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.

How I Traded 4+Million Dollars and Never Lost More than 0.5%

Boris Schlossberg

Give Yourself the Gift of Profit -- Trade with Us

A few weeks ago I took about $25,000 of my retirement funds and put them into my FX day trading account (Yes such a thing is possible and even legal).

In less than 10 days of trading, I managed to do 4+ Million dollars of notional volume on the account or about 160:1 leverage off the equity base and yet… and yet… I never lost more than 0.5% of my account at any time during all this trading. That’s right. My equity -- that is the REAL money in my account never dipped by more than 125 bucks.

How is that possible?

How could I have achieved such risk control (I am up by the way on an absolute basis about 1/2 of 1 percent after two weeks of trading -- but that is not the point) with seemingly such ridiculously high leverage?

The answer is size. But not in the way you normally think of size in FX trading. Generally, when we think about margin trading we are conditioned to view leverage as a function of credit. You have $1000 dollars. In US, your broker offers you 50:1 leverage (higher elsewhere) and you can open a trade for $50,000 units. That’s classic leverage and it’s basically the crack cocaine of trading. It gets you hooked and it gets you killed -- well your money at least.

There is, however, a completely different way to achieve leverage that does not expose you to any sort of serious risk. It’s called turnover. If you have ever been in the retail business you understand the concept of inventory turnover very well. Basically, if you flip over your inventory ten times you levered your working capital by 10:1. Put simply you used the same $1000 dollars to buy $10,000 worth of merchandise.

Day trading is the exact same thing. You can lever your position by borrowing money from your broker and be at the mercy of the market, or you can lever by making lots of small but frequent trades and expose very little of your account to risk.

My average trade size on that $25,000 was only $5000.00 units. That’s right I actually traded at less than 1:1 leverage. I was UNDERLEVERED at 1:5 size. That’s why no single trade, not even ten bad trades could hurt me. Size will forgive almost all your trading sins and is far more important than any strategy you use in achieving long-term success.

Novice traders always have their priorities wrong. To stay alive and thrive in trading first things first.

Size.
Stops.
Strategy.

Get that order right and you can trade forever. Get it wrong and you’ll just be another 90 day blow up statistic in the forex market.

Oh just in case you doubt me -- here are the stats.

Screenshot 2017-03-03 12.02.54
Boris.Volume
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How Losing Makes You Win

Boris Schlossberg

My FREE list of 10 FX Websites to Take You to Profit

How much money should we lose?

That’s not a question that most traders ask before they press the buy/sell button, but it is perhaps the only question you need to answer if you want to trade well.

Nobody ever starts trading because they want to lose. Everyone gets involved in the markets because of the tantalizing prospect of big wins. But the reality is that most traders lose big precisely because they never think about losing properly.

If you are day trading like we do in the BK chat room, losing is simply part of each day. The more trades you take, the more stops you’ll have. That’s just the nature of the markets. The key is always to control the losses.

The first and easiest way to do that is to automatically wrap each trade with a stop and a take profit using the simple buy/sell scripts I shared a few weeks ago. Doing that will ensure that you don’t have a “dangling” order whose loss can quickly grow out of control due to some “news bomb”.

One of the most common mistakes traders make is that everyone wants to fight sentiment. When markets turn against you the universal instinct is -- “it will come back”. And 8 out 10 times it usually does. But the 20% of the time that it doesn’t, comprises 100% of the cases of all blown accounts. Having an auto stop attached goes a long way towards avoiding that nasty scenario.

