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Cannot make money with forex trading: bad strategy or trader’s fault

Three negative demonstrations that cannot make money: what is wrong with each?

Many people are quick to point out that:

  1. Individuals cannot make money with forex trading because the market is a scam
  2. Forex schools defraud individuals by selling trading strategies that do not work
  3. Forex trainers are unethical people

I have written many articles including ones that describe successful strategies that can deliver consistent forex trading performance. So today's exercise is to present negative demonstrations instead. Instead of giving my opinion, I invite readers to put on their thinking cap.

 

Forex Strategy 1 - Follow the trading indicator 'Cross up buy, cross down sell'

Trading Indicator: MACD

Using trading indicator to 'cross up buy, cross down sell'

This one is doomed to fail.

Verdict: Cannot make money.

Whose fault was it?

 

Forex strategy 2 - Take profit 20 pips, Stop loss 25 pips

As advertised, this high probability trade system asks traders to adopt a 5 minute per trade method that has a take profit 20 with 20 pips, stop loss 25 pips

Johnny Goodstudent funded his trading account with $1000 for trading capital and forex leverage of 50:1.

He has not mastered the method but does not do too badly. In fact he abided with the trading rules and performed the take profit and stop loss levels as asked. He also achieved around 55% probability for winning trades. After making 300 winning trades and 240 losing ones, he lost all his money.

Verdict: Cannot make money.

Whose fault was it?

 

Forex strategy 3 - Take profit 50 pips, stop loss 25 pips

As advertised, this high probability trade system asks traders to follow the rules. It also claimed to have a probability of 70% winning trades over 1000 live trades.

Jamie 'KS' Tan funded his trading account with $1000 for trading capital and a forex leverage of 50:1

Jaime started off on the right foot with 2 winning trades and earned $100. Over the next 5 trades, he lost $125. The losses affected him so he listened to his best friends advice. He still took profit for wins at 50 pips. But when he lost, he kept the position open until he clocked losses of 125 pips per trade (in other words he became a 'specu-vestor'). After a while, Jaime checked his trading diary and realised he was doing quite well. Indeed, he achieved a track record of 7 winning trades for every 10. The forex strategy performed as advertised. Soon after he lost all his money.

Verdict: Cannot make money.

Whose fault was it?

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31 thoughts on “Cannot make money with forex trading: bad strategy or trader’s fault”

  1. Soh Tiong Hum says:

    I invite readers to login and comment. First 5 persons* who can provide an interesting take (as decided by me) on any one of the strategy above will receive a voucher to attend the next available 4M or BP class.

    *Must have prior attendance at Tflow® Course.

  2. Ou Yong says:

    For strategy 1, it is my belief that most people do not realise that these indicators are lagging, and does not show with much certainty where the pair is moving. I can’t imagine having to sit there watching and waiting for it to cross up or cross down. Almost akin to herd mentality in the stock market. No understanding of the fundamentals, like key resistance and support levels. The stress alone will kill you. : )
     
    For strategy 2, having a high winner:loser ratio is only good if it is coupled with a high profit ratio. What is the point of earning $10, when potentially I can lose $15. For everyone 1 trade I lose, I have already lost 50% of the next potential profitable trade. This is doomed to fail from the word “go”.
     
    For strategy 3, whatever the system that one choose to adopt, they are only good if you stick to the rules and hopefully that system chosen is TFlow. ; )

    1. Soh Tiong Hum says:

      Good effort. I will wait till end of day for more comments before coming back. You got chance to take prize. Congrats!

  3. Clarenceong says:

    Great insights to why traders can’t make money on Trading above. These are my opinion:
     
    Strategy 1 shows an amateur trader who doesn’t understand price action trading. Indicators are just a guide tool for any price action analysis, one should never trade purely on indicators only.
     
    Strategy 2 shows a trader with bad money management, someone who will always loose money at the end. I once saw some people teach others to trade 10 pips TP and 50 SL, he is doomed to fail but wants to drag other along with him.
     
