Principle #3: Not the Best-Performing, nor Worst-Performing

At any one time, there will always be bad traders that out-perform good traders.

This goes back to the concept of absolute gains vs. consistent gains (that we’ve covered in the first part of the manifesto).

Take this example. Trader X can trade with too large a lot size (over-trade), get lucky and make a $500 profit, while Trader Y can practice sound money management, and make only a $30 profit. During this particular period, Trader X has performed 1,667% better than Trader Y.

Trader	Capital	Profit	Percentage gain	Performed better by
X	$5,000	$500	10%	1,667%
Y	$5,000	$30	0.6%	–

At first glance, it may look like Trader X’s strategy is the one we want to follow.

What happens, however, when both traders take an equivalent loss instead?

Trader	Capital	Profit	Percentage loss	Performed worse by
X	$5,000	-$500	-10%	1,667%
Y	$5,000	-$30	-0.6%	–

Note that in both cases, Trader X was either the best, or worse performing trader. This has got to do with a term in the world of statistics called variance.

Basically, the larger the difference between the wins and losses (of a trading method), the larger the equity swings, and the more at risk the trader is at wiping out his account.

Here’s a graph describing the typical trade results of bad traders:

Notice that these traders either made huge losses or huge gains, with few trades making a little, or losing a little. These are trade results with a large variance between the winning and losing amounts.

Compare this to the trade results of good traders:

Good traders take consistent profits often, and in relatively small amounts. They don’t typically take large, windfall profits, nor do they take large, unmanageable losses.

Let’s put the two graphs together and compare them:

Notice that there will always be a portion of trades where the bad trader makes a lot more money than the good trader:

The colored area depicts the trades where the bad trader out-performs the good trader.

What is unseen however, is the potential for equally large, or even larger losses:

This has significant implications when choosing between different trading strategies.

You see, bad trading strategies have a short-term advantage over good strategies, in that they will almost always see significantly larger profits for a certain period of time. When the market phase changes however, their potential for large losses will be realized.

This is why so many seemingly profitable strategies eventually fail.

Every time a bad trading strategy blows up, a new one (that also boasts large profits) will quickly take its place as the popular choice… until it also blows up and the cycle is repeated.

All this happens while the good strategies quietly make smaller, consistent profits in the background.

Truly effective strategies are often shunned by ignorant traders as having “weak performance”.

The fact is that at any point in time, the best-performing strategies are likely to be the worst overall strategies. They enjoy large profits only because they fit well into the latest market phase.

The problem is that once the phase changes, they lose all the profits they’ve accumulated, and often more.

The only way to tell a good trading strategy from a bad one is the consistency of the wins, and period of time the strategy has been applied. Absolute profits (per trade) tell nothing of the long term survivability of a trading method.

So don’t focus on making the most amount of money per trade. Focus on small, consistent gains. Consistency will cushion the impact of market phase changes on your account.

In trading, slow and steady truly wins the race.

We have now covered the first 3 Principles of a successful retail trading strategy:

1. Trades on the longer time frames
2. Does not require constant monitoring
3. Is not the best-performing, nor worst performing strategy

These are probably the least exciting principles you’ve ever heard of.

Ironically, this is the reason why most retail traders will never achieve their dreams of financial freedom with trading – the opportunity-seekers are too busy hopping from one holy grail to another without realizing that the least attractive methods are the most effective ones.

Even as I type these words, I am struck by how boring these Principles are. And yet they are the ones that helped me quit my job, pay for my car, apartment and a few other financial investments so far.

These Principles work whether you believe in them or not.

What Do You Think Of Principle #3?

Let Me Know In The Comments Below!

Next: Principle #4

Click here to read Principle #4

Let Me Know What You Think!

Your Comments (57 comments so far)

simon

so far your principles on forex trading seem credible and sensible for all retail traders……
Derek Hayes

worthwhile!!!
Warren

There is alot of truth in what you say. Very worthwhile read,

Thanks
jihad

hello thanks for your advice
seb

its totally true men, thanks. Please, send me the next information

Thanks again
Mohammad Kavoshnia

Hi Chris,

Like principles 1and 2,this one is also brilliant.

