Which Trades to Cut and Which to Keep

11/14/2013 9:00 am EST

Focus: FOREX

Trading can be likened to running a business, says Tyler Yell of DailyFX.com; you keep good employees and let go of bad ones quickly.

“Think about it this way: If you had to launch your business in two weeks, what would you cut out?”

― Jason Fried & David Heinemeier Hansson, ReWork

When entering into a work force and meeting different companies you’ll often hear the phrase, “our biggest asset is our employees.” This is often warming to the fearful entrant into the workplace, however there is a flipside to this truth and that is that the wrong employee or worse, group of employees, can easily bring down a business. Understanding this simple fact can have a powerful and beneficial impact on your trading.

Trading is Little Different Than Running a Business
Throughout this article it may be helpful to think of your trading account as your own enterprise with you being the CEO behind a beautiful mahogany desk. As the CEO of your company, it’s your job to make sure that every employee (i.e. open trade) on your payroll is pushing your business forward and that you’re not holding on to any employees that are holding you back.

Why think this way?
Trading is simple but that does not mean it’s easy. One way or another, your long-term success as a trader will depend on your ability to fight the fight for trading survival by quickly cutting trades that are doing more harm than good and keeping trades open that are technically acting right within your analysis.

Business Success is Built on Employee Retention and Termination
As the CEO of your own trading firm, you need to be able to cut the fat that is holding you back from reaching your goals. While companies know that it is expensive to hire, train, analyze, and fire bad employees, they know that is a much cheaper alternative than holding onto said employee and hoping she or he is due for a bounce of good performance. Sadly, this is similar to what many traders do, where they hire a bad employee (trade) and once proven ineffective, they’d rather hold on hoping for a turnaround as opposed to cut the waste and look for another employee that can deliver the results they originally sought.

A Long EUR/USD Employee May Be Ready for a Pink Slip

chart
Presented by FXCM’s Marketscope Charts
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As a forex trader, you’ve probably learned or are still learning that markets are emotional and trading should be logical. From a logical point of view, if trading under the paradigm that this article recommends, then a long EUR/USD position is no longer making business sense as EUR/USD continues to break levels of support on a move lower. This is a simple illustration with a current chart to show you that EUR/USD long is likely not helping further your businesses goal of long-term profitability.

Trading Is a Game Built on Keeping Good Employees & Quickly Letting Go of Bad Ones
Just like its often painful for a company to layoff an employee that had so much promise at an interview, it’s tough for a trader to let go of a trade gone sour. Naturally, when you got into a trade, it likely had a good story behind it that made it easier to open the trade along with some excitement about potential property. But in the end, the p/l doesn’t lie and the only thing worse than a 5% loss is a 10% loss or more.

This article begun with a quote from the book, Rework, that asks a prospective business owner what they would cut if they had to begin their business right away. This question is meant to adjust your mindset so that cutting the unnecessary portions of the business are easier to stomach. Of course, trading is a bit different than heading up a start-up. But like the quote challenges start-ups to ask them self, I encourage you to reflect on the following question:

If you were going to raise outside capital to manage tomorrow or next week and had to show your open trades, which would you be embarrassed to show?

Those are likely the trades holding you back that you should think about firing.

By Tyler Yell, Trading Instructor, DailyFX.com

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