The other great risk control tool is simply size. Size however is not just a function of your risk tolerance but of the frequency of trading as well. A trader who has a 10,000 account and trades once a day at 10:1 lever factor could trade 100,000 units of currency. The very same trader who day traded 10 times that day would only be allowed to trade 10,000 units per trade in order to maintain his leverage factor. This is something that most rookie traders miss completely. If you day traded 10 ten times at 100,000 units each -- your total turnover would be a 1M and you would have basically levered 100:1. (Yes I know that mathematically that is not quite true, but for trading purposes it’s much closer to the truth than not, which is why everyone should think of leverage this way)

My own personal preference is to trade no more that 1 times my equity on any given trade (that includes all the add-in positions I may employ). Generally, my starting trade on my 25,000 IRA account is 5,000 units which may be too conservative for some but suits me just fine, since I expect to make 20 trade each day (there is that frequency lever multiplier).

The very last question you want to ask yourself is how much am I willing to lose each day? Again that is a function of personal preference, but my hard rule is never more than 1% of the account. So far, I have not come close to hitting that limit (mainly because my initial opening size is small) but if I ever do -- I will close all positions and stop trading for the day.
A 1% equity stop on your account may not seem like a lot, but if your goal is to make 10 basis point per day than it is just right. In fact that is a very good rule of thumb to use. Take your daily goal target (assuming it is realistic of course) and multiply that by 10. Put a hard stop on your equity at that level and never, ever, question or doubt that move. Any loss that takes more than 10 days to recover is going to be a very difficult task to achieve. Don’t make trading any harder than it is.

Know your losses ahead of time and you will set yourself up for the wins.

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Trading Discipline? Waste of Time

Boris Schlossberg

The greatest economist that ever lived was John Maynard Keynes. (All the Austrian School economists, indulge me for a minute). But besides saving capitalism and setting the foundation for our modern world, Keynes was a damn good trader.

Here is how Keynes performed during the depth of the Great Depression managing the endowment of King College, which he managed to increase tenfold over a period of twenty years.

Keynes

As you can see, for a pointy headed academic, Keynes was a very skilled trader. One of Keynes great quotes is, “I would rather be vaguely right than precisely wrong.” That’s pretty good advice for life overall, but it’s probably the greatest trading advice ever given.

I was thinking about Keynes’s words when I was live trading in the BK Chat room during last night’s UK Retail Sales. As I was furiously moving in and out of the pound, the yen and the various pound crosses I suddenly realized that there are three very distinct states of trading. There is the ideal trading model that you develop after thousand of hours of observation and back testing. There is the live market price action that rarely corresponds to the exact parameters of the model and lastly there is the actual trading that you will do under real market conditions that will only approximate the rules of your model.

Don’t get me wrong. It’s extremely important to have all three components in order to trade successfully. You can’t trade a strategy unless the intellectual foundation is technically valid. But it is naive beyond belief, to think that having a great trading strategy is all you need to make money in the markets. The markets are designed first and foremost to wreak havoc with your strategies and force you out of your trades, usually at the worst possible time. Speculative markets are essentially nothing more than massive poker bluffing machines whose primary function is to transfer the wealth from the weak hands to the strong hands.

The easiest way to become weak is of course to over leverage your trades. But beyond that I think the other way to let the market wear you down and destroy you is by being too disciplined, by faithfully following your model on every single trade, every single day. Doing that will inevitably create two problems. After some period of time your model will begin to lose -- and no matter what you tell yourself -- just like a spouse who cheats on you -- will grow to resent your model and then doubt it and then eventually abandon it, even though in the long run it may prove to be very profitable.

So it’s actually okay to be sloppy, to be imprecise, to make mistakes. In my BK chat room I laid out my run to the 00’s model using crisp, clean instructions that looked wonderfully efficient on the chart. But of course in the mayhem that followed news trading, my execution was off, my first exit was flawed and my second exit was driven more by psychological compunction rather than proper risk control.

And yet it was perfect trading day.

We made money because I got the big thing right -- direction. And most importantly I did not fret about botched executions, or missed opportunities or unfavorable spreads. I focused on the only thing that really mattered -- where was the trade going?

And as John Maynard Keynes made perfectly clear -- in trading and in life that’s the only thing that matters.

