It is vital that you have a strategy when trading, the strategy is what lets you know how you can get in and out of your trades as well as containing the risk management for your account. So it is important that you have one, however, you need to consider what sort of strategy you are planning to use, the fact is that there are good strategies and there are bad strategies. A bad strategy does not necessarily mean that it will make you lose. Some of them can actually make you a lot of money. They are often considered bad because of the risks involved or the inflexibility that they have when things go against you
So we are going to be looking at some of the strategies that a lot of people consider bad, remember, it doesn’t mean that they do not work, it just means that there are some very obvious flaws in them that the markets will not be afraid to exploit.
The Martingale Strategy
If you have been involved in trading or gambling or pretty much anything to do with investing then you most likely would have heard of the martingale strategy.. It first became popular casinos, specifically on the roulette tables and later on Blackjack tables. The idea behind it is simple, place a $1 bet and place it on red or black, if it wins, you double your money, if it is wrong you lose. If You lost, the next bet you put a $2 bet on the same color, if it wins you are -$1 + -$2 + $4 so $1 in profit, if it loses, you double again. So a $4 bet on the same colour, this method will continue until there is a win when you win, you will always be that $1 up.
Sounds good right? In principle you will always win that $1, there is no way that you cannot, well apart from the fact that you do not have unlimited money. Let’s say that you have a balance of $1,000, how many times do you think you can put a bet on using his strategy? 10? 20? 50? In fact, your $1,000 account could only manage to put on 8 trades, just 8, if all 8 lose then you will blow that account. The only way that the Martingale strategy works if you have $an unlimited amount of money. The thing is, people know what you are doing, the casino world got around it by limiting the maximum bet that you can make, so you can only get 4 or 5 bets on before it becomes unprofitable.
So how does this work with trading? It is pretty simple and works exactly the same way, you place a 0.01 lot long trade on EURUSD, it, unfortunately, moves against you, so you decide to open up another position, this time though it is at a 0.02 lot size. This means that the markets do not need to move as high in order to make the overall positions profitable. However, if it goes south, you now have 0.03 lots adding to drawdown. So you add another position, this time 0.04 lots, the markets gain you do not need to go as high to get you out. But as it continues the wrong way, you have 0.07 lots going against you. This can continue because when the markets go on a strong trend, and if they do, it will continue to drag you down. If you keep adding positions until your margin no longer available, your account will eventually be depleted.
If it is so risky why do so many people use it It is simple really, it is by far the easiest strategy to get into and to learn. There is very little to learn at al. Some people can literally just stick a random trade on, regardless of the markets and the direction doesn’t matter. It is a complete gamble to them as the market will eventually turn right? It is also the easiest trading robot to create, which is why there are so many of them out there for sale. If you go to any trading robot marketplace, a large percentage of them will be using a form of this strategy, simply because it is a quick and easy strategy to use, although it is also by far one of the most dangerous.
We would advise sticking clear of this strategy unless you love to gamble and do not mind losing all the money that is already in your account.
A grid strategy is actually very similar to the Martingale strategy, the main difference is that with a grid strategy, there is not an increase in the bet or lot size that is being used, they often also have a number of different ways of getting out of trades. While the drawdown and lot sizes do not increase quite as dramatically, it does post a lot of the same risks and is still considered as a very dangerous strategy to use.
The strategy takes a very similar pan as the Martingale strategy does, as things go against you, you open up additional trades in the same direction, the main difference between this and the Martingale strategy is that the size of the trade is consistent, it does not increase with each additional trade.
There are also some differences in the way that the trades close, the grid strategy will generally do this in one of two ways. It will wait until the markets change direction and will then close the entire basket of trades once it goes into profit. The other method will close off the most recent trade when in profit and then close off the oldest trade or part of it so that the overall position that is closed is profitable. This will slowly eat away at the first trades that were made, eventually closing them out.
Much like the Martingale strategy, this has a lot of potential for the drawdown to begin to grow exponentially depending on how many positions are open, this is another reason why many more experienced traders would advise you to steer clear of this strategy.
Not the official name for it, but this is a simple strategy when you are trying to grab as many 2 to 3 pip wins as you can, sounds easy right? The problem with this strategy is that it can get out of control very quickly. It’s only 3 pips, right? Easy, most trades move to that position at some point right? Wrong, trades can continue to move against you, but you haven’t planned for this so when do you decide to get out of the trades? They could be taking away the profits of the past 20 or 30 trades. As you are putting on so many, it can be quite hard to keep track of everything and this will only lead to complete disaster and ultimately a loss of your account.
Strategies Using too Many Pairs
Not a specific strategy, but there are a lot of strategies out there that tell you to diversify and to trade a lot of different currency pairs at the same time. It is far better to have a strategy that focuses on one of two different assets. You need to remember that different currency pairs and different assets all move differently, there are different elements and factors that dictate whether they go up or down. In order to trade all of them successfully, you need to have an understanding of them all, this is just nothing that is practically possible in the real world.
Do not use strategies that trade 20 different pairs, it will be confusing and you won’t be able to keep up, let alone know why you are making those trades. Stick to strategies that specialise on one or two strategies, you can then expand into other strategies that work with other pairs instead of using one that claims to work with them all.
So those are just a few of the strategies that you really should avoid, they may well work for a short time, but the risks that they bring and put on your account only means that at some time in the future, they will blow it, so try and stick to those less risky strategies, even if they are giving you slightly lower yet more realistic returns.