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In Trading the Power of Old and New
This week at the Chicago Traders Expo I was accosted by a group of young forex traders who peppered me with questions for a good have an hour and it was the best time I had all year.
The energy and curiosity of youth is intoxicating and it revved up my own enthusiasm for trading and sent me back to New York a better, more focused trader. One of the great side benefits of prepping for Chicago was going through my archive of strategies.
I am notorious for writing strategies and then abandoning them for the next great thing. But this time I actually applied a critical eye to my past ideas and was able to improve them by adding some current knowledge gained from the school of hard knocks. The net result was that I revived an old BK Flow strategy by applying filters from our current research and created a dynamite new day trading setup that we’ve been using all week long in the chat room. I am actually so excited about it that I think it will the core strategy in my day trading channel.
Looking at old ideas with fresh eyes can be incredibly valuable. One of my older concepts was to Trade Tiny. The idea was to trade the smallest possible size of 0.01 units on all your trades even if you had a five or six-figure account and could afford much larger positions. My argument at the time – and I still think it’s absolutely true – is that Trading Tiny eliminates almost all bad trading behavior. It allows you to trade much larger time frames with massive 200-300 pip stops because a loss on any given trade is only $20-$30.
In the realm of academia and logic size should not matter. It should simply be relative to your account. But in real life where psychology controls all size is everything. Regardless of your account size, it’s still easier to lose $40 on $1000 then $3000 on $100,000 even though proportionally the latter is a smaller loss.
But of course, we don’t think in proportions or probabilities. We think in absolutes. So when we trade a strategy that is 80% accurate and hit 3 or 4 losers in a row we are ready to ditch it the way Kendall Jenner dumps boyfriends. That’s why pain in trading need to be kept at an absolute minimum and Trading Tiny is the best solution.
But having developed scores of strategies since the time I first proposed that idea, I realized that now I can have the best of both worlds. I can keep my individual trade risk very small ensuring that I won’t pull stops or revenge trade or average down needlessly, but I can also generate a meaningful return even on a larger account by trading a variety of configurations for each strategy I have, diversifying by currency pair, timeframe and risk parameters.
By dividing up my capital by ten or even twenty slices I can create a very powerful portfolio of trades that will aggregate to a meaningful return while taking tiny individual trade risk.
This is a very cool idea and I would have never thought about it that way if I hadn’t looked at my past work and applied the lessons from my current research. In trading as in life getting young and old together can work marvels.