How Standing Aside Can Double Your Money. You may have read or heard that in order to make money back that was lost during a trade means you must make back twice the amount that was lost just to get back to break-even. This can be a tricky little notion that, on the surface, doesn’t seem to make any sense. How in the world does losing, let’s say, $500.00 during any one trading add up to $1000.00 just to get back to break-even? Afterall, it was $500.00 that was lost, not $1000.00, right?

Well, yes…and no.

The money that was made up to the point that one decides to stand aside is the money that was made before any of it was lost. Once a position is entered and a specific amount of money is lost then making that money back again is like having to make twice what was originally already in the account. Why? Because the money that was in the account before some of it was lost was money that had already been made once, before the loss was sustained. Getting back to the break-even point from that point where the account suffered a loss is making the money that had been made once before, once again.

It’s like having to make $1000.00 for a $500.00 loss. The $500.00 that was in the account before suffering the loss is still $500.00, but getting back to where that money was before the loss will require another $500.00 to get there. Standing aside and not taking any position in the market could mean that you actually made $1000.00 for having not lost the $500.00 that would’ve been lost had a trade been taken.

On the other hand, trading with “scared” money doesn’t help to manage one’s losses either. In fact, it can cause more losses if one’s trading is not disciplined enough to know when to place a trade and when to stand aside and wait for a better opportunity. Trading with “scared” money is often the result of attempting to make money back that was lost during earlier trading activity, and can lead one into a downward spiral of seemingly never-ending losses.

Ultimately, the worst case scenario is the demoralizing affect such a series of “scared” money losses can have on the mind, leaving one with little if any confidence to ever trade again.

Finding the middle ground between the fear of loss and the desire to make money is one of the greatest lessons any trader can learn, and will serve all traders in their pursuit of mastering the trade. Preparing for the entry-point in a trade is, in my opinion, one of the most critically important things a trader can do. As with so many other things in life, the beginning of anything will often determine how things unfold in the middle, and how they will often end.

The entry-point (the price at which one decides to start the trade), can mean the difference between a winning and a losing trade. Depending on how experienced one is as a trader, if an entry into a trade is premature – or too early – and one’s stop-loss is based on where one entered the trade, the trader could be stopped out before the trade has gathered any momentum; or, the trader who doesn’t use stop-losses could be placed in the precarious position of having to manage the trade, dealing with issues that require advanced psychological mind-management techniques that are beyond the experience of most novice traders.

Indeed, even though this is where true learning can enter into the scheme of things (especially when there is real money on the line), better it is to “plan the trade and trade the plan” by knowing ahead of time just where the entry-point will be, what the risk/reward ratio is; i.e., how much to risk, and where the profit targets are before ever getting into the trade; otherwise, as a trader, you are only trading by the “seat of your pants,” and more often than not, that seat can get pretty hot.

Since the attempt here is to show how standing aside can also be thought of as taking a position when it comes to trading, perhaps talking about the importance of entries into the trade should be something put off to the side for another time. However, when you think about it, precision timing of entries is just the result of having practiced the patience and discipline of standing aside and waiting until the market shows us when to get in and when to stay out.

Standing Aside is the Art of Trading by Not Trading at All

When asked what his secret was as a jazz musician, Miles Davis once said it was all about the sound he heard in between the notes. Those sounds of silence are the moments when a musician simply stands aside and lets the ‘grooves’ within the sound show him when to play. The trader is like a musician who watches for those times when it’s best to be in the background and just wait until it’s time to trade. Instead of hearing the sound in between the notes, the trader sees the possibilites in between price patterns (grooves); and, like a jazz musician, comes in on the beat upon seeing the best time to enter.

When it comes to standing aside and waiting for the best time to enter the market, here’s another way to think about it: Let’s say a you enter a trade before the candle closed. It could be a candle for any time-frame, but for the sake of discussion let’s say it’s the one hour candle. The previous three one hour candles showed consecutive positive direction, closing at or near their highs. The current candle which you were watching still has 5 more minutes before it closes, but you decide to enter the market with a long position on a market order thinking that it will also close near or at its high. Unbeknownst to you, someone makes an unscheduled announcement inside of the last 5 minutes before the candle closes causing the market to drop 50 pips. Your drawdown is now whatever 50 pips equals for the amount per pip that you are trading.

If you are trading one standard lot and it’s the EUR.USD that you are trading, then you’re down USD $500.00. In order to get back to break-even now you must make back the money that was made before you entered the trade prematurely (before the candle closed). Had you waited until the 1-Hour candle closed before entering the trade, rather than taking a long position perhaps you would’ve taken a short position seeing that the market has reversed. Now, however, you are in a position that requires you to either manage the trade from a defensive standpoint or exit the trade with a loss.

Again, even if you do get back to break-even, you have only made the same money that you already had before having entered the trade. Remember, what was $500.00 before entering the trade now means you must make another $500.00 just to get back to break-even because the $500.00 drawdown is money you had already made, and now you are having to make it again which is like having to make $1000.00 instead of just $500.00. Waiting until the 1-Hour candle closed could have prevented so much unnecessary action needed just to get back to break-even; and, perhaps you would now have made an extra $500.00 that you had to defend when the trade moved against you, meaning you would now have $1000.00, including the $500.00 you preserved by waiting for the candle to close.

Essentially, the bottom line is this:

If you are suffering losses or drawdowns because of premature entries, and you are winning back the money that you lost by getting back to break-even, why not simply stand aside until the market shows you the right time to enter and make what is equivalent to a doubling of the money that you had to make by winning it back when you lost it in the first place?!