The Winning Way to Set Trading Goals

Boris Schlossberg

In life, if you really want to achieve something -- set a goal. Most people start out the New Year by resolving to lose weight or get in shape and fail miserably at those tasks. If on the other hand, everyone resolved to lose just 5 pounds or to walk briskly for 20 minutes twice each week, many of those resolutions would be kept.

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In order to make goals viable and achievable, they have to be concrete and realistic. As human beings, we are very bad at abstract targets but set a hard number in front of us and we will go after it like a bloodhound on a hunt.

Yet when it comes to trading, many gurus will tell you NOT to set goals. The markets are utterly unpredictable, they’ll say. You can’t set hard targets on a daily basis, like a car salesman or donut store owner. Financial speculation just does not lend itself to consistency, so it’s not advisable to set targets, you’ll just get frustrated.

It is true that trading is not like any other business. Unless you are a dealer and have reliable customer flow against which you can trade, financial speculation has all the consistency of unset jello. Some days every trade turns to gold and other days you do nothing but bleed money. In that environment expecting to make a steady daily paycheck is woefully unrealistic.

But that does not mean that traders should not set hard target goals. It simply means that those goals should be measured on a longer time frame than 24 hours. If you are trading a high-frequency system, one of the best ways to measure your performance is to compare the actual results against results on a monthly, quarterly and annual basis.

By having at least 100 trades in your records, you will be able the law of large numbers tell you if the strategy is performing to spec or not. Looking at your trading from a longer term perspective eliminates most of the day to day angst of our profession and allows the trader to examine his performance in a rational, quantifiable way. It also creates the single most important aspect of goal setting — realistic expectations.

Just as no normal person would resolve to lose 200 pounds in a month, so too no real trader would expect to earn 100% in a year. Setting realistic targets against the backdrop of market tested results is the much more professional way of approaching the trading business. I recommend you give it a try.

EURUSD – Heading for 1.1700?

EURUSD – Heading for 1.1700?

Chart Of The Day Uncategorized

Mario Draghi tried. He really did. But the market would just not buy his dovish talk. The fact of the matter is that the Eurozone recovery is in full bloom and the ECB is definitely heading for a taper as it tries to normalize monetary policy after years of extraordinary measures.

Meanwhile, on this side of the Atlantic, attempts by the Fed to reassure the market that further rate hikes are coming look increasingly dubious as US data continues to disappoint. The odds of another rate hike by the end of the year have fallen below 50% and today’s weak Philly Fed numbers did not help matters.

Tomorrow the econ calendar is barren, but euro bulls having broken through the key 1.1600 level are emboldened to challenged the multi month highs at 1.1719

GBPUSD – 1.3200 in View?

GBPUSD – 1.3200 in View?

Chart Of The Day

Cable saw a small selloff today in the wake of cooler than expected CPI readings, but the pair held key 1.3000 support and appears well on its way towards testing multi-month highs at the 1.3200 level.

Tonight is an off night for the eco calendar with nothing on the docket in either UK or North America, but on Thursday the pair will see the release of UK Retail Sales which is seen as a key barometer of UK consumer health. Retail Sales have been a major drag on the UK economy but the market anticipates a massive rebound. If the data meets forecasts -- it could be the catalyst to spur a further rally to take the pair towards the 1.3200 target as the week comes to a close

Do You Want to Run a Business or Do You Want to Gamble for a Living?

Boris Schlossberg

One of Sylvester Stallone’s less known credits is a movie called Shade, set in the world of LA hustlers and poker players that deals with the inner workings of the gambling world. I’ve always loved the tagline for the movie which reads, “When betting is your life, you leave nothing to chance”. The movie is all about intricate cheat schemes that professional gamblers create to make sure they always win the pot -- so its lessons to us as traders go only so far.

But I have always loved the ethos of the movie which was basically that in games chance you leave as little as possible to luck. To me, the message of Shade is that in a highly uncertain business such as trading you must be prepared for every eventuality by limiting your market exposure to the smallest reasonable risk.

That means that as day traders we need to trade small and trade often. We are the pigeons on the market floor. Plucking away at a few easy pips here and a few pips there, fleeing at the first sign of true danger. That may not sound glamorous or noble, but it is much better than either one of those things -- it’s an effective way to make money.

