The True Risks of Trading

Boris Schlossberg

  1. You had an argument with your spouse.
  2. You woke up with a vicious headache or a head cold.
  3. Someone you know belittled your judgment about a trade.

Tell me, after each and every incident above did you trade worse or better?

How about.

  1. You missed a target by 0.1 pip and the got stopped on the trade
  2. You hit three stop outs in a row
  3. You were in a trade when a news bomb hit and you suffered -100 pip slippage off your intended stop

Did you trade better or worse then?

Or.

  1. You watched the currency rise all night long and were convinced that it was a long bias and then it reversed all of its gains and more so./li>
  2. You been trading a set up you were sure would work, but when you did a quick backtest it turned out to be a massive loser./li>
  3. You missed a trade that was a winner and so decided to do another trade in hopes of replicating the experience./li>

Did you trade better or worse?

I think we all know the answer to that question. The funny thing is that none of the issues I raised above have anything even remotely to do with a particular strategy you are trading. Yet they can all sabotage your long-term results far more than any specific setup you choose.

Every trading guru likes to pretend that trading is logical. Just do A when B occurs and voila you will be rewarded with endless and consistent pips. It just like making widgets. Stamp them out and collect the revenue.

Of course, nothing can be further from the truth. Trading is not at all logical. Its psychological both in the market structure and in the way that the whole process works, and while we obsess endlessly about this indicator or that one, this exit level or that one -- the true risk in all of our trading lies in the day to day issues above.

Each one of those pressure points is about losing control. Indeed, the whole purpose of the market is to FORCE YOU TO LOSE CONTROL SO IT CAN TAKE AWAY YOUR MONEY.

That’s why it’s important to be aware of the real risks in trading. If you just had an argument, don’t trade. If you feel sick don’t trade. If you got stopped on a bad market break, don’t trade. But frankly, we all know that is advice that we will ignore. Nobody in life ever obeys’s DON’Ts. Not consistently anyway. That’s why the only way to combat those risks is to follow the only DO that can help you stay in control -- trade small. Angry at the world and want to punch your computer screen? Trade the 0.01 lot. You will be very glad you did. It will hurt a lot less than the 100K lot you waste on the market in revenge.

There is no Such Thing as a Winning System

Boris Schlossberg

I’ve often made the argument that there are only two types of trades. Continuation or Reversal. Flow or anti-Flow. Trend or Fade. Call it whatever you want, but whenever anyone places a trade they are always implicitly making a bet that prices will extend in the prior direction or will reverse.

That’s why there is no such thing as a winning strategy. All strategic success depends on a market regime. In trending markets momentum strategies perform great. In choppy markets reversal strategies bank pips. You can do all sorts of things to finesse returns around the edges by using fancy money management techniques, but ultimately if you are caught in the wrong market environment you will get stopped out and sometimes even slaughtered.

They key is not to make things worse. And as traders we often do. That’s because we are obsessed with the idea of a “winning system”. That’s probably the single biggest lie ever told in the trading business. The only guy in the history of the markets who had a “winning system” was Bernie Madoff. For decades he fooled investors that he had the magic formula. And we all know how that turned out.

Indeed the key to winning in trading lies much more in NOT TRADING when the regime is against you than in forcing your system on the market that will chew it up alive. No doubt that’s hard to do with any degree of accuracy ahead of time and that’s why you have to accept the fact your great money making system will lose. Sometimes for days, weeks, even months on end. It does not mean it is not working. It just means it is not working NOW.

These days, I spend 90% of my time trying to figure out the most probable cases of when my set up will fail. Then, I try to studiously avoid making trades during those times. Again that’s not easy and answers change because market conditions change, but even if I can avoid three negative days per month, that could be the difference between winning big or just getting by.

Understanding that there is no such thing as a winning system should also help you to understand that there is no such thing as a winning trade. There is just the set-up and at any given time it can go either way. That’s why great traders trade positions not opinions. Opinions should be made before each trade. In fact, each trade is nothing more than an opinion. Once it’s in the market however, it becomes a position and that position either resolves to profit or a loss.

Most of us, however, develop opinions once the trade is in the market, which means that at that point we are no longer trading but practicing religion by relying on hope and faith. Hope and faith are very powerful human drives but they have nothing to do with trading.

Yet even the most atheist of us have prayed when a trade turned against us, especially if we changed its initial parameters with a post entry “opinion”. In fact the more we’ve changed the initial position the more intense our prayers become.