Three Simple Questions Every Trader Should Ask At The Start of Each Week

Boris Schlossberg

Plan your trade, trade your plan is an old maxim in the markets that almost everyone ignores.

The reason is obvious, of course. Financial markets are the least predictable environment there is. Every day is different from the last and anything can happen at any given time. Executives at Amazon, for example, can predict within a few packages, the demand for some product from a particular zip code at a particular time of the day. This is especially true for highly consistent products like soap, or cereal, or shaving cream that people reorder all the time.

In real life demand for goods is remarkably consistent since it must satisfy physical needs that are inviolable. In financial markets -- especially in speculative ones -- demand is totally mercurial. If you still believe that currency markets exist to help corporations and investors to settle their cross-border transactions or that oil markets exist to help producers and consumers find a settlement price -- you are woefully naive. More than 97% of all activity in both markets is purely speculative in nature -- meaning it does not emanate from an actual economic need for the product. The average daily volume on NYMEX for crude oil is 22 Billion barrels of notional value. The actual daily demand in the real world? 80 Million barrels per day.

Whether this is good or bad is a philosophical question that I will put aside for now. But the wide gulf between how real world markets behave and how financial markets function goes a long way towards understanding why traders have such a hard time “planning” their business. The volatility of trading simply does not have any legitimate parallels in the real world which is why almost all “real world” business advice is worthless.

And yet… the longer I trade the more I begin to appreciate the value of planning. As traders, we can never expect the kind of control that real world business people enjoy, but that doesn’t mean we should operate by the seat of our pants as a result. This is especially true if you are trading some sort of systematic approach on a day trading basis. Day trading systems have the very big advantage of the law of large numbers. The more trades you make, the more likely the possibility that the large volume will smooth out the volatility spikes of the financial markets.

If you are trading a system here are three simple questions you need to ask yourself at the start of each week.

How many trades do I expect to make this week?
How many winners versus losers do I expect will occur?
What is the pip target this strategy will likely produce?

This is hardly the Big Data-regression-driven-sophisticated-stat analysis that exists in the real world, but it’s enough to ground you in making much better trading decisions for the long term. Just asking those 3 simple questions can tell you if you are overtrading or not trading enough. If the volatility of the markets is aiding or destroying your win ratios and most importantly if you are actually following the system that you claim to trade.

Setting expectations doesn’t mean that you are now a prisoner of your rules -- quite the opposite. It means that you can now exert a modicum of control over one of the most unpredictable human activities there is.

Tools to Change Your Trading Life

Boris Schlossberg

This week no words of wisdom. No ruminations on the foibles of human nature and the art of trading. This week I would just like share with you two very simple tools that could very well change your trading life. They are nothing more than an MT4 BUY script and an MT4 SELL scripts that I picked in public domain and modified to my spec. They allow you enter a market buy or a market sell in a flick of an instant. But they also do three very important things.

  1. They always use a default size
  2. They always have a stop
  3. They always have a target

Why is that so valuable? Because 99% of retail forex failures come from using the wrong size and never adding a stop to the position. That almost always devolves into the add-trades-until-I-get -lucky-and-get-out-at-breakeven cycle which in actually always resolves into I-blew-my-account-to-a-margin-call reality.

These two simple tools will stop that from happening.

The defaults in the version here use the smallest size possible and a take profit of 10 pips and stop of -25 pips but the in the video below I show you how to adjust that to your liking.

If you want the dropbox link, just email us at [email protected] and say SCRIPT in the subject heading.

Timing is Everything

Boris Schlossberg

Trading is timing, so goes the old adage and when it comes to intraday trading that’s certainly never been truer than now. We spend all our days and night perfecting the timing of our trades. We write algos, we test strategies, we pour over charts.

But 99.9% of our time retails traders focus on entries. Exits are always relegated to various strategies on price. We look to trade with fixed exits, scale out exits, scaled in exits and every trick imaginable in inventory management.