The greatest business columnist working today is Matt Levine of Bloomberg. He is a former M&A lawyer at Wachtell Lipton and a former banker at Goldman so his understanding of market structure and Wall Street machinations is second to none. The other day in his column he made a casual observation that really hit home. Matt said that Wall Street banks are in the moving business, not the storage business. What he meant is that successful trading is inherently about moving inventory whether it be through bid/ask differential, scalping, short term dealing or even agency brokerage business. Banks make their money by moving product from customer A to customer B by passing risk along, rather than storing it.

Almost always the tragic mistake that all of us make is that we suddenly stop being a moving business and become a storage business. Sometimes the change is so subtle that we don’t even notice it. But it almost ends badly as the inventory inevitably turns rotten. These days, whenever I find myself nursing a trade that is long past its stop-out level -- I try to remind myself that I am not in the storage business and let it go no matter how much it hurts.

Keeping things moving is crucial to long-term success and survival, but I think many retail traders fail because do not understand the real nature of this business. The romantic notion of trading is built on the idea of placing a thousand dollar bet on one trade and walking away with a million. Trading books are full of such lore -- The Soros Bank of England trade, the Paulson short mortgages trade -- blah, blah, blah. The reality is much more prosaic. It’s a business of making 1 pip a time.

A few years ago, I horrified another trader when I told him that it took me 100 trades to make 100 pips. (I meant of course net -- after commissions, slippage and all other costs were taken into account) Still, he was repulsed at that notion and couldn’t imagine trading like that and yet if I were to ask him how much Coca-Cola made per ounce of Coke or McDonald’s made per hamburger the numbers would be not much better. Almost all high volume businesses have net margins of 10% or less. Most supermarkets operate on margins of as little as 2% and yet they manage to make money year in and year out. That’s because these enterprises don’t have any romantic illusion about wealth creation, only hard-headed understanding of how money really gets made.

Once we as retail traders, start treating trading as a business, rather than a lottery our chance of success will increase exponentially. As guys in Shade constantly remind me -- when you gamble for a living, you should leave nothing to chance.

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What Makes Trend?

Boris Schlossberg

What is trend?

That is a deceptively complex question. As someone who almost exclusively traded counter-trend moves for the past ten years, I found the idea of defining and identifying trend to be a real challenge. Counter-trend trading is relatively easy because it’s organic. It’s a reactive strategy that is derived from the trend itself. Until trend materializes there is nothing to do and nothing to define. Once trend takes place, the counter-trend setups kick into gear.

Trend on the other hand, requires predictive rather reactive skills and therein lies the rub.

At its most basic trend is simply a continuation of price. But what causes that continuation? Certainly, news is a major catalyst. An unexpected piece of data or a casual remark by a central bank official can have price ramifications for hours and sometimes days. But news is not the only catalyst for trend. Sometimes it’s just price. A price move will take on a momentum of its own and will create trend without any new information in the market. So sometimes news creates price and sometimes price creates news.

That’s what makes trend so tricky to trade.

Counter-trend trading (which is effectively market making) is an actuarial activity. It’s based on the law of large numbers -- very much like the insurance model. Trend, on the other hand, requires the eye of a fine jeweler. Ideally, the trader needs all three components to come together -- price action, news action and sentiment. Trend is rare -- it occurs no more than 30% of the time in the market. And that is perhaps the most difficult thing about trading trend well. For a day trader like me, it’s truly a Herculean effort to maintain the patience to trade trend properly.

Still, the more I do it, the more I appreciate it. Trend, in reality, is very different from what the books and gurus tell you -- but nevertheless, it can be a very profitable strategy once you figure out how it works.

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When to Trade Sloppy and When to be Precise

Boris Schlossberg

When to trade sloppy and when to be precise?

Screenshot 2017-06-30 11.00.30

The answer, of course, is that you should always strive to be precise in your trading. But the real question I want to pose here is -- When should you trade with an ECN broker and when should you use the less accurate platform of a spread based broker.

Of course, it depends on the broker and your personal strategy, but the short answer is that if you are using a mean-reversion market making strategy than an ECN with raw spreads is a must. On the other hand, If you are trading trends then spread based broker should be just fine.

Let take a look at the two types of strategies I run in the BK chat room.

My bread and butter setup is a strategy called Boomer in which we are always trying to sell short-term overbought levels and buy short term oversold levels. Just like FX dealers we buy when everyone is selling and sell when everyone is buying. Needless to say, this requires a lot of b-lls and a very quick robot that can juggle inventory during fast markets.

