Dieting Your Way to Profit

Boris Schlossberg

Dieting and trading are pretty straightforward activities. In the US trillion dollar businesses are devoted to both subjects and yet 95% of people who attempt to either trade or diet fail miserably.
Why?

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Allow me to suggest an answer. Those of you who have been reading me for years know, I have tried to shed weight for the better part of last decade. I was hardly fat -- but I was getting a belly, the old suits did not fit, and my sense of pride demanded that I return to the trim fighting shape of my college glory years.
Yet nothing I tried worked. At best I’d lose 5 pounds over a period of months and then essentially gain them all back.
About three months ago I decided to stop eating carbs. That’s it. No portion control. No special cooking directions. No pills. No additional exercise save for the once a week weight lifting session that I’ve been doing for more than a decade.
But here is the thing. When I say I stopped eating carbs. I mean stopped totally.
No.
Carbs.
Ever.
I haven’t touched a bagel. I haven’t eaten any pizza. I never have any dessert. I was known as a Jew who cooked Italian like a “Neopolitano”, but I haven’t had an ounce of pasta since I started my little experiment.
The net result is I dropped more than 15 pounds. The old suits fit and I even had to add a notch to my belts to keep the pants up.
Somewhere along the line, I realized that dieting wasn’t an extracurricular activity or a hobby. It was a permanent lifestyle choice. That realization dawned on me slowly but powerfully.
When can I have dessert?
Never.
When can I have pizza?
Never.
When can I eat muffins-bagels-donuts?
Never.
That may sound harsh, but I am actually fine with it. I like being lean and mean and I am willing to give up the carbs to maintain my weight.
The unvarnished truth in life is that there is no such thing as balance. There are always costs to achieving your goals and most people are simply not willing to pay them.

So what does this have to do with trading?
Just about everything.

Trading like dieting is a discipline of a few simple rules and just as with dieting you need to find the program that works best for you. I am a day trader by nature. I make five to ten pips and move on to the next idea. The thought of holding positions for weeks on end does not appeal to me at all.
If someone told me that the only way I could lose weight is by eating porridge I would never diet. So just as with dieting, you need to find a trading strategy that will work for you. Something that you will be glad to do every day rather than be forced to do every day.
That’s the first and foremost task because nothing else will work if you are not comfortable with your trading style.
But, just as with dieting, once you find your methods you need to COMMIT.
When do you trade without a stop?
Never.
When do you size up beyond 2 times equity?
Never.
When do you revenge trade?
Never.
When do you take a random setup?
Never.
Once you realize that trading is a lifestyle and not a just a sideline hobby it is amazing how your approach to the markets changes. You stop trying to win every moment and focus on becoming better at the game. Losing trades still hurt, but far, far less because you now see beyond the next pip and that vision keeps you from doing all the stupid things we that we do in the markets to sabotage our success.
There is no magic to losing weight or banking profits. It just a matter of deciding if you really, really want to succeed. I don’t mean if you really want to be skinny or be rich. We all want that. I mean if you are willing to do the things to move you in that direction. 95% of people don’t and that’s why they fail.
It’s that simple.

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(PS. This article is obviously meant as a parable for trading. I fully realize that there are people with serious metabolic and genetic issues for whom simple dieting does not work and I do not want to minimize the seriousness of such chronic conditions. I am not offering medical advice, just market observation)

The Biggest Sucker Bet in the Market

Boris Schlossberg

A CBOE options market-maker once said something that has stuck with me forever. “Take any athlete you know”, he said, “and I bet I can make them miss. Suppose you are playing with a great golfer and he is about to putt for par. Now before he makes a move, tell him that you’ll pay him $10,000 dollars if he sinks it, but he will have to pay you $10,000 if he misses.”

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“Most people,” said the market-maker, “will miss, because they stop thinking about the shot and start thinking about the money.” The market-maker was simply expressing the truth about financial markets that is almost always overlooked. Amongst all the talk of strategies and tactics, statistics and backtests everyone forgets that none of those things matter, once money comes on the line. Every single mistake we make (and I don’t mean the mistakes we make on individual trades, but rather structural mistakes such as changing the stop, lifting it altogether and trading unprotected or adding to a position beyond your strategy limits -- all those mistakes -- are always the result of money playing games with our psyche.) The bigger the money, the bigger the games.

