The 5 Stupidest Words Retail Traders Say

Boris Schlossberg

Most trading gurus tell you to ignore the fundamentals and focus on the technicals. Almost every trading book you pick up is filled with technical patterns, indicator glossaries and a multitude of strategies based on the combination of both. Most retail traders can expound on differences between MACD and RSI, but would be stumped by the meaning of PMI reports or the IFO survey.

I understand. Fundamentals are hard. They are confusing and often contradictory. In the inimitable words of Yogi Berra, “It’s tough to make predictions, especially about the future” -- and especially if those predictions involve some long-term view on the economy, which can change faster than the weather in Florida.

Fundamentals are fickle. They require context, which often only becomes obvious after the fact. And they certainly appear less objective than a couple of trend lines on a chart.

But here is what I don’t understand. I don’t understand retail traders (most specifically day traders) who tell me with a straight face. “I don’t care about news.”

Those have to be the five stupidest words that I hear every single day.

What do you think moves price? Only two things. Price itself and News. So if you just watching price and not following the news you are like a half blind man competing against thousands of traders with eagle eye vision. Is there any wonder why 90% of retail traders lose money? Without any awareness of the news retail traders are simply fodder for the market. They are the quintessence of “dumb money”.

I can’t tell you how many times I’ve seen retail traders lay down a bet on some cross like EUR/NZD because “it looked good on a chart” 3 minutes before an RBNZ announcement or an employment report only to see their money evaporate before their eyes.

Here are some simple rules for retail traders.

If you know the difference between RSI and ADX, but can’t tell me the name of every single leader of a G-20 central bank -- you are patsy.

If you love Fibonacci and can wax poetic about Elliott Wave, but have no clue as to what time of the day UK data generally comes out -- you are a HUGE patsy.

If you think that that brand new tweak to your MACD settings is the key to your future success, but you have no idea of who Taro Aso is I got news for you. That USD/JPY trade you been holding will blow up in you face worse than a bowl marinara set on microwave setting of high.

In fact, 90% of all retail traders would be much better off if they knew NOTHING about technical indicators, but knew the weekly G-20 economic calendar COLD.

In our chat room, we never day trade fundamentally, but we know every single economic event and we listen to a streaming Squawk Box from London 24 hours each day, because we know that the key to success in day trading, does not lie in trying to figure out the meaning of a squiggle on the chart, but in making sure that you are aligned with the price flow after the news hits the screen.

Random Day Trading Observations on A Hot Summer Day….

Boris Schlossberg

If you trade in a team you will always trade better…

When day trading it easier to be 80% accurate on 1-2 risk reward scheme than 40% accurate on 2-1 risk reward strategy…

Edges are easy, sticking to them is hard…

If you trade small and take your stops you may lose, but you will rarely FAIL and lose it all…

Every blown account is the result of ego rather than strategy…

The most important thing in trading is not to win, but to survive…

The market is a Markov process -- it could give a sh-t about yesterday and even less of a sh-t about your position…

Moving averages, support and resistance lines, Fibonacci retraces are all just squiggles on a chart to give us illusion of control…

Brett Hull is right. Systems exist so you can remove as much randomness as possible from trading…

The best measure of your performance is your total return divided by your max drawdown. If it’s 2 or higher -- consider yourself doing well.

The maximum opening trade if you trade more than 10 times a day should be 1X equity. If you don’t add a single unit you would have already levered your account by 10X through simple turnover alone…

The maximum opening trade if you trade less than 5 times a day should be 2X equity.

The maximum opening lever factor if you day trade period should be 4X of as we like to say -
4X for forex…

If your profit factor is 1.3 or better and you did more than 200 trades pat yourself on the back…

If you don’t have a myfxbook account, you are not really trading. You are just f-ing around….

If you want to be good at this, commit yourself to trading for at least ten years….

With dog days of summer upon us, it’s good to take a break. So until Labor Day , I’ll recycle some of my favorite columns from the past.

Enjoy the beaches and the mountains everyone.

Trading for a Living Versus Trading for Life

Boris Schlossberg

Many times when I meet BK traders in person I often hear the very same thought expressed over and over again -- “Man I wish I could do this for a living!” My response is always to wince. Don’t get me wrong -- it’s certainly possible to make all your money exclusively from trading, and there are individuals who have made the transition to full time trader, but they are few and far between.

Trading for a living is a feast or famine business. Kind of like sales except much worse. Not only do you not get a monthly draw, but very often Mr. Market will take away last months and the prior month’s paycheck and you have to trade for two or three months forward just to get your money back to even.

