How an Admiral Gave Me The Greatest Trading Advice Ever.

Boris Schlossberg

“Every morning in basic SEAL training, my instructors, who at the time were all Vietnam veterans, would show up in my barracks room and the first thing they would inspect was your bed.

If you did it right, the corners would be square, the covers pulled tight, the pillow centered just under the headboard and the extra blanket folded neatly at the foot of the rack- that’s Navy talk for bed.

It was a simple task. Mundane at best. But every morning we were required to make our bed to perfection. It seemed a little ridiculous at the time, particularly in light of the fact that we were aspiring to be real warriors, tough battle hardened SEALs but the wisdom of this simple act has been proven to me many times over.

If you make your bed every morning you will have accomplished the first task of the day. It will give you a small sense of pride and it will encourage you to do another task and another and another.

By the end of the day, that one task completed will have turned into many tasks completed. Making your bed will also reinforce the fact that little things in life matter.”

So begins one the best commencement speeches ever written. It was delivered at the University of Texas last year, by Naval Adm. William H. McRaven, ninth commander of U.S. Special Operations Command.

I’ve been thinking a lot about that speech this week.

On Wednesday, a trader in my room took a big hit on an ill timed GBP/USD trade that wiped out 20% of his account. He is a great guy, loved by all, but I knew that just telling him to buck up move on wasn’t going to help him.

Instead, I didn’t even bother commiserating about failed trade and ordered him to do the following: for the next few days he had to trade with the smallest size available on the platform (in our case that’s 1000 units on MT4) and produce 100 pips before he could do anything else.

Like all good advice this idea was completely spontaneous. It literally went straight from my head to the keyboard. But it seemed to have had the intended impact. The trader quickly forgot about the losing trade and set to work on his given task. His feel for the market returned so fast that he was able to bank 100 pips in a day rather than in a week handily beating the goal I set for him.

From this I learned several things.

  1. We are far more resilient than we realize
  2. Having a well defined, hard target goal is the best antidote against wallowing in self pity
  3. Doing one small thing well is far more important for your self esteem and your skillset than any “self-analysis” you can muster

In fact, I liked this advice so much, that applied to myself. Today I woke up and just couldn’t get into the groove with the market. Everyone in my trading room was banking pips while I stared at the screen numbly missing setups left and right. So I started to trade the smallest size possible using our day trading strategy and just plunged into the market until I was back in sync with the flow.

Guess what?

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It worked.

Thanks Mr. Buffett. You are the best day trading coach I ever had.

Boris Schlossberg

Let’s get first things straight. Never in a million years would Warren Buffett ever day trade. So this little missive of mine is just an exercise in make believe. But believe you me, the Oracle of Omaha Buffett has some very real life lessons to teach us day traders.

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You may think that Warren Buffett is in the investment business but he is actually in the insurance business and insurance is the greatest scam — ehh I am mean “business” — ever invented.

Think about it. In what other activity in life do you go on paying for months, years, decades -- for literally nothing? I still remember a classic scene from some movie where an exasperated customer starts screaming at insurance executives for refusing to honor his claim, “WHAT HAVE I BEEN PAYING FOR ALL THESE YEARS?!” and the insurance agent without missing a beat simply says, “Peace of mind”.

Now I don’t want to beat up on the insurance industry -- it does after all serve a vital economic function in our lives -- but if you look at their business model my exaggeration is not that far off the mark. The perfect insurance policy is one that never pays out.

This is where Warren Buffett comes in. If you read the history of Berkshire Hathaway you will note that Buffett bought NICO (National Indemnity Company -- a major reinsurer) precisely because he loved the way they did their business. Instead of chasing every customer in the market NICO kept its premiums extremely high and was happy to give up the business if the risk proposition did not make sense to them. In fact Buffett boasted in one his annual shareholder letters that he was very happy to own a company that did less business that year than the year prior.

In short Buffett was perfectly content to walk away from a trade if it looked even slightly risky to his portfolio. He always gave himself an extra margin of error even if it meant lower profits upfront.

I’ve been thinking a lot about Buffett this week as the volatility in FX continues unabated. Our day to day job in BK is to speculate on short term flows -- and we are always on the opposite side of the trend. We in fact provide a form on insurance by offering liquidity to those who must get out NOW.

Thinking like a Warren Buffett man, I managed to really tighten up my “underwriting” criteria this week by looking at my key levels buy and sell levels and then going one level further -- to give myself an extra margin of error just like Mr. Buffett. That little trick saved me a lot heartache this week and helped us to record yet another positive week in the BK Trading room.

