Let me rephrase: Not taking trades is key.
Yep, you read that right, I’m here to say that doing absolutely nothing is (a hell of a lot) better than taking trades every single day.
Okay, this subject is mainly going to be about trading and investing, but it may apply to over industries too…
Do you know why you shouldn’t take too many trades? (Think about it for a few seconds)
There are three key reasons you may have thought about:
1- Trades in your trading plan don’t happen every single day so you definitely shouldn’t be taking more trades than what your plan tells you to. (Absolutely agree with this one)
2- Your broker commission, hell, I enjoy trading with FXCM, I don’t have (too many) issues with them, yet I’m still paying 5% of the risk I am willing to take per trade on average… (Fuck… I just realized it, it’s way too much )
3- Focusing on quality trades instead of just average trades.
I’ll mainly focus on this third point (even though the commission one just pissed me off ugh)
The importance of focusing on quality trades & not over-trading.
This may sound pretty obvious, but sadly it’s a lot harder to actually follow this rule. Mark Hutchinson (from Falcon Trading) brought up an interesting concept.
80% of the trades taken should be high probability trades and the other 20% can be valid trades.
You want to wait for those high probability set-ups before putting a trade on, but sometimes you can have a gut-feeling the trade will just go in your favor before you see the perfect set-up and you should still act on it.
I really like that rule, usually my trading follows a very similar breakdown between valid and high probability, and I do believe it’s really beneficial for me.
That being said, I didn’t stick to it last month (July) and I ended up having a negative month… Yep… It happened I have no shame, I committed a few mistakes, anyway, that’s not the subject.
You may know of Michael Marcus (he was one of the traders interviewed in Market Wizards) who, in less than 20 years, managed to turn 30,000$ into $80 million trading commodities.
One of the quotes of his I really enjoyed is:
“One of the secrets to trading success is cutting down the number of trades you take”
When someone with his track record talks, I tend to listen, and that advice, is (I think) spot on.
Taking too many trades reduces the quality of your portfolio
Now let’s think about an investment portfolio, your returns will be the sum of all the trades and opportunity cost is really important here (in FX too due to leverage requirements) …
If you take trades that have a lower expected value you’ll reduce your overall yearly return and therefore make less money while increasing your risk, is that something you’re into? (I’m definitely not, I want the opposite)
I came across a cool website by Safal Niveshak – which I would highly recommend checking out (especially if you’re into investing)
The last article he posted was: Is your stock portfolio a warehouse or a museum?
In it he argues that we want our stock portfolio to be a museum and not a warehouse, which makes sense, so do go and check-it out
In it he quotes Jason Fried book Rework (a book I really enjoyed) :
“You don’t make a great museum by putting all the art in the world into a single room. That’s a warehouse. What makes a museum great is the stuff that’s not on the walls. Someone says no … There is an editing process. There’s a lot more stuff off the walls than on the walls. The best is a sub-sub-subset of all the possibilities.”Jason Fried – Reword
Makes sense when explained like that? Right? We want our trade portfolio to be a “sub-sub-subset of all the possibilities” and only the ones where we truly believe to have an edge in.
From there, he picks the explain of Costco v. Walmart
We want to focus on returns on invested capital, 28% sounds a lot more attractive to me than 12% (which is still good).
Less is better – quality over quantity.
Now in this part of the post I’m really tempted to bring up Bruce Lee quote about not fearing a man that practiced a thousand kicks once, but fearing a man that practiced one kick a thousand times (see what I did here?) but that won’t be my main focus.
Instead I’ll just pick a recent example
One of my friends (Aldo) realized that taking better trades is not only more enjoyable but also doesn’t necessarily reduce your trading returns. Especially while traveling and not being able to spend as much time on trading.
That being said, I’m kinda forced to bring it up, I mean I love the guy…
Bruce Lee has another quote (not about the number of kicks this time)
He probably didn’t say this quote thinking about investing or trading, but it applies to everything in life.
Anyway, I hope this was helpful.
If this was useful and you enjoyed reading it, it would mean the world to me if you’d leave a like or even commented 🙂