Tell me -- how’s that worked out for you in the past?
I thought so. The market can be crueler than the meanest of the Greek gods.

That’s why it all starts with understanding that there is no such thing as a winning system. Once you can come to terms with that you can start trading positions not opinions and save your prayers for when they can help.

Trading Tiny

Boris Schlossberg

After I graduated college I took my father’s advice to “rent everything from underwear on out” and have never owned a home, a car or a boat my whole life. But whenever I am on the road at some hotel killing time, I turn the remote to HGTV and like a visitor from another planet watch with fascination the endless house renovations on the channel. I love Tarik and Christina.I love Chip and Joanna and I love the crazy twins. I love everybody who flips houses and turns garbage into gold.

But the one show on HGTV that has been getting the most play lately is “Tiny House” where people abandon their complicated, gadget-filled lives in McMansions and exchange them for tiny little affordable homes that look more like toys than actual places of residence. What is perhaps most amazing about the Tiny House phenomenon is that almost no one regrets their decision to downsize. In the end, most people are happier in a Tiny House.

I’ve been thinking about the Tiny House trend a lot recently. There is a huge upside to getting small both in real estate and in trading. Whenever someone asks me what is the first thing they should do to improve their trading, I always tell them -- reduce size. It’s no guarantee of success but it is definitely an assurance of survival. And survival is 90% of the battle.

But let’s take that point further and consider the idea of Tiny Trading. The minimum MT4 size is 0.01 lot -- a dime a pip -- or 1000 units of currency. Lately, I’ve been trading one of my accounts at that 0.01 size and the results have been quite positive. Mostly because I could give a f- about either entries or exits. Stops are easy to take when they are trivial and entries are easy to make because you really don’t fear the stops. The net result is a kind of a virtuous cycle that puts you in the groove with the market and allows you to do all sorts of things that are much harder to do physiologically at a larger size. You can let trades run for a hundred pips. You can trade many pairs at once. You can scale up and scale out of a given trade without feeling any discomfort whatsoever.

Trivial you say? Perhaps not, Today I managed to bang away nearly 20 dollars clicking away at the account in between managing much bigger size elsewhere. 20 bucks may not seem much but think about it for a second. Say you have $10,000 account. There are 250 trading days in a year and you make $20/day with your Tiny Trading. That’s $5000 at year-end. Double that every year and by year seven you are making $360,000 per year in an account that started at 0.01 lots. Granted by that time your size has to rise to 3.2 standard lots but it’s a slow and steady progression to big money.

But let’s just say you simply Tiny Traded for the rest of your life. And every year you put the $5000 in winnings into a 3% carry trade and just let that compound. After 30 years you would have a quarter million dollars trading all those dime pips.

Without stress.
Without care.
And with much better clarity on the market than you probably have now.

Just like Tiny Houses, I suspect Tiny Trading could make a lot of people much happier by getting more with less.

Everything Good is An Accident

Boris Schlossberg

Every “guru” advice about the “secret of success” is pure bullsh-t.

Every success in life is an accident.

No, I really mean that.

Everything.
Is.
An.
Accident.

Penicillin -- the first antibiotic that literally changed life expectancy on earth?

Accident.

(from https://www.healio.com/endocrinology/news/print/endocrine-today/%7B15afd2a1-2084-4ca6-a4e6-7185f5c4cfb0%7D/penicillin-an-accidental-discovery-changed-the-course-of-medicine)

“Sir Alexander Fleming, a Scottish researcher, is credited with the discovery of penicillin in 1928. At the time, Fleming was experimenting with the influenza virus in the Laboratory of the Inoculation Department at St. Mary’s Hospital in London.

Often described as a careless lab technician, Fleming returned from a two-week vacation to find that a mold had developed on an accidentally contaminated staphylococcus culture plate. Upon examination of the mold, he noticed that the culture prevented the growth of staphylococci.”

The iPhone?

An accident. Steve Jobs was trying to create a tablet computer. Only when he shrunk it down to palm size did he realize that he had a smartphone on his hands which became the best selling product of all time. Steve Jobs did not invent the iPhone. It was an accident of an open mind.

Warren Buffett’s wealth?

All accidental.

Seriously?