That is of course what makes trading FX such a challenge. It’s not just the need to find an edge on the market, but it’s also the will to ignore the minute by minute pressures of watching your money rise and fall. Even if we master the first part, the second part usually takes years to perfect.

Yet as tough as it is to trade FX spot, there is one product that I think should never be traded at all.

Binary options.

That is truly an instrument from hell. Now let’s just set aside all the regulatory issues with the product. There are actually plenty of places you can trade it in a fully secure, fully regulated manner including several US exchanges. Let’ put aside the few traders who actually have the superhuman skills to succeed at trading this product. Let’s just understand why most of us will fail miserably at trading it.

Binary options contain three variables -- price, volatility and last but definitely not least -- time. Time is the killer variable here that most traders woefully underestimate. When you make a spot trade you only need to be right about direction. In theory, you can hold your trade forever until it resolves. Not so for binary options. You need to be right about both time and direction. That second condition makes it inordinately harder to win at the game. Time is an ever wasting asset, and much like money on a sports shot it acts as a relentless pressure point in every trade you do.

That’s why binary options are a sucker bet.

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Day Trade Like Warren Buffett

Boris Schlossberg

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OK. Guilty of click bait as charged. Buffett would never day trade in his life. His holding time is years rather minutes, but that doesn’t mean that we can’t learn valuable lessons from him about trading. There are a few core principles that Buffett holds which we as day traders can adopt for our own purposes.

1. Don’t Lose Money.

How important is this rule? Buffett once quipped that this was his rule #1. When asked what his rules #2 was he said, “See rule #1”. Everybody talks about not losing money, but I think it’s important to understand just why this is the single most important factor in trading success. Losing money is not just psychologically unpleasant, but more importantly, it is mathematically very challenging. It’s the two-steps-back-one-step-forward problem. If you take two steps back, making one step forward isn’t going to cut it. Even two steps forward won’t help you much. You need to make three consecutive steps forward to move beyond the two-steps-back losses.
That’s why the single most underappreciated move in trading is the scratch.

A few days ago I listened to a great interview with Virtu President Doug XX. Virtu is one of the leading high-frequency trading firms in the world, and almost everyone thinks that they make all their money by front running orders -- yet if that were true they would be gone long ago as other faster competitors would beat them to the punch. Virtu’s actual skill is in market marking, and specifically in scratching out trades. They only win about 51-53% of their trades, but unlike amateur traders, they don’t lose on the rest, they simply scratch out at even on most of them. That’s the great secret to winning at the day trading game.

Buffett for his part also knows the value of keeping your drawdown to the minimum. During the 2000 -- 2002 cycle when the S&P was down -11% and -21% respectively Buffett was down just a few percentage points making the recovery in 2003 much easier for him.

2. Let it Come to You.

Buffett is well known for not overpaying for assets. In fact, his favorite dictum is -- Be Fearful When Others Are Greedy and Greedy When Others Are Fearful. The underlying philosophy of this approach is that risk on balance is always lowest when markets dislocate to the downside and always highest when they ramp to the upside. Now there are plenty of individual examples of when this strategy fails. Momentum moves could decimate even the stingiest bid and leave even the most aggressive offer biting the dust. But this is an actuarial argument. Just because some smokers live to 100 years of age and some marathon runners die of heart attacks at 45 does not mean you change your premiums to accommodate the exceptions. If anything exceptions in insurance as well as in investing prove the rule -- don’t f-ing chase price! You may succeed once but you will fail ten times and end up losing in the end.

3. Stick to what you know

Are you good at making 10 pip trades? Do you excel at reactive rather than predictive trading? Do you feel much more comfortable trading with trend than against it? Each trader has personal strengths and weaknesses. Unlike real life where we are taught to constantly “improve” ourselves trading will actually only make you much worse if you go against your natural strengths. Buffett has been adamant about not investing in technology because he did not understand it -- and when he broke his own rules by buying IBM -- he demonstrated just how bad of a tech investor he is. Now he may have missed Google and Microsoft and Amazon, but his performance still remains much better than the vast majority of active managers (though not much better than the S&P). The point being is that by sticking to his formula of buying “old business” companies he still managed to perform very well and found plenty of profit opportunities away from tech. The greatest thing about the market is that it is not a monolithic entity -- there are literally thousands of niche strategies that can be profitable. The key is to find the ones that work best with your personality.

