Forex Trading Tips: The Train to Gain

The Train to Gain

You have 20 minutes to get to midtown for a very important meeting. As you stand on the 72nd street subway platform you see the local pulling into the train station. You glace at the express track and it is empty What do you do?

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If you are a true New Yorker you don’t even hesitate. You hop the local. It doesn’t matter that the express is just one stop while the local is four. It doesn’t matter that it may come 30 seconds after the local leaves the station. It doesn’t even matter that it may arrive to 42nd street before the local. If you are long term commuter you know that its very dumb to take the chance of missing your meeting for the possible advantage of getting there 5 minutes earlier.

The key is to always keep your eyes on the goal rather than optimizing the means of achieving it. The goal in commuting is to get there on time. The goal in trading is to preserve your capital and turn a profit. Sometimes both goals are best achieved at the expense of efficiency.

For all of us living in an, post-industrial world where speed and efficiency are the unifying values that connect us all, the idea of inefficiency borders on anathema. Yet when it come to trading inefficiency is often the key to winning, Don’t get me wrong efficiency is the foundation of our civilization and when it come to automobiles or internet searches efficiency is what we all seek.

My dental surgeon is one of the most efficient and adroit human being I know. He has the hands of piano virtuoso and can inject you with Novocain shot or extract a tooth without you feeling so much as pinch. But my dentist practices in the world of certainty and near absolute control. He can do 1000 extractions with the secure feeling of knowing that as long as he follows protocol the results will be positive nearly every time.

As a trader I don’t have such luxury. I exit in a murky world of probabilities and possibilities, where each action may have a thousand different outcomes, all slightly different from each other. In fact in the world of trading if I am utterly and completely wrong 300 out of 1000 trades I am considered to be a near genius in the field.

That is why the quest for efficiency can be deadly in trading. The commonplace maxim that most novice hear over and over is -- cut your losses short and let your profits run. Yet anyone who has ever traded for real for any period of time realizes how idiotic that precept sounds. In real life trading you can not do both. You can either let your profits run , but at the expense of incurring very steep drawdowns or you can cut your losses quickly but in that case you better book some profits to offset those losses or you will suffer from the death by a thousand cuts.

Price action rarely trends and even when it does it never does so in a straight line. Prices moves nearly always retrace and the difference between a retrace or a turn is only evident in hindsight. Trading gurus love to show the few well chosen charts where a buy a the absolute bottom or a sell at the absolute top resulted in near uninterrupted profits for the trader. My response to that chicanery is just wait. Wait long enough and any winning trade will turn into a loser. Who amongst the equity investors would have thought that holding Dow from 8000 “for the long term” was going to turn out badly 10 years later?

Trading is always the art of the compromise. It is the domain of the imminently practical rather than the realm of the idealistically possible. That’s why our modern instinct for efficiency mist fall to the wayside once we start trading. Much like hardened New York city commuters who know that when the train comes you take it, experienced traders know that profits must be booked lest they evaporate like ice cubes in your hand.

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