Share:

Imagine you open a little donut shot. You are a creative person. You experiment with funky flavors adding savoriness and spice to contrast against the sweet. People love them. You are busy from morning ‘till night and crowds build outside your doors from 6am every morning.

After a few months you start to think - Hey I could do this on the other side of town as well! So you go to the bank and take out a loan. Since you pretty much know you’ll sell 1,000 donuts each day you feel confident that you can meet the monthly nut on the loan and still make a positive spread on the whole operation. You do this over and over and over again until you’ve become the Krispy Kreme King of Kalamazoo running 25 stores all of them financed by the bank but all of them earning a positive spread making you profits every day..

This is the American dream, but try to copy it to the world of trading and will almost certainly turn into your worst nightmare.

Trading is unlike any other business in the world. Unless you are a market maker or an HFT fund the profit function in trading is never linear. If you have a trading system that is working well on the S&P and you think - Hey I’ll just lever up my account and will start  trading it on EURUSD and Oil and Gold and Nas - you will almost certainly run into the risk of ruin. That's because there is no homogeneity in trading like there is in the rest  of life. You can’t assume like you do with donuts that just because something works in one neighborhood it will work in another.

Now of course I am simplifying and exaggerating. Real life has plenty of heterogeneity. You’ll never get a Westerner to eat congee as their regular breakfast meal. But the heterogeneity in real life is much less pronounced than it is in trading. Otherwise sushi wouldn’t be the world’s most popular food from Dubai to Dubuque. In trading the variance is just much greater than in real life. The chance of tomorrow being pretty much like  yesterday is much lower in trading than it is in the donut business and we must all be vigilant not to fall victim to  “premature extrapolation” a term I heard the other day on @kevinmuir Market Huddle podcast that I absolutely love.

This is what makes trading so challenging and so maddening at the same time. The formulas are universal and you must always appreciate the fact that what worked yesterday may not work tomorrow.

One of the great traders of the 1980’s - Marty Schwartz, the author of PitBull - had a great rule that I think is worth following. Marty always preached that you were not allowed to increase size until you doubled the account. That could be a maddening slow constraint especially if you are trading well and are eager to open up more “donut stores” every day, but trust me that rule will save you from a lot of blown accounts because it embeds a natural discipline to your trading that requires a very high increase in  performance before allowing you to assume more risk.

Another idea that I find really useful for traders who trade systematically is to give each system a separate trading account. This has nothing to do with money management - after all you can trade multiple systems in one account if you size them properly. Rather this is a pure psychological hack that can also help you avert the risk of ruin because of one simple fact. If one system starts to go bad in your account you will always try to size up the other systems in order to make up the P/L. Trust me no matter how much you tell yourself you won’t do it you absolutely will if your trading capital isn’t physically segregated.

So yeah trading aint donuts. You can’t use the lessons of real life and apply them to the markets.  This isn’t a business where you can control the output of widgets by a few  simple turns of the knob on supply and demand function because supply and demand in trading are far more ephemeral than they are in real life. One moment the demand is there, the next it’s totally gone. Donuts are forever. Trading systems are not.

Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

Follow us on Telegram

Stay updated of all the news

Join Telegram

Editors’ Picks

EUR/USD hovers around 1.0800 ahead of NFP

EUR/USD hovers around 1.0800 ahead of NFP

EUR/USD recovered from three-week lows and peaked at 1.0817. It is hovering around the 1.800 area. The pair rose on Thursday supported by a weaker US Dollar amid risk appetite. The focus turns to Friday’s NFP report.

EUR/USD News

GBP/USD clings to small daily gains, stays below 1.2600

GBP/USD clings to small daily gains, stays below 1.2600

GBP/USD staged a rebound toward 1.2600 after touching a two-week low below 1.2550 earlier in the day. The US Dollar struggles to find demand on Thursday amid growing signs of looser conditions in the US labor market ahead of Friday's jobs report.

GBP/USD News

USD/JPY remains volatile below 144.00 after Japan's GDP miss

USD/JPY remains volatile below 144.00 after Japan's GDP miss

USD/JPY is moving back and forth while below 144.00 in Friday's Asian trading. The pair recovered ground after Japan's Q3 GDP missed estimates. However, the Yen holds the upper hand against the US Dollar on hints of BoJ's policy pivot. US NFP awaited. 

USD/JPY News

Follow us on Telegram

Stay updated of all the news

Join Telegram

Editors’ Picks

EUR/USD hovers around 1.0800 ahead of NFP

EUR/USD hovers around 1.0800 ahead of NFP

EUR/USD recovered from three-week lows and peaked at 1.0817. It is hovering around the 1.800 area. The pair rose on Thursday supported by a weaker US Dollar amid risk appetite. The focus turns to Friday’s NFP report.

EUR/USD News

USD/JPY remains volatile below 144.00 after Japan's GDP miss

USD/JPY remains volatile below 144.00 after Japan's GDP miss

USD/JPY is moving back and forth while below 144.00 in Friday's Asian trading. The pair recovered ground after Japan's Q3 GDP missed estimates. However, the Yen holds the upper hand against the US Dollar on hints of BoJ's policy pivot. US NFP awaited. 

USD/JPY News

Gold eyes acceptance above $2,050 on dismal US Nonfarm Payrolls data Premium

Gold eyes acceptance above $2,050 on dismal US Nonfarm Payrolls data

Gold set new all-time highs this week at $2,144.48 in a hard bid rally early Monday, and the XAU/USD has spent the rest of the week in thin trading above $2,000 after paring away Monday’s opening gains. US NFP data is in focus for a fresh directional impetus. 

Gold News

Bitcoin price could retrace to $42,000 if US Nonfarm Payroll comes in at 180,000

Bitcoin price could retrace to $42,000 if US Nonfarm Payroll comes in at 180,000

Bitcoin price just like other assets, is highly impacted by the macro-financial developments. This includes the Nonfarm Payrolls (NFP) report released by the Bureau of Labor Statistics (BLS) of the United States. This time around, the NFP data is expected to cause a dip in the value of BTC.

Read more

US NFP Forecast: Nonfarm Payrolls gains expected to accelerate slightly in November

US NFP Forecast: Nonfarm Payrolls gains expected to accelerate slightly in November

The high-impact Nonfarm Payrolls (NFP) data from the United States (US) will be published by the Bureau of Labor Statistics (BLS) on Friday at 13:30 GMT.

Read more

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology