Forex Trading Strategy:A Man’s Got to Know his Limitations

By Boris Schlossberg • August 28th, 2010
Boris Schlossberg

A Man’s Got to Know his Limitations

“A man’s got to know his limitations” Clint Eastwood, Magnum Force.

For some people the prospect of sitting on boat deck, floating gently on the water with a line cast into the sea is the pinnacle of pleasure. For others playing golf on a beautiful and challenging course is the highlight of the week, each hole like a course of a sumptuous gourmet meal providing a modicum of joy. Yet to others making camp in the woods, communing with nature, being one with the wilderness is the ultimate form of peace and relaxation.

For me, all of these activities are just different versions of hell on earth.

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Fishing bores me beyond tears. I would much rather rollerblade through New York City traffic. Golf, much to my father’s great disappointment, has never interested me in the least. I love tennis instead. And to me, the great outdoors is simply a vast cauldron of bugs and mosquitoes – a place that civilization forgot to conquer. My idea of camping is ordering room service from a five star hotel in any of the great cities of the world.

Undoubtedly, my tastes are very different from yours, but at least I know what they are and I am comfortable with my choices. More importantly I don’t try to change my ways unless I want to.
Most of us, especially in America, live by the Darwinian rules of business – adapt or die. And we often internalize that lesson to every other part of our life, trying to do the latest, coolest hippest thing (Vegan cookies? Locavore restaurants? Botox injections?) not because we want to, be because we feel we have to. But life is much more varied than we think. More often than not it is much easier to find an activity that adapts to our tastes rather than force ourselves to follow other peoples sense of fashion.

Trading, which is just life stripped to its emotional and intellectual core, is great case in point. All of us are always taught from the moment we enter the game the great commandments of “proper” trading :

  1. Trade sparingly and be selective
  2. Use at least 2-1 risk to reward ratio
  3. Cut your losses and let you profits run

And most of us fail miserably until we learn to break everyone of those rules and trade to our own preferences.

I, for example, love to be in and out of the market every day. For me long term trading setups hold no interest. I have never made 10% on a trade in my life, but I have 10% on my account many times -- 25 basis points per trade.

I also like high probability setups. By definition that means that I must trade with a negative or a best 1:1 risk to reward ratio. The markets simply do not offer you frequent, high probability opportunities with positive risk to reward ratios.
Lastly, I can never let my profits run, but I am very good at cutting losses. In trading there is just one inviolable rule that I learned. You can either cut your losses AND cut your profits or you can let them both run. In other words, if you want to be a successful trader you can either make very small profits and contain your losses or you can go for outsized gains and expose yourself to a much larger drawdown.

Unfortunately, most traders do neither. Most traders let their losses run and cut their profits and that’s why most traders lose. To succeed in trading you need to know your own limitations as well as the limitations of the market itself. If you can learn to trade to your strengths while at the same time approach the market with a realistic attitude of what’s possible, your chance for success will increase markedly.

Comments

Excellent post, Boris!

Too many times we try to shoehorn our trading into preconceived ideas of what is the “proper” way to trade, but because that may not be natural to us, we end up with mixed results at best.

Love your posts. Keep ‘em coming :-)

Look into post like in mirror and see myself in every word :) Both about modern life and leasures and trading. Strange when You find somebody on the opposite side of Earth who thinks like You engaged in similar business and even has similar national roots :)

I really glad to find this site and Your posts, Boris!

 

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