Don't Trade Every Day!

TradingThere are occasionally times when it is very difficult to make any money in the market. Don’t be fooled by the image of the great trader pulling 100 pips out of the market every day, day in day out, rain or shine. Really great traders know that staying out of choppy or dull markets is an excellent way to improve their overall profitability.

It feels as if now is one of those times. Scanning my charts, action in almost everything looks weak, dull and choppy. Yes, there is a bearish long-term trend in EUR/USD, and the U.S. stock market is falling and making new lows (although it tends to be dangerous to short the S&P 500 Index), but generally it is not a “trader’s market”. One of the ways I know that, which is easy to do for yourself, is to just check whether there are indices, commodities, or currency pairs which are making new 20-day high or low closes. If not, then as a rule, that is a good market to stay away from.

Try to remember that your profitability as a trader is a result of all the trades you don’t take as well as all the trades you do take. Having a position in the market always costs. Firstly, there is the spread and/or commission you pay to enter and exit a trade. Secondly, most brokers will charge a small fee every time you hold a trade open over 5pm New York time. Occasionally you get a small credit, but overall it is usually a fee, and it can be even higher than 1 pip per day. This can make long-term trend trading very difficult, and typically not worthwhile if the fee is more than approximately 0.5 pips per day (the fees apply change all the time and vary between brokers). Finally, consider the fact that about 80% of your profits are usually made by less than 20% of your trades.

What these factors add up to is that it is only worth having a position in the market when things look good, not when they look just barely in your favor. Don’t trade every day: trade when there is a good reason to trade and sit on the sidelines the rest of the time. If you do, in the end when you count your overall profit and loss, you will be glad that you did.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment. Learn more from Adam in his free lessons at FX Academy.