YES!
(from
http://basehitinvesting.com/case-study-the-story-of-geico-graham-and-buffett/ )

“GEICO, for most of its storied history, was considered a high flying expensive growth stock. Buffett occasionally got interested in growth businesses, more so as his career evolved, but Graham was basically allergic to stocks selling for high price to earnings ratios or high price to book ratios.

So it was ironic that Graham ultimately made far more money in this single GEICO investment than all of the other investments he made during the course of his lengthy career… combined. It was also strange that Graham invested nearly 25% of his partner’s capital into GEICO in 1948, acquiring 50% of the growing enterprise for the small sum of just $712,000. This would eventually grow to over $400 million 25 years later!! That is a 500 bagger. To make an understatement: For a guy who made a living hitting base hits, this was a home run.

Around this same time, a young 21-year-old Warren Buffett became interested in GEICO after learning that Graham was chairman of the board. Buffett famously took the train to DC on a cold winter Saturday morning and luckily met Lorimer Davidson, an executive at GEICO who spent 4 hours with this “highly unusual young man”.

Buffett began buying stock the next Monday after being “more excited about GEICO than any other stock in my life”. He put 65% of his small fortune of $20,000 into Geico (the initial seedlings that would grow into his massive fortune). He also tried to sell the stock to every one of his clients and wrote this excellent research report called The Security I Like Best.

So GEICO caused Graham to put 25% of his capital into the business when no other security ever represented more than 5% of his well-diversified portfolio. And it caused a young Buffett to put the majority of his capital into the stock, also violating his mentor and role model’s investment policy.”

So basically the Buffett value approach investment myth is pure bulls-t. He rolled the dice on one great play and it paid off in spades.

My point is that all great ideas in life are bottom up not top down. They are all a result of trial and error process and those of us who are open to the possibilities we never even imagined existed stand a much greater chance of success that those of us who plan every waking moment of our day.

For us as traders, that means that every part of our trading plan is subject to revision. Constantly, adjusting and refining your trading setups is a sign of strength, not weakness.Adapt or die is both the rule of savannah plain and capital markets. Nothing remains constant. That’ why entries, exits, trailing stops are never sacrosanct. Always question and refine your approach and remember that the best ideas will likely be an accident. So never fear to experiment.

The Best Trading Advice Comes from A Guy Who Makes Tapas

Boris Schlossberg

Unless you are a foodie the name Jose Andres will mean nothing to you. But in the restaurant world, Mr. Andres is a big deal. He owns 26 restaurants across the world, several of which carry Michelin stars. Ha has also been the face of Puerto Rican relief serving more than 100,000 meals in PR daily.

In short, Mr. Andres is what my grandmother would call -- a mensch -- a good and decent person who also has done well for himself.

Although I’ve known about Mr. Andres for years and have even eaten at his Las Vegas restaurant, I really didn’t give the man much thought until I came across a Business Insider profile of him.

Unlike many Emperor Chefs who brook no criticism, Mr. Andres has stayed humble and in fact, does something remarkable that caught my eye. Every day, before he starts his day Mr. Andres reads every Yelp review of his restaurant. Unlike most chefs who refuse to even consider the words of the hoi-polloi, Mr. Andres takes the reviews seriously and tries to instantly fix matters if he considers the complaints to be legitimate.

This is, of course, easier said than done. No one likes to be criticised, least of all chefs who are some of the most domineering personalities in the world. But Mr. Andres uses a very interesting trick to help him cope. As he tells the interviewer,”Thicker skin is something like, José the person, José the chef, inside me, I’m, like, ‘What the heck do those people think? Who are they? I don’t want them in my restaurant anymore,’ which is good to have, but it’s good that you do that internally.
“And then he’s José the businessman, who says, ‘Man, this is free advice that I should thank the person for, taking the time, and this we will use to communicate.’ Every day on my phone, I receive reports of every restaurant, social media, comments in-house by the guests. We use them. We don’t use them every day, but sometimes maybe something needs immediate attention and other things is information you put together and then three, six months later, you say, ‘Listen, look at the pattern here.’”

Now let’s see how we can apply Mr. Andres’s tricks of the restaurant business to our own little world of trading. What is a stop, but simply a market critique of your trade? It is essentially an instant Yelp review of your actions. Now for Joe the Average Person a stop is a very painful experience that makes him question his worth as a human being. That’s why we all hate stops and why we try to avoid them at any cost, often blowing up our accounts as a result.

