Boris and Kathy's FX Blog www.bktraderfx.com

Recently we conducted an interesting experiment. We examined all of our winning trades over the past two years. Guess what we discovered? 90% of all winning trades never went against us by more that 70 points.

In FX a good trade is a trade that’s profitable from the get go. That’s it. It’s that simple. We may use fundamental, technical and positional analysis to select the highest probability setups, but once we are in the trade there is only factor that controls our decisions – price.

You can argue until you are blue in the face as to why the trade SHOULD go your way, but if Mr. Market disagrees – you better pay heed. This week-end we came across a great quote on one of the trading boards on the Web. The poster wrote, “When you are in the prediction business – you never go all in.“ This is the mantra we live by. There is always another day and another opportunity to make money – as long as you control risk

Stops are not a reflection of your incompetence. Getting stopped out does not necessarily mean that you are wrong. It may just mean that you are early. One key difference between amateurs and pros is that pros will make several probative trades in the same direction if they believe that the setup is strong. Amateurs will often walk away in frustration once they get stopped out or worse still will flip their position only to get stopped out when their original thesis proves true.

In almost every other aspect of life intolerance is a horrible character trait. It limits your creativity and leads you to make decisions based on ignorance and prejudice. In fact in America our cultural instinct against intolerance is so strong that we tend to carry it over into our trading – which is the one area of life where intolerance can be truly an asset.

Allows us to explain. Most traders lose because they tolerate their losses. They allow positions to move hundreds of points against their entries, they add to losing positions and more often than not they allow one bad trade to wipe out many trades worth of profits.

Trading is not the art making money. It is the business of not losing money. That may sound simplistic, but in order really understand trading you must accept the fact that wins are often a matter of luck but losses are strictly a question of skill. That is why once the trade moves in our direction by 50% of our risk we move the stop to break even and take some money off the table. If we get stopped at break even and the trade then goes on to made oodles of cash, so be it. We move on and look for the next good idea.

Let us demonstrate to you in very simple terms why capping your losses is so important. Two scenarios. Scenario one you are in a short term day trade with 30 points of risk. It moves in your direction by 15 points then stalls. You place the stop at breakeven and it bounces back and takes you out of the market. Scenario 2 is the same trade except this time you hold your stop 30 points back and refuse to budge. You are either going to make your target or you will get stopped you tell yourself. Surprise, surprise, you get stopped out for –30. But here is the kicker. Suppose you wanted to make 30 points by end of that trading day. Under scenario 1 you would only need to make 30 points in a trade to reach your target. Scenario 2? You would have to make DOUBLE – 60 points to reach that same target. Why? Because you would have to make up the 30 point loss before you could even begin to think about making profits. Repeat this dynamic hundreds of times over a year and you start to appreciate the fact that profitable trading has far more to do minimizing losses that any other factor and therefore the most successful practitioners of the craft are some of the most intolerant people on earth.

posted by BKTrader  # 10/08/2006 06:07:00 PM