Hello traders! This past week I had the pleasure of hanging out with another instructor, Justin Krebs. He was in Dallas doing a Market Timing Class and I had the pleasure of observing this class. If you didn’t know, I was one of Justin’s first instructors several years ago. He was determined and disciplined enough to become a successful trader, and eventually an instructor as well! I could not be more proud of sweet little Justin!
The reason I bring Justin up is because of a couple of conversations we had during the week. As we were discussing the forex markets, naturally the conversations turned to how trading has impacted our lives, the lives of others, etc, etc. At one point in our discussions, I jokingly said I would pay him one US dollar if he went and got me a cup of coffee (the break room is just a few steps away). He looked at the door and said no, that it wasn’t worth it to him. How about I double the offer? Two dollars! The answer was still no. Ten dollars? Now it was becoming ridiculous. How much would I pay someone to get me a cup of coffee from fifty feet away, that I could easily do myself? At the price of one US dollar, I was trying to bid for/buy Justin’s coffee service. However, he wasn’t willing to “sell” me his service of getting coffee for that dollar. At my ten dollar bid for the coffee service, there was demand for coffee service, but no supply of coffee service. There was no trade. Now, imagine if my nephews and nieces were there. They range in age from 7-12 years old, and don’t trade in the forex market. (Yet!) If I offered them two dollars for coffee service, there may have been some supply for my demand of $2 coffee service. If so, there would have been a trade that took place.
If Justin had offered his coffee service for $500, I would not have accepted, or bid, for that service at that price. Again, no trade would have occurred. In your personal life, this entire story would easily compare to getting bids for work at your house/office/etc. Say you needed to get your house painted and didn’t have the time or inclination to do it yourself. One painter offers his service for $5,000, the next offers their service for $5,500, and the last offers at $7,000. All things being equal, which offer will you accept? Obviously, the least expensive (unless you work for the government.) The next time you are getting price bids for services, I hope you pit them against each other! This is how a free market works, the buyer wants the most work for the least money and the seller wants the most money for the least work. There is nothing wrong with this! This incentive to improve products or decrease prices is a good thing, believe it or not.
Another way that regular life is like trading is our reward to risk ratio. As a reminder, we recommend only taking trades that have at least a 3:1 ratio-which means for every dollar of potential loss, you should have three dollars of potential profit in a trade. In real life, quantifying the ratio is a bit tougher. Some are easy. For example, if you are following a semi-trailer up a steep mountain two lane road, with no visibility around the rig, does it make sense to pass? The reward is you may save a couple of minutes on your trip. The risk? Your life and perhaps the lives of others! Certainly not worth it. As the view changes, and you have miles of open road, the risk of loss of life diminishes a lot to almost zero. Now the reward is worth making the pass of the slow moving truck. How about walking up to an attractive stranger and introducing yourself, perhaps even asking them out for a coffee? The risk is they will say no. Ouch! The pain, the humiliation! (No big deal!) The reward? You might meet someone who is your soulmate, and live the rest of your life in romantic bliss. What about something as simple as reading one of our Lessons From the Pros newsletters? The “risk” is only losing a few minutes of your time, but the reward could be huge! Occasionally, a Lesson might give you that golden nugget that opens the door to being a successful trader, changing your life forever!
The bottom line message of this newsletter is that you have already been a trader, just by living your life. Nearly every decision that you make can be broken down to the basics of trading. When you apply the same discipline from your real life to your trading life, I believe that the vast majority of you would make the right decisions when it comes to your trading accounts.
Until next time,