Forex Trading Tips: Lost No More

Lost No More

As the best television series ever comes to a close this week, I cannot help but pay homage to Lost. What makes Lost so good aside from the mind bending plots, the lush landscapes, and the riveting characters is the fact that it never feels like a TV show. I once had the pleasure of watching a Lost trailer on movie screen and was simply astounded at the cinematic breadth of the show. Lost is the only TV show that could play on a movie screen without ever losing its allure. Kudos to JJ Abrams, the cast, the writers and the crew for some of the best storytelling ever made. Like millions of others I’ll be glued to the screen for the finale, but this being a trading column I also thought that this week may be a good opportunity to examine the key existential question posed by the show and see how it relates to our every day experience in the financial markets.

The essence of Lost is that a band of people constantly operates in a highly dangerous environment without any helpful information. In short every character must make life and death decisions with imperfect knowledge of the situation at hand. No one exemplifies this idea better than Locke. Not the new “smoky” Locke played with great malevolence by Terry O’Quinn, but the old, bumbling John Locke who is always trying to do the right thing but inevitably ends up making the wrong decision. The old Locke is of course presented as a man of faith and is juxtaposed against Jack Shepherd’s man of reason. (One of the key ironies of the show is that the real John Locke, the philosopher was one the greatest rationalists of his time and is considered to be one of the founders of empiricism). More importantly, Locke’s faith often leads him to make impulsive decisions that result in horrible consequences for him in the past life, the Island life or the sideways life.

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Faith of course is a deadly trap for the trader as well. Financial markets are very much like the Island – a deadly cauldron of mystery and enigma through which we stumble exposed to danger at any moment. In fact trading the FX market can often feel like being on the set of Lost. Every day we face an opaque adversary armed with less than perfect information and must make buy or sell decisions amidst the drama of global macroeconomic events that unfold in front of us. Depending on faith to get us through this process will result in all of us being like the old John Locke.

In order to have even a modicum of success in the financial markets, we have to take our lessons for the other John Locke - the empiricist. While the past is by no means a perfect map to the future, it is the best guide that we have. That’s why the study of past price action can help us eliminate some of the blind reliance on faith and allow us to make decisions based upon reason. P> One of the best ways to improve your trading is to simply back test an idea that you may have. And I don’t mean to simply plug in some variables into Trade Station or Meta trader and let the computer run wild. That’s fine as final course of action, but what I am suggest is that you sit down with a chart or Excel spreadsheet and methodically and tediously plot every single trade. As humans we are tactile beings and cannot absorb the true mechanics of any system by simply looking at the end results of the equity curve. To truly understand how a system interacts with the market we need to feel every trade. This way when the system begins to lose money (as it inevitably will) we will not panic impulsively, but will be mentally prepared to stay the course as long as the drawdown remains within reasonable parameters. Armed with information from the past we should therefore be able to deal better with the challenges of the future. Of course this approach is not a panacea, but it is the best way I know to tackle the unknown markets of tomorrow. Just like characters in Lost, all we can do is rely on our wits and our intellect to help us survive another day.

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