Looking forward to receiving more info from
you I am very grateful to you.
hyun jin han

very good
VONKnezins

Backbone, which should not be forgotten! Thanks
j.j

I see you have a logical principles, and I hope I can make them a guide to my trading…

Thank you
Emmanuel

Very interesting, looking forward to the next part, thank you so much for sharing 🙂
Frank

Hi Chris
Thanks for Principle # 3.
You’ve hit the nail on the head. Greed has caused many trader’s downfall. Stick to the recommended 1-2% trades. If you do loose, it is not a crisis.
Your next Principle timing is important and that goes for both ways entering and exiting. I’d like to hear what you say – also by looking at the movement of the canclesticks.
Thanks
Frank
ng

really worth reading,waiting for part #4
Gina

good words
agree to what you say. tired by sitting at the comp for hours
cant wait for the next part

you done a great job

Gina
Tim

This is good and pls keep it up!
Frank

Very logical and worthwhile’
Itohan

Your knowledge about forex candlesticks is very unusual, but profound and the views expressed in the 3 released principles so far are deep and insightful. I cant wait to read the remaining principles.
Charis

Hi Chris,

so far, I’ve been enjoying reading and agreeing with all that you have said. You’re not predicting, but you’re stating factual psychology and live encounters of almost every retail trader, me included!

I agree that trading on longer time frames does not require constant monitoring, and the indicator signals are also more reliable than from the lower time frames. However, the dilemma is that higher time frames would also mean higher price moves – can be >100 pips range in an H1 candle, or >250 pips range in an H4 candle. So, a standard lot could see a potential loss of $1000 within an hour or $2500 within 4 hours. This can be really nerve cracking and horrifying when one monitors after a couple of hours and noticed this. After one encounter of such scenario would prompt one to monitor more often the next time. So, it still end up having to monitor more often and on the lower time frames to have a clearer picture of price action.

In the past, I’ve tried with higher capital like $50,000 on a demo account and traded on the 4 hour time frame in 5 standard lots. I could afford to ignore a negative price move of as much as $20,000 potential loss a few days after entry. After a few more days, a reversal could result in $25000 profit instead! So, I thought one needs a large capital so that we could afford to hold till a reversal occurs, and ignore temporary price move against our trades. My demo account grew to >$500,000 in less than 3 months. Then within another month, it was completely blown off!

So, trading on higher time frames also pose problems like I’ve encountered as depicted above.

While trading on lower time frames (excluding M1 and 10 Secs which would require your eyes to be glued on the screen) would appear to require more monitoring, on the other hand price moves are within 10s of pips and one could also afford not to monitor too closely.

I sense that having sufficient capital to trade (with lower leverage) relative to position size and time frames one wants to trade is vital.

We can of course also trade in micro lots with higher time frames with a small capital, but that would still drain us and not worth our time for the miserable profit potential.

That said, what is the optimum capital relative to position size and time frame trading? I’m still looking for an answer.

Hope you can enlighten me on this.

Thanks!
- Chris
  
  Hey Charis,
  
  You’ve pretty much answered your own question… the key here is to trade with low leverage.
  
  Now, the optimum capital relative to position size would really depend on your trading method and the philosophy behind it.
  
  I won’t be going into too much detail now, so look out for more information coming to you in the next couple of days!
ck Lau

You have spelled the true facts.
Now waiting for part#4.

Thanks for sharing your TRUE facts with us! Cheerio!
Charis

Hm… Look forward to seeing more info soon, then.

Thanks!
kevin

Good Stuff, lets proceed 4? 5?
Neville

Very very good. I believe the purpose in trading is to make a profit. This should be done in the most time efficient and consistent manner. Your comments confirm this approach. Great!
DIN

Hi chris,
Just bought the mbfx . . N with your advise. It helps.

Thks n looking forward
- Chris
  
  Hi Din,
  
  Happy trading with it!
Bhagirathpuri Goswami

It is practically seen that slow yet sound wins consistently . awesome. Thanks Chris.
Bogey

Thanks Chris, a timely reminder to all that GREED is the main stumbling block for most of us and
confirmation once again to control it.
Regards
Bogey
charles Ibenye

Thanks Chris for this dispassionate and straight forward advise on how to trade the forex market with minima effort and minimal loss . I have already started applying your advice and found them very very usefull .I will continue to stay tuned to you for more honest revelations and advice .Those greedy brokers wiil be grumling all the way but please continue your goo works
Best Regards
Dr Charles Ibenye
Helmut Thoma

the timing factor is very importent during the whole stradegy does’t matter is a uptrend or a downtrend a priviously setup is necessary before go entry etc.1.setup conditions,2.entry contitions.3.Initial stop rules.4.exit strategy rules.define 1 day or 2day trade before .Money Management is by far the most important criteria of trading.
it’s nice to read your Manifesto thank you
kevin

Very sensible advice. Makes a pleasant change!
paul kirschke

beginning to fall in place for lasting results..now for the last principle
dung

Do you have the formula to calculate number of trades , reward to risk ?
Lindsay Evans

Hi Chris,
Thank you for the Manifesto’s, they make for excellent reading and truth about Forex and retail trading.
I am sorry I cannot follow you on Face Book as I will not join it on principal because of all the trouble it causes with malicious scandal and threatening innuendo in this world today.
Yours truly,
Lindsay Evans
Richard

