This guest blog post is written by Vlad Gubernat. He is a full-time trader based in Romania who shares his thoughts on his blog, JLTrader.
“My philosophy has always been to stay out of the market as much as possible. The less time I am in the market, the less risk I am taking. If dictated by market conditions, I’d rather make X percent having significant market exposure in only three months of the year than make the same amount while being in the market all the time.” – Mark Minervini in Stock Market Wizards by Jack Schwager
I was rereading the book Stock Market Wizards recently and the above quote struck a chord with me. It goes against the general wisdom that the more you are in the market, the lower the time frame you trade, and the more trades you take, the higher your potential profits will be.
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And yet, that quote has a lot of truth in it. That’s because in trading, opportunities are not distributed evenly over time: Sometimes the market offers more opportunity, while at other times it might take weeks or months before it offers tradable setups. This is true not only for stocks – the kind of market Minervini was talking about – but indeed in any other market.
As a consequence, the successful trader will vary his or her involvement in the markets: Sometimes trading actively and in size, and other times refraining from trading altogether. I believe that the ability to reduce or even stop trading activity for certain periods of time is an edge in itself because it helps traders hang on to their gains in times when the market is unsuited to their trading system.
As everyone is different, what this translates to in practice is that some traders, for instance, decrease trading when the market becomes very choppy while others when it starts trending strongly.
I think this dynamic reality of trading is hard to understand for most people for mainly two reasons:
1. It’s against their everyday experience in whatever jobs they hold, where they are paid either by the hour or by the number of tasks/projects completed (which is basically just a variation of the same thing, as the more complex and time intensive the project gets, the better remunerated it is). So there’s no surprise that most people try the same approach (the more, the better) in trading, but usually with exactly the opposite results.
2. Almost everyone with a vested financial interest in trading will encourage, more-or-less openly, overtrading: brokers because they get the spread/commissions, vendors and coaches because they have to appear busy and active to continually attract customers.
One hears a lot from traders, not necessarily beginners, that they have a great passion for trading. And that’s the reason why they trade a lot. I think it’s better to have a passion for successful trading. And sometimes this means engaging in other things (trading related or not) and refraining from marginal trades.