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Discipline is Bulls-t.
Do you think George Soros made all his money because he was right?
Over his long and illustrious career Soros made a multitude of investment errors. We simply don’t hear about them because while frequent in scope they were miniscule in size. In fact, Soros was notorious for “testing” the markets by sending out small orders in the opposite direction of his view just to see how they performed. If the trade turned profitable he would rethink his whole investment thesis.
Soros is famous for saying that “it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
I was thinking about this quote this past Wednesday after a few frenetic hours of day trading the FOMC decision in our chat room. K and I live-traded like we always do and I used my personal account to execute the trades. For the first few hours I stuck to our Boomer strategies and slowly and surely put up 36 pips in about 90 minutes hitting all our trades to spec. Then we closed up the “official” tally and I started to screw around. The markets were still very volatile and there were plenty of trades to tempt me. None of them however, were the proper Boomer setups. So basically I just gut traded for an hour and managed to give back all the gains, plus set myself back another 40 pips.
I was trading reasonable size all throughout the day, so the damage was not terminal, but it was nevertheless there and most importantly it was utterly unnecessary. I could have gone on a massive internal rant telling myself how stupid I was for losing my discipline. How I should have known better to not get distracted by the bright shiny objects of the post FOMC price action. But before I even started down that path I knew its was total bulls-t.
The fact of the matter is that I will never be disciplined. And neither will you. And neither will anyone else with a pulse. We are human. We respond to stimuli. To deny that is basically to deny the very essence of our nature.
But thinking about Soros I realized that there is a way to stay consistent and successful while at the same indulging your baser urges. Basically I adapted his
“bet-small-when-you-are-fooling-around-bet-big-when-you-have-the-edge” approach to my own day trading style. I call it the 10 to 1 approach. Let’s say my regular trade size is 10,000 units. I trade that size for any legitimate set up that I have. But anything out of the ordinary. Anything that is not part of my trading plan I trade at 1/10th my regular size. This way I get to participate in the market, but if I get stopped out ( as I inevitably do ) my loss on the “punt” trade is literally half of my one winning trade. Given the fact that I aim to make 10 legitimate trades per day and lose only once, any losses from “punts” are miniscule and do not damage my psyche or my equity.
I even went a step further and created templates 1/10 the size of my real trade templates, so that I would only trigger the “tiny” trades when I wanted to fool around.
Here is how that experiment went today
As you can see I did a lot of random trades, but none of them hurt me because they were “tiny”.
I can’t tell you how important this trick is. All of us who engage with the market every day, who are tempted by risk at least 3 times every hour, need a proper mechanism to cope with the temptation. And just saying NO is not a real answer. Discipline is bullsh-t. It’s what trading gurus who never have real money on the line like to teach you. For real traders who trade every day, the 10 to 1 rule is a much better solution.