How to Keep Your Currency Trading Simple — Put Mr. E on Ice!

I don’t know about you, but investors often get tangled in trading ruts. And most of the time it’s all mental.

“The market is an easy game to play. It is just that we are hell-bent upon making it so complicated. That’s what makes it so difficult for us to win,” Edward Toppel writes, in his gem of a book, Zen in the Markets.

Oscillators, retracements, waves, time counts, trend lines, blah, blah, blah … into infinitum at times, making it harder than it is. Maybe it is just as simple as Toppel says.

Here are the rules; we all know them:

• Buy low, sell high.
• Let profits run, cut losses quickly.
• Add to a winning position, not a loser.
• Go with the trend.

Bingo! Unequivocal! Easy to understand!

The problem, however, is when you break the rules on a consistent basis.

Instead of going with the trend, do you look to make a short-term trade against the trend because you think you know more than the market? Often, investors believe they can tell when a profit should be taken and, thus, cut their winners short. How about you?

It is important that you describe your mistakes and weaknesses in the “I” term. Because in the end, even though currencies are a zero-sum game, you are in competition with yourself here.

The market does not personalize. Dealers don’t personalize if they “gun a stop” when trading is thin; after all, they just want to exit a bad trade, or position for a good one, as quickly as possible.

No, it is part-and-parcel to the process — it is the market. Therefore …

There Is Only One Person to Blame

Toppel cuts to the chase. Once we understand we are in competition with ourselves, the culprit is easy to spot. He refers to it as the “Big E,” for ego.

Because the Big E gets in the way and thinks it’s right, it robs us of the ability to do the right thing.

Trading psychology guru Mark Douglas put it this way, “You don’t have to know what’s going to happen in order to make money in the market.”

Now, that may sound odd to you. But the reality is that currency trading is nothing more than a probability bet. No more and no less.

If you can think of it in those terms, I think it helps remove the Big E from the equation. For as Douglas says, you don’t take an ego hit when you pick heads and then tails comes up on a coin flip. You know it is all about probabilities.

Currency trading should be considered the same. But, that is easier said than done; I know that too well.

Big E is wedged between how you should and how you do think of trading. “Really, ego has a life of its own within all of us. Its hold is more powerful than a plutonium bomb,” Toppel writes.

Toppel talks about how you can change Big E’s hold. He writes about the idea of “egoless sight” — seeing things for what they are and not for what your ego would like them to be.

How often have you nailed all the economic stuff in advance, predicted all the news, reports, etc. and still lost money on the trade?

If the Market Were Logical,
We’d All Be Winners!

This why I try to apply standard Aristotelian logic …

Come up with reasons and rationales; then draw a conclusion. But you should keep in mind that your conclusion represents an alternative scenario.

Always try to build an alternative competing scenario with as much plausibility as possible. And then hold both thoughts in your head at the same time.

Granted, one will be favored over the other. But, do your best not to fall in love with either side of your story.

When you do fall in love with your story, it proves Big E is once again taking control.

Let’s look at some of the ideas many investors have fallen in love with:

• Gold will rise to $2,000. Gold will fall to $300.
• Oil will rise to $200. Oil will fall to $30.
• The Dollar Index will fall to 40. The Dollar Index will rise to 125.

These were potential scenarios based on logic. But …

“If the market were logical, we’d all be winners,” Toppel quips. “So let’s give up applying a system of expected outcomes to that phenomenon that has eluded the best minds sifting through a multitude of data for their analyses.”

Should you give it all up and just throw darts? Maybe, if that works for you. It can be easier and stress-free, assuming no one wanders in front of your dartboard.

But the reality is, the best you can do is “stay in the now moment.” You have to define what a “now moment” is. It may be five minutes or it may be a week.

In one of the interviews in Market Wizards by Jack Schwager, a trader said that every day he wakes up, he considers any positions he has on as new positions. All new risk/reward criteria applies because it IS a new day — it is the now moment.

“The noise is your ego’s voice. Stop listening and turn to the only expert worth following — the market. Don’t make it difficult and obscure this simple truth. Forget your voice, and listen to the clear message and direct call given off by the market. Just feel, follow, and put full faith in your ability to blend with the leader, not attempt to lead the market,” adds Toppel.

Again, easier said than done; I realize. But there are ways to help you achieve this:

• Don’t trade against the trend.
• Whatever the trend is, you must assume it will continue.
• You will know when it reverses because prices will change.

Granted, the shorter-term your trading time frame, the more difficult this simple but powerful way to think becomes.

But if you avoid trying to predict every twist and turn, you can keep your currency trading simple.

Best wishes,

Jack