    Strategy 3 shows an impatient amateur trader who never follows the rules first before he can fish on his own terms. Trading requires experience and that takes time to accumulate, it’s not a fast track. If one wishes to break the rule, he needs to accumulate enough trading experience to make good trading decision on his own. Some traders do make money by managing his losses, only after he has the required years of trading experience to do so.
     
    These are just my opinion only, IMHO. Cheers.

    1. Soh Tiong Hum says:

      Good effort. Got chance got chance!

  4. Jerome Lee says:

    1. Indicators are lagging behind price, so it cannot match price action in terms of faster entry nor as a more grounded form of analysis.
     
    2. Having a high number of wins doesn’t guarantee that one makes money instead even if we only win 50% of the time, with a high reward to risk ratio, we will still stand to come out on top.
     
    3. Even with the best method in the world, ultimately it falls to the user to apply the method diligently for it to succeed. There will always be setbacks but then begins the true test, which is the level of conviction and believe in the method you are using.
     
    In summary, to succeed in Forex, you will need 3 things, what I deem as the 3 treasures (三宝)
    1. A good method based on price action,
    2. which offers a good reward to risk ratio
    3. and the belief and conviction in the method.
     
    Once you’ve found your 3 treasures, guard and hold onto them well as they offer you the path to financial freedom.

    1. Soh Tiong Hum says:

      Good effort Jerome. BUT YOU DO NOT QUALIFY. Thanks for the try anyway. Some good statements there.

  5. Salvador Danilo D. Jr says:

    I concur with Jerome’s comments. From my limited experience, even with a win loss ratio of 1:1, you can still make a profit if RRR is around 2 and the trader limits losses and lets his winners run.

  6. Kai says:

    This is how I see it.
    1. This method to me is not a method. but rather be led by a reaction of price.which is the indicators. when we are more interested in the price itself.雾里看花。
     
    2。Second method to me is a high risk method, when even when I win more times than I lose, I still lose.It is puzzling even to think about how to increase the chance of probability even if the student follow the rules all the time.
     
    3. The student lose his money due to his mental state. With a good method, his only variable in the equation is to follow through and stick to his plan. Which could be trained and practiced. And level up his mental state.
     
    So I conclude my view on this blog post is if i don’t know I can’t win. If I use a lousy knife when I have no skill I can’t win, if I am skillful i am limited. But if I have a good knife, my achievement is as good as how far I push my mental state.

  7. Ulysses Khoo says:

    This is an interesting article which denotes a typical trader’s journey. I will attempt to give my humble opinions. For me, a successful trading journey includes 3 elements – Psychology/ Mind (60%), Trade Management (30%) and System/ Method (10%). The percentage classifies the importance of each aspect, with psychology raking up as most important. However, having said that, a Method which statistically does not deliver good risk-to-reward ratio is a sure doom to a trader’s account in the long run.
     
    For Strategy 1, the trader uses trading indicator for entry and exit which will cause the success rates to be rather low – possibly 50% or less because indicator lags. That’s why it is psychologically challenging to trade a Method like this as half the time the trader will be taking loses. The psychology of the trader is as good the erratic movement of the market.
     
    For strategy 2, the trader is using a Method which has poor reward-to-risk ratio. As such, to compensate for this, the trader needs to adopt high win rates to be sustainable in the long run. Take profit of 20 pips, with stop loss 25 pips equates to reward-to-risk of 0.8:1. For every unit of risk, the trader is getting 0.8 unit of reward; therefore to be marginally successful using this Method, the trader needs to win 56% or more.
     
    For strategy 3, the trader will be successful with a reward-to-risk ratio of 0.43:1 with winning rate of 70% using his system. However, his actual reward-to-risk is 50:125 which equates to 0.4:1. Therefore if he were to continue trading in this manner, the probability of him winning is against him in the long run. He started off well with $50 gain/ trade and $25 loss per trade (healthy reward-to-risk ratio 2:1). But because of unfavorable market conditions, he lost 5 times in a row, which damaged his psychology. He failed to see that trading is about probabilities working out over a sufficiently large number of trades. Affected by his string of losses, he lacked conviction of his method, that he followed his friend’s advice. To make matter worse, he feared cutting loss in hope for his trade to be in his favour, which led him to ride the losses and take little profits along the way. This clearly demonstrates poor money management and lack of discipline/ psychology.
     