That’s why I always recommend that anyone who contemplates a trading career have a side stream of income that is not market dependent. It doesn’t have to be much. But it really must exist, not only to help you cover the basic monthly expenses of living, but much more importantly to give you the peace of mind for those very tough periods when drawdown inevitably kicks in.

But rather than aiming to trade for a living, I think everyone who is involved in the financial markets should actually set a much more useful goal for themselves -- trading for life. Let me explain why that skill, here and now maybe the most important skill you can acquire.

Returns

A few weeks back I tweeted out a graph (see above) that I called the scariest chart in finance that I’ve ever seen. The basic premise is that we are all going to live a lot longer than we think and will all have a lot less money than we hope, because QE and ZIRP have basically destroyed any long term investing options. For all practical purposes bonds all yield zero and will do so for possibly decades to come. Real estate is a highly capital intensive business that is utterly illiquid and could goble your savings faster than a Florida sinkhole. (Tokyo apartments anyone?). And stocks? Well stocks are the last great hope of all investors. But I keep having that sinking feeling that the future isn’t what it used to be. Maybe, just maybe the Dow will be 30,000 by 2030 or maybe like the Nikkei it will just range trade and wallow at 18,000 leaving most of us with nothing to show after decades of investing.

I do know one thing. All those S&P compounded index returns that everyone touts are total bullshit. Unless you buy every month, rain or shine, year after year after year you have virtually no chance of making serious money from stocks when you buy at the highs. Back when my older kids were in elementary school we started two 529 accounts for them for college. We used Fidelity and we bought the basic equity/bond index match like the good savers we were supposed to be. Our only problem was that we bought at the start of 2000.

16 years later guess what that patience got us? After fees, the REAL return on that money was something like 2.1% per annum. Imagine if I had to count on that for my retirement income.

We are living in a very different world now. And yet all the advice that we get about financial guidance might as well come from the set of Mad Men. it’s literally that outdated and just about as relevant.

In my chat room, I see traders making 50, 80, 100 pips. Every. Single. Week. Let’s just imagine that they use no leverage whatsoever. That’s 50 basis points per week or 25% per year. Let’s degrade that by half once again and say that when the dust settles, after all the drawdowns and all the transaction costs they make 12% per year without any leverage and while seeing drawdowns of less that 5%. Do you think you could even remotely approach such consistent returns as an investor? Today I read that Carl Icahn and Bill Ackman -- the Titans of Wall Street! -- are down -18% each this quarter. So much for smart money. So much for trusting other people with your savings.

Trade with BK for $59/week

The future no longer belongs to the organization man. You can’t punch a clock, do what’s asked and expect to live a safe and happy life. The future belongs to those who make the effort to learn and to engage with the financial markets. That’s why trading for life will become a skill we will all need if we want to achieve any semblance of financial security in the new millennium.

Bulls-t Trades vs. Real Trades

Boris Schlossberg

What’s a real trade?

A real trade is any setup that you have tested, traded, written out and generally committed to as your core day trading strategy. Real trades have very specific entry, exit and risk control rules. Real trades have a whole series of defined scenarios when you will NOT trade them. Real trades deserve real size -- generally risking no more than 0.5%-1% of capital on any given idea.

All other trades are bulls-t trades.

Bulls-t trades aren’t necessarily bad -- in fact some bulls-t trades can be brilliant -- but all bulls-t trades must be traded only at 0.01 lot size with a maximum hard stop of 50 pips (swing traders could widen the stop to 200 pips)

Here is the thing. It doesn’t matter how disciplined you are. It doesn’t matter if you are a Marine who takes ice cold showers every day and wakes up every morning to 100 pushups and 200 sit ups. When it comes to trading you will never, ever follow your system 100% of the time. It’s our human nature to explore, to experiment, to veer off the given path. That’s how all progress is made. In fact you would be a horrible trader if you just followed your system blindly, because the market environment would eventually change and make mincemeat out of your strategy.

So trying something new is good. Its to be commended. It may in fact lead you to developing a great new strategy. But for now it’s just a hunch, or an impulse borne of boredom or simply a chase of breakout price action on the chart. In short it’s a bulls-t trade and you must always treat it as such.

The reason most traders lose money is not because they don’t have good setups or because they can’t analyse markets or because they don’t have discipline. The reason most traders lose money is because they treat their bulls-t trades like real trades and inevitably blow up 50% of their capital on one ill-conceived idea that mushrooms into a margin call. This is the post-mortem signature of every failed account I have ever seen in my two decades of trading.