But what if we decided that when we engage with the market we become Joe the Trader-Businessman rather than Joe the Average Person? Suddenly a stop is no longer a mark of shame, but a very valuable piece of communication.

Think about it. There are only two reasons why you get stopped. One, you were dead wrong in your analysis and the market went the other way. Two you either mispriced or mistimed your entry. Now while there is precious little you can do about one, there is actually quite a lot you can do about number two. Instead of punching the screen when you get stopped out, ask yourself -- what is the market trying to tell you? Are your setup assumptions still valid? The answers are there. Sometimes it’s a matter of regime change in volatility. Sometimes it’s as simple as taking trades only during the London-New York interchange. Sometimes it’s a question of creating tighter risk control rules.

The point being is that when you start looking at life like Mr. Andres, criticism becomes communication allowing us to improve and make more consistent pips, just as Jose makes delicious tapas.
10.Resources.For.Fx.Teaser1 (1)

Lock in Your Luck

Boris Schlossberg

Everything I am about to say is statistically inferior, mathematically inefficient and systematically suboptimal.

Agreed.

There is only one reason to use what I am about to tell you -- because it works in real life trading.

But first a story. A few night’s ago K laid out a long GBPUSD trade in early Asia session trade. It popped in morning Tokyo dealing and she exited with a profit. A few hours later a Euro official made an offhand comment and the pair plunged well below her initial stop.

“You got lucky,” I said.

“Wasn’t luck, “ she insisted, “I knew it was going to test the recent highs!”

But of course, it was. Everything is FX has a large degree of luck. The very same day a few hours later the pound verticalized more than 100 pips in less than 5 seconds on news that UK may get to stay in the EU for another 2 years.

Anyone who trades FX knows that these news bombs are common. They are not frequent, but common enough that they take out a few thousand retail traders out of the market every month. It’s simply the nature of the game. FX markets are very news sensitive and when they react they will blow through any moving average, any Fib level any Elliott wave structure -- which is why I consider all technicals to be just lines in the sand.

There is one thing however that K did that vastly improved her chance of success. About a month ago we decided to trail all of her trade ideas. Now, whenever a trade goes in the money by X amount of pips we lock in a profit. Even if it’s a small one.

Yes, yes, I know. This is an inferior way to trade. You rarely get to collect big profits this way. That’s all true. And if markets weren’t highly random that argument might actually be valid. But in real life, markets almost never trade the future they way they traded in the past, which means that whatever system you are using is bound to fail, especially if it’s a short-term day trading system.

Unless you exert some control.


10.Rules.V2 (2)

In our chat room, we started to use a new moniker -- TTM. It stands for Take The Money and it basically means you should do everything in your power to never give up a profit once you have it. Markets are finicky by nature and relying on continuity is a sucker bet made by naive rookie traders. Wizened operators know -- to win at trading you need to Lock in your Luck.

Speculation is the OPPOSITE of Risk

Boris Schlossberg

The other day someone on Twitter posted the following quote from Victor Niederhoffer that went
like this:

“But life, like the markets, offers the greatest rewards to those willing to assume risk. Assuming risk brings uncertainty, anxiety, and occasional loss, but it also brings out the best in us. In becoming a speculator in life, each person embarks on a heroic quest, becoming more than he or she already is. Heroism is a potent antidote to the cynicism and alienation so many of us accept.”

Instantly, I thought it was the stupidest thing I ever read and went a long way towards explaining why Niederhoffer blew up not once, not twice but THREE TIMES.

In trading, there is a false belief that large reward requires massive risk, when in fact successful speculators do everything in their power to minimize risk always and forever. Some of the most successful speculators like HFT giants Virtu and Citadel literally never lose. You can hem and haw and scream that they do this by cheating -- by front-running orders -- but at this point, there are lots of competitors for speed and if speed was their own advantage they would have long ago been taken out of the market. Virtu and Citadel win because they are excellent at professional speculation. They win because they trade very small size and allow the law of large numbers to tilt the odds in their favor.

