In Trading We Sell Greed, but Fear is the True Secret

This was the first week in five that I lost money on my weekly trades in BK and yet it was the best week I had.

I started out very long loonie, thinking that a relatively hawkish BOC, the high price of oil and decent eco data would give my trades a boost. I was also bearish euro as the pair faced the turmoil of EU parliamentary elections, the slowdown in Germany and the nasty fight between Brussels and Rome.

I was right but it didn’t matter. The loonie was bid up ahead of good news and euro sold down ahead of bad data, so the story impact was minimal and prices went against me almost from the get-go. Yet in the end, I managed to lose very little money which is actually the perfect way to trade.

A few weeks ago I noted that the only way to trade successfully is with a two target process, where you take half the trade off at some short risk target and let the rest float looking to bank 2 times risk or more. That second half of the trade is basically a lottery ticket. The “long profit” trade only happens 20-25% of the time but when does hit target that pip gain is responsible for the bulk of your overall return.

This, of course, is what everyone who provides trading education sells. “Risk one dollar to make ten!” “Double your account in a month!” “Trade one hour a day and make five figures a month!” The trading business is replete with bullshit because of course, that’s what we want to hear. We not only want to make money, but we want to make “easy money” with very little risk and massive payouts on a weekly basis. All trading education appeals to our instinct for greed which of course is why most traders fail miserably.

Greed trips us up in a million different ways. It entices us to chase trades with too much size but more insidiously it makes us hold on to losers way beyond reason and prudence. Most conventional wisdom says that we lift our stops because we are afraid of losing money, but I actually think it’s the opposite. If we were truly afraid we would get out. Instead, I think we hate the idea of not making money so stay in the trade against rhyme and reason desperately trying to claw back to even one pip profit so that we can feel like a winner.

How many times have you been in a trade that was deep against you – maybe even a few pips away from the stop – and then rallied halfway to your entry thus cutting your losses significantly – but you refused to get out, hoping that it would “turn around” only of course to lose it all in the end?

I don’t think there is a retail trader out there who hasn’t done that at least a dozen times. The reality, of course, is that it is really hard to take losses just when things are starting to look up which is why I don’t even try. Our instinct for greed is impossible to tame so I prefer to work on my defensive skills. The beauty of short/long exit structure is that it locks in a small profit and instantly goes to breakeven ensuring that you won’t lose money on the trade. It essentially creates an institutional process for fear. And fear is highly undervalued in my opinion. Fear is the key factor that keeps us alive. Fear is what makes us spit out tainted food so we don’t get poisoned. Fear is what keeps us from crossing a five-lane highway in the middle of rush hour. Fear is what keeps us from rollerblading down a 3000-foot mountain road without a helmet ( Yes my younger stupider self actually did that once )

Unlike the romantic notion of bravery which gets all the accolades fear never gets good press, but as General Patton once said, “The object of war is not to die for your country but to make the other bastard die for his.”

Trading is very much the same way. Returns are made not through big gains but through avoidance of massive losses. Last week I was able to lock down small gains in EURGBP and EURCAD shorts before they blew up against me and that kept my weekly loss very manageable and kept my overall pip tally way in the green.

Hooray for fear. It’s the secret to trading.

Boris Schlossberg

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