How To Make Trading Resolutions That Stick

Boris Schlossberg

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

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

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

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

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

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

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

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

We can trade copy ourselves.

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

Why?

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

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

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

Backtests Are For Losers

Boris Schlossberg

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

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

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

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

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

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

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

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

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

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For 2017 – Be Less Stupid

Boris Schlossberg

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

10%ddown

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

monthly-nostops

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

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

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

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

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

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

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

yearendstats

Best Articles I Read this Year…

Boris Schlossberg

The Power of Negative Thinking
NY Times

If you are an American your true religion isn’t Christianity, Judaism, Buddhism, Islam or even atheism. It’s Positive Thinking. I still remember the hand printed poster in my high school football locker room that stayed taped to the door for four years. Conceive. Believe. Achieve. As Americans, we are indoctrinated into the cult of Positivity with no less fervor than I was indoctrinated into the wonders of Communism as a Young Pioneer in Russia.

And it is perhaps because that I am Russian and therefore naturally skeptical from birth, that I always suspected that this American obsession with positive thinking was pure bullsh-t. This article opens your eyes not only to the mindless stupidity of always being positive (putting that pasted Tony Robbins smile on your face can actually be counterproductive -- in fact, Tony Robbin’s whole act (much as I love it) is pure bulls-t. Turns out that coals are terrible conductors of heat, so anyone can walk over them as long as they do it quickly -- no special mindset required) but also shows the value of thinking negatively.

Don’t get me wrong. I hate Debbie Downers. I am “American” to the core. I am always willing to try new ideas. But this article teaches you that you shouldn’t fear negative thoughts, but embrace them. It notes, “The Stoics recommended “the premeditation of evils,” or deliberately visualizing the worst-case scenario. This tends to reduce anxiety about the future: when you soberly picture how badly things could go in reality, you usually conclude that you could cope. Besides, they noted, imagining that you might lose the relationships and possessions you currently enjoy increases your gratitude for having them now. Positive thinking, by contrast, always leans into the future, ignoring present pleasures.”

One of the greatest joys of aimless Net surfing is that you get to stumble across some brilliant fresh voices that can help you understand reality with a much clearer and more accurate perspective. Tim Hanson is one such writer I will be following in 2017 as everything he writes is remarkably insightful. This year, however, one blog entry stands out. In Value at Risk he shows not only the need but the absolute necessity for overconfidence. Yes -- overconfidence -- because without it we would never achieve anything. Also, this article is a nice counterpoint to the one above. But please take a look at the Teacher’s grading table and tell me that it doesn’t remind you of the 1 by 10 trading method I wrote about last week.

Lastly here is a story that should make all of us who day trade feel good. Efficient markets? Bulls-t! In How Behavioral Biases Lead To Hard-To-Capture But Sustainable Alpha Michael Kitces shows how investors make the same mistakes over and over again and how savvy traders can take advantage of these mispricings to achieve Alpha. Reading the story on recency bias I realized that most of our Boomer strategies are basically designed to take advantage of that common flaw in human behavior. Note the article doesn’t say profitable trading is easy. Only that it’s possible.

All the best to everyone in 2017.
Peace, joy and love and happy trading
Boris

Discipline is Bulls-t.

Boris Schlossberg

Do you think George Soros made all his money because he was right?

Wrong.

Over his long and illustrious career Soros made a multitude of investment errors. We simply don’t hear about them because while frequent in scope they were miniscule in size. In fact, Soros was notorious for “testing” the markets by sending out small orders in the opposite direction of his view just to see how they performed. If the trade turned profitable he would rethink his whole investment thesis.

Soros is famous for saying that “it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

I was thinking about this quote this past Wednesday after a few frenetic hours of day trading the FOMC decision in our chat room. K and I live-traded like we always do and I used my personal account to execute the trades. For the first few hours I stuck to our Boomer strategies and slowly and surely put up 36 pips in about 90 minutes hitting all our trades to spec. Then we closed up the “official” tally and I started to screw around. The markets were still very volatile and there were plenty of trades to tempt me. None of them however, were the proper Boomer setups. So basically I just gut traded for an hour and managed to give back all the gains, plus set myself back another 40 pips.