The Hidden Trade that is the Key To Long Term Success

Boris Schlossberg

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Ask most traders what are the possible outcomes of a trade and they will inevitably give you a binary answer.

You either win or lose.

But if we think about it for a second, there is actually a third choice. You can neither win nor lose. In short, you can basically not lose and close the trade out for even. If we go over our many trades, there are countless examples of trades that may have started out badly only to rally to breakeven and then ultimately fall apart.

The art of NOT losing is perhaps the most underappreciated skill in day trading. It is, in fact, the foundational strategy of high probability businesses like insurance and casinos. Insurance companies are of course notorious for eliminating any possibility of large payouts. They are in the business of collecting premiums but the moment a client presents any type of collectible risk they move swiftly to cancel the policy. The insurance companies much like casinos will make sure to rig the rules so that customer has virtually no chance at collecting a payout.

So in Las Vegas, they will stop you from counting cards in blackjack and in Hartford they will make sure to exclude all coverage of any malady you may already have. Indeed, the current debate on pre-existing conditions in Trump-care is simply an attempt by insurance companies to collect as much premium as possible while providing the absolute minimum coverage necessary to satisfy the contract. Indeed, as my wife just pointed out to me under Trump-care pregnancy will be considered a pre-existing condition and could cost insurance buyers as much as $17,000 in out of pocket expenses even if the woman has full coverage.

Now we can all lament the evils of the insurance business, but it has a lot to teach us about trading. The more I trade the more I realize that there are really only two viable models of making money. The low frequency, high-profit model where your wins are very few but are massively larger than your losses and the high-frequency high probability model where the losses are very rare.

We are all familiar with the fact that throughout the whole history of the stock market all of the gains have come from only 20% of all publicly traded companies. Fully 80% of stocks are long term losers. And even amongst the 20% of winners, it is only a handful of equities that are responsible for almost all the stock market returns.

That’s why index investing is so hard to beat. When you buy the index you are essentially buying the whole lottery pot and betting that you will capture the few jackpots that will pay for all the losing tickets. Little wonder then that the hedge funds have been getting killed looking for the diamonds in the ruff amidst a pile of garbage.

But there are other actors in the market that actually play a very different game. HFT (High-Frequency Trading) funds have gotten a bad rap for being nothing more that digital “front runners”, but in reality, they employ a wide array of strategies almost all of them focused on mitigating risk. In fact, HFTs are the kings of the “not lose” trade as they break even on as much as 50% of their positions per day and yet make money almost every single day. Big firms like Virtu have lost money only on one day in six years.

If we are day-trading, the insurance model is the way to go and the “not lose” trade should be studied much more seriously. It is the hidden key to long-term trading success.

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Trader’s Drug of Choice

Boris Schlossberg

Why do we trade?

We like to make money.
We like to beat the market.
We like to play in the biggest economic arena in the world.

But let’s be honest…

We trade because we like the action. We like the volatility, the chaos the pure bedlam that hits the market when an unexpected piece of news appears on the screen and prices start to tumble like a stack of dominoes.

No forex trader ever said, “Wow did you see that 10 pip range in GBPUSD during the Asia session? That was really something!”

We love the speed.
But speed kills in so many ways.
I’ve already discussed the way speed kills through excessive leverage. Almost every retail trader I know (except those in my chat room) trade on way too much leverage. I’ve even created a risk calculator to help you determine how much you should bet on each trade so that you never lose more than 1% in a day. Feel free to check it out here.

But speed kills in another way, and no matter how careful we are with our size we are all highly vulnerable to this other force simply because we are human. When price moves fast in one direction -- what’s our first instinct?

To chase the move.

We can’t help it. We are programmed to react. FOMO -- the fear of missing out -- has been with us from the caveman days. Chasing price is almost always a sucker bet. Yet we all fall for it because chasing is the trader’s drug of choice.

Occasionally, chasing price works. The move is so huge we sometimes get lucky and get swept up in the wave. But luck is not a strategy. Successful trading is a game of playing the rules, not the exceptions. For every chase win, there are usually five losses as we get stopped out in the inevitable retrace.

