The High Profit of Low Expectations

I had no intention of making a good trading system. I just wanted to create an EA that would trade a lot and pretty much stay at break even after commissions so that I could collect rebates. The idea was just to see if I could create a low volatility system that would spin off 5 or 10 pips in rebates every day -- all of which could compound to a nice 10% cash on cash return per annum.

But a funny thing happened. As I traded the system more and more I kept tweaking and refining the original concept and the system suddenly morphed into an actual alpha maker albeit at about one half the trade frequency rate of my original idea. Now I may actually have a genuine money making EA that also throws off some rebate pips along the way.

How did this come about? How did I create such a good EA? Precisely because I wasn’t trying to make money. By not focusing on profit, I could relax and just pay attention to process. That, in turn, helped me align the logic with my “ideal” setup and eliminated a lot of false entries. Add to that some unusual risk mitigation techniques (what my wife derisively calls the “half-half stop”) and suddenly the EA that wasn’t supposed to make money, did.

My friend Rob Booker tells his novice traders that they should focus on making $1 per week. He gets a lot of ridicule for this -- but it’s actually very good advice. Sure, almost anyone could probably make a $1 on a trade -- they goal is in KEEPING that $1 from slipping out of your account as the market tempts you at every turn. As the saying goes, the key to getting rich isn’t how much money you earn, but how much you keep.

The $1 per week trick is all about learning to protect profit -- a lesson that takes a lifetime to learn and that only the greatest traders fully master. But by setting expectations so low, Rob makes that task accessible to anyone -- even traders who’ve just started to trade forex. And that is the most interesting lesson of all.

Trading, in so many ways, is completely counterintuitive to real life. The law of low expectations is just one example of that. In all other aspects of life, we are taught to “reach for the sky”. To set our goals high and once reached, set them higher. But trading is not like playing the piano or learning how to cook or even writing a book. Trading is an activity so fraught with uncertainty that there is very little correlation between effort and result. That’s why the harder you try, the worse you will do. The rules of real life fail miserably in speculative markets. That’s why the completely non-intuitive approach of very low expectations can radically improve your performance. So for now, maybe don’t aim for a 1000 pip trades and try not to lose this week instead?

Boris Schlossberg

4 comments

  1. Richard K says:

    Great point, I wish I had realized it earlier. When I use to set a hard target that I had to make X $ per month or Y% growth more often than not I would lose since if I was not close to hitting my goal I would through my rules out the window, make riskier trades and lose even more money. Now I just look at the balance if is equal to or greater than the previous then its a good month & if I drop beyond a % threshold I stop trading for the balance of the month. I now find my account is growing at a rate that exceeds the hard percentage target that I had targeted to hit every month.

  2. Mavis Phokunani Mkhize says:

    Dear Kathy
    Is very true to make 1 dollar is a good management. I always follow your advises, and I win.
    Thanks Kathy

  3. Excellent post Boris. You said ( wrote) it so well . It took me my first full year to realise this.
    We are in the risk averse business not making money business.
    More power to you.
    Bublee

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