.

He uses fundamental analysis to form an opinion on the market but trades off what is happening on the chart. Again, this could just as easily be describing how I factor in the fundamentals in my own trading approach.

Jacko’s method diverges in the way that he puts on his actual trades. He only uses round price numbers (1.3600, 1.3700, etc.), the 50% fibonacci retracement level and minimal use of trendlines to place his trade entries.

He uses a 50 pip trailing stop and no profit targets. The 50 pip trailing stop is his only exit for both winners and losers.

The most interesting additional flourish he adds is his ‘anti-hedging’ entry, which isn’t a great description of the tactic but memorable none-the-less. If a trade exits for a loss, you wait for a further 50 pip movement past that stop level before placing a buy entry at the stop loss level. If price comes back then you will be back in that market where you were originally stopped out. If the long-term trend is still in force and the fundamentals support this view then the theory is that you will recoup your initial loss and make further profits from a continuation of the trend.

The method is very simple which is its biggest advantage. If you have the long term direction of the market right then you make money; exactly the same as the 4×1 trading methodology I use.

Jacko’s trading results are where it gets most interesting. From an initial starting capital of US$300,000 he was able to make US$500,000 after six months and a million US dollars by year end. That’s a 166% return after six months, and a 333% return after a year.

Jacko doesn’t provide exact information on what gearing he uses for individual trades, but by comparing the lot sizes that he says he uses to his account size I’d guess that most trades use 10:1 gearing.

What reading Jacko’s thread has me pondering on is if I am too risk adverse in my trading approach.

If I look at my own first twelve months of trading I see a return of 42%. In many ways this is an absolutely great achievement. I am a winning trader, which certainly makes me part of a far smaller section of traders than those who consistently lose money.

On the other hand, this sort of return puts my goal of being a full-time, self-capitalized, trader a rather long way off. I don’t have a large amount of trading capital to begin with. For simplicity’s sake, let’s say I have US$10,000. If I was to generate a return of 30% a year (a return that most mutual funds and hedge funds can only dream about) let’s calculate how long would it take to reach a million dollars.

The mathematical power of compounding says that it would take 18 years. That’s a rather long time and who knows how devalued the US dollar will be by then

Another recent event that led to this state of ponderment was a discussion I had with a forex fund manager looking to hire additional traders. He was only looking for traders who were orientated to generating at least a 100% yearly return.

With my current risk stance and gearing on trades I wasn’t comfortable saying that I could produce those kinds of returns. In my mind, 30% to 50% a year is probably more in line with what my current trading plan is able to produce.

The fund manager said that investors were mainly interested in forex to get those larger gains. They were willing to take on more risk, as compared to normal equity markets, to be able to achieve much larger returns.

This fund manager also certainly knew how to trade too. He showed me a trading statement where he had generated a 2000% return over a period of just six months ($5000 into $100,000). It was certainly impressive to say the least!

I’m currently very comfortable in taking the amount of risk needed to achieve that 30%-50% yearly return. Would I be able to step up my risk tolerance to be able to generate a 100% return? If I really want to make forex trading my main source of income do I *need* to make that transition?

If I did decide to step up and try to achieve more substantial returns what is the best path to take? One option is to stick with my current trading methology and just increase the gearing I use. Another is to use the much simpler entry and exit criteria used by Jacko.

Either way, I’m starting to think that I do have to step up, take on and manage more risk if I want to live off my trading capital.

Trading my own capital is not the only posssible medium-term goal open to me. Working as a trader for a fund is certainly another option that I am actively pursuing. I’m now wondering if my passing on the opportunity mentioned above was the correct thing to do. Will working for a fund necessitate that I have to up my reward targets and potentially my risk?

A third route is one that I mentioned in a recent post, that of becoming a forex trainer or coach.

I feel like I am at a fork in my trading journey. What I decide to do about these options in the near future will have a dramatic impact on how much of a role trading plays in my life.

Back to my pondering…