The 10,000-Trade Rule

Gladwell argued that practice was far more important than talent for a person’s success and that to achieve mastery in any field it was necessary to practice the skill for at least 10,000 hours.

The 10,000-hour rule has since been proven to be bunk (sorry — talent and luck really do matter more). But practicing something for 10,000 hours certainly doesn’t hurt, and it does make you at least proficient in your field. So Gladwell’s theory did at least have some validity.

The other day, I realized that I had completed approximately my 10,000th trade since I started in the FX business. So I thought it might be worthwhile to review what I have learned from the experience and to share this wisdom with you.

First and foremost, most people will ask: Do I really need to do 10,000 trades to learn how to day trade? The answer is yes. It’s not that 10,000 trades will magically make you a master of the markets. But after 10,000 trades, you will learn just about every way you can possibly fail, which is a value in and of itself.

The most common mistake – moving your stops.

The most common trading mistake — and one that I still make to this day (though far less frequently) — is moving your stop. The Murphy’s Law of Life and Trading is that no matter how far or how frequently you move your protective stop, the market will always rise or fall just to the point of taking you out and will then snap back in your direction.

You may escape the market’s bite once or twice or even three times. But in the end, the stop will always get you and usually at the worst possible moment and at the greatest possible cost to your equity.

That’s why if you are day trading and losing, it is always better to stop out and get back in with bigger size than to continue adding to your position in the hope of a turnaround. Stopping and starting may not feel good and may not even turn out to be profitable — but trust me, it will be far less un-profitable than adding to a trade.

After years and years of trading, I have narrowed my stop down to just 25 pips. If you stick to that level, it’s amazing how you can survive in the market long enough to maybe even become profitable.

Traders make another major mistake when they start out way too large and get even larger if they add to the position. My starting trade is never more than one-times my equity, and I never scale up to more than four-times equity at any given time. That means my biggest loss should never be more than 1% (25 pips X 4). Again, you can do a lot of foolish trades at 1% max and still live to fight another day.

Finally, losing traders chase the market like a dog. You must let the market come to you. For a winning trader, It’s more important to maintain proper market posture than to attempt to forecast the market’s direction.

I am old enough to have survived the 1987 stock market crash. What almost no one remembers about that day is that it was the single biggest stock market rally in the history of S&P. A little after noon that day, stocks stabilized and started to stage one the most vicious momentum rallies ever.

If you had gotten long at that time and let it run until about 2 p.m. New York time, the gain was more than 10%. In day-trading, it’s not important if you are long or short. The only thing that really matters is the quality of your entries. The better your entry, the better your trade.

Which is why after 10,000 trades in the market, I still spend all of my time researching and trying to improve my entries. It’s not glamorous, it’s not thrilling but it’s what works. And every thousand new trades I definitely get better.

Happy trading,

Boris

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The Money and Markets team