The key to avoiding the chase impulse is to have an intelligent, well thought out structure that helps you enter the move SLOWLY -- away from the sentiment extreme. Recently, I modified one of our day trading strategies using the RSI indicator and the 1-minute chart to stop me from chasing price. It’s been working remarkably well. But the specifics of the setup are less important than the setup itself. You need a plan ahead of time. You simply can’t react blindly to every news bomb that hits the screen, because that’s exactly how every trader gets in trouble.

Trading is immensely fun, but chasing is incredibly stupid. Don’t let it be your drug of choice. Your account will thank you forever.

How to Fix the Most Demoralizing Thing About Trading

Boris Schlossberg

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What the most demoralizing thing about trading?

Losing.

Losing is by far the most demoralizing aspect of trading for anyone who tries it for longer than a week. Rookie traders sometimes catch a burst of beginners luck and will make five, ten, twenty winning trades in a row -- which is just about the worst thing that can possibly happen to them -- because they will then inevitably lose it all on one single trade as they fight the market. I’ve seen it happen so many times that it is basically the trader’s version of Groundhog day.

Losing carries with it all the joy of a sucker punch in the solar plexus when it happens to you. You just can’t believe that the market could be so stupid as to (rally, dive, whipsaw -- pick your choice ) so much that it stops you out (almost inevitably to the pip of a bottom or a top).

It is certainly painful to lose the money, but the damage to your psyche is much, much worse. You start to wonder if the game is rigged, or even if it isn’t -- if you are smart enough to play it. You want to succeed but begin to question if you ever will.

Generally, there are two risk control approaches when dealing with losses. The most common one is the automatic stop loss. For example, I trade with a script that always wraps a stop and a take profit on every entry I make. That way I never, ever hold a position with open-ended risk. I may on occasion adjust my stop, but I never lift it. ( Since doing that, by the way, I have never, ever blown up any account I’ve traded).

Stop losses are ok, but they don’t remove the demoralizing factor. In fact, they can sometimes increase it. You misread the market and then wind up catching three, four, five stops in a row. The death by a thousand cuts can be as painful as the blow from a single punch.

The other approach to risk management has to do with size. Stops are for suckers some traders claim. Trade small and you can ride out almost any move against you. Your account basically acts like a rubber band -- the market throws losses at you but the account bends rather breaks as all your equity absorbs the adverse moves and waits patiently until the market turns around in your favor. So this approach can work, but only if you trade super small. Let define what small is -- that’s basically 1:1 leverage or even 1:2 leverage where you trade a 10,000 unit size for every $10,000 in your account. Let’s understand why that’s important. If you allow the trade “float” it can go against you 5% maybe even 10%. If you are floating 3 to 5 different positions at 1:1 lever you have implicitly levered up 5 times and if the trade moves against you 10%, that effectively makes it a 50% move against your equity. So trading small means trading 1:1 lever MAX.

But even if you let the trade float, you are no less protected from both the monetary or psychic risk. In fact, the WORST losses I ever incurred were the results of letting trades float. The reason is that the market, (like your siblings or your mother) will always push your buttons. As the losses mount the psychological pressure becomes more and more unbearable. This is especially so when several negative positions “add up” and begin to weigh on your equity like a boulder on your chest. When that happens, I guarantee you, you will not sleep well at night, waking up every few hours to glance at the quotes. Furthermore, no matter how small you trade, eventually you will need to cut one or several of your losing positions, generally at a massive loss that will wipe out weeks, months, sometimes even years of gains.

There is nothing more demoralizing than that.

So what’s the solution?

Use stops like you have an OCD complex AND trade ultra-small. That may not sound very satisfying. You may never make 10,000 dollars on a $1,000 account in one single well-placed trade, but trust me you WILL be able to stay in the game for years and years and will get better with every month that passes.

The key to good trading is not winning strategies or brilliant analysis -- both help -- but just mildly. The key to good trading is the speed of the recovery rate. How fast can you recover from drawdown? If you can achieve a recovery rate of one week or less -- you are on your way to success. The money will take care of itself. That’s why trading super small and stopping quickly is the better way go. And just in case you need to motivate yourself consider this.

The best hedge funds in the world do 20% per year.
If you take $10,000 make 20%/year and add $5,000 from saving to you trading pile each year you will have more than 1.5M in your account in 20 years time.