I was trading reasonable size all throughout the day, so the damage was not terminal, but it was nevertheless there and most importantly it was utterly unnecessary. I could have gone on a massive internal rant telling myself how stupid I was for losing my discipline. How I should have known better to not get distracted by the bright shiny objects of the post FOMC price action. But before I even started down that path I knew its was total bulls-t.

The fact of the matter is that I will never be disciplined. And neither will you. And neither will anyone else with a pulse. We are human. We respond to stimuli. To deny that is basically to deny the very essence of our nature.

But thinking about Soros I realized that there is a way to stay consistent and successful while at the same indulging your baser urges. Basically I adapted his
“bet-small-when-you-are-fooling-around-bet-big-when-you-have-the-edge” approach to my own day trading style. I call it the 10 to 1 approach. Let’s say my regular trade size is 10,000 units. I trade that size for any legitimate set up that I have. But anything out of the ordinary. Anything that is not part of my trading plan I trade at 1/10th my regular size. This way I get to participate in the market, but if I get stopped out ( as I inevitably do ) my loss on the “punt” trade is literally half of my one winning trade. Given the fact that I aim to make 10 legitimate trades per day and lose only once, any losses from “punts” are miniscule and do not damage my psyche or my equity.

I even went a step further and created templates 1/10 the size of my real trade templates, so that I would only trigger the “tiny” trades when I wanted to fool around.
Here is how that experiment went today

10v1

As you can see I did a lot of random trades, but none of them hurt me because they were “tiny”.

I can’t tell you how important this trick is. All of us who engage with the market every day, who are tempted by risk at least 3 times every hour, need a proper mechanism to cope with the temptation. And just saying NO is not a real answer. Discipline is bullsh-t. It’s what trading gurus who never have real money on the line like to teach you. For real traders who trade every day, the 10 to 1 rule is a much better solution.

The Worst Mistake in Trading

Boris Schlossberg

So you a got a great setup going. You are banking pips each and every day. You decide to drop more money into your account, you increase frequency and … you lever up! Because it’s time to stop being a wussy! It’s time to make it rain!

I give you two, three days -- a week at most -- before your fantasies of “bricks on bricks on bricks” blow a hole through your account big enough to drive a double-wide through. You just made the worst mistake in trading -- you forgot about the Hidden Risk Relationship.

In any financial transaction you can achieve leverage two ways. The more common way that most of us are familiar with, is to simply borrow against collateral. That’s what margin is and we are all aware of its dangers. At BK we have a saying 4X for forex. It’s a shorthand for the maximum amount of leverage you should employ on any trade. It may seem ridiculously conservative to most traders, but if you want to stay alive in this game for more than a month then using 4 times your account size is about all you should do.

But if you are day trading. And I mean really daytrading where you do 5 to 10 trades every single day then 4X for Forex is way to aggressive.

But let me explain to you why. It has to do with the 2nd way to achieve leverage which is through turnover. If you ever worked retail you are well familiar with both concepts. You could borrow lots of money and stock the store with many items. Or you can flip over your inventory three times per month like Zara and achieve amazing leverage on your capital.

So when you are daytrading 10 times a day you are effectively flipping over your inventory. A lot. Which actually means you should use LESS leverage rather than more. Let’s say you use our 4X for Forex formula and you trade 10 times per day. That’s effectively 40x lever factor as you flip over 4X your equity 10 times per day. Do you think there is a chance that in doing 5-15 trades per day you could lose 3 or even 4 times on some days? You bet. At even a 25 basis point stop you are now down 4% in just one day. Do that a couple of days in a week and suddenly you are down 10% without even trying.

There is another reason why high leverage and high frequency do not mix. Revenge trading. No matter how much you promise yourself you won’t do it. You will. You’ll hit a couple of bad trades in a row. You’ll get pissed, and you’ll want to “get it all back” in one fell swoop. But if you are already trading on leverage that means you will have to lever up 10x, 20x to make up that one trade that brings you back to even. That is prescription for disaster. On the other hand, if you are trading at no leverage, even a few revenge trades won’t hurt you too badly. Certainly they won’t damage you permanently.

So the Hidden Risk Relationship comes down to frequency versus leverage. The more you do of one, the less you do the other. There is good reason why HFT funds trade only a couple of hundred shares per position. They understand that that returns are a function of frequency not leverage. It’s time that retail traders learned that lesson as well.