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Thanks Mr. Buffett. You are the best day trading coach I ever had.

The One Rule Traders Should Never Forget!

Boris Schlossberg

The other day I read one of those “Greatest Lessons from Investors” articles in WSJ. I seem to come across one every week, given the massive amount financial reading I do every. This one was no different -- basically recapping all the bromides familiar to us all. However, as my eyes glazed over the words, I stopped and found this passage on Jeffrey Gundlach the King of Bonds actually useful.

It was March 2008, and Jeffrey Gundlach was testing his nerve in a crisis.

Even assuming a rash of defaults and other bad news, debt investments priced at 65 cents on the dollar looked attractive. He began buying, though he knew there was a good chance markets would continue to drop.

“If fundamental value is compelling, you should keep buying,” he says. “It’s OK to take short-term losses.”

Mr. Gundlach was right—prices continued to fall for another full year, eventually hitting 45 cents on the dollar. One big client got nervous and withdrew money from his fund. Mr. Gundlach ran out of money and couldn’t buy more, locking in his cost basis.

By 2009 bonds started to recover as the Fed saved the world from the Second Great Depression and Gundlach’s trades started to turn profitable. Now he is recognized as the undisputed King of Bonds and everyone wants to give him all their savings to invest.

But stop for a second and consider something.

What if bonds went to 25 cents and stayed there until 2010? Gundlach would have gone from hero to zero and nobody would be hanging on his every word. He may have been forced out of business.

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So here is the lesson for us all. If you want to survive and thrive in trading -- never run out of money. In other words trade small. Its the one rule that trumps all others when it comes to what we do.

I Broke Every Trading Rule There is – Here is What Happened Next…

Boris Schlossberg

Traders who come into the BK trading room are initially astounded by the unconventional way we trade the markets. We couldn’t care less about trend, average true range, long or short term moving averages, the macro state of the economy, overbought or oversold oscillators, Fibonacci, Gann, Elliott Wave, Bollinger Bands, RSI the price of tea in China or a million other useless things that have never a pip for anybody over the long run.

Don’t get me wrong. We are not a bunch of Luddites. We follow the market like a hawk. We know all the news the moment it comes out. We follow all the stories from the FOMC presser to the New Zealand milk auction. We watch the charts, we know what moving and what’s lagging and we know when volatility will spike and when it will recede. In short, we are very well plugged into the world at large and the forex market in particular.

But that’s not what makes us money. What makes us money is our underlying thesis that on an intraday basis the markets will mean revert as profit taking always kicks in. We trade short term extremes over and over and over again. What’s worse is that we do it on a highly negative risk reward skew. What’s even worse than that is that we bet on conditional probability and increase our size (but never martingale) as our trades take on more and more heat.

In short we break every rule you’ve ever been taught about trading and yet continue to bank pips on a daily basis. Not just me -- but almost every trader in room who follows our method seriously walks away each day with positive P/L.

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Why does this happen? Because clearly markets are not predictable. Because speculation has nothing to do with investing. And because the basis of trading is not logical but psychological. When you finally start to appreciate this reality, you begin to master the market, instead of letting the market master you.

How To Escape From A Losing Trade

Boris Schlossberg

This week the EUR/USD did something extraordinary -- it spiked more than 4% in the aftermath of a dovish FOMC presser -- a move of such ferocity that it hasn’t occurred once in more than one thousand days. If you day trade the EUR/USD like we do in BK chat the lessons of Wednesday’s melt up were invaluable.

Generally we are trend faders on daily basis. We sell highs and buy lows and if you know how to do it properly that can be a very profitable business. Providing liquidity rather taking it is how banks make their money and we simply follow their methods. But of course on days like Wednesday that approach can cost you dearly if you don’t know how to escape.

The key to knowing when “to hold ‘em” and when “to fold ‘em” is velocity. In a regular market
price will generally follow a two way market even if it climbs steadily higher or drifts continuously lower. The most important part to understand is that price trades through time and in the EUR/USD for example it will rarely climb more than 50 points in an hour. (Note I am NOT talking about news based dislocations where price simply skips many levels in reaction to event risk. This is a separate issue and we have many safeguards to avoid such moves).

Therefore if price is moving on a chart like a speeding car on the Autobahn -- BEWARE. The faster the speed, the quicker you must get out of the way. In moments like Wednesday the markets essentially go into a liquidity vortex. Any trades that are offered get sucked up by the relentless demand destroying anything within its path much like a black hole devours anything within its pull.

