The Great Paradox of Trading

The reason why it can seem so hard to make money as a trader is best summed up by the following paradoxical statement by Ray Dalio in the book Hedge Fund Market Wizards:

In trading, you have to be both defensive and aggressive at the same time. If you are not aggressive you will not make money, and if you are not defensive you will not keep money.

It is trying to strike a balance between being aggressive enough to make money while being defensive enough to keep the money you’ve made that is the most basic problem a trader faces in the market. Today’s lesson will give you some tips on how to keep the two in balance so that you can not only improve your chances of making money in the market but, more importantly, not give that money back to the market.

The Great Paradox of Trading

How to be an aggressive trader but not too aggressive

As a trader, you face constant temptations to trade too much and to risk more than you’re comfortable with, all because there’s an idea in the back of your mind that you could “get rich quick.” It’s very hard to ignore such an enticing idea due to all the warm and fuzzy feelings it brings you and the images of being “rich” that it drums up in your mind.

In other words, it’s extremely easy to be too aggressive in the market. However, as you may well know by now, being too aggressive is a quick route to losing money and possibly blowing out your trading account. But you do need to be aggressive enough if you want to make money trading, so how do you find that middle ground between not being too aggressive and not being aggressive enough?

There’s no one answer that will easily solve this problem for you; rather, it’s a combination of realizations and abilities that you need to acquire and implement. Here’s a quick list of these realizations and abilities to help you find that aggression “sweet spot”:

Realize that you need to pick and choose your trade entries carefully. If you are not picky with your trade entries, you’ll end up over-trading, i.e., being too aggressive, and you’ll lose money as a result. You must first understand exactly what you’re looking for in the market (your trading strategy), and then commit to only trading when that strategy gives you a signal.

Realize that you cannot hesitate once you identify that your trading strategy is giving you a signal to trade. Hesitation and fear have no place in a successful trader’s mind. You need to know what you’re looking for, as I said above, and then act on the signal without hesitation once it arises. Realize that it’s better to trade less frequently but with a larger lot size when you do trade than to enter many smaller trades per month. Going in relatively “big” on two or three trades per month that exactly meet all your trading plan’s criteria is much more intelligent than constantly being in the market on a bunch of random trades that are basically just gambles.

What you need to do is be aggressive, but infrequently. If you’re too aggressive, either by trading too much (over-trading) or by risking too much, or the worst possible combination, risking too much and over-trading, you will lose money. The key lies in being aggressive only when your trading strategy is clearly telling you to trade. In other words, save your “bullets” for the easy or lucrative targets, and you’ll get the most bang for your buck. When I trade, I go in “big” relative to my account size, but because I only trade maybe 2 to 4 times a month, I am probably still risking less relative to my account size than a smaller trader who enters 20 or 40 trades per month, each with a small dollar risk per trade. All those little trades add up very quickly, and they can’t all be high-probability, good signals. So, the key is to wait patiently for the most obvious signals and then back yourself when they appear, i.e., don’t risk TOO MUCH that you can’t sleep, but don’t go in too light either.

How to be a defensive trader but not too defensive

On the flip side of the coin, you have to be defensive in trading but not too defensive. Traders very often give back their trading profits, usually all of them and more. This can be very frustrating and is a big reason why most people fail to make money over the long run in the market.

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Again, finding the middle ground between being too defensive and not defensive enough is no easy task. But, the following tips should make it easier for you…

Withdraw some of your profits at the end of the month, if you had any. Doing this will not only make sure you can’t give them back to the market, but it will also serve to reinforce the fact that it’s your (real) money and not just numbers on your computer screen. This way, you will start to view profits as something more real, which should make you a bit more defensive about them.

Realize that you’re going to be the most emotional and thus most likely to give back profits right after a trade. Don’t jump right back into the market for no reason after your previous trade closes out. Monitor yourself after a trade, whether it’s a winner or a loser. Make sure you don’t jump back into the market on a “whim” and give back the profits you just made. Profits are not easy to make in the market, so protect them.

Realize that you don’t need to trade every day or even every week. Out of the market is frequently the best and most lucrative position. Strong trends are the easiest time to make money (like we are seeing now in many pairs, e.g., EURUSD, USDJPY, and other majors), but they don’t happen very often. Thus, if there’s not a strong trend underway, odds are you should be flat on the market unless your trading strategy has fired off a very obvious signal, like we discussed above.

“If you don't find a way to make money while you sleep, you will work until you die.”

- Warren Buffett


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  1. Great article, exactly what I needed.

  2. Thanks for finally talking about > The Great Paradox of Trading < Loved it!

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