Except one.

Very few traders focus on time stops -- using time rather than price to exit the trade that hasn’t hit the take profit. Yet time stops maybe one of the greatest risk control tools in the markets and yet one of the least utilized.

One of the greatest examples of a time stop comes from Jack Schwager’s Market Wizards interview of Paul Tudor Jones. The interview takes place in the wake of 1987 Stock Market Crash (still the biggest single day decline ever) and PTJ spends most of the conversation essentially talking about the end of the world as he presents a reason after reason for being short. A few week’s later Schwager catches up with Jones and much to his surprise discovers that PTJ is no longer short. Jones tell him that he always uses a time stop along with the price stop and when his 1929 analog model did not confirm his thesis he got out.

Contrast that behavior with Robert Prechter who at the time was considered to be the greatest market analyst alive. He had predicted the bull market of the 1980’s but after the ‘87 crash turned bearish and stayed bearish through Dow 4,000, Dow 10,000 and now Dow 20,000 -- I kid you not.

A time stop is essentially a check on your ego which is why it is such a powerful tool of risk control. Presently I trade with a 10 minute time stop -- which we are going to automate shortly. Am I going to miss out some take profits? No doubt. Am I going escape many unnecessary stop outs? I believe I will.

Trade Like General Patton

Boris Schlossberg

One of my all time favorite wartime movies is “The Guns of Navarone” which tells a quasi-biographical story of an attempt to sabotage a seemingly impregnable German fortress in Greece that threatens Allied naval ships in the Aegean Sea, and prevents the rescue of 2,000 stranded British troops.

It starts a motley crew of British and American actors, including Gregory Peck, but by far my most favorite actor in that movie is Anthony Quinn who plays Colonel Andrea Stavrou from the defeated Greek army. There is a scene in the movie where the whole team is captured by the Nazis and Quinn begins to grovel obsequiously in front of the German officer. The imperious officer lets down his guard as he pushes away Quinn with disgust, but he lets Quinn get a little too close to him and is instantly stabbed to death.

It’s one of the greatest fight scenes in the movies precisely because it is not heroic. Quinn essentially lets go of his ego and as a result, he saves the whole team and the mission. It shows that in life you win by wile rather than force.

That same idea is also present in another great war movie -- Patton. The film starts with George C Scott playing the famed US general, staring directly into the camera as makes a devastatingly simple proclamation, “No bastard ever won a war by dying for his country. He won it by making some other poor dumb bastard die for his country.”

What does this have to do with trading?

Just about everything.

Both movies are about winning. And their message is that winning is the exact opposite of our romantic view of heroism. Heroes don’t win because they get slaughtered running straight into a stream of bullets. Heroes may be noble, they don’t achieve their goals.

How many times have we played “the hero” with the market? How many times have we tried to sell rallies or buy dips and kept on doing it to the bitter end? How many times have we played Tony Montana taking on bullets (or in our case losses) until we bleed out in the end?

Has that “hero” fantasy ever worked? Maybe once or twice, but in the end you go down bigger and harder than ever. The market always wins because we are never willing to grovel.

Lately, however, I’ve started to let go of the hero mentality. Not only have I started to trade much more with the flow rather than against it, but I have been willing to walk away from bad trades rather that try to “repair” them. The net result is -- yes I do have more stop losses -- but they are basically harmless scratches now rather than life threatening wounds.

To paraphrase General Patton, “No bastard even made money in the market by blowing up his account. He won by making some other dumb bastard blow up his.”

How To Make Trading Resolutions That Stick

Boris Schlossberg

They say that by the first week of the New Year 90% of all resolutions are broken. That seems about right. We, as human beings, suck at discipline. It’s hard to start a new routine and even harder to maintain it.

The classic advice that all experts give is to make your resolutions as discrete and precise as possible. For example, instead of saying I want to make money this year, resolve to make 10% on your account -- actually go even further than that -- resolve to make just 5 pips net each day. That may sound easy, but is actually incredibly hard.

