Patience: a minor form of despair, disguised as a virtue – Ambrose Bierce
In last week’s edition, I touched briefly on some general concepts regarding patience as it applies to the Forex trader. Let’s look at some specific examples of why patience (coupled with a sound trading plan) is important.
In our first scenario let’s look at a trade that is in profit and growing nicely. We have several possibilities available to us: if you’re happy the profit gained so far, you can just simply take profit. Remember, it is never wrong to take profit. Taking profit, even a small one, is always better than taking a loss. As professional traders we want to do what we can to avoid and mitigate losses. But in this case, let’s take the patient traders approach to profit-taking. As for me, many of my trades are split into parts, usually two parts, each in separate accounts.
Why two accounts? It gives me flexibility in the order in which I close my trades, as well as hedge. In my primary account I can have multiple BUY orders open concurrently on the same currency pair, but I’m limited in the order in which I can close them. The second account just gives me that much more flexibility. Back on target, as my trade grows in profit, I do like to take a little money off the table. So at some point I will take profit on one trade and let the other run some more (usually with a trail stop and no TP). Now I’ve earned some guaranteed profit out of the trade and I may even get more. Or I might not, but that was my plan. I usually find I do better when I leave the trade alone, act in a patient manner, and try as hard as I can not to panic.
What about those trades that don’t go your way? What then? Each trader is going to have his or her own unique limit as far as drawdown is concerned. Depending upon market analysis, a good strategy could be to wait out the drawdown in the case of a of a price pull back, waiting for price action to resume its desired direction. If you’re using a broker that allows hedging, or working with multiple accounts, hedging helps take the sting out of a drawdown, and can really help especially if price is unlikely to recover for a long period of time.
For those of you who are new to Forex a hedge is simply a trade taken in the opposite direction to the trade you are ready have open. Some brokers will allow hedging, while others do not (typically the US-based ones). Remember in so doing to maintain proper risk management when hedging. Something to remember about Forex trading is that a loss isn’t truly a loss until you close the trade. Many times, if your account can handle it, you can simply wait out the drawdown, but you really need to be patient to do that. That could take days or even weeks to occur. When I first started trading Forex this sort of thing just drove me crazy. It took a long time for me to grow as a trader and be patient enough to allow the market to do its thing.
One of the techniques that helped me become a more patient trader was how I changed the way I use my demo accounts. Initially I set them up to mimic what it would be doing in a live account; that is, I had a balance that was similar to my live account balance and I never traded any more than what I would in my live account. Not necessarily a bad thing to do, but lacking experience with market behavior I was limiting my trading exposure. After a fashion I changed the way I use my demo accounts. I put in a large sum of money which allowed me to take on lots of different trades, giving me the opportunity to watch how these trades played out. The primary take away for me in doing this was that I became more patient and allowing a given trade strategy to develop. In time I became more comfortable with the trades I opened and less likely to micromanage them every five minutes, with the predictable result of small to no profit coupled with lots of frustration.
Oh I almost forgot, I didn’t finish the story about Scott. Yes indeed, Scott took half of my pot, double down on blackjack, and lost. But that’s okay, because he offered to take the other half, double down on blackjack and restore my losses. He lost again. He managed to lose all of his money and all of mine! Maybe we should’ve studied those John Patrick videos some more, because he was right, there are only two kinds of people who go to Vegas – and we learned what it was like to be a dope.
That’s all for now, have a great week in the room and, as always, thanks for reading.
JC