Your 1 Pip Fortune

Boris Schlossberg

There are only a few things that I fairly confident about and the idea that the next 20 years will be terrible for long term investors is one of them. Over the past three decades investors have enjoyed unparalleled good luck as declining bond rates, rapidly improving technology and a massive fresh, new pool of savings from one billion Chinese consumers made investing in equities a very lucrative proposition.

Stocks have compounded by almost 8% annually for the past 30 years and all you had to do was drop money every single year into an index fund and you were guaranteed to be rich (or at least much wealthier than when you started). We are now living in the golden age of the index investing with more than 3 Trillion dollars allocated to that instrument. But I have news for you, whenever 3 Trillion dollars is allocated to anything in the financial markets it’s almost certainly a sucker bet, because contrary to the Wall Street propaganda markets are much more like a zero sum game than you think. Here is paper from McKinsey that provides the intellectual foundation for my skepticism about the future of investing but you don’t even have to read it. Just look at the table below that shows 70 plus years during the last century when equities produced “bupkas” as we say in New York.

screenshot-2016-12-02-14-32-05

So don’t bet on buy and hold, because it most likely will not work.

Which bring me to active trading. Now I am first to admit that I am talking my book here. I love daytrading and would probably do it even if I could make more money as an investor. Guilty as charged. I believe that day trading is a superior way to make money not only because it is far less volatile, but also because it is an absolute return game and does not depend on the upward drift of the market in order to make you money.

But it is, by no means easy.

I remember a few years ago I horrified a member of my chat room when I told him that the only way to make 100 pips by day trading is to do 100 trades. He was aghast that it would take so much work to achieve such a paltry profit.

The other day, I suddenly remembered that conversation during our daily webinar and decided to look at my personal trading account which I have banged around for more than 1600 trades over the past year. True enough the average NET profit was 1.1 pips. Feel free to check it out here (just make sure to run the data up to November 7th, because my massive winning trade in USD/MXN wildly skews the average to the upside from the election onward).

When you think about it, my day trading results are not at all surprising when you put them into the contest of the real world. After all, consider toothpaste, gasoline, even running a restaurant. When the business person accounts for all the costs of the business what drops to the bottom line is just 3 cents on every dollar of revenue.

When you start thinking about day trading as a business rather than as lottery based amusement that’s when you get a much more accurate idea of not only how to succeed, but what to expect.

And that’s another reason to be grateful for day trading. When done right it provides us with a much more accurate view of the financial world.

Un-Trump Me

Boris Schlossberg

Soooooooo….. How’s everybody’s holiday going? If you are reading this in the United States of America I am guessing the red/blue divide in your family this year will be particularly deep. It is certainly in mine. But for the sake of sanity it would probably behoove all of us to lay down our rhetorical arms for a bit and enjoy the season for what it is and give thanks for all that we have.

And I must say watching our ADHD-addled President-elect operate over the past few weeks I realized that I must give thanks even to him for making me realize a very important point about myself. It is clear that Mr. Trump lives in a constant state of stimuli seemingly afraid of nothing and no one except being bored. Such an approach to life has certainly been a success for him as he is now the most powerful man on earth and holds all of our fates in his hands.

Watching him wheel and deal over the past year, I realized that I share a lot of personality traits with the man. I certainly posses his predilection for constant excitement -- it’s is after all why trading has such a hold on me. But this holiday season I finally understood that unlike Number 45, this very desire for stimuli is actually hurting my performance.

Allow me to explain. Those of you who have known me for a while, know that I never stay true to my strategies. I am constantly fiddling, tweaking, exploring and changing my approach to daytrading. The upside is that my own ADHD-addled mind has produced lots of interesting and exciting setups that many traders in our chat room have exploited for far bigger profits than I. But the downside is that I never allow my strategies to fully express themselves in the market over a meaningful length of time. Not only that but the constant “tweaking” actually destabilizes me mentally and puts me “offside” -- as the Brits like to say -- far more than needed.

Let’s take today. I have at this point pretty much perfected my Boomer strategy and just need to patiently lie in wait in order to scalp off 9 pips whenever my levels are hit. But today, I get distracted by a new variant traded by one of my star traders in the chat room. Meanwhile, USDJPY decides to explode for 200 points to the upside during the US session and blood pumping through my head I decide on the spur of the moment to try his variant in my own account. Except of course I am not satisfied with his exact levels and decide to expand the range. In short, not only am I not using his setup (which worked fine by the way) but I am now using my own untested method in the middle of one of the most volatile days of the year. Exciting? You bet. Stupid? Beyond all doubt.

