Why do we REALLY Lose at Trading?

2009 forex forecasts Boris Schlossberg

“You miss 100% of shots you do not take”. That’s a famous Wayne Gretzky statement that many trading gurus like to quote. I’ve used it myself in past columns as way to motivate traders to take on risk.

There is just one problem. It’s probably the dumbest trading maxim you will hear.

You see, trading is not like hockey or almost every other human activity out there. It has negative costs attached to every failed action.

What’s the worst thing that happened when Wayne Gretzky missed a shot? Did it ricochet off the boards? Hit the glass? Ended up in a goalies glove? To Gretzky, the downside of missing a shot was minuscule. Now imagine if every time Gretzky missed a shot, every time Lebron hit the rim, every time Messi sent the ball wide of the net, the opposing team got a point.

That’s trading.

That is what makes trading so unique and challenging. We lose not because we can’t take being wrong, but because it’s truly painful when we are.

But here is where things get really interesting.

What the most common thing we do when someone punches us?
Punch back!
So the moment we lose on a trade, we instantly get into a brawl with the market. Our trading turns into “Slap Shot”, which was a great movie, but I think we would all agree is not a good way to live life.

We can deny this all we want. We can call it “trade adjustment”. We can call it “maintaining our thesis”. But in actuality it’s just a schoolyard fight and whether we are thirty or eighty we still look like idiots rolling around on the ground trying to subdue the market which will always be stronger and meaner and dirtier than we are.

In the end, we are just left with a black eye, a puffy lip and a sense of humiliation as the money in the account is gone.

So what can we do to prevent this?

I wish I had a magic answer -- but I don’t. There is no perfect way to overcome this problem, but there are two practical solutions to that go a long way to helping contain it.

Trade smaller
Trade less

In FX one of the absolute best ways to avoid a losing spiral is to trade with no leverage at all. That means for every $10,000 in your account your trade size should be 10,000 units or less. Although FX appears to be wild and crazy, the asset class is actually the least volatile major market in the world. It rarely moves more than 1% per day. What makes it so dangerous is the high leverage that can magnify those moves by a factor of 100 or more. Losing 100 pips on no lever trade doesn’t feel like a punch in the face, more like a slight pinch on your arm and you will be much less likely to lash out at the market and want to “punch it back”. You are always much cooler and calmer when losing large amounts of pips on small leverage rather than losing a small number of pips on large leverage -- and keeping your cool is half the battle.

The other half has taken me a very long time to realize. The basic fundamental rule of the market is -- the rarer the trade, the better the trade. It seems to so obvious in retrospect yet few people appreciate that fact.

Imagine the reverse. Great trades are common! If that were true we would all be billionaires by Tuesday. In fact, if you study the actions of great traders throughout history, guys like George Soros, John Maynard Keynes, and even Warren Buffett. They resemble nothing more than the hunting habits of a lion. Basically, they spend 90% of their time doing NOTHING. And only pounce when the conditions are ideal for a score.

As day traders in FX we can’t be that choosy, but we can still be selective. If you are trading with the trend, only buy higher lows, sell lower highs. If you are fading the trend, stay as close the daily ATR as possible. You’ll be amazed at how much more accurate you will be. Instead of making 10 trades per day, do just 2 and your overall pip score will likely increase.

None of this, of course, will make you an absolute winner. You still need a strategy, an edge, an execution structure and risk control rules. But all those things can be worked out. 99% of us never get the chance to find out if we can succeed because we lose it all in a stupid schoolyard skirmish with the market. Let’s do less of that.

Bearish AUD, CAD and EUR

2009 forex forecasts Australian Dollar Canadian Dollar eur/usd euro forex blog Kathy Lien

Fresh back from vacation in the Sunny Caribbean -- here are some trades that I like off the bat:

1) Short AUD -- After last week’s disappointing GDP, retail sales, service and manufacturing PMI reports, there is no chance the RBA will be talking about another rate hike this evening. The last time we heard central bank governor Stevens speak, he was crystal clear in saying that the current level of interest rates is appropriate. He also indicated that the next rate hike may not be until mid next year. Last week’s dismal economic reports served to confirm that not only is now not the right time to continue raising rates, but it would be smart to let investors know that the RBA is officially on hold until the U.S. and/or Chinese recovery gains momentum. Now of course, the U.S. has its own problems so even though I am bearish Aussies against the U.S. dollar (AUD/USD now @ 0.9875), I particularly like shorting Aussies against the Japanese Yen (AUD/JPY now @ 81.65).

2) Short CAD -- Same story in Canada. Even though there was an increase in employment last month, it was all in part-time and not full-time work. If this shift becomes a continuous trend, it would suggests that companies are growing concerned about future business activity. Back in October, the Bank of Canada downgraded their growth forecasts and last month the BoC warned that they could intervene in their if there was extreme movements in the currency market. As a result, with USD/CAD trading just a tad above parity (USD/CAD now @ 1.0070), I think that the BoC will remain cautious, warning of the downside risks that will impede them from normalizing monetary policy. There is a good chance that USD/CAD will be trading back above 1.02 before the end of the year.

3) Short EUR -- European sovereign debt problems have not gone away and despite the weak U.S. NFP report, traders have resumed their sale of euros. All eyes are still on Spain and Portugal and this is not likely to change anytime soon. EUR/USD is currently trading @ 1.3270 and I am looking for another move into the 1.30 handle.

If you can’t tell – I am bearish risk. Good luck trading.

Correlation Between EUR/USD, USD/JPY and Stocks

2009 eurusd forecasts 2009 forex forecasts forex blog Kathy Lien

Over the past few years, traders have become accustomed to the idea that the day to day moves in stocks impact currencies. When equities sell off aggressively like they have today, the U.S. dollar usually strengthens across the board as investors pile into the low yielding safe haven currency. When equities stage a strong rally on the other hand, the dollar tends to sell off as safe haven flows ease.

However often times currency traders will forget about this correlation and for good reasons because currency movements can oftentimes decouple from equities. This happened in June when the correlation between the EUR/USD and the S&P 500 fell to 50 percent. In comparison, since the beginning of the year, the correlation between these two instruments has been greater than 80 percent. This meant that 80 percent of the time that stocks rallied, the EUR/USD strengthened as well.

Yet the correlation between equities and currencies has recoupled over the past week with the EUR/USD and the S&P 500 moving in unison 90 percent of the time. Even the correlation between USD/JPY and the S&P 500 has hit 85 percent. This is particularly notable because the correlation between USD/JPY and U.S. equities was 80 percent last year but for this year up until last week, the correlation was negative 6.9 percent. In other words, there was no correlation whatsoever.

With earnings season underway, we expect this renewed correlation to be one of the dominant drives of price action in the currency market so if you aren’t doing so already, make sure to always keep an eye on how U.S equities are trading intraday.