Unlike gamblers -- speculators never, ever “have a hunch bet a bunch”. They always control their size and always assess risk with fresh eyes. Even the very picture of a swaggering speculator George Soros is not what he seems. Take the great GBPUSD trade of 1992 when Soros broke the Bank of England and collected a cool Billion dollars in a day. The story has become its own myth and most people assume that Soros gambled all his capital on this one amazing trade. That’s not at all what happened. In 1992 Soros’s Quantum fund was having a good year across a variety of asset classes when the GBP trade presented itself. Soros then decided to take all the profits of the year -- and ONLY THE PROFITS -- and lever them into the bet that cable would have to exit the ERM. If he was wrong, Soros wouldn’t have been close to bankrupt, he would have just been even for the year. Which goes a long way towards explaining why he continues to make money after 50 years in the business and Niederhoffer is just a footnote of history.

The better I trade the more I realize that intelligent speculation is the opposite of gambling. It is the art of saying NO and eliminating risk at every turn. My latest Trend trading strategy has been working well, but recently I discovered (with the help of traders in my chat room) that it actually exposes itself to unnecessary volatility during what I dubbed the “Bermuda triangle of FX trading” (the Tokyo -- Frankfurt -London interchange between approximately 0500-0800 GMT -- when prices are subject to sudden spikes and quick retraces. Now I try to avoid that time zone like the plague and it my risk will decrease as a result.

BK.Trend.09.25-29.2017

And that’s how it goes. The truly heroic traders are not the ones that take outsized bets with their capital, but ones that assiduously remove risk from the process and live to trade and win day after day after day.

100 Trades of Profit

Boris Schlossberg

The other day I stumbled across an amazing YouTube video. Two guys -- both skinny non-athletic nerds challenged themselves to do 100 pushups each day for 30 days straight. The rules did not require them to do 100 pushups consecutively -- just cumulatively -- as long as the total ended up to be 100 at the end of the day.

This was a fascinating experiment. Push-ups require no equipment and can be done anywhere (they did push-ups in parking lots, conference rooms, etc.) Push-ups take very little time and need almost no athletic skill. It is perhaps the simplest human exercise there is.

Their journey was eye-opening. Neither man was in good shape. Neither man was ever an athlete. During their first week of attempts, they could barely do 5 push ups consecutively. One of them failed to achieve the 100 goal until the 7th day of the experiment. Yet,l they persisted.


BK.Trend.09.25-29.2017

Here is the absolutely remarkable thing. After 30 days, both men were visibly stronger and more muscular. Each one had changed his diet to a much more healthy regime and their overall posture and presence was decidedly more confident. All of this was achieved through the lowliest, most humble of exercises simply because they set a modest goal and stuck to the plan.

The hundred push-up experiment made me realize that we can achieve the same type of radical improvement in trading if we adopt their methods. Let’s do a simple experiment. Let’s commit to making 100 profitable trades of 10 pips each over a period of 30 trading days. The only rule is that you must honor your stops (whatever they are). You cannot let losing trades float. The purpose of this experiment to not necessarily make you money (though that would be nice) but to get you to engage with the market in a proper way.

Why do most traders fail? Because they have no defined plan for how they will trade. In fact, most traders quit simply because they hit 3 losing trades in a row. Here is my prediction if you do this experiment. I predict that you will begin to realize what trades work and what trades don’t. I bet you will become a lot more selective in your entries. I predict that you will become a lot less greedy in your exits. I bet you will develop a healthy respect for risk. I bet you will begin to feel joy and then confidence at winning 5 and maybe even 10 trades in a row and will begin to understand how winning is possible.

If two nerdy guys can transform themselves into strong confident young men just by doing 100 pushups each day for a month, then we as traders can certainly improve our skills by focusing on making 100 profitable trades in 30 days. Give it a try and even if you are making 20 losers in a row, keep going. The lesson of the pushup experiment is that success lies in simply trying for a meaningfully long time.

The Healing Power of the Repair Trade

Boris Schlossberg

“When you are shooting a moving target, a shotgun is more useful than a rifle!” Penelope, one of the best traders in my chat room

It’s been a good month of trading in BK. I’ve managed to bank 20% in my own account which is by far the best monthly performance for myself in years, but looking over the trade blotter, I can’t help but appreciate how many times this month my a-- has been saved by the repair trade.

Those of you who have followed me for a long time know that I always trade with a multi-entry approach. My first entry is never my last entry into any trade I take -- be it swing, news or day trade. Of course, you can sneer and say that I am simply averaging down, and as Paul Tudor Jones once famously said, “Only losers average losers.” But while there is great truth to that statement I take exception with calling what I do averaging down.

Typically when traders average down in their positions they do so out of desperation as they try to rescue a losing position. The average down trade is often done reactively with little thought to the overall size and ultimate stop.