Of course, I get stopped out. Now I am pissed. And to compensate for my own idiocy I decide to modify my bread-and-butter setup to “adjust for the volatility”. My original setup would have worked perfectly. My new fangled version fails miserably and I am now carrying two stops for the day -- something that I haven’t done in months. Sound familiar? It should. That’s how we all get into trouble.

We seek excitement. We seek the new, new thing and the very thing that brings us daily success is compromised as a result. So this holiday season I am making just one resolution. I will stay boring. I will rinse and repeat my successful set ups.
I.
Will.
Stay.
True.
To.
One.
Thing.

Happy Thanksgiving all.

How To Make Money Trading When You Are 100% Wrong

Boris Schlossberg

The past week has been a rollercoaster ride for us all. I am too exhausted for bon-mots of trading wisdom this week but I did want to show you how traders always need to trade what they see rather than what they want to see.

I walked into the US election armed with exit polling data that assured me Clinton was going to win. The markets had already rallied ahead of the result and frankly, I expected a boring night of little action. But about half and hour into the session real results started to deviate from the models and I made one fateful little move that saved the night for us and ballooned our P&L even as it deflated our spirits.

Watch.

screenshot-2016-11-11-18-12-30

Be the Bruce Lee of Trading

Boris Schlossberg

We are trading the US election LIVE -- Come Trade with us.

When I was wee little lad just starting my Wall Street career at Drexel “Burn’em and Churn’em” we had “The Book”. “The Book” was big fat three ring binder that contained every possible response to any objection that a prospect might make. When we pitched a stock we had to know its story COLD and we had to overcome any objection that came our way. The client never had a chance -- he either bought or hung up the phone -- but in either case we never let him win the argument because we had all the answers.

As a salesperson at Drexel you had to know every possible detail about your stock, so that no question could surprise you. That competence, translated into confidence and ultimately led to sales. Wall Street in the 1980’s was a well oiled sales machine and “The Book” was the cornerstone of its success. I am certainly glad that those Glengarry Glen Ross days are long behind me, but I was just thinking that the idea behind the “The Book” has a lot of value for the modern day trader.

Whether you realize it or not, every time you trade -- it is you against the market. Every time you sell, someone else is buying and betting that you are wrong. Every time you buy, the guy on the other side of the trade is looking to take your money. That’s why knowing every possible detail about your setup is your only true path to long term success.

Retail traders can be generally divided into three groups. Group one is the punters. The “have-a-hunch-bet-a-bunch” is the biggest cohort and they are also the easiest group to beat. They have no clue, no discipline, no structure. They are the rube tourists in a market of thieves. The second group of traders has some sort of set up that they trade but only with intermittent success and discipline as they quickly lose focus and move on to another strategy. This is where most of us fit in.

But then there is a third group of traders. They are the truly elite, because they generally trade one setup and one setup only -- sometimes for years -- and they take money out of the market with enviable consistency of a robot. What makes these traders so good is that they know every possible detail about their strategy. They know when it works well and when it fails. They know which pairs yield the highest accuracy and which pairs don’t follow the pattern. They sometime even know if the setup is skewed to the long or the short side and trade just one side of the market.

This knowledge does not come cheap or quickly. It is the result of countless hours of observations and refinement and it is never ending in its quest for success. The markets constantly evolve and although the fundamental forces of supply and demand don’t change, the slight variations in how they manifest themselves require that traders always stay alert and never rest on their laurels.

Bruce Lee once said, ”I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” That is what “The Book” was all about and what successful retail day trading is all about as well. Instead of always seeking the “new”, “new” thing we should all take Mr. Lee’s advice and commit to one setup with relentless focus. There are a million ways to make money markets, we just need to find one that works.

We are trading the US election LIVE -- Come Trade with us.

3 Tips for Day Traders

Boris Schlossberg

1. Trade in 100 trade batches.
You need at least 100 trades to determine if a strategy works or not, but unfortunately most traders won’t even make past 10. We get bored. We get scared. We absolutely hate bleeding money NOW even it means making money LATER. Mostly we just love to tinker. No one is more guilty of that than yours truly who would be much better off if I just let my systems trade.