Five pips per day at 250 trading days per year is about 12%. Do that for a decade and you will have developed a skill as valuable as any job out there. Of course no one can make five pips every day. The markets are just not that kind. You’ll have days, weeks, even months where nothing is working and the best you’ll do is just stay even.

Still five pips per day is a worthy goal because it’s a reasonable constant that will keep you on the path towards profitability. If you can just maintain that pace going you will win at trading. But of course we all know that goals are not the problem for most well trained traders -- money is. The moment we start losing money, real money, all goals, all discipline goes out the window. At the moment financial press is rife with headlines that George Soros lost a billion dollars since the Trump election as his shorts blew up in his face.

First of all ouch. As famed House Speaker Sam Rayburn used to say, a billion here, a billion there and pretty soon you are talking real money. On the other hand, as Josh Brown tweeted out “If you’re gleefully sharing the headline ‘Soros Loses a Billion’, try to remember he has 30 more of them.”

As enormous a sum a billion is to most of us, to Soros it the equivalent of 10,000 dollar. Sure it hurts, but for most of us it isn’t going to change our life. It’s all relative. It’s why he s able to wage such vast sums of capital and lose it without much concern. Soros has gotten to an age and a level that allows him to operate unintimidated by the risks he takes.

But most of us can’t do that. We are too close to our money and in fact the more money we put into an account, the more of it we tend to lose because we are human -- we can’t help it. A loss that is painful but small is inevitably turned into a much deeper and more substantial loss because we just can’t let go of our money, so we pull the stop, we double down and we revert to the vicious cycle of loss.

Is there a way to circumvent that problem? Is there a way to stick to our resolutions and adhere to our goals? There is, bit in order to succeed we need to isolate ourselves completely from our money. Fortunately these days technology can help us do that.

We can trade copy ourselves.

Yes I know that sounds idiotic. Why would you want to replicate your own trades into another account? Not only do you have to pay someone to do this (although there are ways to do it for nothing) but your replicator account will often suffer slippage because of natural delays in signal delivery. And yet for all the problems that trade copying creates it’s psychological benefits are far greater.

Why?

Because it separates you from your money. Think about it for a second. When you trade copy you have a master account and a slave account. The master account can be as small as you like because you can simply apply a multiplier to the slave account to get to proper size. In fact master is often traded at the smallest size possible of 0.01 lots. There is a lot of power in that structure. In fact many traders often trade very well on 0.01, but once they scale they lose all control. It’s a lot easier to take a 50 point stop at 0.01 lots because that’s only 5 bucks of P/L. It’s a lot harder to do that with 500 dollars and harder still with 5000. Yet to be a successful trader that’s what we have to do day in and day out.

By trade copying ourselves -- we cheat mother nature. We create a psychological barrier that separates us from our money and prevents us from falling into the vicious vortex of uncontrolled losses.

So if you really want your trading resolutions to stick -- stop trading your real money.

Backtests Are For Losers

Boris Schlossberg

I know. I know. How could I possibly disparage backtesting? After all, every algo-driven quant fund in the world -- the new masters of the universe -- runs all of their strategies through rigorous backtesting.

Let’s put those guys aside for a moment, because first, they have more computing power that the Pentagon and second 90% of their “edge” has nothing to do with trading and everything to do with cheating as it is essentially a programmatic form of front running. Most of the quant world reminds me of an old Sylvester Stallone movie called Shade in which he plays a card shark. The best part of that movie is the tagline -- “When betting is your life- leave nothing to chance.” The movie is basically about very sophisticated forms of cheating much like most of quant trading.

But us mere mortal retail traders must operate in the world of risk and when it comes to retail trading let me ask you a question -- have you ever seen a backtest that was confirmed in real life trading? I have seen plenty of beautiful 45-degree equity curves that turned to mush once real money was put on the line. I have seen many, sophisticated backtest results that were put through more data torture exercises than I could possibly imagine and yet they too lost their “robustness” within months of going live.

