How to be a successful forex trader using Forex Expert Advisors - PART 3
The “greed-panic” cycle in trading with EAs
One of the biggest enemies of the trader is the human nature. The so called “greed-panic” cycle is a psychological phenomenon which lies at the heart of most failures from the time markets and trading started to exist. It is interesting that this phenomenon is one of the reasons why many people fail to gain profit even when trading with a reliable trading system that is profitable in the long run.
One of the biggest advantages of trading with automated trading strategies (EAs) is that our mentality is involved to a limited extent. And yet it plays a certain role. Although we may be able to fight the urge to intervene in trades, it is even harder to resist the “greed-panic” phenomenon and here is why. Many traders start using an EA when it is at its peak performance and the equity curve is skyrocketing. Sadly, this is often the exact moment when a drawdown comes in. Even the greatest trading system has its bad periods and when these occur, many traders just throw the system aside, because they are not committed enough to resist the “greed-panic” cycle. A great example in this respect is one of our best-performing trading strategies, “WallStreet EUR33+GBP30”. The latter is positively a very good system with high long-term profitability and uses very reasonable stop loss levels. On the equity curve, we can pinpoint several clearly defined points which correspond to “greed-panic” cycle points. Many of the system’s users started taking unreasonable risks in point 1 and then dumped the system in point 2 just to witness its quick recovery. As our example demonstrates, up to know, this cycle has occurred once more. Despite all that, the system recovers after each bad period and will keep recovering in the future, because it implements a solid trading logic and uses a proper risk management strategy.
So, what can we learn from that?
1. Do not get overly excited when your trading is showing fantastic results. Keep calm and maintain a reasonable risk level, because the “rocket” mode will not last forever.
2. Do not panic when your system falls into a bad series. If you have a good and reliable trading system, stick with it - it will recover sooner or later and you will be rewarded for your patience and self-control.
3. Remember! Risk management is the key to successful trading. Wise risk management is what keeps you in the game!