The Trade You Never Take

The other day in our BK signal service I faced the choice of three possible trades. I didn’t take any of them which in the end proved to be the right decision. In trading as in life it is very difficult to argue the counterfactual. Fiscal authorities all across the G10 face a similar problem these days. They are being blamed for massive deficit spending, ruining the credit of the respected nations and generally living beyond their means.

Yet what most critics absolutely miss is the fact that if spending wasn’t massively increased post 2008 crisis we would all be in a Great Depression right now eating dog food for dinner. How do we know this? Herbert Hoover. Despite the economic assertion of the Austrian school of thought, markets do not miraculously “fix themselves”. Economics at its core is nothing but a confidence game, and once confidence is irreparably broken it takes generations to repair itself. There is a reason why the Austrian school policies have never been applied in modern democratic societies -- they don’t work. They are the “creationist” version of economics and in fact people who believe in one tend to believe in the other.

But I am not here to argue economics or politics, or to defend the pathetic excuse for Keynesianism’s that passes for today’s policy. My original point is about counterfactuals -- those exercises of thought that ask what would happen if I did so and so instead of what I had actually done. When it comes to trading counterfactuals can provide a very valuable lesson.

In the example above, all three trades turned out to be losers and not taking any of them was a great decision. Too often we focus only on the trades ahead and never review the ones we’ve done. This week I had a chance to examine all of our 2011 BK signal trades and discovered that if we had just traded on the side of flow every time we would have passed up on 5 losers. That may not seem like much but it would have added 500 points to our overall return which is huge.

In life there is only two ways to make money -- you can earn more or you can save more. In trading the savings comes from taking fewer stop losses which the primary expense of doing business. Of course you can never pare your expenses to zero, but practicing the counterfactual can help you become a much more efficient trader. Sometimes the best trade is the one you never take.

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