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Instead of focusing on backtests let’s look at how one of the most successful companies in the world does business. In a recent article on Amazon, here is what it said, “But Amazon doesn’t spend too much time on internal testing. “They prioritize launching early over everything else,” one engineer wrote in an epic 2011 rant comparing Amazon’s culture to other technology companies. Launching early with what Ries has dubbed a “minimum viable product” allows Amazon to learn as quickly as possible whether an idea that sounds good on paper is actually a good idea in the real world.”

This is an incredibly valuable lesson for us all. “Real Life” or in our case “The FX Market” will be the true test of our ideas. In fact, over the past three years I am proud to say that aside from a 20 or so manual samples on a chart, I have never backtested any of my strategies. In fact much to my amusement, every year traders with far more computer skill than I email me very elegant charts showing me exactly why my strategies are horrible losers -- and yet in real life we haven’t had a down year on day trades since we started in 2013 and as shown last week I closed my personal account in 2016 with 21% gain.

Why do my strategies lose in theory but win in practice?

Because I don’t care about theory, I only focus on practice. Trading is 90% tactics and 10% strategy. People who like to backtest everything have those numbers in reverse, which is why much to their consternation they inevitably lose. They spend too much time thinking and too little doing.

I would even go so far as to say that I despise backtesting because it mainly offers false hope and breeds intellectual arrogance that forces the trader to make the same stubborn mistakes over and over again.

To trade well -- take a lesson from Jeff Bezos. Prototype and then put it out into the real world. Let the market be your teacher. That’s the only test that matters.

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For 2017 – Be Less Stupid

Boris Schlossberg

Here is the trading record of my personal account in 2016. When you look at it the Twin Drawdowns of about 10% each in March and December respectively jump out at you right away.

10%ddown

Was this the result of faulty strategy?
Adverse market conditions?
Bad execution?
None of the above.
This was the result of nothing more than sheer pridefulness and stupidity. In both cases, I traded without a stop and even worse than that I traded at my normal trade size on the initial trade which in turn resulted in massive losses when I eventually closed out the trades.

monthly-nostops

Let’s once again examine exactly how this slow motion car wreck occurs.

Let’s say your normal trade size is 1X equity and you risk 0.25% per trade. But then you decide Nawww! This trade will come back so you lift the stop and let it float. Soon you are -0.5% underwater so you add another unit and now you are at 2X equity on the position. You keep doing that every 50 pips or so until you are at 6X or 7X equity into the position and in the meantime the currency is in a freefall of 150 pips or more with no retrace in sight. Now in a matter of hours you are down -5% to -7% on your account and essentially starting at the screen like a deer stares as headlights. You have one last fateful choice to make -- double down in size or cut losses now. Inevitably, you will opt out for choice number one, because -- there is no way that the currency can fall 200-250 pips without a retrace -- right?

Of course it does and now you are truly fearful for your account so you just cover at market usually at the low. That’s how you get 10% Drawdowns. They are almost always a function of stupidity rather than some unusual market action.

The only thing I can say for myself is that I was a little less stupid on the second drawdown. I didn’t double down and I exited the long EURUSD trade without trying to break even. Had I not done that my loss could have ballooned to 30% or more and I would have given back the whole year.

As a result of that nasty little loss, I put in a new rule that I only trade without stops for positions 1/10th my usual size. Anything that starts out at normal size or bigger gets a stop. Always.

So my resolution for 2017 is very simple -- be less stupid. That way I could target 30%-40% in 2017.

In the meantime, the overall data for the account was actually quite good. I did about 1600 trades or a run rate of 2000 trades per year and my average expectancy net of all costs was 1.1 pips which brought me to 20% for the year. I’ll take that.

yearendstats