One piece of advice that may help. See what is the minimum amount of parameters that would make you leave the trade the f- alone and try to reduce your system to those factors. Then just trade win, lose or draw.

Remember if you don’t have 100 of the same trade -- you got nothing.

2. 4X 4 Forex
What’s the maximum lever factor you should use for forex? You are looking at it. Four times. Four times MAX. So if you are trading $10,000 of capital your maximum trade should be 40,000 units. This assumes that your maximum stop is 25 pips. If your stop is bigger than that then you are not day trading -- you are day praying.

Why 4X? At maximum size and maximum size you lose 1% per trade which is not going to bankrupt you even if you lose 10 times in a row.

Try this for the next 100 trades you will do with your system and I am pretty confident you will still be in the game when the experiment is over.

3. Don’t lift the stop -- Ever. Chip away at your losses.
Oh it’s soooo easy. The FX market is always whippy. Prices almost always reverse and that loss almost always turns to profit if you -- Just. Let. It. Float.

Except when it doesn’t. And you keep adding and adding until the account is gone and you don’t even know how you got to that point from one single, stupid trade. When losing it’s ALWAYS better to stop out. If you like the trade you can always get back in and you won’t be carrying dead inventory if you are wrong again.

Painful as it is to take a loss, it always better to chip away at it even one pip at a time. It took me 6 trades today to recover from a loss and it was worth every pip, both mentally and financially. Resolve to never lift a stop and you will always live to trade another day.

The Easiest Way to Be A Profitable Trader

Boris Schlossberg

The easiest way to make money is not to lose it.

Yes I know that sounds banal, but bear with me here.

If strategy was the true determinant of success than most traders would be wildly rich. But in reality all of trading can actually be reduced to two strategies -- trend or fade. You either buy the highs in hopes of momentum moving forward or you sell the highs in hopes of a reversal.

Every. Other. Thing. In. Trading. Is. Just. Footnotes.

Yes, yes, yes -- there are a thousand variations on trade management (Actually much less than you would think) that could increase or decrease your odds of success somewhat, but ultimately if you are buying breakouts in range or fading fresh highs/lows in trend you will not win.

90% of all successful trading is simply stepping aside when your strategy is wrong for the market environment. As many wise floor traders used to say -- being flat is a position.

Which brings to Aaron Fifield, the wonderfully gregarious host of the Chat with Traders podcast, that has become a small addiction of mine as I try to walk my daily 10,000 steps.

In the most recent segment, Aaron interviews Adrian Dey a former professional sailor who turned himself into a retail day trader.

They often say that pilots make very good traders because they are trained to be extremely thorough and know how to follow a checklist, but after listening to Adrian I think we would have to add sailors to that list.

The podcast makes for wonderful listening and -- aside from the fact that an Aussie interviewing a Brit turns English into a foreign language to an American ear -- it contains many interesting insights. But I would just like to focus on one. Adrian makes a very good point that process -- not performance -- is at the root of all long term success in trading. One of the most interesting parts of the conversation turns to the discussion of how Adrian went from a losing trader to a modestly profitable one, by simply tracking his error trades.

What is an error trade for Adrian?

Here is small sample of what he considers to be error trades:

  1. Not taking a trade when the system provides a signal
  2. Rushing to enter and being early to the trade
  3. Missing the entry and being late to the trade
  4. Putting in the wrong size for you risk control parameters
  5. Lifting your pre-set stop
  6. Putting in the wrong take profit
  7. And the ever popular -- taking a trade that is totally outside of your setup.

How many of us are guilty of making error trades?

I would say 100%.

Note that the error trades have NOTHING to do with the actual set up. They are in fact all trades taken outside of the setup.

Marty Schwartz, the great S&P trader of the 1990’s used to say that you can’t go into first gear until you move through neutral. In other words, the easiest way to improve your profitability is not by constantly tweaking the parameters of your strategy, but by actually trying to eliminate the errors you are already making.

Once you are settled on a set up -- create a “serious” account where all you do is stick to the rules you developed for yourself relentlessly tracking any “errors” you make. Then create a “play” account where you can make all the errors you want as you experiment with new ideas. You’ll be amazed at what a differnece it will make.