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The Art of Avoiding Losses: Forex Trading Resembles Insurance Business

The Art of Avoiding Losses has been a key to success for insurance companies and can be applied in forex trading. Often, forex traders perceive trading outcomes to be either winning or losing. However, there's actually a third option: exiting a trading position without experiencing any loss (break even). The concept of "The Art of Avoiding Losses" has proven successful in the insurance industry and can be adapted into the trading world.

Though Not Winning, Doesn't Have to Result in Loss

According to Boris Schlossberg, "The Art of Avoiding Losses" might be one of the most overlooked skills in day trading. However, it's a fundamental strategy in the insurance business and gambling industry. Insurance companies often encourage people to buy policies, but when there's a claim, they strive hard to avoid paying it. Similarly, casinos in Las Vegas prevent players from counting cards in Blackjack. They employ every method to reduce the chances of customers winning. While seeming cunning, this teaches us some crucial principles in forex trading, namely how to avoid losses even when not winning.

50% Break Even

There are two approaches to making profits from forex trading. The first approach is the "low frequency, high profit" model, where though winning is rare, the profits gained when winning are significant enough to offset losses. The second approach is the "high frequency, high probability" model, where losses are infrequent, thus preserving the initial capital while still generating profit. The latter model is less popular because it's deemed to require a large capital. One example of the use of the second model is by investment fund management companies employing high-frequency trading robots. Despite frequent criticisms, they seldom incur losses because their primary focus is risk reduction. As a result, they often exit trading positions without losses (break even) in around 50% of their total trades.

The Art of Avoiding Losses

For those accustomed to day trading, be it in forex, stocks, indices, or other assets, this concept of "The Art of Avoiding Losses" akin to the insurance business needs to be studied. Rather than solely chasing profits, which can increase the risk of losses, "The Art of Avoiding Losses" can be the key to success in long-term trading. Additionally, it's crucial not to solely rely on indicators for profit generation, as trading without indicators can also be successful. However, equally important is how we set Stop Loss and Trailing Stop, and apply discipline in Risk Management to minimize losses.

By implementing this concept of "The Art of Avoiding Losses," forex traders can enhance their chances of success and reduce the risk of losses in their trading activities.


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