## Being Close Minded and Being Cautious, Two Very Different Things

I consider myself an investor in the sense that I do not take decisions regarding my trading very lightly, every time I decide to run a system on one of my personal or managed accounts I always take as many steps as possible to ensure that capital preservation and low risk will be the highest priorities. Of course, many people – especially those newer to the scene – view this as being “close minded” and having problems dealing and implementing new ideas. On today’s post I want to write a few paragraphs about the difference between being close minded (which refers to being unable to embrace new ideas) and being cautious (taking care of one’s capital and risk taking levels). In the end I hope that you will see how both of these things are completely different and how one does not necessarily imply the other.

So why do people view conservative traders as being “close minded” ? The answer to this questions is actually not that complex and goes into the way in which new and experienced traders view trading and how they differ in the way in which they approach their trading accounts and the way in which they trade this money. For new traders there seems to be an urge to gain high returns with small amounts of money, something which is very understandable and aligns perfectly with all the hype and risk taking that can go on with small amounts of money. Since the amounts of money risked by new traders are usually small the sense that the potential reward is much higher than the potential risk is very important.

You will see that new traders will be very easily convinced to use any trading tactic that promises large returns, merely due to the fact that the balance of possible benefit and loss is heavily tilted towards the rewarding side. New traders are therefore much more likely to try new trading tactics which don’t have proved long term profitability in order to face the potential and very tempting reward. On the other hand, experienced traders are very reluctant to trade anything that has yet not shown long term profitability because the stakes are – in most cases – much higher (in absolute money terms).

Experienced traders also have an advantage here regarding the number of systems they have seen in the past and which ones they have seen succeed and fail as the years have gone by. Most professional traders will know that certain systems are – by experience – very bad ideas while others are more sound approaches. The answer of new traders to this argument is generally that the fact that no one has done it doesn’t mean it cannot be done, which is a valid, yet dangerous argument.

Professional traders are more focused in the long term ability of their systems to succeed while new traders are more comfortable in using new systems which have a very high probability of failing. In the end it is not that professional traders are unable to embrace new ideas, it is simply that they require these ideas to be put to the test rigorously since every time they have been used they have shown to fail in the long term. This is analogous to the people who attempt to build perpetual motions machines, which would violate the laws of thermodynamics. Since these laws are based on vast amounts of observational data for which an exception to the rules has never been found, there must be an overwhelming and convincing amount of experimental evidence to disprove any of them. In the end the people who do not attempt to build perpetual motion machines are not “close minded” they just know that the laws of thermodynamics work on all the observations of our universe that have been made and therefore such an endeavor is most likely a waste of time.

In trading things work the same way. Conservative traders do not develop martingales and scalpers with very bad risk to reward ratios because they know that these systems have always failed in the long term, even if there is no absolute proof saying that a very profitable scalper or martingale cannot be made, professionals know that this is most likely a complete waste of time since from a very large amount of attempts, none have succeeded. It is not that conservative traders are “close minded” since they will eagerly test new ideas which have not proved to fail so dramatically during the past, it is merely that they are being careful and applying the experience most traders have had in order to trade only systems that can reward them in the long term.

So in the end it is not a matter of traders being “close minded” when they do not embrace ideas that seem to put extreme amounts of risk on equity, it is merely that these same ideas have already shown to fail time and time again in the past. It is therefore not a matter of being “close minded” but a matter of being cautious aiming to put your money in the hands of trading systems that are likely going to work for you in the long term. Where would you rather put your money, in a new company that promises you 100% returns each month (knowing that all of these companies in the past have turned out to be ponzies) or into an investment fund that has given its customers an average 15% compounded yearly profit during the past twenty years ? The same applies to choosing trading systems for your forex account.

You can leave a response, or trackback from your own site.

### 2 Responses to “Being Close Minded and Being Cautious, Two Very Different Things”

How about thinking of probability ?
For example if i have dangerous system that give 25% return per winning, and backtest said win:loose ratio is more than 4:1, is this acceptable ?

I am agree about small or big money aspect. It is easier to accept loosing 100% of $100 compare to 20% of$10,000 and on the other hand, winning 100% of $100 is small if compare to winning 20% of$10,000.

I don’t like scammer HYIP, but from mathematic view: on 100% monthly return, i just need 1 month to enter safety zone.. am i wrong with this point of view ?

Regards,