20% is equal to 2000 basis points
There are 250 trading days in a year.
That means you need to make 8bps or 8 pips each day to achieve that long term goal.

The Greatest Rally of All Time? The Day of 1987 Crash

Boris Schlossberg

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Howard Marks, the famed investor who runs more that 100 Billion at Oaktree Capital, tells a story of a phone call that changed his life. He had a conversation with Michael Milken who was just starting out as the king of junk bonds at the time. Milken told him that, “If you buy AAA or AA bonds they only have direction. If you buy single B bonds, and they survive, all the surprise will be on the upside.”

Out of that brief encounter Marks took away the lesson that all investments are about price. As he tells Business Insider, “There’s no such thing as a good investment idea, until you’ve discussed price.

Investing well is not a matter of buying good things, it’s about buying things well. And people have to understand the difference. And if you don’t understand the difference you are in big trouble.”

Mark’s observation made me think about the great stock market crash of 1987. I am embarrassed to admit that I am old enough to remember it. And ironically enough I was at Drexel Burnham Lambert, the very firm that Milken made infamous, when the crash occurred.

What very few people realize is that the 1987 crash was also the day of one of the greatest stock market rallies of all time. At around noon, after a vicious sell-off in the morning, stock staged a massive rally that brought the indices almost to breakeven. All in all, the move from the bottom to its apex was more that 200 Dow points or greater than 10% gain in matter or hours. Trader who bought the bottom and exited midday made a fortune. Of course, equities then faded into the afternoon and ended up down more than 500 points on the day or more than a 22% drop -- still the biggest one-day decline in US stock market history. But if you were a trader, there was almost as much money to be made from the long side as there was from the short side. All of which leads me to conclude that in trading just as in investing price entry is everything.

So as traders, we should banish the concept of oversold or overbought. We should stop worrying if we are aligned with trend or not. The only real question to ask whenever you make a trade is -- did I get a good entry or not? The answer to that query will determine your chance of success far more than any strategy you use.

Wanna Day Trade? Be Like Donald Trump

Boris Schlossberg

Last night as US tomahawk missiles rained on a Syrian airbase while my four-year old kept dancing around me an hour past her bedtime, and CNBC producer screamed in my ear over a poor phone connection, I felt completely calm and in control. That was particularly ironic because whole day prior I was miserable and ill at ease. The markets yesterday were flatter than a Florida landscape and I spent the entire day sulking making exactly one trade in the BK chat room.

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But now, with USDJPY dropping like a stone, I knew exactly what to do. I waited for the small, but inevitable bounce, eyeballing the levels because I didn’t have my Trendy algo turned on and fired off some sell orders across a couple of levels covering everything back for profit a few minutes later. No parent of the year awards for me, as the four-year old continued to dance happily around my office, but I had my mojo back.

What makes good day trading?

This.

What’s this?

Reacting.

Good day trading is reactive by its very essence. That’s why it defies classification. It defies “methodology” and it most certainly defies consistency. You can’t “make” $1000/day day trading. Some days you can make $3000. Some days you make nothing. Good day trading is all about synthesizing the news of the moment and then adjusting your trading approach to exploit the short-term flows in supply and demand.

If you are a positional trader you are by definition -- prognosticating. It doesn’t matter if your reasons are fundamental (Non-Farm Payrolls will be weak because ISM employment index sank 5 points) or technical (USDJPY broke 200 SMA, it’s in Elliott Wave III of abc correction, it’s bouncing off Fib resistance -- blah, blah, blah). You are trying to forecast the distant future. That is the implicit bet you are making each time you trade. Trading forces you to have an opinion on the market whether you realize it or not, and the longer your time frame, the stronger your opinion must be. That’s why it’s so hard to be a great swing trader.

Good day-traders on the other hand generally have no opinions. They look at what is happening NOW. Five minutes ago may as well be five years ago, as their focus is on the next 10 pips of profit regardless of the intellectual foundation of their views. In short, good day traders are exactly like Donald Trump -- willing to change their position on a dime and completely abandon their previous views. The very things that drive both the right wing and the left wing absolutely insane about our current President are actually qualities that we must embrace to daytrade successfully in the market.