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BK.09.18-09.22.17.Results

I, on the other hand, always know ahead of time exactly how many entries I will make, exactly how much size I will use and exactly how much risk I will bear. My systematic approach to trading basically assumes that I will be wrong on price but correct on the general vicinity of entry. I think it’s a more humble way of trading because you admit ahead of time that you will likely be wrong. In fact, often you are wrong more than once or twice and yet can still come out a winner by never committing all of your capital to a single price.

If markets are essentially probabilistic entities then it always amazes me why more people don’t trade probabilistically. To me, it’s the height of arrogance to assume that you can pick a price with a degree of certainty greater than 50/50. However, you MAY BE able to prick a price area with a degree of certainty that often approaches 90/10.

Strategies are important, but even the best ones have a very tiny 55/45 edge which can quickly evaporate in the changing environment of market volatility. That’s why to truly improve your trading you need a multi-entry approach and a humble attitude.

You need the healing power of the repair trade.

Why is All Trading Advice so Contradictory?

Boris Schlossberg


Trading is all about exits.
Nah -- trading is all about entries.
Trade with a minimum of 2:1 risk reward ratio
Nah -you’ll never make money if you don’t let your stops be bigger than your profits -- pigs get slaughtered.
If you want to make money trading follow your system rules.
Nah -- rules are meant to be broken -- they are just guidelines.

Spend an hour on the internet researching trading advice and you can easily conclude that this is a schizophrenic business and that no one has a clue as to what they are saying.

Trading advice may seem contradictory on the surface, but actually, it is not. It’s simply a matter of what trading model people choose to follow.

As I’ve noted many times before there are really only two ways to trade -- the lottery model and the insurance model. The lottery model is the traditional approach that looks for 2:1 or greater win ratio, has very few winners but makes sure that they are large enough to pay for the losers.
The insurance model, on the other hand, does the exact opposite, It tries to make almost every trade a winner and avoid losers as much as possible, but when it does get hit the loss is much larger than the wins. Just like the insurance business, it counts on winners (i.e. premium payments) to offset the rare losers.

Once you begin to view trading advice through the prism of these two models it makes much more sense. If you are following the lottery model and every potential trade could be a huge winner while the risk is generally small -- then, of course, you should follow the rules of your system and take every single trade. Discipline is paramount.

On the other hand, if you are trading the insurance way then passing up a single trade means almost nothing -- in fact, it may be hugely advantageous to do so, since you may miss a big loser which is the same thing as banking many winners. Discipline is actually idiotic and discretion is the key to success.

This also goes a long way to explaining why exiting early under the insurance model is actually very smart but under the lottery model can be ruinous. Under the insurance model, you are trying to avoid losses, your wins are practically guaranteed. So an early exit that avoids a major loss is the right move. On the other hand, an early exit from the lottery model can be devastating -- it’s the equivalent of losing your ticket before you can cash it.

The lottery/insurance duality also plays into trade selection. Lottery model traders should be very promiscuous with their entries (their risk is limited, but their payoff is large) but must be very disciplined with their exits (you need to bank massive wins to pay for a large number of losers.) Insurance model traders are just the opposite. They need to be extremely cautious with entries (the last thing you want to do is sell a life insurance policy to an overweight, chain smoking, motorcycle rider who doesn’t wear a helmet), but generally free to exit as they choose.

So when you hear two traders on the Internet yelling at each other, very often they are talking past each other.They are operating under completely different logic regimes. Therefore, before seeking anyone;’s advice or taking anyone’s criticism seriously understand your strategy and trade accordingly.

How to Scale up Size Like a Boss

Boris Schlossberg

Suppose you have a great system working the market. It’s hitting 90% or better of all its trades and you want to start trading in size. How do you do that without blowing up?

You know what I am talking about. You are on a hot streak. Money is pouring into your account every day and instantly you start projecting linearly. Man -- if I just traded ten times the size, I’d be making $10,000 a week and then after a few months I could double it and start making $20,000 a week and pretty soon I’ll be making a cool million a year off this thing!

We’ve all had that trading reverie when the temporary success in the market seduces us into thinking that we are on the way to fast and easy millions. Needless to say, those daydreams always evaporate. Usually, we over leverage and quickly blow up soon thereafter.

Trading is so hard that we have all sorts of contingency plans for not losing our capital, but few of us think about what we should do when we start winning.