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A good rule of thumb is that if price has moved 25 pips in one minute or less (again NOT in a gap like way as it does post-news, but in a normal fashion by chewing through bids or offers) then its best to fold up your tent and go home. Just like it is always much more prudent to pull out of the lane and let the crazy speeding driver pass you by, so too in the markets when price velocity becomes extreme its best to stop trading for the day. In both cases you are much more likely to escape with your life and your money intact.

The Future of Trading is Team

The Future of Trading is Team

Boris Schlossberg

New York Times today reviewed the software that we use in our trading room and while the write up was mostly positive I think the article really did not do it justice. Slack, which was created by Stewart Butterfield, the founder of Flickr, is now worth 1.2 Billion after only a year of existence and is already making a million a month in revs.

I can just see some of you rolling your eyes at my Silicon Valley fanboy praise of yet another web based start up -- but mark my words -- Slack will be bigger than Microsoft one day. Certainly it is already a million times more useful than the bloatware that comes out of Redmond.

Although on the surface Slack may seem like an amped up version of AOL messenger, it is actually the first truly integrated global collaboration platform that allows anyone, anywhere to plug in engage with the world on an instant basis.

When it comes to trading forex -- which is the most global capital market of all -- the distributed nature of Slack has not only radically transformed how I do business, but more importantly has improved my trading by a factor of ten.

Most Americans who are brought up on the myth of the individual, the lone “creator” of wealth and prosperity, are utterly unaware that almost all advances in civilization have been the result of teamwork. No one ever accomplished anything in a vacuum and in real life (not Hollywood) a team of average people will beat a genius anytime. What makes Slack so powerful is that it allows for individual initiative while at the same time providing the user with constant collaborative feedback and support.

For anyone who has ever traded electronically in the isolated glow of computer monitors this can be a revolutionary change for the better. Trading strategy problems that used to take weeks to solve could be fixed in a day. Major tactical mistakes that would not become obvious for months, pop up to the surface in a matter of days. If you trade as a team your skills grow not arithmetically but geometrically.

I’ve mentioned before that some of the best traders in my room are making 1% day (today some of them banked 3%+), but I thought it might be interesting to share the words of someone far less experienced who just joined us a few weeks ago. Here is what she what she wrote in the room (sic.)

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“Hi Boris and Team, I find it hard to believe that despite being new, with not enough sleep, No EA, No Raw Spreads and all Manual trading…it’s still an 82% winning!…and that’s on VTs, NVTs during a PNPT day!…plus on a CADmania freaky Friday! Boy, I love trading. Boris and Team, thank you for your experties. Have a great week end.”

I could have never generated such results with any of my former students, using the standard “webinar/seminar” methods. In fact I hear it all the time in the room, that traders have learned more in a month there then they have in years, trading by themselves. More than ever I am becoming convinced that Team Trading is not just a fashionable millennial catch phrase -- but is actually the future of our business.

The One Trick That Lets You Trade Like Warren Buffett

Boris Schlossberg

Remember Jon Corzine? The one time CEO of Goldman and former Jersey Governor? As his last gig in finance he became CEO of a futures broker called MF Global. In 2011, in the midst of the Eurozone sovereign debt crisis, Corzine loaded MF Global trading books with Italian and Spanish bonds yielding 7%-9%.

You know where those bonds trading today? At yields of less than 1.5%.

So how come Corzine isn’t hailed in the media as the bond king extraordinaire that he once was? Why did he resign in disgrace after the MF went bankrupt and has spent the last few years fending off lawsuits?

Contrast his fate with that of Warren Buffett who was also buying distressed assets at the time, including BoA and many other financial stocks. Buffett is revered as an investment genius and is called “the Oracle of Omaha”.

But you know the only difference between Corzine and Buffett? Its not intelligence, it’s not courage, its not skill.

Its just money.

Corzine was overleveraged and ran out of capital before his trades could start to work. Buffett on the other hand never runs out of money and can afford to wait for as long as it takes to let his investments make money for him.

Now we may not own an insurance company to provide us with a ready source of funds any time we need it, and in all honesty no retail trader could ever replicate Buffett’s returns even if he shadowed him stock for stock (a topic for another column), but there is one lesson we can all take from Buffett that could greatly increase our chances of success.

Don’t run out of money.

The rule in trading is that money buys you time and time makes you money. This is true if you are long term investor or day trader like me. If you can wait out the adverse excursion of the market 9 times out of 10 you can turn a profit on your position. We do this all day long in my chat room.