Today, for example, I was able to avoid the massive short squeeze is USDJPY despite the fact that “job numbers were horrible and yields were low!” because I saw the pair hold the 110.20 level in post news trade and realized that shorts were in danger of getting squeezed. Did my fundamental skills honed by four years of economics at Columbia help me? Did my knowledge of pivot points, or fib lines or moving averages help me? No. It was pure price action. It was watching what was happening rather than what I thought would happen that helped me make the right decision. It was the Trumpian ability to read the “mood in the room” that kept my P/L positive today. Now that certainly may not be the right way to run a country, but it is definitely the right way to day trade.

React, don’t prognosticate.

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The Most Important Technical Indicator is… Fundamentals

Boris Schlossberg

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I am a technical trader. I trade price on the 1-minute chart, which is about as granular as you can get without becoming a high-frequency scalper. I couldn’t care less about Fibonacci levels, Gann angles, Elliott waves and any other geometric structures that traders try to graft onto what is essentially a never-ending price auction. If those tools work for you -- all the more power to you -- but I like to operate in the here and now, where my sense of the future is never more than an hour long.

I have a great new algo, called Trendy that we developed in my chat room and I am very happy to follow its signals. But Trendy, like all robots it is just an execution algorithm. Like a hunting dog, it can follow a scent but it can’t tell you if that scent will lead you to a dirty old sock or a murder weapon. Like all algos it needs to be turned on and off. It needs to be properly positioned. It needs to be … managed.

Just for fun, I let it run 24/5 on a demo account and watch it bleed money hour by hour, while I collect 20-30 pips most every day judiciously deploying five to ten times each day.

But much as I believe in the tactical value of trading price, the other day I realized that the single most important input into Trendy’s success is actually … fundamentals. Today, for example, the market gave me three good Trendy trades -- a short AUDUSD off a meh RBA interest rate statement, a long USDJPY off the burst in US yields and a short GBPUSD off Jamie Dimon’s letter about the perils of Brexit. All else was garbage, as prices weaved and bobbed and dropped and chopped producing lots of heat but little light as they say the American South.

Technical analysis tells us what IS happening. Fundamentals tell us WHY something is happening. Understanding the WHY gives us the confidence to predict that the price action in the near future. Especially if we’ve seen that pattern of behavior hundreds of times before.

Does it work all the time?

Of course not.

Another story could come by and bump our analysis out of the way. Or some large, non-price sensitive order could disrupt market flow completely and stop us out. However, on balance, this approach works 70% to 80% of the time with reasonable risk-reward ratios. That’s because instead of segregating technicals and fundamentals into two disparate disciplines, this methodology tries to synthesize the two and treats them as two sides of the same coin.

To make a successful day trade you need two things -- the price action to be moving your way and news flow to continue pushing prices it in that direction. Trading, after all, is very simple. It’s the act of predicting that price will either continue or reverse.

So instead of having never ending debates as to which method works, isn’t it better to always be aware of both technicals and fundamentals at any given moment in time so that we put the odds in our favor and make more accurate trades?

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No Bulls-t Advice for the FX Trader

Boris Schlossberg

So you want to trade FX?
Forget strategies. Forget fancy charts. Forget listening to TV talking heads like me.
If you want to have any chance at success in trading here are five simple things you need to do.

1. Get a good execution broker.

You can trade on bid-ask spreads or on raw spreads with commission. In the end, the costs all even out. The much more important question is -- how’s your execution? If your trades get slipped and even worse rejected more than once a month. Leave. Leave the broker, because they are clearly not honest or competent and eventually one or both of those sins will cost you all your money.

Speaking of money if you broker is not Licensed with one or several of the following authorities: NFA in US
FCA in UK
ASIC in Australia
MAS in Singapore
HMA in Hong Kong

Consider your money gone.

Do a simple experiment. Ask for half your account back. If it takes more than 48 hours to get your money -- leave the broker immediately.

You need to understand that brokers don’t consider your money to be yours, the moment you make a deposit they consider it to be theirs. So unless they have a regulator that makes them act as a fiduciary, your money is their money and all that trading you are doing is strictly for entertainment value -- you are never getting it back. If you are tempted by flashy offshore brokers with high leverage and tight spreads then understand that your trading is most likely imaginary. Your money is never coming back, even if you do manage to beat the market.

