Just like making movies, trading is basically 99% boredom and 1% action.
That’s what makes it so dangerous.
We all know that we need to eat our vegetables, drink at least eight, 8 ounce glasses of water per day and exercise regularly.
But, how many of us actually do even 50% of what we are supposed to? Life is not like Lake Wobegon, where all the women are strong, all the men are handsome and all the children are above average. In real life, we are all full of character flaws and the key to success isn’t to correct them through willpower, but to intelligently manage them with minimum damage.
Which of course brings me to trading.
We are not perfect Platonic beings. We can’t sit perfectly still waiting for our setup to occur while prices flash in front of our eyes. We are day traders. We like to get involved.
But of course, that is always the start of every sad story in Forex. I got bored. I took a trade. And before I knew it…you can fill in the rest.
Basically there are two ways for the market to rattle you. One, it can shake you out of good trades by moving prices against you, make you doubt your set up and then make you cover at break even and then turn to hit your profit target. This happens to me all the time, and while it’s bad, it is by no means catastrophic. The net result is that you spend a lot of time treading water instead of making profits; but eventually, if you follow your setups, you will swim…even if it’s with all the grace of a frog.
The other way for the market to con you is far more insidious. It is essentially the financial market’s version of the three card monty. In that game, the mark (who is always you) is attracted to the game by the smooth-talking dealer who flashes the card deck and shows you how “easy” it is to find “the lady” (e.g., queen of hearts). In Forex trading, it generally looks like this: Prices are rallying! Its strong move! I am jumping in! Wait – it’s correcting? I am not going to lose. I am adding more this move will resume for sure!
Almost every day we are tempted to place open-ended trades without any clearly defined risk or reward…triggered solely on our hunch rather than any well tested method. Even if we don’t do those type of trades for a month or more because we are “disciplined”, we will eventually break down and do one anyway. As I wrote awhile back, we always bite the cookie.
But that’s OK. There is a simple solution to protect you from “you”. Here is all you need to do.
Trade the 0.01 lot
It doesn’t matter if you have $10,000 or $100,000 or $1M in your account. Here are the 3 times to trade at the 0.01 lot:
- If the trade is not part of your well tested, well thought out strategy
- If the trade does not have an exact size, exact entry, exact stop and exact exit to it
- If the trade like so many of our trades is “experimental”
Always use the above guidelines when trading at the 0.01 lot.
You can do as many stupid trades as you like. You can hold them forever or you can flip then over 50 times each day, but trade the 0.01 lot.
That one simple trick will let you survive any number of idiotic ideas. No need to be “disciplined”. Diets and risk control never work anyway. We all want to trade for fun…not just for profit. The key is to do it in a way that will never damage your real money.
So trade the 0.01 lot.
Until next time,
Mr. Schlossberg is the managing partner at BKForex and creator of the new course The ULTIMATE Forex Trading Course produced in conjunction with Weiss Educational Services. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex strategies.