I will show you why doing nothing is surprisingly powerful in trading.
This simple exercise had a profound impact on how I will try to manage my trades in future. Once I open a trade and I’ve got my stop to break even its time to do nothing, just walk away.
Obviously the vast majority of my trades would have been stopped out at break even however the small percentage that survived were taken by the long term trend and became little profit pulling machines! To give you an idea of the power of doing nothing lets take just one trade from the EURUSD. I entered this short sell trade back in January 2010, it was a simple trend collapse breakout trade risking 35 pips (2% of my account) and I took profit at around 95 pips. Which is not bad right? I risked 1 to get almost 3. (see details of the move at end of this post)
Now lets take a look what happened if I did nothing. The Daily trend took this trade and it never came back to hit my break even stop. In June 2010 it hit a maximum profit of 2410 pips and if it wasn’t closed it would be sitting right now at 1250 pips. Realistically I believe any long term sell positions on the EURUSD would have been closed the moment the head and shoulders pattern played out on the daily chart at the end of June. This would have closed the trade with a profit of about 1800 pips.
Now here is the shocking part!
Remember that the initial risk on this trade was 35 pips, which was equivalent to 2% of the trading account.Closing the trade at 1800 pips would have resulted in a gain of 102.8% on the account! Remember, this is just one trade!
Obviously this doesn’t account for some losses also taken during that period. But to give you an idea of the power of doing nothing lets take the worst possible scenario. Lets say I’m the unluckiest trader alive and after that trade I lost every single trade I took on the EURUSD to date. My account would still be sitting at a gain of 56.8%! Thankfully I’m not the unluckiest trader alive and that trade was just one of many positions that that would have survived the trend fluctuations without being taken out at break even.
Keep in mind this is only on one pair!
Ok, so back to reality… It would be great to trade this way and I am confident that if I just took trades, moved to break even and then did nothing I would be a more profitable trader. Unfortunately I am human and having trades close at a loss or break even for weeks on end would be extremely difficult to cope with. A logical solution would be to split your positions into two. One half would be treated as normal and closed at your usual target resulting in a nice small gain on your account. The second half would be set at break even and left to hopefully catch a ride on the long term trend. Using this method in my example above that one trade would have still netted over 51%!
Hopefully this has given you the push to do some testing of your own but in the end it just boils down to an old, but very wise quote…
“Cut your losses and let your profits run”
(see details of this move posted in Apr 2010 by a former MIGBANK Researcher here Euro Crisis)