Now of course that is not always true. Of course some ideas are never going to work and whether you trade or invest you will eventually have to let some positions go. But if your size is small enough even a total wipeout of an idea won’t take down your whole account.

Buffett may trade in billions of dollars but relative to his equity size he never overlevers his positions. He can afford to have any one trade idea go to zero and he will still be in business tomorrow.

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That -- not strategy, not analysis, not market knowledge -- is the key to Buffett’s success. Money buys you time which as Warren Buffett knows is the most valuable asset in any market environment.

The Spock Within Each Trader

Boris Schlossberg

Leonard Nimoy died today. A son of poor orthodox Jews from Boston he managed against all odds to succeed in Hollywood and create one of the most iconic characters of the twentieth century. He also turned an obscure Jewish priestly gesture into the Vulcan salute, forever delighting those of us who have had to sit through the interminable theater of High Holiday services.

Spock personified the fundamental struggle between reason and passion, between logic and emotion and his conflict is very familiar to all of us who trade. How many of us preach the gospel of “discipline” only to fail over and over on one seemingly minor trade that turns into a massive disaster that nearly bankrupts our account?

In my day trading room we have a perfectly serviceable trading strategy that made money every single day last month. You’d think all of us would be ecstatic, just counting our “Benjamins” as take profits rolled in.


The strategy is slow. It trades only once or twice a day. It trades obscure crosses that don’t really move that much. In a word- its boring.

So we seek action elsewhere and trade the same strategy on the majors, often taking suicidal risks on highly volatile pairs like GBP/USD or USD/CAD. Because the strategy is very robust and because I try to be as careful as possible we’ve been able to escape most of the of the damage, but we have certainly taken on more heat than necessary.

Why do we do this? Because we want to trade. Of course we want to make money, but don’t ever fool yourself into thinking that making money is the number one priority of any trader. If it was we would all the have the cool dispassion of Spock and only trade that which produced the highest probability of profit.

But that’s ok. I think its much better and much more honest to admit to ourselves that trading lures us not just for the money but because we love the game and want to engage with the market every day. Forex trading is one the few pursuits in life where you can instantly match wits with the rest of the world and the act of a trade taking profit is as pleasant as the actual money it drops in your account.

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Nimoy was great at making Spock a multi-dimensional character rather than just another robot and we should appreciate that just as Spock fought the battle between logic and feeling we do the same in the market every day. There is a Spock within each trader and we should recognize that fact.

The Fat Finger Trade

The Fat Finger Trade

Boris Schlossberg

USD/CAD has certainly been an entertaining ride for the last couple of months. Slapped from its slumber by the massive volatility in oil, the currency went from tracing out quiet 50 point ranges to jumping 150 points in the blink of an eye as it turned into one of the most volatile G-10 trades of the year.

This week however it wasn’t oil that turned the loonie upside down. On a quiet Thursday morning just as the US traders were stumbling to their desks on a freezing New York morning the pair suddenly popped up. Not in a ten pips at clip kind of way, but straight up from 1.2500 to 1.2556 without a single pause along the way.

In my day trading chat room we scrambled for cover. Our stops were slipped by at least 25 points and what was intended to be loss of no more that 1% turned into an ugly 2% haircut before we could even say, “wtf?”.

There was no news on the wires and oil was quiet. Quickly, it became evident that this was a Fat Finger trade. Fat Finger is an old Wall Street colloquialism for a big mistaken order where a trader may wish to sell 50M CAD and inadvertently sells 500M or more. In this day and age of automated trading Fat Finger trades are much less common -- but they still happen for a variety of reasons.

What happened next however showed me just how much progress many traders made in my room. Instead of whining and crying about the unfairness of life, several of my most active members flipped direction and went long the pair, “repairing” the damage done by the Fat Finger trade. I had actually done the opposite. I sold into strength with size and covered quickly taking back 1% of the loss.

Whether we went long or short USD/CAD in the aftermath of the Fat Finger trade really didn’t matter. Volatility assured profits for both sides. What mattered more was our posture and our reaction. Since we always trade with small size, even an outlandish move by the Fat Finger trade didn’t hurt our account by more than 2%-3% and our mental willingness to react rather than freeze like a Bambi in headlights helped us mitigate some of the losses. The next day many of the same traders picked up another 1% in CAD pairs and the bad memories from the Fat Finger trade were history.

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That in my opinion is what great trading is all about. Its not about “hitting the big one” like some degenerate gambler with a Lotto ticket. Its about trading small, keeping your wits about you and never, ever losing so much that you can’t come back to trade the next day.