    Therefore to sum up, to be a successful trader, one needs to have probabilities in his favour by adopting a high reward-to-risk ratio Method. With more hands on practice, and exercise of discipline in money management, the trader will be psychologically stronger to ride off market irregularities. Ask this trader to attend 4M class by Terraseeds.

  8. Victoria Yam says:

    1) I am not trained in this method so I cannot place a knowledgable judgement. From my amateur study of the chart, I think it works when there is a strong trend development. However, during consolidation, you’ll probably experience heart attacks from the wild swings inside. Probably major losses here. Not sustainable.
     
    2) This method sure die. @55% percent hit rate. Out of 10 trades net loss 3 pips. 5 min per trade, $1000 capital assuming you only place 1 mini, money will be squandered in less than 28hrs. Wow! I think I buy ToTo got better chance.
     
    3) “He still took profit for wins at 50 pips. But when he lost, he kept the position open until he clocked losses of 125 pips per trade.” The problem is with trade management. He did the total opposite. Kept losers and rid winners.

  9. Soh Tiong Hum says:

    Wow this is great. Thanks for all the great comments and please keep them coming. I make 1 observation however. None of the responses so far hit the spot for strategy No.1. Anything to do with ‘Price Action’ is not what I am looking for. Like Victoria mentioned, probably most of you have not really encountered the right use of indicators. This is something I will elaborate later.

  10. Raymond Lee says:

    Thanks for another great article and post Tiong Hum. Here are my humble personal experiences & thoughts with having done all three before :( … lol. (Please correct statistics if incorrect.)

     
    1. Trading with a positive edge.
    In the application of any trading system, its expectancy has to be positive over a significant number of trades & time (different market conditions) to give a trader’s his edge:
     
    (Number of winning trades x average win amount) / (Number of losing trades x average lost amount) > 1
     
    In looking at a trading system, perhaps these are three beginning questions to ask:
     
    a. Does the strategy inherently provide the trader with an edge?
    ‘Random expectancy’ – For example, when using 20pips SL and TP, one would expect lesser than 50% hit rate due to the spread. If using a 100pips SL and 50pips TP, one would expect a 66% hit rate. Likewise for a 50pips SL and 100pips TP, one would expect a 33% hit rate. All of these scenarios will lead to a near zero sum game (its negative actually due to the spread), with the occasionally big drawdowns.
     
    ‘Is there an edge?’ – However, if the trading system consistently gives significantly above its ‘random expectancy’ say about 10%, then then one might say that this system might provide an edge. Hence, whatever the SL / TP ratio, if the system provides an edge, it is still possible to end positive.
     
    For a system with a significant edge, there must be some basis, be it from fundamental or technical analysis, and articulated or otherwise. And of course, when there is strong basis, there would be stronger conviction.
     
    b. Is the system tradable / repeatable by another trader?
    For example, if have to monitor every 15 mins for 24 hours a day, can’t be manually tradable. Too complex needing advanced calculus won’t do majority of the people much good.
     
    c. How to apply the system successfully.
    If any of the above 2 are false, then unlikely that all the amount of discipline or conviction would be of any help to the trader – he’ll eventually lose.
    If the above are true, and if a trader fails when trying to trade with the system, then it is highly likely to be the trader’s ‘fault’ for failing: didn’t follow trading rules, or not skillful enough in applying them.
     
     
    2. Forex Strategy 1 – ‘Cross up buy, Cross down sell’
    Tend to work in trending markets, have been shown cannot be used alone overtime.
     
     
    3. Forex Strategy 2 – Take profit 20 pips, stop loss 25 pips.
    Expected win/lose rate if method is random: 1 – (20/(20+25)) = 56%
    Actual expected win/lose rate would be lower if taking spread into consideration.
    Hence his 55% probability was ‘expected’ for a system that didn’t provide an edge – ‘System’s fault’.
     