Hi Chris,
Thanks for #3 found it to be very interesting,I wait in great awe for #4,certainly you so far have addressed topics which I have not seen any where on the net so WELL DONE all the best
Richard (South Africa)
anwar

So far the write up passes for a good text book for the beginners; what I am looking for I expect to find in the coming two emails i.e. some winning edge points.
Thank you.
Robert E. Russell

Hi Chris..
Truly an enjoyment and very informative report. I am a six month paper trader because I came into Forex with no money, (unfortunately I did have a good credit card and if successful AND happen to live long enough, ((both very iffy, at this point, I may add) ) I might even get it paid off before my trend expires – pun–ny intentionally!) Any way, you have described my recent history with the Forex markets, sellers, trainers, and manipulators very adequately.So as you probably know, I am quite happy to have received your High Five Ps. At this point since just beginning last Friday, I’ve had four somewhat successful trades. I’ve been told before, along with a daunting plethora of much other information, to use the longer time frames – but I could not help trying to follow every candle and falling back on the five and fifteen with many more failures than successes. Of course, YOU KNOW that already. So I just want to thank you and ask a question about buying the trading book. Does the payment HAVE to be made through PayPal? I used my credit card and got sent back to PayPal. I will if I gotta, but I do not like PayPal.over Click Bank.
May I tell you a little historic story? Thanks. I know you are very Polite! So, SMILE. It’s a truth.

You and I do have a little bit in common!! I am an ex-expatriate to Singapore, Having arrived fresh from the Prudoe Bay area of Alaska in 1974 – an old brawling drinking type from the oil fields of West/East Texas, until late that year, I met Por Lay Ai, who very graciously agreed to marry in
1975 and we lived happily for 17 years until I separated myself with the oil field industry in 1985 and lived there together (as long as the visas allowed – a very in and out existence until my Mom passed away in December of 1990, and I had to return – alone; Jenny just never did accept the American style of life here and gave up her green card.

I’ve lived here in Baton Rouge, LA, U.S.A., since then We finally divorced in about the year 2000 without having seen each other since 1994, and both getting uite along in the age brackets.
Oh well, long story cut short – back to the chase; Forex may be the ticket to see her again, among many other things, of course.
Have a great day a great life and hope you enjoy merry old England – have you learned to speak Farsi or other Arabian dialects yet? What a Challenge, that!
I did learn a little Mandarin and Malay, almost took on Australian, but could never begin to copy the accents of any.The old Texas drawl still abides – somewhat intack.
Looking forward to reading the book and getting off the 0.1 per pip paper trades real soon- hopefully.Oh yeah, I will be checking in on the Facebook blog – just now getting the hang of it!

Thank you again.
Robert E. Russell
michael

I like it excellent.
bayobee

I cannot wait to the end of the series before thanking you again, your message just assisted to mix the principles with practices.
eza

THANKS CHRIS
sean bensberg

This lesson was all new to me , ill have to re read it another 10 times to fully get it , but i get the jist of it, very clever
Zam

Thank you Chris.
Mike

Hi Chris, enjoying it so far..the longer time frames…it was confirmation for me as I’ve been in this zone since June….and guess what?….June first successful month for X@! years! less time at the computer, more free time to do other things….off the treadmill. ThanksChris.
- Chris
  
  Hi Mike,
  
  You’ve crossed over to the longer time frames and have reaped the benefits.
  
  Congratulations!
lyd

I’m very grateful for the information you have shared, it makes me more interesting regarding this kind of business.
John

It all makes sense!
Suwandi

Please continue Chris, It is more interesting
Tezcan Cirakoglu

This principle is the one that i sometimes follow and sometimes not. According to my analysis, if i really see the future trend, and my blief is so strong, i risk %7 of my account. ıf am not 80% sure what the future trend will be, i only risk %3

So i am sometimes good trader, sometimes bad 🙂
Lance

Good solid advice. The total opposite of most of the typical FOREX hype, which gives your viewpoint much more credibility IMHO.
Robert

Thanks Again Chris.
Lance

Makes complete sense.
Arnie

Hi Chris,

Thanks for the guidance, Looking forward to #4 and #5..
Wolfie

Thanks for part 1 to 3. ..looking forward for part 4.
paul

Very inspiring & am actually putting it to practice
Phillips Nath

thank you for ur thought i will be expecting #4 tomorrow
Eric Tang

Agreed on this, as in business, I’d rather go for a boring business with consistent cashflows than a fad business with potentially explosive profits but an unforeseeable timeline to drying up…
Maek Wiegand

similar to my own principles
Douglas

Makes a lot of sense to consistently make smaller profits than risking it all and wiping out your account.
ric

interesting