Do You Want to Be Right or Do You Want to Make Money?

Boris Schlossberg

There are no asterisks in life only scoreboards

Ari Gold

Entourage

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“Do You Want to Be Right or Do You Want to Make Money?” That is a very common question that every trading guru likes to pose in order to “demonstrate” the need for risk control. But the more I trade the more I think that this is a very simplistic and conventional view of how the markets really work. The fact of the matter is that if you want to make money you need to be right. You have to take a point of view. You have to challenge the market and you have to suffer all the slings arrows of outrageous fortune.

Of course you cannot be right all of the time. For high reward strategies where you risk one dollar to make two you cannot be right even most of the time. But to be a successful trader you must learn to be wrong as little as possible. This is not the same as being right.

To be right in the market means that you are implicitly engaged with it. You not only hold a view, but you actually carry a position. To be wrong as little as possible, means that you may often pass up opportunities to participate. It means that you become much more of a spectator rather than an actor in great financial drama of the day.

As I have written many times before, my true profit now comes not from creating any strategies ( at this point I have plenty that work well enough) but in being much more selective in using them. This is extraordinarily hard to do on a consistent basis especially for anyone with an aggressive personality that likes to tussle with the world (which I believe describes the vast majority of individual traders).

So how do you put this plan into practice? I have no perfect solutions but one way I try to satiate my craving for battle with market with the need to be highly selective is to try to be “wrong” small and “right” large. Basically I will take a lot of small mediocre trades in one of my accounts to satisfy my need to speculate and will take very few, much larger trades, in my “investment” account to try to earn “real” money. This by no means works all the time. Sometimes you can have an unbelievably hot streak in your spec account and a miserable run of losses in your investment account but the key is to maintain this duality and discipline no matter what because in the long run this is the only way to succeed.

Three Key Questions to Being A Better Trader

Boris Schlossberg

There are only three ways to make money in this business, be first, be smarter or cheat

Jeremy Irons Margin Call

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When you think about it there are only three ways to trade -- you can trade analytically, you can trade statistically or you can trade on inside information.

Hedge Fund girl is one the best analytical traders I know. She can pick up a copy of Entertainment weekly and tell you six months ahead of time that Hunger Games is going to kill it at the box office turning a loser like Lions Gate into a monster stock trade. She can make these unseen connections many times over which is why I have long ago given up trying to trade stocks and simply let her run my portfolio.

K on the other hand excels at statistics and can compile very thorough databases of economic information with a variety of correlation factors that usually provides her with an edge over the rest of Wall Street.

Although inside information is perfectly legal in FX, I have never had the privilege of having Ben Bernanke’s ear or knowing what the Mervyn King or Mario Draghi will do ahead of time. Over the years I’ve learned to follow “smart money”, so if the Russians are selling or buying I usually join or stand down but never challenge their position because they generally tend to be right about short term moves.

But generally, my own style is a combination of analytics and statistics. Having pored over thousands of hours of price data, I’ve been able to construct pretty robust models of how currencies will trade on an intra-day basis. However, models are models. They always lack context. One of the most valuable exercises you can do is look at that wonderful 45 degree equity curve you’ve just generated with a backtest and zero in on the drawdown periods. This is something that most traders do not do. They look at the great backtest results and just jump right into the system, more often than not to very disappointing results. That’s because winning trades do not matter. They take care of themselves. They key to being a successful trader is to assiduously remove as many losing trades from your system as possible. That’s where analytics come in. Basically you spend all your time asking -- why did the system not perform. What happened in the market at that time and is the current environment similar to that one?

The better you can answer those key questions, the better a trader you will be.