    300 x 20 pips – 240 x 25 pips = 6000 – 6000 = 0 pips.
    So if he traded same lot sizes, he would have made 0 pips, lost 0 pips after 540 trades.
     
    However, to lose all his money, must have meant that he mismanaged his trade sizes at some points and caused him to lose all his money at the end. This is his fault too.
     
     
    4. Forex strategy 3 – Take Profit 50pips, stop loss 25 pips
    Expected win/lose rate if method is random: 1 – (50/(50+25)) = 33%
    Any system that claims more than 43% win rate for this might be positively significant.
    To claim 70% when the random expectancy is 33%, is quite unbelievable. However, Jamie didn’t trade the system for long enough to determine if it was indeed the ‘system’s fault / false claim’, or that his losing streak was part of the ‘expected’ in the system.
     
    He changed the trading rule – from 25 pips SL to 125pips SL. Although he got the 70% winning trades, this was not due to him trading the original system. His 50pips TP and 125pips SL random expectancy is 1 – (50/(50+125)) = 71%, which is about what he got.
     
    7 x 50 pips – 3 x 125 pips = 350 – 375 pips = -25 pips
    So if he traded same lot sizes, he should not have lost all his money. Again, he must have mismanaged his trade sizes at some points and caused him to lose all his money at the end. This is his fault too.
     
     
    5. In summary:
     
    a. A trader must have a system that has positive expectancy that is repeatable by him, and that he can handle the system’s characteristics such as expected draw downs, and time to next equity high. How to find, and who to learn from is key.
     
    b. Must pick up real skills in trading the system skillfully. And with all skills, need good mentor, support and continued hard work to become, skillful.
     
    PS: personal question to myself now: What do I need to continue doing and learning, on a daily basis, so that I can trade TFlow skillfully…. and have a life, not being glued to the screen. :)

    1. Soh Tiong Hum says:

      Hi Raymond, this is great. After reading your feedback I was thrown back. Had to go back and check the numbers I presented. Shame on me. Thanks!

      1. Raymond Lee says:

        Paisay… “please correct statistics if incorrect” refers to if the figures in my contribution has errors, kindly highlight so that i can change them and learn from the mistakes … Thanks!

  11. jacky says:

    Hi,for Strategy 1,I think it is user’s fault.Indicator is useful in some place.Yes ,it is lagging but it also has its own advantages. It is just a tool.We can’t say indicator is useless if one uses it wrongly.If one man use a knife to kill somebody,we can’t say it is the knife’s fault.
     
    For Strategy 2,I think it is the trainer ‘s fault who teaches the wrong concept. Secondly,it is also the trainee’s fault who just follows the trainer blindly.I did see one trainer teach his student to take profit with 6 points, stop loss 15 points.He showed his “marvelous performance” on his website. It attracted me and almost wanted to attend his course. I didn’t attend in the end because I felt the concept didn’t make a sense.

  12. maineting says:

    Strategy 1: Are you convinced trading basis on the shown indicator only, did you conclude if you can trade like that with no other support/plan to enter your trade, are you convicted to hang on to the trade if you traded basis soley on the indicator used.
     
    Result: if you really trade basis on strategy 1, if it fails, whose fault, indicator’s fault, no.. because it serve as a aid not a must follow “blindly”. That’s why it boils down to individual mentality how one wants to evaluate his/her way of trading.
     
    Strategy 2 & 3: Are you convinced with the RRR being projected for the trade to be applied, did you conclude the feasibility of trade, are you convicted to the rules & method being applied.
     
