The Woodchuck and the Possum
- Find a system to test. Lots of traders use moving averages – when the moving averages cross each other, they give off buy/sell signals. The might read candlestick patterns, Elliot Waves, or Fibonacci Arcs. Find a system that you like and test it. Get charting software that allows you to backtest your results. AmiBroker and TradeStation both work well.
- Play with the variables. If someone’s system says to use the 5 and 13 Exponential Moving Averages, then try the 4 and 9 instead. Then add in the MACD or the CCI or the RSI and look for candlestick patterns. Backtest these new variables. Are the new ones more profitable?
- Keep notes of the results. Keeping notes in a trading journal or notebook is essential. Are you recognizing any patterns (e.g., Fridays are bad days for your strategy, or the 5 and 13 work well if you wait for a -.0004 MACD?
- Draw preliminary conclusions. Once you’ve done your testing, write out the principles that you’ve discovered. Then test the principles with a demo account for at least 4 months -- did your system work? If so, set it in stone. Well, the last time I made this mistake, I entered a trade that lost 250 pips in 72 hours. I stayed in the trade hoping that the market would rebound (it never did). I figured if I just laid down quietly, the trapper would never come and shoot me. Well, he did. I lost my usable margin on the last day. I lost 75% of my account. I resolved on that day to never again violate the principles of my trading strategy.
I tell everyone that trades forex the same thing: you can learn this the hard way, or the easy way. But you will learn it eventually: in the world of forex trading, there are only
Woodchucks and Possums. If you’re just trading on emotion, speculation, or excitement, then you’re a Possum, and you’re going to get shot. Either take it from me, or learn on your own. I hope you take the time to read the principles below and learn from my mistakes.
How to Be a Woodchuck
There are five steps to thinking like a Woodchuck in the forex market.
1. Be hungry and determined
The Woodchuck wants the fruit. He believes that he has a right to it. He is willing to do whatever it takes to safely get it and eat it.
As for you, you’ve got to want profits. You’ve got to put profits ahead of everything else. You’ve got to say to yourself that the most important thing at the end of the money is not making lots of trades, or any trades, but rather the most important thing is to end the money higher than when you started it. This belief has to drive you. If you trade because you like to trade, you’re going to lose money – you will end up making stupid trades, getting trapped, and laying down to wait for the bullet.
The Woodchuck wants to fill his belly – but not at the expense of his life. Remember that.
Be hungry for profits, not just for trades.
2. Discover true principles.
The Woodchuck, unlike the Possum, can learn from its own mistakes or the mistakes of other animals. It understands that if it enters the trap, it will be caught. It knocks over the cage, sets it off, and then jumps back. When it senses the danger has passed, it might start poking at the cage from the outside, or try to grab the fruit through the bars of the cage.
Likewise, you need to become a student of the forex market if you want to become successful. The forex market does not reward lazy people. Plan on spending some
money on books to become familiar with charting patterns. Read everything you can online about how the market works. Get some charting software – there is plenty of good free charting software to start you out – and watch the formations. Most important, start trading on a demo account immediately. Get involved, take notes. Keep a trading journal that lists every trade and the reason you entered and exited. As you do these things, you will distill principles of the forex market. From the jumbled mess of data, patterns will emerge. Effective trading strategies will become apparent. Profits will still be elusive, but you will begin to learn true principles of trading. Write these principles down as you learn them. They will serve you well later.
3. Obey true principles
Once you discover a set of true principles, they’ll do you no good if you disregard
them. I’ve met forex traders that understood many, many true principles, but they were still dumb as a bag of hammers and poor as church mice because they failed to obey them.
Our culture isn’t much fascinated with obedience – if you’ve noticed, we’re all
about how free we are, how unrestricted our behavior can and should be, and so on. This booklet isn’t a commentary on social issues, but I do want to advise you that sticking to your principles may seem odd at first. You might determine that although important, your principles are more “guidelines” than hard and fast rules. Don’t fall for that! Don’t spend all your time discovering true principles just so that you can violate them – and lose a lot of money in the process.
Once you discover what works, stick to the plan!
Mark Twain said that once he learned all f the intricacies involved in navigating the
Mississippi – the steering of the boat, the reading of the compass, the charting of the deep and shallow points – that the river lost its beauty.
That’s a lesson, a truth, that you’re going to have to become comfortable with. At some point, when you develop a profitable trading system, the system will return profits if you’re awake, asleep, playing football with your kids, or if you get hit by a bus. The system will be tweaked from time to time, of course, but it will work. Your hard work will pay off. But the mystery of the forex market will disappear for a time, maybe even forever, and thus your fascination with it might wear off too.