Lessons from the Pros


80 Percent Waiting, 20 Percent Trading

In the current market environment, where daily ranges continue to narrow, it’s becoming more and more challenging for the disciplined day trader to find trading opportunities. Notice I’m referring to the disciplined trader, that’s because for the “undisciplined” trader, all types of markets are difficult. Now, that’s not to say that the professional trader doesn’t have to overcome the daily demands of trading. However, my point here is that greater volatility in the markets provides more opportunity.

Free Trading WorkshopPart of having this attribute that almost everyone in the investment business espouses as the Holy Grail of trading (self-discipline) is exercising patience. Now, I know you’ve heard this message before from many trading sources, and it’s something that I think every serious trader strives to achieve. Still, if this is the case then why is it so few are able to exercise self-restraint in the heat of battle? or when the chips are on the table?

One of the challenges with waiting for a trading opportunity to set up properly, or for the odds to stack up in one’s favor before executing a trade, is that trading is unlike any other endeavor that most people undertake.

Let me explain: Most people make money doing something that involves hours of daily activity associated with a particular situation. For instance, a doctor sees and diagnoses patients, a lawyer puts together his case and presents it to a judge and jury, and an entrepreneur runs his business by producing a product or servicing clients. In other words, they are constantly engaged in activities associated with their professions. Moreover, in most professions remuneration is expected to match or equal the level of effort put forth into that activity. This is not the case in trading. New traders, it’s safe to assume, have done well in their pre-trading professions since they’ve accumulated the necessary funds to start trading. These same successful professionals enter a trading endeavor with the mindset that since they are now traders, they should always be trading. Unfortunately, it doesn’t quite work that way.

Wait for your trading opportunity.

I frequently hear traders say that if they’re not actively trading, they can’t make money. There is some truth to that, however, more activity does not necessarily translate into more profits. Tweet: More trading activity does not necessarily translate into more profits. https://ctt.ec/9F13B+ I’d say it’s quite the opposite. In actuality, over-trading is a very common affliction of newbie traders. This can be attributed to a lack of planning and the impulsive need for action. Additionally, the feeling of not being “busy enough” will also lead to forcing trades that for the most part are not beneficial to the bottom line.

Some of you may be familiar with the 80-20 rule that is prevalent in business management. Simply put, the theory states that eight percent of results are produced by twenty percent of input. In my view, this can also apply to trading. First, let me be clear: I’m not suggesting that all you need is a twenty percent win ratio to be consistently profitable, although it is possible (with a larger risk-to-reward ratio). What I am referring to is the title of this piece.

Specifically, I believe that eighty percent of a trader’s time should be spent observing, learning how the market works, practicing and planning. And twenty percent of the time actually executing and managing trades. People outside of trading often wonder how it is that people make money by staring at lines on a computer monitor all day. It doesn’t seem like “work” to them. What they don’t realize is that trading is a mental game, which can actually be extremely taxing.

The reason I wanted to cover this topic is because in this low volatility environment, I’ve been hearing of many traders that are suffering because of their impatience. It is demanding enough to put hard-earned money at risk daily, but when the rewards are slim and the opportunities are few, one’s patience can really be tested.

If you’re one of these traders having a hard time waiting for the good trade, you might want to incorporate a specific rule to combat the urge to trade even when a good trading opportunity hasn’t presented itself. Leaving the environment tends to work well. When stricken with the impulse to make trades (just for the sake of trading), get up out of your chair and take a walk. Another way to fight off this tendency is to think about your goals and decide whether the trade you’re about to make will bring you closer to your goal. If the trade is not low risk, high reward or it’s not part of your plan, the clear answer is no.

To conclude: In trading, patience is indeed a virtue, especially when there aren’t many high profit opportunities. So hold on to your capital and only take risk when it is warranted. Incorporating the 80-20 rule to your trading plan can perhaps help you achieve your goals.

Until next time, I hope everyone has a profitable week.

DISCLAIMER 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.

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