August 12, 2010 Update
I am currently reading the Art of the Advantage, 36 Strategies to Seize the Competitive Edge by Kaiban Krippendroff. In the first stratagem, he goes into the example of competitive pattern between Coca-Cola & Pepsi. I thought it was wonder, and it can be use as an analogy for forex automated trading. In the book example, Coca-Cola innovates, Pepsi copies, Pepsi innovates, Coca-Cola copies, and the competitive pattern repeats. Coca-Cola and Pepsi play cat and mouse with each other, following closely, but never falling too far behind. When one lurches forward, the next pounces...but the pounces are NEVER FATAL.
The key lesson here is that each pounce is never fatal. Similar to automated trading, we are not looking to have a single trade that is going to yield us 2,000 pips profit or to make us rich instantaneously. Alternatively, we always trade with a stop loss such that one losing trade will not wipe out our entire trading account, i.e. the fatal pounce. Think of it as a give and take in Forex trading. We can’t win all the time and constantly take money from the market. We have to give some back as it is a back and forth relationship. Think of it as a dance but with automated trading, we are leading. We win some, give some back, we win some more, and then we give some back. The point is to respect the market and to avoid dealing the fatal blow to each other. Remember, it is a dance, and we are leading; hence, we will make money if we are patient.
As we stand, Haley is currently at $12,560 in equity. This is 2,560 pips profit over the period of 2.5 months. During this 2.5-month period, Haley dances with the market with winning and losing trades. Haley went from $10K to $12K, back to $11K, then to $12.5K, back to $12K and now at $12.5K. We should think of trading as a long term relationship with the market. We can’t take an enormous withdraw from the market without future consequences. It is better to give and take with a net profit in the long term.