Forex Trading Tip #3: It’s OK To Do Nothing
It’s OK To Do Nothing!
I’ve mentioned many times on this blog how trading is one of the most counter-intuitive professions you will ever undertake.
Often times what is right seems wrong, and what is wrong seems right. Today I want to address one question that many new traders have, and that is:
Does taking more trades mean making more profit?
The short answer is no. The long answer is it depends on how good your strategy is, how cooperative the current market conditions are for it, and how skilled you are at execution and trade management.
But generally speaking, more exposure to risk does not always equate to more realized profit. Often it actually leads to the opposite result.
One of the traits that stands out across most highly successful traders is that they are highly selective in which trades they take. They aren’t sitting there looking for a trade every minute of every day.
They are like hunters or assassins. They wait patiently and calmly for all the necessary factors to align that signal to them that they have a high-probability or high-reward trading opportunity at hand. And when that opportunity eventually presents itself, they act without hesitation.
But in the meantime… they sit on their hands and do nothing.
We make our money in not by doing something, but by doing the right things. Sometimes the right thing is doing nothing.Rich Trader
Sometimes Traders Don’t Trade
There is a fantastic quote from one of my favorite trading books Reminiscences of a Stock Operator:
This statement really struck a chord with me when I first read it.
In regular civilian life it is normal to expect a return proportionate to the amount of effort you put in. In most jobs and professions, more work means more money, or at least more production output.
But in trading this belief is dangerous, particularly for newer traders.
When you first begin trading forex it is likely (and normal) that you will be excited to trade. It’s fun, novel, and the potential for random punishments and rewards is literally addictive – just like in gambling.
The problem with this is that if you begin to focus on the excitement and attraction of trading action just for the sake of being involved in the markets, then you open yourself up to fatal vulnerabilities in your trading approach.
A huge part of trading is knowing what not to do. There are far more things that you shouldn’t do in the markets than you should do.
Forex markets are open 24 hours a day for five days a week. This means that you have 7,200 minutes each week to make good (or bad) trading decisions.
It can seem tempting to try to spend every one of those minutes looking for reasons to get into a trade. But the (relieving) fact of the matter is that doing that doesn’t mean you’ll make more money.
When it comes to trading, less is often more.
Being Flat Is A Defensive Position
Taking no trades is a trading decision too.
It may not seem like it. But each time you don’t take a trade, you don’t put your capital at risk, which is a trading decision like any other. Obviously it also means you can’t make anything, but as you will learn over time – making money is not the only thing you need to focus on in order to be a successful trader.
When I began trading my new pullback strategy this year it didn’t take me long to realize that I had a terribly bad win rate on Mondays. My Monday win rate was less than 25%, while the other days of the week were closer to 50%.
Once I stopped taking trades on Mondays it didn’t take long to notice the positive effect on my equity curve.
Every time I don’t take a trade on Monday I don’t put my capital at risk with a horribly bad chance of winning. This act of staying flat on Mondays is actually a defensive position. It ensures that I stay in optimal condition to take advantage of opportunities later in the week that have a higher yield. It allows me to start each week off with stronger footing.
I don’t waste my ammunition on setups that aren’t worth shooting at. Ammunition is valuable, and in trading, it is money. Conserving your ammunition is a wise idea when you know that higher priority targets are always on their way.
It’s not lazy to do nothing. It’s not counter-productive to sit on your hands when the market conditions call for it. In fact it’s one of the main reasons I managed to get out of my drawdown at the beginning of the year.
I didn’t turn my results around by taking more trades – I turned them around by taking less trades and being extra selective in deciding when to participate in the markets.
Don’t Micromanage Your Positions
Another temptation trap that new traders often fall into is micromanaging their positions.
They think that if they spend more time staring at the charts and moving their stop loss and targets around then they’ll have an even greater edge over the market as a result of their responsiveness. They feel the need to babysit each moment of the trade’s lifespan.
Again, the relieving truth is that this won’t make you more money. In fact it’s likely that you’ll burn yourself out emotionally by judging the meaning of each and every tick until you make a bad decision or exit the trade entirely.
Trading is stressful enough as it is. You don’t need to add to the stress by trying to outsmart the markets at every turn. Let the trade play out. As I said in my Forex Trading Tip Turn Off Your P&L!, you don’t need to put yourself through that misery.
Unless you are a consistently profitable scalper or discretionary trader then you should know exactly where you’re getting in, what your exit reason will be, and what your risk is before you enter the trade.
Once the trade is placed… all you need to do is get out of its way.
Conserve Your Mental Capital
Trading is a draining game. It will sap you of your energy both physically and emotionally. This is normal, and it can be managed.
But if you spend too much time obsessing over each and every tick in the market then your trading results will suffer.
Most traders, even professional day traders, spend most of their time waiting for factors to align. Trading is nowhere near as exciting as they make it seem on TV. Like most other professions, it’s a grind. There’s a lot of boredom involved. But that’s what it’s like to be an elite trader.
That’s not to say that you should bum around and literally do nothing between trades. You should use that down-time to work on your trading process. Work on your journal, do some backtesting, analyze your recent trades, look for patterns in your trading that could result in optimization of your edge.
But when the markets are open and your charts are loaded up and connected to your broker, make sure to keep yourself in check. Remind yourself constantly what your job is as a trader.
Wait only for occurrences of your edge. Ignore everything else. Sit on your hands in the meantime. There’s no shame in doing nothing. In fact that’s exactly what is required in order to keep yourself in optimal shape to take the most advantage of your best opportunities.
Conserve both your financial and mental capital. If you don’t know what to do, or your trading plan says to wait, then don’t do anything. It’s OK to do nothing!
It’s better to do nothing than to do what is wrong. But whatever you do, you do to yourself.Buddha