As a FOREX broker in the late eighties and nineties, I traded thousands of clients and as you will probably guess very few made money.
There were two groups that constantly lost and one group that won.
Let's look at one of these groups in more detail.
In my first article on my broking experiences I discussed day trading and why you can never win at it.
Here I want to look at another type of losing trader – The Educated Fool.
I have taken the above phrase from Jake Bernstein (an excellent writer on trading psychology) and every broker comes into contact with him.
He is normally very clever, arrogant and, develops a complicated system, that promptly loses all his money.
The lesson here is:
Trying to be to clever when trading with an online FOREX broker will see you lose.
Today, we live in a world where we constantly marvel at the developments in science and technology, that are changing our world at lightening speed.
Some of the developments are truly staggering and we can only marvel at some of the developments.
Many traders see this appliance of science and believe that if they apply technology to the markets they can get a trading edge.
Think about it:
Your PC on your desk has more processing power than was available to Mission Control Houston, when they landed a man on the moon!
You have charts, the capacity to back test huge amounts of data and a vast amount of online news available to you with the click of a mouse.
So do all these tools increase your capacity to make money?
The answer is no and the facts support this:
Today 90% of traders continue to lose despite having better tools and FOREX education than ever before.
The fact is:
The appliance of all these new tools will not only not help you make money, they can also ensure you will lose.
The Educated Fool
The educated fool doesn't understand that being clever and cocky is not a way to make money from trading FOREX markets.
Generally, this person thinks he is clever and as a consequence invincible, but he is in for a hard lesson.
I have seen numerous traders with masters degrees and incredibly clever, get obliterated in the markets.
What they don't understand is:
Simple systems combined with discipline make money – not complicated methods and cocky attitude.
If you read about the great traders (and a good place to start are the excellent books by Jack Schwager- Market Wizards and The New Market Wizards) which interviews lots of different traders all making money and guess what?
They are all generally using relatively simple systems.
Why complicated systems fail
What the educated fool fails to understand is, that markets are essentially an odds game.
Cluttering a system with to many indicators means:
It is less robust than a simple system with few indicators.
Furthermore, the educated fool when his system is not working tends to think more is better!
So, he clutters his system with more and more variables and indicators and this ensures it fails.
In the markets you get your reward for being right – not being clever.
If you want to be right, a simple system (with just a few indicators) will in most cases beat a highly complicated system.
The facts of winners to losers supports this view.
Most traders who succeed use simple systems and are humble and they know the market can and will make them look stupid at times.
I remember one trader a very clever man, with a higher degree in maths saying to me:
“I can't understand why my system doesn't work, I will make it work”
My answer of:
“Why don't you try getting a new system?”
Fell on deaf ears and another educated fool got wiped out.