How to Win At DayTrading

You may not believe me. You may in fact think that I am full of sh-t. I really don’t care, but allow me to leave you with the following chart. This is what happened to my account when I finally got serious and started treating all my non strategy trades as bulls-t never letting my impulse for exploration sabotage my drive for profit.

Screenshot 2016-07-26 20.39.03

The Easy Way to Trade Like Soros

Boris Schlossberg

In Alchemy of Finance, the legendary trader George Soros recalls his short of the home builders in the 1970s. He notes that he profited handsomely from the trade, but then did something interesting -- he looked at his own notes for the original thesis for the trade which discussed how the sector would dive then rebound and then collapse once again. Revisiting his own words Soros decided to re-short the builders and once again walked off with a handsome profit.

Out of that little story Soros ultimately developed his theory of reflexivity of the markets which has allowed him to make billions over the years.

So what’s the most important thing that we can learn from one of the greatest traders of all time?

Take half an hour this weekend and write out your trading setup.

Soros, who is steeped in European tradition writes because he fancies himself a Renaissance man and craves the intellectual approbation almost as much as material wealth.

But for us as day traders writing has a decidedly more practical application. It will literally make you trade better. Forget indicators, forget EAs, forget systems, forget gurus. Mark my words the single most important improvement you can do right now is to write out your trading plan on paper.

In fact, the best exercise for the trader is simply write out all the times that he will NOT trade during the day. One of the best traders in my room -- a guy who hit 50 winners over the past three week while taking only 1 stop -- did just that yesterday sending me a text of his thoughts.

It was an amazing document, showing crystal clear reasons for why he would and would not engage with the market and made me understand why he has been so successful using my Boomerang system.

Writing forces discipline. Discipline creates structure. Structure leads to efficiency and efficiency leads to profits.

Screenshot 2016-07-22 07.47.16

Want stop flailing in your trading? Write your thoughts out this weekend -- it will be the best trading hack you can do.

Day Trading for Newbies

Boris Schlossberg

Our Goal is not to make predictions -it’s to make money.

Ok so you want to learn to day trade FX?
Here are three things I think you should do.

Trade the 0.01 lot.
It doesn’t matter if you have 1,000 or 1M in your account. Trade the 0.01 lot for at least 500 trades. Yes I know it sounds ridiculous, but trust me you’ll thank me after. The 0.01 lot is a perfect size for the beginning trader because it’s real money without any serious consequence. There is nearly a 100% chance that you will blow up your first account. (One way you will do it is by blithely ignoring this advice) But at least if you trade the 0.01 lot you will have a chance to hang in the market much longer. You will have an opportunity to make many, many, many more stupid trades -- which is actually very important because that is how learn. Trading is the art of learning what NOT to do, so making mistakes is a crucial part of your education. The more 0.01 lots you trade the more you will learn.

Use a System
It really doesn’t matter if the system you use is profitable or not. It helps if the system has a definite edge, but that’s not really the point. When you start out trading you need structure. Most newbies start out wallowing in the sea of randomness and only after a year or so, develop some kind of structure. It’s much easier to do the reverse. It’s much easier to start with a structure and then experiment with its constraints.

As my friend Robbie Booker says there are literally hundreds of intelligent systems floating on the web. You can use his missed pivot system, you can use my Boomerang approach -- it really doesn’t matter. You’ll never follow the rules exactly anyway. You’ll always make adaptations. I, make adaptations all the time -- and it’s my own system! So do most of the traders in my chat room, who by the way, trade it much more profitably than I ever can.

That’s all fine. The purpose of a system is to teach you to do the same thing every day. To observe the market through an intelligent structure that will in time reveal to you the basic behavior of the market. I’ve noticed that since I’ve focused on the Boomerang to the exclusion of all else, my market analysis has actually improved as I am able to see the change in sentiment with much clearer eyes.

Here is one thing to remember about any system you trade. Feel free to improvise with take profits, but never, ever pull your stops. Most newbies of course do the exact opposite. They remain adamant about hitting their take profit targets and then compound their errors by moving their stops when the trades go against them. I call this the Savonarola school of trading -- the idiotic notion that you MUST adhere to your take profit targets otherwise your system won’t be profitable. In real life of course your trading will look nothing like the backtest, so adhering to whatever orthodoxy you’ve been taught is a sure way to end up at an auto-da-fe.

In any case, taking profits early but sticking to your stops is will keep you in the game for as long as possible. Doing the opposite is a guarantee of a blow up. It’s just a matter of time.