2. 4x for Forex

Speaking of beating the market. I had an interesting discussion last night. I was at a party with a lot of industry people including a consultant that sets up a lot of these offshore brokers. What the gentleman told me is that contrary to popular belief most of these brokers don’t even try to scam the clients. The mathematics of the FX business almost insure that 97% of traders will lose all their money. Why? Because of leverage. In FX leverage -- the ability to borrow on your account -- is astronomical. Outside of US leverage can be as high 400:1 or even 1000:1. That means you can trade 400,000 unit position on just 1000 dollars of equity. You may think that’s great but it’s actually financial suicide. Let’s just use a simple example of 100:1 leverage. If you put on a trade that size, just 1% move against you, wipes out your account. Do you know how often currencies move 1%? About 200 times per year. Do you think you can survive 200 days of 1% moves and escape whole? Let me ask you differently. Suppose I told you to run across the race track at Le Mans 200 times while the race was in progress. How confident would you be at surviving that challenge? When you are trading at 100:1 you are doing the exact same thing except with your money rather than your body. The end result is a disaster either way.

What’s the maximum leverage per trade? Four times. That’s right. That’s not a typo. Not ten times, not twenty times, not forty times. Four times -- and that is MAXIMUM not starting position. You starting leverage should be 1 or 2 times equity. That means that if your account is 10,000 the starting trade should only be 10,000 or 20,000 units.

Go ahead and snicker. But if you don’t follow that rule, the chances of you losing all your money are virtually 100%.

3. Get a Rebate
Every single broker in FX will pay you money to trade with them. They won’t tell you that up front and they may not even be willing to give it to you on an individual basis, but every broker has a rebate program that will pay you back anywhere from 0.1 to 0.5 pips back. If you do 5000 trades a year that’s 1000 pips of profit for doing nothing. That’s why you need to connect with a good introducing broker who will advise you what FX broker would be best for you. If you want some names just email me.

4. Discover Metatrader 4.

If you are trading FX on a proprietary platform rather than MT4 -- you are already at a disadvantage. MT4 is an almost universal piece of FX software that is available from any major broker. It allows you to create software programs that can trade for you. But you do not need to be a programmer to get the full value of MT4. The platform has hundreds of thousands of trading robots (called Expert Advisors) -- including those that we develop in our chat room, that can help you place trades at the right time, at the right amount and with the proper risk control. The future of life is robots. If you are not using them for trading you are already way behind all because you are subject to massive human error. You will hit the buy button instead of sell, you will buy 10 times the size you wanted and you will miss the exit price because you were looking at something else away from the screen.

Don’t worry, that’s totally normal -- we’ve all done it. But traders who trade with MT4 -- don’t do those things often, so they have an edge on you because they are making fewer mistakes. One very simple thing to do is to trade with buy/sell scripts so that any market order you place is always automatically wrapped around with a limit and a stop and never creates a risk problem for you down the road. Robots are the future and that fact is especially true in trading.

5. Get a good education (like our BK chat room) Trade with us

Yea ok, shameless self-promotion. I gave you four pieces of good advice so I get to toot my own horn a bit. Actually, it’s not even my own horn I want to toot. Most of the time I am just the sideshow in our chat room. The true value for you comes from interacting with other like-minded traders who will very often improve and refine the trading ideas and strategies that I suggest. Trading in a team environment completely transforms the game and gives you hundreds of different and creative ways to look at the market. Trading is not a solo sport. Make it a lifetime pursuit and join a team to trade with.

In FX 10 is the Magic Number

Boris Schlossberg

Over the past few weeks, I must have made more than 1000 short term trades. Some were on demos. Most were live accounts. Some trades were done on raw spread, others used a full spread broker. Here is what I discovered.

It doesn’t matter what strategy you use. It doesn’t matter if you trade chop. It doesn’t matter if you trade trend. It doesn’t matter if your spread is 0.2 wide or 1.4 wide. It doesn’t matter if your target is just 3 pips or even 1.5 or 5 or 6 or even 7 -- you can’t make money in FX day trading unless you target is 10 pips.

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The reason is -- to paraphrase Bob Dylan is that you got to pay somebody. It may be the Devil or it may be the Lord, but you’ve got to pay somebody. Regardless of how you make your trade your average cost per trade is 1.5 pips (either spread or 1 pip commission + raw spread). That translates to about 15% cost of doing business.

