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Patience: The Importance of Sitting Tight

Last updated 7/6/2012 10:45 PM EST (GMT -5) 0 Comments - Add your comment

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Work ethic is important.  It seems that most cultures value a strong work ethic, and idle hands only create negative outcomes.  For almost every job, this is true.  The best salespeople are the ones that typically make the most calls and have the most appointments.  The best athletes train the hardest and never rest during the game.  This type of work ethic depends on constant activity; never sitting still.  However, while work ethic is important in trading, it doesn't work the same as making hundreds of sales calls.

All of the best traders plan ahead and are prepared.  They have a detailed trading plan, plan their trades out, and have their finger on the pulse of their markets.  This preparation takes time and effort.  Since the currency markets are open 24 hours a day, I personally sleep with my laptop next to my head.  If an important price alarm goes off, my REM cycles are going to have to take a backseat to my trading.  However, that doesn't mean that traders are always trading.  Some new traders apply the wrong "work ethic" to trading.  They think they must constantly be entering, exiting, adjusting, etc.  It is important to be prepared, but sometimes it is best to patiently sit tight and do nothing in the market.  As Murphy said in The Boondock Saints, "We're sorta like 7-11.  We're not always doing business, but we're always open."

So why is patience so important?  Let's go through some examples of why sometimes it is best to sit and tight and do nothing.  Let's say a trader currently has no positions and is on a winning streak.  That trader might be feeling so good about themselves that they take a trade that doesn't fit their criteria.  That rushed trade almost always loses and can even lead to a panicked second trade that doesn't follow the trader's rules.  Trading is hard enough as it is without giving away these likely losses.  Same goes for a trader on a losing streak.  They might get so desperate to regain capital that they enter any trade just hoping to get lucky.  Of course, this rarely works out.  A "streak" is the most likely time for a trader to ignore their rules and take an ill advised trade.  This is the time when it becomes most important to patiently wait for a new trade to develop.  Even if no trades emerge for a couple of days, it is better to sit tight and wait for a setup that actually conforms to one's rules.

Let's say our imaginary trader has already entered a position.  This is where it gets really tempting to over manage.  Almost every other job requires action to succeed, so the trader may be tempted to prematurely move stops or completely exit the trade early.  However, in trading it is often inaction that is the best step to take.  For example, I always plan out my entry, stop, and profit target before I ever enter a trade.  Then I enter the trade, and I wait for it to work.  There is no more action to take.  This is important because it is much easier to be objective about the market before the position has entered.  Once a position enters, emotions come into play, and it is very difficult to be objective.

One of the most common mistakes traders make is moving their stop too frequently.  However, instead of locking in profits, usually frequently moving stops closer will simply increase the likelihood of being stopped out by a whipsaw at the least favorable price to exit.  Furthermore, it is very difficult to constantly move the stop closer in a consistent manner, which generates an added variable.  A consistent methodology is the only hope for consistent results, and an extra variable only makes that more difficult.  On top of that, let's say a trader moves their stop early because they are afraid of taking a loss.  The trade promptly hits the stop only to rally directly to the original profit target.  If the trader simply let the plan play out, they would have had an easy win.  But now their mindset is hurt because they moved their stop too early.  Now uncertainty creeps in and the trader likely has temporarily lost their confidence.  Even if a trader could consistently win more by constantly moving their stop, I think it is a bad idea because the effect those types of losses have on one's mindset. 

Exiting trades early has a similar effect.  Why would anyone enter a trade just before it hit the stop?  The risk of letting the trade continue is very low if the trade has almost hit the stop.  But if the trade rallies back to the profit target, the reward could be substantial.  Again, it boils down to following the plan and patiently letting the trade work.    If a trader just let's the preplanned trade work, suddenly the drama created by each tick up or down will go away.  The trade will either win or lose based on the predetermined entry, stop, and profit target.  The stress reduction alone makes this strategy worth it.

Trading requires a strong work ethic, but that doesn't mean traders must constantly be adjusting something in the market.  Rather, it means that traders must constantly be prepared to take advantage of the opportunities they have in the market.  If no opportunity is there that fits the plan, simply wait for the next trade that does.  When that trade does appear, act decisively and let the trade work.  By exercising patience, taking trades "just to get in the market" will become a thing of the past and it will become easy to sit tight and let the proper trades work.

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About The Author

Bradley Gareiss has been a technical analyst with GFT since 2008. Brad is known for his ability to identify high probability trading opportunities through geometric pattern recognition. He also focuses on trading psychology and risk management, and has written many extensive articles on these subjects.