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Why Defence Wins in Forex Trading



Why do people trade? For most, their primary motivation is to make money. Sure, there are secondary reasons however they all stem from the undeniable urge to make money.  

I will often ask this question at the beginning of presentations … who trades to make money? Interestingly, most people are shy or reluctant to admit that their primary motivation is to make money.  Almost as if it is something to be ashamed of.  

Let me introduce you to what I think is the great irony in trading. The primary reason why people trade, is to make money. Yet, it is the money that often causes people to make all the mistakes and not make money, because they focus too much on it.

For example, the most important thing you can when trading is to cut your losses, yet deep down people don’t want to because it appears to go against the primary reason why you are trading — to make money. By cutting the loss, you are confirming and locking in that loss while also denying yourself the opportunity to make back the money in the trade that you may have lost.

There are numerous exercises that I and many others have shown to traders over many years which proves our focus as well as our instincts are very much on making money.  This causes tremendous conflict for many traders when they are told that protecting your money is much more important than making it.  

As Will Rogers said, “return on capital is not as important as return of capital”.  

Whilst I concede the idea of making money is important, it is not as important as protecting the money that you have to trade with.  I think the fund manager Paul Tudor Jones says it best when he said, “Don’t focus on making money, focus on protecting what you have.”

Trading seems to take lessons from everywhere in life, especially in sports.  

Stephen Waugh is a former Australian cricketer and was the captain of the Australian Test Cricket Team from 1999 to 2004.  He is credited with a quote that can be applied to trading. He said the best advice he was ever given about batting was to “Not get out!”  That was it … in other words, how can you score runs if you have been dismissed.  

So, whilst making runs is very important, there was something more important – protecting his wicket.  If he protected his wicket, he was going to eventually make runs.

Most of us will admit to ourselves that our primary aim is to make money - yes, it is important, it is not as important as looking after the money you have to trade with.

No more money - no more trading! Simple ...

This is hard to do because when we start trading, all we can think about is all of the money we are going to make. Eventually, reality sets in and we realise that trading successfully may be a little more difficult than we first realised.

How can we change our mindset and approach trading from a different angle to ensure we do everything we can to protect our capital? How can we become more defensive-minded and conservative with regard to our capital? 

First, if you had never traded before and was about to start and called upon my services to coach you.  I would talk about your setting some goals for your trading. For example, what do you want to achieve in the first three, six months and one year?

The first thing I would say to you is that after 12 months of trading, I want you to still have every dollar you started with.  That is it. I don’t want you to have made X percent on your capital, just have all the money you started with.  

I can say with confidence that the vast majority of people starting out won’t achieve this goal.  

The funny thing is that this goal doesn’t sit well or resonate with many as their primary motivation is to make money.  In fact, it is probably the last thing they expect me to set as a goal for them, as all they can think about is all of the money they are going to make.  

This goal serves two purposes.  

  • First, it makes you realise that this endeavour will take time.  It will take considerable time for you to develop the necessary skills and attributes to be a consistently profitable trader.
  • Second, it hopefully helps you adopt a more defensive posture with your trading capital.  It helps you to focus less on making money and more on keeping it safe.  

Let’s think of this from a sporting perspective.

Sport at the highest levels provides interesting parallels with trading.  It captures all human emotions and often the stakes can be high and the pressures enormous.  A couple of sports I play regularly and love are basketball and golf. The object of basketball is to outscore one’s opponents by throwing the ball through the opponents’ basket from above while preventing the opponents from doing so on their own.  Notice the object is two-fold. 

Having followed basketball around the world for many years, I know that the very best teams we have seen have all been considered outstanding defensive teams. Furthermore, their great success was often attributed to this reason, and not to their ability to outscore their opponents.

I am also an avid watcher of golf at the highest levels and often observe some players taking risks and others being more conservative.  Course management (risk management) is a critical part of what golfers do. They must manage their risk around the course and constantly assess reward (scoring low) with risk.  My observation has been that often, a more conservative approach to course management has yielded greater benefit.  

At the highest levels of sport, a defensive mindset and posture can lead to outstanding success and achievement.  

Accepting that protecting our trading capital is the most important aim in trading, adopting a defensive posture can greatly assist in achieving this aim. What specifically can we do to ensure we protect our capital? Two things stand out for me.

First, you must set stop losses for all your trades and then more importantly execute them ruthlessly and without hesitation should they be triggered. Learning to take losses is the most important thing you can do to make money. If you take the loss defensively, you are eliminating the possibility of further loss in that trade, thereby taking the right steps to protecting your capital.  Winning traders are patient with profitable trades, but ridiculously impatient with losers.

Second, you must size your position effectively. Don’t commit a large percentage of your trading capital into one trade regardless of how confident you are of the outcome. Break your capital into small pieces and commit money into trades carefully once all your entry conditions have been considered.

There is no doubt that a conservative and defensive mindset is the modus operandi of many highly successful people and teams. Traders should adopt a similar mindset and reap the rewards accordingly.

Next time you think about your trading, rather than ‘attack, attack, attack’, I want you to think about ‘defend, defend, defend’.  

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