Sports fans are well aware of such concepts as "offence" and "defence", which discuss how teams can attack or defend. In the world of trading, these terms are not really used, but they are equally valid.
This article provides an overview of the key defensive and offensive aspects of trading. It also explains how traders can use these ideas for improving their trading.
Check out this blog post to find out how you can improve both your offensive and defensive game when trading. We first explain what aspects can be considered defensive or offensive.
Defence Concepts Explained
Defensive aspects are concepts that basically limit your risk or vulnerability. They simply prevent you, your team, or organisation from incurring more damage.
When playing football or basketball, defence is used to limit the chances of the opponent making a score. It is critical for team dynamics, and it's considered to be the foundation, building block for the team.
If the defence is weak, the entire team is vulnerable. Most sports coaches focus on defence as the priority when they start out with a new team. In a way, the entire team rests on the defence.
Another example could perhaps be found in business. New company managers focus on fixing the current or ongoing issues first before shifting their focus to improvement, efficiency ideas, or strategic changes.
In trading, defence concepts are focussed on limiting your "downside" exposure also known as risk. Traders can achieve that by implementing the following techniques:
- Applying risk management;
- Using stop-losses;
- Not overusing leverage;
- Not overtrading;
- Ensuring a proper feedback process;
- Keeping a balanced trading psychology;
- Checking your risk trading statistics, such as the Sharpe ratio
(but use a decent number of trades like 40 to 50).
Source: MT5 Supreme Edition showing the EUR/USD 4-hour chart from 2 to 24 May 2018
Offence Concepts Explained
Offensive aspects are concepts that basically offer or provide opportunities, possibilities, and/or rewards. They allow you, your team, or organisation to capitalise or grow from that benefit.
Let's use again the example of football/basketball coaches and business managers. Offence is used to create chances for yourself, the team, or organisation. Offence allows teams to get ahead and beat the opponent. It looks at the "upside" rather than the "downside".
In my view, offensive concepts in trading are for instance:
- Trading strategies, systems, methods,
- Indicators and tools,
- Optimising the risk/reward ratio,
- Understanding the market structure,
- Learning more about technical or wave analysis,
- Developing an EA.
Value of Offence vs Defence in Trading
The defensive concepts are critical for defending your trading and mental capital. It is important that traders do not lose too much of their trading capital because otherwise they are not able to continue trading (without adding capital). Nor do they want to waste mental capital as that could lead to fatigue and bad decisions.
Basically, defensive concepts preserve and defend your capital, but they do not allow traders to grow their account. At best, they keep the losses small or your account at a break-even spot.
Defensive concepts help you avoid the big losses that wipe out a large part of the trading capital. They make sure that you do not encounter a very big hit.
Offensive concepts, on the other hand, allow your account to grow. These are the methods that can pull your account into positive territory, which defensive concepts are less equipped for.
Balancing Offence vs Defence in Trading
Of course, long-term account growth can only occur when both defence and offence are properly implemented. Short-term growth could occur when traders implement the offensive tactics correctly... However, that growth (and more) can be lost when defence does not suffice.
What is the main message? Traders need to take care of both defence and offence for a sustainable and long-term growth path.
When traders start out with trading, it makes sense to focus on defence first. You want to make sure that your account is not a losing one. The next step is to think about offence and how to grow or build an account.
Most traders get swayed by offensive tactics and, unfortunately, ignore or neglect defensive concepts. Offence is, for many traders, the most interesting aspect of trading, which is understandable, but all traders must have their defence up and ready to see positive trading results in the long-term.
Wishing you a happy week of trading,
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.