There is an article in this week's news section which is entitled How to Combat Over Trading. It's an issue that I tackle often in this column because it is probably the greatest source of pain for most traders I know. K and I are often amazed by emails we get from subs who tell us that they have blown up even after BKT has had a huge run of winning trades. The reason clearly is that they over trading their account. Now this particular article tries to fix the problem by talking about the need to "visualize you plan", "talk out your trades" and "keep a running diary". While all those sentiments are noble I am here to tell you that they are all pure bunk.
Let's face it, as currency traders we are in the markets because we love to trade. We don't pore over balance sheets looking for misalignment in cashflow calculations like the credit gnomes in the bond market. Nor do we spend endless hours researching business plans like stock investors. FX is the purest speculative market there is driven first and foremost by sentiment. What is the value of a currency anyway? Some will argue that the dollar isn't worth the paper its printed on. But we don't care. There are no bear markets in FX. We are the ultimate "absolute return" asset class.
We are in the game because we want to PLAY. We want to match wits with the smartest people in the world and win. Trading is also very much like violin playing. If you don't practice every day - you lose your touch. But just as violin players miss a few notes from time to time, so do we miss a few trades. The key difference of course is that the violin does not crumble into a thousand little pieces after each bad performance, but our trading account can be decimated by just one bad trade.
So how do we reconcile our desire to play with our need remain disciplined and preserve capital? Simple. We separate our money. I have multiple accounts just for that reason. For example we trade the BKT account only twice or three times a week and not surprisingly it has the best performance by far. The reason is of course because we are extremely disciplined and take only the trades that are consistent with our trading model. Next, I have an account where trade K's calendar calls both proactively and reactively. Those of you who have been with me in live chat are familiar with some of those trades. Finally I have an account that I just trade - no real rules, lots of experimentation and needless to say a lot of stupid mistakes.
The BKT account is serious money, the procactive/reactive account is semi-serious money and the free trade account is just stupid money. The key to winning in FX is not to curtail the over trading. It is not only futile but arrogant to think that we can conquer our worst impulses. The key is not to over trade your serious money. Ironically enough the more freedom you give yourself to experiment in your stupid account, the more likely you are to stick to your trading plan in your primary account. Give it a try and let me know if it helps.