I find myself in that position now. I am running a very successful trend trading strategy that is hitting 90% of its trades and has already managed to bank 10% just this month trading at my maximum lever factor of 4 times equity.

Should I increase my leverage?

Hell no.

I am already flying too close to the sun and frankly, 10% is a ridiculous amount of money to make in just a few weeks if you want to maintain a sustainable model for profit. Those of you who have been reading me for a while know that my motto is 4X 4 Forex -- meaning that no single trade ever should exceed four times the size of your account. I believe this is the absolute maximum amount of leverage you should employ in the markets if you want to survive in the markets for more than a month.

So levering up is out of the question.

Still, I am only using 10% of my capital on this strategy and the prospect of going “all-in” is very tempting. But that would be a huge mistake. Like all high probability strategies, my strategy has a very negative risk reward payoff. If I instantly scale up to ten times my size and hit a string of losers, it would wipe out all the gains of the past few weeks. Mathematically it would have no impact on the overall payout of the strategy because I would still be trading within my leverage limits, however, psychologically such massive loss would be brutal.

In fact, that is how all good strategies die. Greedy traders push them to their size limits, then when they hit an inevitable losing streak the sudden increase in scale erases all the hard earned gains so they quit in disgust leaving possibly years of future gains on the table.

So is there a better way?

I think so. The key as with all things trading is to control your greed and ramp scale up gradually. Instead of plowing all in, I intend to finish out this month with the current 10% allocation. If the strategy performs well I will add another 10% of my capital the next month and so on and so on. This way the scope and scale of capital allocation are manageable. The losses -- both psychologically and financially -- are far more tolerable and more importantly, the ultra slow pace of capital increases will not only help me survive the inevitable drawdowns but will also allow me to intimately study the strategy performance under a variety of market regimes.

It’s great to have a winning strategy for a while, but it’s even better to turn it into a lifetime moneymaker.

Discover this strategy. Join BK.

Trade Less, Make More

Boris Schlossberg


Suppose you had a setup that was 90% accurate. Your natural inclination would be to trade it as much possible but if you do that you are almost certain to blow up your account.


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Rookie traders often make the deadly mistake of conflating high probability with high frequency. In reality, the two are always mutually exclusive. If they weren’t -- then anyone who had a high probability/high-frequency setup would be able to acquire all the wealth in the world within a year’s time.

One of the biggest misconceptions in day trading is that high-frequency shops like Virtu are high probability traders. In fact, just like roulette tables at the casino Virtu makes money only 51%-53% of the time. The rest of the time it scratches out trades or takes small losses. How is then that it wins 99% of the time? Through the law of large numbers. Virtu makes money all the time, not because its trade signals are accurate, but because it makes hundreds of millions of trades per day and the small edge almost always makes it P/L positive.

Retail traders could never replicate that process because it requires massive infrastructure and gargantuan sample size to achieve such results. Yet many traders fail to see that point and start to bang away at prices thinking that just like the big boys -- the more they do the more they’ll make.

The truth is the exact opposite. In retail, trade less, make more is the motto of the day. The only advantage that we have as retail traders is our ability to STEP AWAY from the market. In other words, the only true advantage that retail traders possess is their complete freedom to choose only the best possible set ups and walk away from all others.

This is an incredibly difficult concept to internalize because everywhere else in life we are taught that more input equals greater output so we naturally assume that trading follows the same principles. However, in trading, we are actually inputting nothing. In trading we are in fact absorbing risk, which is why the rules are turned upside down with the general principle being -- the rarer the trade, the better the trade.

This week I realized that this principle can be extended even further. Like every forex junkie I follow the market almost 24 hours/day, often waking up on cue at 2 AM to check on Tokyo afternoon trade before catching a few more hours shut eye ahead of my regular wake up time for the London open. While I doubt I will ever give up those habits, I realized that my actual TRADING TIME is contained to only 10% of the trading day. On a day to day basis, almost all of my profitable trades occur between 900-1100 NY when the major economic news of the day is released.

Now FX is a 24/hour a day affair, and occasionally news breaks that is so vital that it can move markets for hundreds of points at any hour of the night, and as forex traders, we certainly want to take advantage of such volatility. But most of the time forex market is like war -- hours of boredom interspersed by minutes of action which is why it behooves all of us to ask -- when do I make the most money during the day and then focus on trading those hours only.