How to Protect Your Capital by Staying Flat

“If most traders would learn to sit on thir hands 50% of the time, they would make a lot more money” – Bill Lipschutz

If there’s one dangerous habit that I frequently uncover during coaching sessions, it’s the overtrading syndrome. In particular, I have assisted one student that had traded himself into a hole and in this process had lost confidence in himself & in his capacity to trade well. And yet, this same trader had already been fairly consistent for over one year.

What happened? Simple: he had not learned when it was more adequate to sit on his hands. Let’s shine some light on this particular subject.

Trade When You Have an Edge

Whatever approach you’re using to trade in the markets, there will always come a time when that approach will actually not give you an edge. For example: if you require the market to be in a trend in order to have an edge, you are required to stay flat when there are no trends to be seen.

That’s why most trading systems have some kind of a market type filter that defines when to actually follow a signal or not. Depending on the strategy you adopt, you might want to consider filters such as:

  • Check if there’s an evident uptrend or downtrend
  • Check if Volatility is increasing or decreasing
  • Trade only between certain hours
  • Trade only on certain days

Without filters that help you stack the odds more firmly in your corner, it’s very hard to make money in the long run. Just like my coaching student,  whatever money you’ve made when the market was in sync with your method, you’ll most likely give most of it back if you stubbornly keep on trading when the market is not demonstrating the behavioural characteristics required.

It comes back to really understanding your edge: what does your trading system do? What conditions are required for it to work well? Avoid trading when it’s not there.

One Benefit of Diversification

Knowing when not to trade is actually an edge in itself. If you keep on trading all the time, you will  lose money during these periods where you should not be trading at all. It may sound counterintuitive but avoiding a loss is, at the end of the day, as good as having a winning trade. The only difference is that it just doesn’t feel that way. It feels like you didn’t “do any work” and “might have missed some opportunities lying elsewhere”.

If you take a trade and make 2R, it feels like you “did something”: you see that trade on your account statement. Instead,if you stay flat, you might not even notice that you just saved yourself from multiple 1R losses, just that it doesn’t show up in your account statement.

One way to partially overcome the issue of low activity is to “cast a wide net”. I actively encourage my students (once they have demonstrated fluency with the model) to diversify their bets across multple asset classes. Even a simple tool like Finviz, that shows various asset classes in a simple way, allows traders to run the ruler over multiple markets quickly, and uncover more quality situations than just sticking to Forex for example.


Over to You

To use an analogy from the corporate world: what is the ultimate goal of the Purchasing Office within large businesses? The main goal is to cut costs, evaluate processes and save money. Traders should learn to apply the same reasoning to their trading.

Trade less, filter quality trades, sit on hands when nothing is evident.

Good Luck!

About the Author

Justin Paolini is a Forex trader and member of the team at, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.

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