Featured Article

How to Eat an Elephant

Rick Wright

Hello Traders! This week’s Lessons From the Pros article has one primary goal – to teach you patience. I was talking to my brother a few days ago, who believe it or not is also trading the foreign currency market. While not a full time trader (yet!), we were discussing his strategy of going for just a few pips a day, almost scalping the market. Traditionally scalpers will be trading frequently – perhaps dozens of times throughout the day going for 5 to 10 to 20 pips at a time, but his style is to only trade 1 or 2 times with a goal of making 10-20 pips.

I expressed my “concern” that he is probably leaving a lot of money on the table, that he should let his winners run much longer with some of the extra volatility that the market has been giving us recently. His response to me was “I’m just trying to eat the elephant.” Seeing the puzzled look on my face, a more detailed explanation followed. Here is our conversation, paraphrased:

Brother: Have you ever tried to eat an elephant?

Me: That would be a “no”.

If you ever did, how would you do it? At one huge meal, or a couple of bites at a time over weeks, months, or years?

Definitely over weeks or months.

That is my long term goal.  To me, the elephant is growing my trading account to be elephant-sized over weeks and months and years instead of trying to do it in one huge trade or just a couple days. By taking small, frequent winning trades with little draw down, I can increase my account by a few percentage points a week/month and in a few years, look out world!

So you aren’t going to quit your day job next month? (Half jokingly.)

Of course not! I need a track record of many months or years before I would do that, and trading for just a couple of hours a day, part time, eventually I’ll have the account size to quit if I want to.

I then proceeded to ask him if I could use our conversation in my next newsletter article. Even though he and I have had numerous conversations about trading over the years, I was a bit surprised at the maturity and longevity of his plan. One of the main issues that new traders have is that they have expectations of huge rewards in a short period of time. “I’ll take my $5,000 trading account and turn it into a million dollars in a year, and tell my boss where he can go!” That rate of return is a bit unrealistic. By increasing your account size just a couple of percentage points a month, the power of compound interest will make you wealthy, but over a long period of time. Trading is a marathon, not sprint. Those who try to make too much too fast often over-leverage their account and take on unnecessary risks by doing so. One or two large losses can wipe out a few weeks or months of good gains! If you do that you have earned nothing and wasted your time as your account takes these major drawdowns. Does anyone want to put in that much effort and earn nothing in return? I know I don’t. By taking the higher quality trades that we discuss in these newsletters, in our Online Trading Academy classes, and especially in our Extended Learning Track trading rooms, it becomes much easier to eat that elephant!

When I talk to most traders, occasionally I’ll ask them if they ever took a calculator and multiplied their “expected” performance out over time to see how much money they would eventually have. The answer is usually a sheepish “yes”. Try it yourself! Put in your account size, say $10,000, and multiply that times 1.1. This means you are expecting a 10% return, and will give you your total account size after that return. Now keep hitting the = sign on your calculator. Most calculators will continue to increase that amount. Try hitting that button 50 times! If I did my math right, after that many periods you will have approximately $1,173,908.00. Not too bad! Notice I said “periods.” I certainly don’t expect anyone to make 10% a day in their account. What about per week? Still a bit unrealistic. Monthly? Possibly. Quarterly? Probably. Yearly? Definitely so!

By looking at your long-term goal, instead of trying to make money on every potential small level of supply or demand in the markets and spending hours a day trading, it is much easier to focus on the higher quality trades, making that elephant much easier to eat. Having a long-term goal helps to alleviate a lot of stress as well! Instead of frantically taking every trade just trying to make a living today, knowing where you are in your journey is much less stressful. In the meantime, where is that ketchup? I’m hungry.

Until next time,

Rick Wright

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.