THE POWER OF DOING NOTHING IN FOREX - forex market basics

THE POWER OF DOING NOTHING IN FOREX ~ forex market basics

I will show you why doing nothing is surprisingly powerful in trading.

This simple exercise had a profound impact on how I will try to manage my trades in future. Once I open a trade and I’ve got my stop to break even its time to do nothing, just walk away.

Obviously the vast majority of my trades would have been stopped out at break even however the small percentage that survived were taken by the long term trend and became little profit pulling machines! To give you an idea of the power of doing nothing lets take just one trade from the EURUSD. I entered this short sell trade back in January 2010, it was a simple trend collapse breakout trade risking 35 pips (2% of my account) and I took profit at around 95 pips. Which is not bad right? I risked 1 to get almost 3. (see details of the move at end of this post)

Now lets take a look what happened if I did nothing. The Daily trend took this trade and it never came back to hit my break even stop. In June 2010 it hit a maximum profit of 2410 pips and if it wasn’t closed it would be sitting right now at 1250 pips. Realistically I believe any long term sell positions on the EURUSD would have been closed the moment the head and shoulders pattern played out on the daily chart at the end of June. This would have closed the trade with a profit of about 1800 pips.

Now here is the shocking part!

Remember that the initial risk on this trade was 35 pips, which was equivalent to 2% of the trading account.Closing the trade at 1800 pips would have resulted in a gain of 102.8% on the account! Remember, this is just one trade!
Obviously this doesn’t account for some losses also taken during that period. But to give you an idea of the power of doing nothing lets take the worst possible scenario. Lets say I’m the unluckiest trader alive and after that trade I lost every single trade I took on the EURUSD to date. My account would still be sitting at a gain of 56.8%! Thankfully I’m not the unluckiest trader alive and that trade was just one of many positions that that would have survived the trend fluctuations without being taken out at break even.

Keep in mind this is only on one pair!

Ok, so back to reality… It would be great to trade this way and I am confident that if I just took trades, moved to break even and then did nothing I would be a more profitable trader. Unfortunately I am human and having trades close at a loss or break even for weeks on end would be extremely difficult to cope with. A logical solution would be to split your positions into two. One half would be treated as normal and closed at your usual target resulting in a nice small gain on your account. The second half would be set at break even and left to hopefully catch a ride on the long term trend. Using this method in my example above that one trade would have still netted over 51%!

Hopefully this has given you the push to do some testing of your own but in the end it just boils down to an old, but very wise quote…

“Cut your losses and let your profits run”

(see details of this move posted in Apr 2010 by a former MIGBANK Researcher here Euro Crisis)
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FOREX TRADING AS AN INVESTMENT INSTEAD OF A GAMBLE - forex trading basics in telugu pdf

FOREX TRADING AS AN INVESTMENT INSTEAD OF A GAMBLE ~ forex trading basics in telugu pdf

There are thousands of articles and media reports that equate any type of investing to gambling. When you focus on investing on the Forex or commodities markets there is even more of the inherent prejudice of the mass media to discredit it as an investment and call it gambling. While this is not an accurate depiction of the markets, it may accurately describe many of the people involved in the market. The Forex and Commodities Exchanges are legitimate venues for investors with risk capital. Many of the people that trade in these markets are gamblers rather than investors. 

The impression that currency speculation is actually gambling comes from a lack of understanding about the process. The people choosing to call it gambling have some pretty strong facts on their side however. More individuals lose money in the Forex market than make profits and no system is foolproof. These are simple facts but they cloud the real picture. It is the same amount of money be being lost or gained. Every loss or gain results in the opposite loss or gain on the other side of the equation. This does not mean (as some suggest) that it is impossible to profit over the long term based on the structure of the market. The fact that the majority of the profits are made by an overall minority of the investors, it is clear that there is in fact a skill and strategy involved that can be learned and developed. 

Investing is a Business – Treat it Like One

This is nowhere more important than the Forex. If you base your decisions on a planned and established strategy making a handsome profit it is more than possible over the long term. This requires either a solid understanding of technical and fundamental indicators, or a strict disciplined approach in a price point strategy. The most successful investors while adhering to one method have enough understanding of other methods to become aware when they should not invest at all based on market conditions. 

The key difference in the mentality of investing as a business compared to the gambling mentality of many individual investors is in what the focus is on.
The investor mindset is focused on the ratio of risk to profit potential and conservation of capital. Professional investors are not bothered greatly by losses because the amount of the potential loss is already calculated in advance and deemed an acceptable risk. If every position is 2% of capital risked, than no single loss or even a series of losses will have a dramatic enough effect to cause an emotional turn. By the same token even a large profit is simply a new number to consider, maintaining correct sizing so there is no more or less risk in the next position. 

This basic structured process takes the wild balance fluctuations and emotional highs and lows out of Forex trading, and to be honest may make it seem boring. It is business and work, not entertainment so this is not a negative. While potential profits of 2% and 3% seem very boring and timid consider this. Many people lose money every day trying to make 20% returns, but if you manage 2% or 3% a month than you will be earning 24%- 36% a year on your portfolio and that is exciting to anybody.

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