Lessons from the Pros


A Laissez-faire Approach to Trading

Laissez-faire is French for what loosely translates into a policy or attitude of letting things take their own course, without interfering. This type of approach when it comes to trading (in my humble opinion) would benefit many traders. Simply because the biggest challenges traders face constantly are the emotions of fearing losses, making the wrong decisions and missing out on trades. What better way to deal with these challenges than to let a trade run its course without interference.

Think back to the all the trades you’ve made since being involved in the financial markets. How many of those do you recall would have worked (produced a profit) if only you had left well enough alone? For the newer trader, I would venture to guess that there are too many to mention. Now that’s not to suggest that seasoned professionals on occasion exit trades prematurely. In trading there is no such thing as perfection; however, the difference is that Pros exit early less as they have learned to embrace the uncertainty inherent in any speculative undertaking.

One way to avoid this trading pitfall is to fully  program the entire trade. This means, once the trade is on, the entry, the stop, and target are in place. The best course of action (or in this case, inaction) is to “leave it alone” or Laissez-faire.  After all, aren’t the emotional reactions of micromanaging trades the primary cause of early exits out of perfectly good trades?

Free Trading WorkshopWhen I bring up this topic to students, I frequently hear that their biggest winning trades were the ones they just “let go.” In other words, they keep themselves detached emotionally from the trade, and just let the market do whatever it is going to do. If this way of trading seems to produce better results, then why is it that more traders don’t implement this Laissez-faire approach to all their trades?

Part of it may just be due to the fact the new traders aren’t aware of all the capabilities of their execution platform. In addition, I’m sure there’s a segment of thrill-seeking traders that probably think it’s no fun to have the computer do all the work. Another reason might be psychological. As I mentioned earlier, stifling the fears of losing and giving back profits are challenging when first starting out. That’s why I encourage students to systematize the entire trading process. With the advent of technology, that’s very easy to do nowadays. Most direct access trading platforms have features that are well-suited for traders to simply place the trade and walk away. This can only be done after the trade is well thought out and meets all the rules set forth in a trader’s strategy

For example: A trader wants to go long 1 ES (E-mini S&P) at 1095 limit with a bracket order attached, which simultaneously places a sell stop market order to sell 1 contract with a 2-point ($100.00) stop. This sets the stop price at 1093.00 and a target which would be a sell limit order 10 points higher, or 2003.00 for a profit target.

As with anything, there are pros and cons to this type of order. The positives are that you have a specific entry price, stop, and target. However, because the entry and target are both limit orders, there are no guarantees you will be filled. This is where the strategy comes in. The entries, stops, and targets have to be placed based on a set of high probability parameters. What’s important here is that once the trade is placed a trader must let the trade unfold. This means being OK with whatever the outcome.

To conclude, it’s clear that emotions along with poor planning and a lack of preparation play a big role in a trader’s lack of success.  So why not then utilize the tools available to mitigate some of these issues? After all, trading should be logical and methodical, not irrational and emotional. But I think you already know that. And to that end, here’s an idea: In the New Year, I challenge everyone to commit to making the necessary changes to becoming a successful trader. Perhaps one of those changes could be to start taking a Laissez-faire approach to trading.

So until next time, I hope everyone has a great 2016.

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.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.