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Trade Less, Make More
Suppose you had a setup that was 90% accurate. Your natural inclination would be to trade it as much possible but if you do that you are almost certain to blow up your account.
Rookie traders often make the deadly mistake of conflating high probability with high frequency. In reality, the two are always mutually exclusive. If they weren’t -- then anyone who had a high probability/high-frequency setup would be able to acquire all the wealth in the world within a year’s time.
One of the biggest misconceptions in day trading is that high-frequency shops like Virtu are high probability traders. In fact, just like roulette tables at the casino Virtu makes money only 51%-53% of the time. The rest of the time it scratches out trades or takes small losses. How is then that it wins 99% of the time? Through the law of large numbers. Virtu makes money all the time, not because its trade signals are accurate, but because it makes hundreds of millions of trades per day and the small edge almost always makes it P/L positive.
Retail traders could never replicate that process because it requires massive infrastructure and gargantuan sample size to achieve such results. Yet many traders fail to see that point and start to bang away at prices thinking that just like the big boys -- the more they do the more they’ll make.
The truth is the exact opposite. In retail, trade less, make more is the motto of the day. The only advantage that we have as retail traders is our ability to STEP AWAY from the market. In other words, the only true advantage that retail traders possess is their complete freedom to choose only the best possible set ups and walk away from all others.
This is an incredibly difficult concept to internalize because everywhere else in life we are taught that more input equals greater output so we naturally assume that trading follows the same principles. However, in trading, we are actually inputting nothing. In trading we are in fact absorbing risk, which is why the rules are turned upside down with the general principle being -- the rarer the trade, the better the trade.
This week I realized that this principle can be extended even further. Like every forex junkie I follow the market almost 24 hours/day, often waking up on cue at 2 AM to check on Tokyo afternoon trade before catching a few more hours shut eye ahead of my regular wake up time for the London open. While I doubt I will ever give up those habits, I realized that my actual TRADING TIME is contained to only 10% of the trading day. On a day to day basis, almost all of my profitable trades occur between 900-1100 NY when the major economic news of the day is released.
Now FX is a 24/hour a day affair, and occasionally news breaks that is so vital that it can move markets for hundreds of points at any hour of the night, and as forex traders, we certainly want to take advantage of such volatility. But most of the time forex market is like war -- hours of boredom interspersed by minutes of action which is why it behooves all of us to ask -- when do I make the most money during the day and then focus on trading those hours only.