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Trading Right By (NOT) Being Wrong
The longer I trade in the forex markets the more I am convinced that long term success has almost nothing to do with choosing winners and everything to do with avoiding losers. In short, trading is basically the art of saying NO.
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Before I proceed – let me qualify my comments by emphasizing that I am only talking about day trading where in the course of a year I am presented with as many as 1000 trading opportunities. So even if I eliminate the vast majority of those ideas I am still making many trades. If I were a long term trader my decision making process might well be different.
Alas as I have noted many times in the past, I am just not smart enough to know where currencies will trade 72 hours from now much less 50 week forward. So I operate on the shorter time frames – much like a meteorologist that only tries to forecast the weather two hours ahead.
When you are in the forecasting business the key to making good decisions is not to focus on whether you are right, but to relentlessly question yourself as to whether you are wrong. After all as traders we operate in a probabilistic universe where the kind of revenue certainty that say a McDonald’s franchise owner enjoys is laughably out of reach. No decision we ever make can be unqualifiedly termed as “right”. On any given day, at any given moment a piece of news could instantly wreak havoc with our position. That’s why focusing on being right is a futile proposition.
On the other hand, looking at all the ways that you can be wrong can be very productive. My best strategy refuses to make directional, takes only a few select trades during the week and holds hard time expiration rules that often result in no trade at all. Like some algorithmic Grinch it surveys the market and constantly say – NO, NO, NO – which so far (and of course past performance is no guarantee of future results) has translated in YES YES YES on my bottom line.
The key I think is that professionals in any field try to remove as much waste and profligacy from the actions as possible. Ted Williams never swung at a pitch that wasn’t a strike. Warren Buffett’s number one rule is DON’T LOSE MONEY ( Note it’s NOT – make as much money as you can). ZARA runs a very tight inventory system in its stores and only makes more of what’s working. The examples are endless and I think they all center on one key point – To Trade Right, Focus on Not Being Wrong.