When you factor in the vagaries of the market, the risk/reward payoffs, the various news bombs that blow up your trades, that frankly is about as much cost as you can absorb. If you go down the 5 pip level, the transaction cost becomes too large at 30%. Basically, you give up a third of your gross profit right off the bat and few businesses can survive that math over the long haul.

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10 pips is also a very reasonable distance for a day-trade. The average true range for a major pair is about 100 pips (yes, yes I know that’s wishful thinking in these low volatility times -- but it is still a decent rule of thumb). That means that a 10 pip trade is about 10% of the daily move which is very achievable 2-3 times each day. Like a perfect bowl of porridge, 10 pips is not too cool, not too hot. For those of us who like to day trade -- 10 pips is juuuuuuust right:)

As to all the snarky position traders who constantly berate day traders for just churning our accounts -- feel free to ridicule all you want, but some traders in my chat room have been trading for years with drawdown profiles of less than 10% -- and that’s basically what? -- a bad week in your world :).

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When to Trade Raw

Boris Schlossberg

With the exit of FXCM out of the US FX market, it looked like the last of the US raw price dealers was gone. Fortunately, Oanda stepped up to the plate and this week revealed that it will be rolling out raw pricing first for its FXtrade platform and then eventually for MT4. So I thought this is a perfect time to examine when traders should choose one or the other type of brokering service.

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

What is raw price dealing? That is simply the wholesale price feed from the Interbank market. In a dealing desk model, all retail FX brokers markup, the wholesale price feed the get from the big banks before they display it to their customers. So in the Interbank market, the EURUSD typically trades 0.1 pips wide -- a normal quote would be 1.06801 by 1.06802. Most retail dealing desk firms would quote that out as 1.06795 by 1.06809. Some might even quote 1.0679 by 1.0681.

The raw spread comes with obvious advantages. When the spread is only 0.1 pips wide versus 1.5 pips wide, it is a lot easier to get trades done. Limits get hit faster and more frequently. Stops are given more room and can sometimes even be avoided. But the raw spread trade comes with a catch. Every time you trade you have to pay commission. Typically the commission is about 1 pip round trip (half a pip to buy and half a pip to sell).

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

That may not sound like much, but it can quickly add up. When I traded with FXCM my monthly commissions were often larger than my profit. That’s ok when you are making money, but it can add up quickly to your costs of you are not. So we go back to the original question -- when should traders trade raw and when should they accept paying the full spread.

The answer as is the case with so many of these things is complicated and not necessarily intuitive. Generally, you would think that if you have a high-frequency strategy that requires exact execution and quick in and out tactics then trading on raw spreads would be the way to go. Not necessarily so. A high-frequency strategy is basically a massive commission generator. If you can make money on a high-frequency strategy with full spreads or even if you can break even -- the full spread broker may be a better way to go.

Let me explain why. When you pay full spread, you not only pay nothing in commissions, but you can actually -- in fact, you should by all means -- collect rebates from your broker. There are several very good IBs who will set up a rebate program for you. I work with the best in the business -- feel free to email me for info. In any case, a typical rebate is about 0.2 pip per trade. If you do 25 trades per day on NO LEVERAGE. In other words, if you have $10,000 account you trade 10,000 units per trade, then in 20 trading days, you will have earned 100 pips in rebate. That’s 1% per month or 12% per year on your account even if you fail to make one single pip.

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

On the other hand, if you have a strategy that trades 2-5 times per day with 10 to 20 pip targets, you are probably much better off with a raw spread strategy. That type of “in between” trading can really benefit from the raw spread difference. Let’s say you have a strategy that has a stop of -20 and a target of +15. If just one out of 20 trades flips from a loser to a winner (i.e. you avoid getting stopped on raw pricing and eventually make target or you make target on raw pricing and bank profit, but miss doing so on markup spreads then you essentially have a +35 point swing in your P/L (you make +15 and avoid losing -20) that more than makes up for the 20 pips of commission you would pay on your volume.

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

So trading raw versus markup is really a question of style as much as cost and every trader should consider his individual condition before making the move. Fortunately, it doesn’t have to be a binary decision. Most brokers let you have both accounts and that’s probably the best way to go.