ForexSpirit

While I’ve been keeping my trading pretty quiet over the holiday period I have been posting a bit on Forex Factory. There are two posts I wrote on the millipede thread that I think are worth repeating here.

The first one is all about inevitability.

Graeme, your post on inevitability could not have been better timed.

I have been trading this method since early September. I jumped in the deep end, starting off with 9 currency pairs in my roster. Over the past number of years I have tended to primarily focus only on EUR/USD, so I knew that it was going to be a challenge to adapt to widening my focus.

Fast forward to now. The only pair I have been able to successfully diversify on has been EUR/USD. On all other eight pairs I was just seeing my trades get eaten up and spit out by the market. I began to wonder if I should just go back to solely trading the euro.

I decided to ponder on it over the holiday break. Even though I’ve only been on holiday for two days I think I’ve made my decision: to stick with trading all nine pairs.

I know that being able to trade multiple pairs allows me to focus on ones that are moving and ignore those that are consolidating. I know that I have to work on upskilling my ability to identify and focus on pairs that are ripe for picking. For me, a big part of this will be getting in tune with the fundamentals of countries outside the EU and US (as I know my ability to trade the euro is in large part to being able to follow the big picture).

The power of inevitability is also evident when I review my open trades and I see that I have two legs in EUR/CHF both over 1000 pips each. I obviously haven’t been able to add to my good fortune there, but I know that at the very least I’ll be able to close one of those legs, which will cover my expenses of 350 pips to grow those two legs, plus a nice profit, while leaving the other to continue on its merry way.

I have a 500 pip position open on EUR/JPY and a couple of minor positions on AUD/USD and USD/JPY (all of which still could easily be closed out at BE, but are in open enough territory that they could grow quite nicely).

So EUR/USD was my first inevitably profitable pair (most likely due to my prior experience with it). EUR/CHF is inevitably next. I don’t know which pair is going to be next, but I have confidence in my abilities to make it inevitably all nine pairs (and then I can start to think about adding some more pairs).

I was thinking essentially along the same lines as MidKnight: things can go wrong for a long time, how do you keep positive and work out what needs to be improved or fixed?

I had a sliver of success with euro straight off the bat, but have struggled with every other pair. My biggest current drawdown is 850 pips with sterling (I’m beginning to see why some people just can’t trade this pair at all). But then I look at my surviving legs and just know that when I get a couple of legs I’ll be able to clear that drawdown and reset the clock on sterling. And ditto for all the other pairs I trade.

Maybe I was slightly dumb to start trading nine pairs off the bat, rather than starting with one or two and working my way up. Even if it has been dumb, I’m still in the game. Mainly due to going with low gearing for each trade (0.5:1). My account equity is down 20% from its starting amount, but I’m not unduly worried, mainly because my unrealised profit has always been enough to see things back into the black.

Going forward I’m going to trade normally on pairs that I know I currently trade well (basically euro based pairs). I’ll be more conservative on the other pairs until I get some more experience with them, and the inevitable profitable legs that will allow me to trade them more normally.

Trading is all about overcoming adversity. You have to survive and struggle through the short term roller coaster ups and downs to be able to experience the rewards that come long term.

I was also asked to compare BWILC to the millipede method.

There are basically five parts to BWILC, so I’ll cover each in turn.

1. One currency pair. In BWILC, Dirk (du Toit) has you start with just one currency pair. You stick to just one until you know it inside and out. When you can profitably trade one pair you are free to add more as you see fit. Each currency pair has its own personality and it makes sense to master one so you know what it takes to become equally comfortable and profitable with additional pairs. Graeme has basically said that traders should take the same approach with the millipede method.

2. One direction. With BWILC you try to identify the long term trend in your chosen currency and look to only take trades in that direction. With the millipede you have your hindsight, which is essentially the same thing: a preference for one direction which you think is the long term trend direction, which you then use to anticipate.

One key difference between the two methods involves how you deal with being wrong in your choice of long term trend. Using BWILC you don’t set stop losses. Instead you manage trades in a way that leaves them open to withstand a lot of market gyrations to allow them to become profitable. If they go in the red you manage culling them generally when they are negative 200-300 pips, or you can enter hedge trades. BWILC hedging involves freezing a bad position in place, giving you more time to understand what is happening with the market and hopefully either working out that its worthwhile waiting for the market to come back or deciding to take a loss.

Millipede hedging is looking to get in at the start of a new trend direction. Here you are only looking to hedge positions that you have open that are profitable, which is a completely different mindset. I was never comfortable hedging losing trades when I traded BWILC (I preferred to just take the loss, although many BWILC traders are able to hedge negative trades very successfully). Hedging profitable trades because you never know what the market is going to do next makes a lot of sense to me and thus I’ve been able to incorporate into my trading vocabulary successful and very easily.

3. One lot. This means trading with low gearing. When I initially stared trading BWILC my position sizes ranged from 1:1 to 3:1. Using low leverage allows you to ride out market fluctuations so that you don’t have to pinpoint with extreme accuracy the ‘perfect’ entry. I’m using 0.5:1 gearing right now, so have become even more conservative over time.

4. One percent. The BWILC method has you take frequent wins. You aim for small, medium and large wins (30, 50, 100+ pips). The small wins become your daily bread and butter. The medium profitable trades aim to grow your account and the large trades are mainly used to offset the, hopefully infrequent, large losses that you’ll suffer.

The millipede method is radically different on this point, looking for infrequent very large wins, and lots and lots of small losses. If anything, the millipede method reminds me of Nassim Nicolas Taleb’s way of trading when he ran a hedge fund.

5. Relational analysis. The last BWILC cornerstone is Dirk du Toit’s forte: applying fundamental analysis and market timing to know when and how forcefully to trade. There was a great link earlier in this thread that provides a great description about what trading is all about: ambiguity and being able to read the market. This is so important. It alerts you to potential turning points in the market, which allows you to start placing more counter trend (counter hindsight) trades in case the tide really is turning.

BWILC was an important leg of my trading journey, and probably the one that I learnt the most from (about trading in general, the forex world and myself), but it didn’t suit me fully in the end. Three years later and following the millipede method I’m still basically following four of the five BWILC points. I’d still recommend checking out BWILC if you haven’t done so before.