But what it really demands is absolute precision. Just like an insurance company, the business model of any mean reversion strategy is based on making very few and far between mistakes. You won’t survive long in the insurance business if you sell a lot of cheap life policies to diabetics and heavy smokers. Same in FX trading. When you are fading all day long ( trading against the flow like dealers do) pricing is key because sometimes you have just seconds to resolve your trade before another wave of buying or selling overwhelms you. One missed execution could mean days of recovery because you are working on such a negative risk/reward structure.

That’s why despite the overhead of commissions the execution edge is far more important. Suppose you are trading with 5 pip target -35 pip stop (suspend your outrage for a moment and indulge me) If you win 19/20 trades you are doing very well and can basically print money every day. Even if you are winning 18/20 times you are ahead of the game. But suppose you miss just one more trade and the ratio turns to 17/20 and now the net P/L for the series in negative.

Guess what?

When you are trading for 10 pips or less, missing target by the spread can happen as often as 1 out of 10 times. In the example above even if you paid 20 pips in commission (1 pip per round turn) you would still be ahead by 15 pips because you would save at least one -35 pip loss.

So the rule of thumb in daytrading is -- the thinner the edge, the higher the breakeven percentage, the greater the need for an ECN account that will give you the best execution possible.

Another one of my setups in the chat room is called Trendy. This is a much more casual setup that requires only a single entry/single exit structure and has a far more forgiving risk and reward structure. With Trendy, the key to success is not sniper-like execution but a good, general sense of direction.

Trend trades should really be called The John Maynard Keynes, after one of the greatest economists in the world, who was also a very good trader. (He compounded returns at 12% per year for 2 decades at a time when the stock market index lost 15%.). Keynes once said, “I would rather be generally right than precisely wrong.” And that’s what trend trading is all about, because if you get the general direction right, the exact entry is far less important and you will still be able to bank money on the trade.

Trading trend based setups, you really don’t need to bother paying commission. As long as you can call direction right, trend based setups will easily absorb the cost of the spread.

As traders, almost always we focus on nothing else but the pip ahead. Sometimes it pays to step back and examine the subtle differences in our strategies and to determine which platform suits us best for what trade.

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Why We Should Trade Like Woody Allen Rather Than Warren Buffet

Boris Schlossberg

Regardless of what you think about him personally, you have to admire the artistic accomplishment of Woody Allen. The man has been making movies since the 1960’s and even now, in his 80’s the man continues to produce a film a year.

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What’s even more remarkable about Allen is that the subject of many of movies is neurotic, intellectual Jews -- hardly pop culture fare. I often wonder how people outside my zip code can even understand some of the references in his films. But like all great artists, he is able to make the particular universal and help us laugh at and appreciate our humanity. It is no surprise then, that such wildly different filmmakers like Spike Lee and Chris Rock are big Woody Allen fans.

Of course, when you look at his whole body of work, there is plenty of derivative, repetitive garbage, but there are also absolute gems of world cinema like Manhattan, Hannah and Her Sisters. Midnight in Paris and of course Annie Hall. What’s astounding about Allen is that he brings it. All. The. Time.

A long time ago Allen revealed in an interview, that early on in his career he realized that if he could stay on a modest budget he could make movies the way he wanted. Therefore, his scripts have always centered on the human-scale drama that can be filmed inexpensively in the interiors and exteriors of New York with A-list actors that were willing to work for scale because they all wanted to be part of the project. This has been his formula since he left Hollywood and he has never deviated from it. Even in his most recent work that has taken him to Europe he basically repeated the format making the city a principal character of the script (Midnight in Paris and the wonderful Vicky, Christina, Barcelona).

Woody Allen’s longevity and productivity can be attributed to his consistent work ethic. He is famous for saying that 90% of success in life is just showing up. And he practices what he preaches. The moment he wraps up a movie he starts working on a new script.

It’s a deceptively simple motto, but it can be of enormous value to us traders because it is essentially a recipe for success in the markets.

Many traders like to look to Warren Buffet as their shining example of success. But Buffet’s “aw-shucks”, folksy wisdom belies a very complex investment structure of an arbitrageur and is never possible to replicate for a simple retail trader. For a much better deconstruction of why you can never trade like Warren Buffett, I recommend this article here.

But back to the Woodman and his simple take on doing one thing over and over again. I thought about it this week when I came across yet another great interview on Chat with Traders with Victor Haghani who, a very long time ago, was one of the principals in Long-Term Management. Presently he is running an active index fund and has started doing a variety of trading experiments. One of those experiments was discussed on the show and it is very apropos to our topic.

