The F-up Factor

This is back to school week in United States and of course my son decided to do all of his summer homework in the last few remaining days of the vacation pulling several all nighters and generally making a mess of his work. Ultimately he was able to finish all of the assignments but at a steep cost both in physical exhaustion to himself and the mediocre quality of his product.

When I confronted him about the mad scramble to finish he replied, “Dad! I was under pressure! That why my work sucked.” After which ensued a long discussion on the value of preparation and on the idea that success depends not on executing something well, but rather on giving yourself plenty of time to fail before finally mastering a task.

Now my son is a teenager and he will hopefully learn the valuable lesson that 90% of life is failing repeatedly until you have finally “succeed” at whatever it is that you are doing. Already, I am starting to see the dim appreciation for the value of preparation as he starts his classwork. However, in having these long conversations with him this past week, I realized how many of us as traders act exactly like teenage children.

Most novice traders I know approach the market with same naive attitude that my son approaches his schoolwork. They simply assume that they can just start trading and will succeed from the moment go. Very few traders allocate any room for what I call the F-up Factor -- namely all the things that will go wrong that you haven’t even thought about. Hit the buy button instead of sell? Oops. Left a dangling limit order on the books that you forgot about? Oops it just triggered. Sold 1M euros instead of 100K? Ooops your account just got margined out.

The single greatest mistake that most novice FX traders make is to trade at the default leverage offered by their broker. In US the default is 50:1 and that’s basically equivalent to driving at 150 miles per hour. At that speed you will wreck the car by hitting even the slightest bump on the road. On the other hand if FX traders set their default leverage at 5:1 they could survive many of the inevitable mishaps that will await them. It really doesn’t matter how big a pothole you hit, if you are driving at only 20 miles per hour you will survive to drive another day.

Allocating plenty of room for the F-up factor whether it be in relation to your capital allocation rules, execution rules or money management rules is what separates long term winner from losers in FX.

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