    Result: if you really trade basis on this strategy 2, firstly, with the RRR, one is already at a losing end whereby one may lose more than what is projected to be gained. Is that what you want or desire to achieve? Even though the rules & method are applied, are you really convicted to it or only half minded?
    However, for strategy 3, although in the end you lose it all but wait, yes, you may have applied the necessary, seek for advice along the way but did you really have the faith & perservence to carry on, did you really evaluate when you have a losing trade, is it a doom trade or you still harbour hopes… believe it is a dilemna for many (i guess) including myself…
     
    Thus the 3Cs to be applied for all 3 strategies, convince/conclude/conviceted?? it all boils down to individual mentality how one wants to achieve certain things…
     
    just my 2cents of novice thoughts… hehehe

  13. Daniel Ku Guet Liang says:

    Read the comments above, learn a lot from them. My humble bit of contribution:
     
    1. Any indicator draw from previous price but in many instance, they need current price to validate some ‘prediction’. Example given use MACD. Macd (bullish/bearish) divergence needs price to break some trend line to validate the direction they predict.
     
    2. That kind of risk reward (25:20) is akin to MBS/RWS putting a zero in the roulette circle. The favour are in their hands; in the long run, the banker (market) will gain.
     
    3. Quite similar to (2) in that he has put the favour into the mkt’s hand. But the cause in this case is due to not following the rule or in SG hokkien context: kay kian (aka being smart aleck)

    1. Ou Yong says:

      Hi Daniel, from my own limited understanding of the MACD, the closing prices are used for these moving averages. For sharing please –
      http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve

      “The MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that are historically overbought or oversold, the MACD does not have any upper or lower limits to bind its movement. During sharp moves, the MACD can continue to over-extend beyond its historical extremes.”

      1. Soh Tiong Hum says:

        Hi Ou Yong, MACD is foremost a trend indicator. But 1) the MACD histogram is very good for identifying overbought oversold situations. We even have a name for it – extreme MACD histogram. 2) Not having upper and lower limits is a plus point – not a minus – for its intended function. This is one feature that makes bullish/bearish divergence from MACD highly significant.
         
         
        Pardon me but I’d like to say this: before focusing on the Tflow® forex trading course, our bread and butter business was ‘MACD high probability setups’. We phased it out because a lot of new entrants were conducting all sorts of indicator classes in a cut and paste way, Binni and I thought we were selling something superior for peanuts. Those were good old days.

        1. Ou Yong says:

          Tiong Hum, thanks for sharing. I am glad I brought up the point and got to learn something.

          1. Soh Tiong Hum says:

            You are welcome. MACD is good. BUT stick to Tflow®.

  14. jacky says:

    I am enjoying reading the comments.It is good if we can find a place to discuss like this and everyone can contribute and benefit others.

  15. Michelle says:

    Strategy 1) Lagging indicators. Does not show the optimal zone of entry. Easily get stop out and don’t get the max profit. Thus, cannot make money.

    Strategy 2) Profit 20 pips. Stop loss 25 pips. Loss more than profit. Thus, how to make money?

    Strategy 3) When a method works, believe in it and pratice to make the best out of it. Listening to others or add in own strategy may make things worst. Thus, don’t make money.

  16. jayromelai says:

    With regards to the Strategies provided , here are my two cents worth
     
    Strategy 1 : an indicator based trading strategy. An indicator by itself is not wrong nor is it useless in trading. They have their uses and many funds and institutions do utilise them in their analysis. However , to me indicators often have a couple of main issues : They are a derivation of price itself , hence in many instances the indicators will be lagging . 2) They do not function optimally in all market conditions. Some indicators will work well in ranging situations , others in trending situations. There is no one size fits all – holy grail indicator . Practitioners of indicator based strategies need to be able to adjust their systems in tune with the market condition in order to achieve optimal results.
     
    For the person trading using the first strategy , if he has to simply buy and sell when the indicator gives the related signals , undoubtedly he would be subject to whip saws when the market conditions change. He might have a saving grace if some one , a mentor or higher being comes in and advises on the market conditions and its changes , when to trade and not to trade using the system but if he were to just apply the system across the board blindly, then it could be a problem.
     