Haghani created an experiment with a virtual coin that was 60-40 biased towards heads. In other words for every 10 flips, the expectancy of the coin was 6 heads and 4 tails. He then proceeded to do an experiment with 61 participants -- all then trained in quantitative finance -- by asking them to flip the coin repeatedly and make bets with a $25 bank for a period of 30 minutes. He TOLD the participants ahead of time that they had a 60-40 edge on heads. He told them that the virtual coin was biased. Had they simply bet on heads every single time they would have had a better than 95% chance of winning $250. (Haghani capped the payout -- otherwise, his exposure would have been enormous).

Instead, 30% of the traders went bust. Why? Because they couldn’t resist betting on tails, uselessly trying to capture mean reversion even though they KNEW that they had 60% edge with heads. The experiment is fascinating because it confirms something that I see in myself and in many other traders in my chat room. Even if we have a winning trade strategy we do everything in our power to sabotage it. We exit early. We pull the trade signals. We -- and this was the most common takeaway from Haghani’s experiment -- refuse to do execute the “correct” strategy all the time because it’s “boring”.

It is amazing to me how I manage to sabotage my trades even on my own accounts as I second and triple guess my structures instead of letting them just trade and bank pips.

The Haghani experiment offers true resonance to Woody Allen’s words.

90% of success in life is just showing up. As traders, there are a few simple things we need to do.
We need to trade with the proper size.
We need to always honor our stops.
We need to trust our setups.

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That’s it. It seems so simple. But as Woody Allen shows only a few can do it.

I Know EXACTLY How Your Index Fund Will Crash

Boris Schlossberg

Ah, the glory days of passive investing. Has there ever been a time when it paid so handsomely to be dumb money? While Wall Street Masters of the Universe close up shop and day traders fight to the death for every single basis point, Mom and Pop investors continue to grow rich with every passing day by blindly buying their Vanguard funds on a regular basis.

Hell, even Hedge Funds have stopped fighting the trend and joined the party. Business Insider recently reported that “Hedge funds are crushing it with a trade that anyone can replicate” noting that the best and the smartest are now basically buying up the emerging market ETFs (EEM, VWO) owing more than 12.4% of all outstanding shares.

It’s easy to believe that easy money will continue to flow. After all, the single decision bet of buying a cheap well-diversified ETF has been the most profitable investment idea of the past decade. No worries about risk control, commission costs or even selection bias. It’s done for you. Just set it and forget it as Ron Popeil used to say.

But mark my words this will end very badly for most investors and I know exactly how.

This week FT reported about the “Tech Tantrum” last Friday when many of the best known and biggest companies suddenly tumbled without a reason. What happened? As FT explains, an increasing number of institutional investors now use “factors” to allocate their money. Factors such as “growth” or “value” are the basic building blocks of market performance, and investors can try to cheaply and passively beat their benchmarks by tilting towards some that have shown to produce benchmark-beating returns over time.

“Indeed, the correlation of the “FAAMG” stocks – Facebook, Apple, Amazon, Microsoft and Google – to the growth, volatility and momentum factors are in the 92nd, 90th and 96th percentile respectively, Goldman Sachs noted on Friday. Tech has this year been even less volatile than utilities.

When tech began to buckle, reversing both their momentum and low-volatility factors, systematic funds would begin to sell, with nervous traditional mutual and hedge funds – which have piled into the sector this year – adding to the pressures.”

If all of this sounds familiar then you must be old, because I have only one word for you -- 1987.

Yes if you are old enough to remember 1987 then you know how 25% of your whole net worth can be wiped out in a single market afternoon. At that time, the new fangled “program trading” system managed to create the biggest crash in market history.

Robots have no feelings and at a time when only 10% of all trades are proprietary, the soothing, vol dampening aspect of algorithmic trading which has created so much complacency in the market over the past 8 years can quickly morph into a death-defying momentum crush of the machines.

Almost no one believes that US equities could fall by 50% in one day which is precisely why it can and will happen. Because machines have no limits and will pound an asset down to zero if the algo rules suggest that to be the highest probability in the next hour.

So active traders, don’t despair. Your hard work and knowledge of risk control may protect you yet because in life passive never pays in the end.

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.

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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.
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?
When can I have pizza?
When can I eat muffins-bagels-donuts?
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?
When do you size up beyond 2 times equity?
When do you revenge trade?
When do you take a random setup?
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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