Every car ad I watch seems to have a warning at the bottom of the screen: “Professional driver on closed course. Do not attempt.” Perhaps it is just our litigious society these days, or maybe knuckleheads actually try to replicate some of the stunts. When something difficult is done well by a professional, it only looks easy!
That’s pretty much the experience that Deborah Levine, a brave reporter at MarketWatch, had when she tried to trade foreign exchange on her own. The painfully honest article is entitled How I Lost $100,000 Trading Currencies: A Reporter’s Firsthand Experience. Her experience is quite typical of retail forays into the financial markets:
I opened two trial accounts, one with FXCM and the other with Forex.com, figuring that after writing about foreign-exchange markets for a while, I could put on some trades based on what I know about the markets.
The results were not pretty. Nor were they any better when she attempted to rely on “expert” opinion.
In one month of setting my own trades, I lost about $45,000.
I also tried a platform that allows individuals to piggyback on successful, professional traders. I started with $100,000 there, and split it between a few systems that seemed to be doing well. I ultimately lost $72,000 trying this.
Fortunately for Ms. Levine, the trial accounts only let you use play money. Unfortunately, lots of amateur investors go off half-cocked with real money in their 401k or personal account-and not necessarily just in forex. This process happens in every asset class, from stocks to bonds to precious metals. Amateur investors often have issues they are not fully aware of.
1) they think they know something about the market. The truth is, no one knows anything. Forecasting has not been shown to be a fruitful way to interact with the markets.
2) they do not have a disciplined plan for what to trade, when to trade, and how much to trade. All of those things need to be specified. Without a systematic process in place, you cannot do adequate testing.
3) they do not have any test results on their approach. Testing is critical. Would you like to fly in a plane that had not be tested for airworthiness?
A systematic approach utilizing relative strength does not require forecasting, specifies a transactional process precisely, and allows for long-term testing to be done. Even then, a return factor that can be shown to have a good record over the long term will go through numerous negative periods of performance. Markets aren’t easy even when you take a professional approach, but are almost sure to beat you senseless if you engage them in an amateurish way.
Currencies are simple. Long in a backwardated uptrend, short in a contangoed downtrend, otherwise ignore the contract.
The rest is detail …