    For Strategy 2 . it is a clear case of mismanagement of risk – reward ratio. When you risk 25 pips for every 20 pips gained , in the long run , assuming the trader does every trade which has a signal, it will become a losing proposition if the wins to loss ratio is lesser than 50% approx . In order for this method to be successful, the win loss ratio will have to be higher , say in the 80% range. Further, practitioners of this method may be subjected to more psychological pressure as every time they lose , they will lose more than they gain if their win – loss ratio is low.
     
    Strategy 3 . when you have a good win loss ratio, coupled with a decent risk reward ratio , we might have a golden goose in our hands. In this case, this strategy has a win – loss ratio of 70% and also a Reward to risk ratio of 2-1 , where profit to be taken at 50pips with a 25 pip risk every trade, it is indeed a sound strategy where it has also a backtest of 1000 live trades.
     
    In this case, it is the trader who has thrown the proverbial spanner in the works. He lost confidence after the initial losses and then strayed from the proper usage of the strategy. Just like the shooter who has bad groupings due to wind or extraneous circumstances, he then loses conviction and changes weapon, target or range.
    It is not the weapon but the Shooter.

  17. kuraikamikiri says:

    Greetings,

    I shall attempt to put my opinions forth the best I could, do keep in mind that I’m pretty much an inexperienced trader and as such, the ideas put forth are purely based on my own limited experience.
     
    I will not dissect each scenario and will just comment accordingly.
     
    In my opinion, indicators are only as good as its user is. A user, or in this scenario, a trader should first be able to understand the fundamental idea behind the indicator he or she choose to use. Just by following what a “guru” says or recommend without understanding is like how blind mice would attempt to cross a busy street. I assure you that it will be very exciting. How many traders would actually study in-depth in how the indicator will respond in correlation to the price action. It’s too much work. And in many cases, what works for one may or may not work for another. Just like there is no “holy grail” of trading systems. It is up to the individual trader to make his or her assessment to include an indicator into his or her overall trading strategy.
     
    The market will punish you if you do not understand her.
     
    The market is always in a constant flux of activity and trading rigidly in accordance with the rules can be a double edged sword. No doubt, a set of rules is required to instill discipline in the trader and provide guidance but there are times when snap decisions may need to happen that might seem to provide a better solution in hindsight.
     
    Trading is a lonely activity, it is true that with a supportive community you will able to move along smoother. Do keep in mind that human beings in general are not creatures of logic, machines are. The weakest link has always been the human being. Giving in to emotions, listening to friends who say negative things and the list goes on. Self doubt can destroy you faster than the market can hose you.
     
    Good trading folks !

  18. Helmy Hamzar says:

    Hi TH,
    Strategy 1, as others have mentioned as well, it is suited mostly for trending market. once consolidating/ranging market comes indicators tend to give false signal. Sideway consolidation occurs pretty often, traders would start to lose money here. The issue here is the misuse of the trading tool/indicator.
     
    Strategy 2, statistically it would work if your winning ratio needs to be high as every losing trade requires 1.25 winning trade. if you are a newbie, your winning ratio won’t be high. The losses will be amounted faster than wins which results into account closure due to margin call. Thus, the issue here is risk reward ratio
     
    Strategy 3, strategy sounds good as 1 winning trade can cover 2 losses. However, changing risk reward ratio leads to 1 loss requires 2.5 winning trades. so, discipline is the issue here. It takes perseverance to master a strategy.

  19. Soh Tiong Hum says:

    Thank you folks for the good job and enthusiasm. The 5 individuals who qualify for a free voucher worth $40 to attend class will be announced here later today. In addition, we will notify them by email. As I mentioned, it will be the first 5 qualifying entries. I will post my own take also later today.

  20. Soh Tiong Hum says:

    Here are the results but before that, the basis for my evaluation:

    1. First 5 qualifying entries
    2. Clarity
    3. As long as get it right in one of the strategies (but for information, none of the entries provided the explanation I was looking for why Strategy 1 is a fail)

    And the winners are: Ou Yong, Ulysses Khoo Victoria Yam, Raymond Lee and Jayrome Lai. You folks will be notified by email to collect the vouchers.

  21. Ou Yong says:

    Thank you. : )

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