All setups are worthless if you don't practice proper risk control.

That was my message at the New York Expo this past Tuesday as Kathy and I presented to a very enthusiastic group of FX traders who had come from all corners of the world. We produced chart after chart of various trade setups that we use daily but constantly stressed the possibility of failure and the need to always limit your losses. In fact I presented my Rules to Scalp By list which essentially boiled down to:

1. Trade only during the high liquidity times of NY- London crossover.
2. Always auto attach a stop to any entry you make.
3. Never average down.
4. Stop trading for the day after three consecutive losses.

Someday I will deconstruct each one of these ideas in detail, but for now suffice it to say that these rules should be part of any trading model. A trading model of course is nothing more than an organized, logical construct of the market. It is not a set and forget it profit maker. It is not the holy grail and no matter how well it backtests on your simulator it will never make you rich all by itself. A trading model -- any trading model -- is simply a business plan and like all business plans it needs flexibility in order to succeed. Nevertheless without a plan, even one written on the back of napkin, few businesses can survive and prosper. Similarly without a trading model few traders ever become consistently profitable.

But let’s get real for a second. Even if we have a good trading model that provides us with a reasonable edge -- how many of us would follow it faithfully taking only the trades that the model suggests? It would fair to say that most traders fail at the same miserable rate as most dieters do - about 90% never stick to their plan. We are after all human and very few of us can withstand temptation -- be it a red velvet muffin or the fast moving price action of the currency market.

While I can’t help you with your diet, there may be a way for you to have your cake and eat it too when it comes to trading the currency market. Can you trade without rhyme or reason, break every rule I’ve mentioned above and still adhere to your trading model? Yes. The key lies in the ten percent solution.

I bet that if you examine your trading statements and extract only the trades that meet your setup criteria, the net return would be positive. However it is the sprinkling of random seat-of-the-pants trades in your daily P&L that is typically responsible for the majority of your losses. You can castigate yourself for the hundredth time promising yet again that you will never, ever deviate from your plan. Or you can do what I do- trade at one tenth the size of your normal trades whenever you make a trade that is not part of your model. In other words if your standard setup trade is 100,000 units then the impulse trade is only 10,000 units. This way you get to experiment with new ideas, satisfy your urge to be in the market, but also maintain risk control. Even if you make five losing impulse trades in a row, one proper setup trade will bring your account back to break even.

The ten percent solution is by no means a panacea for bad trading, but it is a pragmatic strategy in dealing with our human foibles. In life there is always a wide chasm between what we “should do” and what we can realistically accomplish. The ten percent solution tries to bridge that gap by mitigating our worst instincts when we trade while giving us the freedom to experiment with new ideas.

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.