Trade 3-5 times a day
One of the hardest questions about day trading is also the most obvious and I only wish that someone revealed the answer to me years ago.

How many times should you trade per day?
Answer: Three to five.

If you are doing ten trades or more you doing too much. There will be days when you do twenty. There will be months when you do fifty everyday. But when you finally settle down and focus on making money rather than seeking an rush high you will realize that three to five is just right. You can argue with me. You can flame me. You can troll me. I couldn’t care less. When you actually decide to become profitable -- this is the number you’ll settle on.

My favorite FREE resources for FX Traders

Lies Traders Tell You

Boris Schlossberg

1. Trade with a Positive Risk Reward Ratio

Of all the lies taught in trading this is perhaps the worst. Mainly because it sounds so reasonable. Who wouldn’t want to risk $1 to make $2? You only need to be right 40% of the time to win! It’s such a seductive pitch. Too bad it’s total BS.

Maybe that approach works on swing trading which is much more like a lottery type business model ( You catch one good trend and that can make your year). In day trading the positive risk/reward model rarely works. You need superhuman timing skills and it’s almost impossible to maintain your skill/luck over the long term.

What works in day trading is forgiveness. You need to give yourself lots of room to be wrong. You need to create more than one opportunity to resolve the trade profitably. And most importantly you need to trade with a very, very, very negative risk to reward ratio.

I know. One trade. JUST ONE LOSING TRADE! And you will blow a week’s worth of profits. Well yes that’s an extreme you probably don’t want to reach. That is probably too negative a risk to reward ratio. But one losing trade for two days of profits is actually quite doable. In my room I have guys who have gone two, three even three and a half weeks without hitting a losing trade. In the month June I managed to lose money on only two trading days banking 10% for the month, so it’s possible. The key to day trading isn’t cutting you losers short and letting your profits run -- it’s making sure that you can resolve each trade with either a profit or a scratch.

2. When You are in a Losing Streak the Most Important Thing to Do is Stick to Your Strategy!

Yet another platitude that sounds great when you hear it but crumbles under the pressure of real trading conditions. When you lose money the greatest damage done is not to your account, but to your psyche. There is nothing so fragile as a male ego (since 95% of traders are men let’s just focus on the lesser sex for this one). The moment you lose, you damage your confidence. I remember in the late 1990’s when I was trading stock index futures, I lost 18 straight trades in a row and stopped trading after that for more than 2 years. I followed all the rules. I stuck to my strategy and I basically wound up abandoning the markets because I destroyed the most important thing a trader has -- his sense of self.

So no. When you are on a losing streak the most important thing is not to follow your strategy. The most important thing is to win. If you strategy calls for a 10 pip take profit and you are 5 pips in the money -- take it. Do that two, three, four times in a row until you have your mojo back. Those trades do not matter. They are not part of your “sample”. You don’t use them to evaluate the long term statistical viability of your strategy. They are there for one purpose only. To make you a winner and to get you comfortable with taking risk again. Which bring me to my third biggest lie.

3. Strategies Matter.

Strategies do not matter at all. All strategies can be divided into two simple trades -- mean reversion or momentum. Everything else is tactics. Which is why the best traders in the world never really follow rules, but rather establish guidelines and constantly adjust against those parameters.

In my trading room we have a great mean reversion strategy. It works more than 90% of the time. Yet not one trader follows it exactly to the tee. Everyone has their own variations not only in tactics but in trade selection, time selection and currency pair selection. That’s why when people jealously guard their “secret” strategy I laugh. They may as well guard air -- it’s just as pointless. Share your ideas and they will only get better. Hoard them and they inevitably get worse.

The Last Car on the Train

Boris Schlossberg

One of the small pleasures in my life this summer is to take an hour long walk each day and listen to the Chat with Traders podcast as I walk around the Upper West Side. Like every middle aged American male I have become obsessed with doing my daily 10,000 steps and the podcast makes the time go by easy.

The podcast is trove of valuable trading info if for no other reason than it shows you just how many different ways you can make in the market. It has interviews with scalpers, swing traders, algo traders, futures traders, equity traders, discretionary traders, systematic traders, technicians, macro traders, stat traders and a whole lot more.

It’s like a digital age version of Market Wizards and if you are market junkie (which of course you are :) -- then this is great resource to enjoy on a sunny day.

I like all the interviews but perhaps my favorite is with a trader named Jeff Davis who is the least likely person you would imagine to be a successful trader. Davis is only a high school graduate who worked all of his pre-trading life in the Post Office. Yet his enthusiasm for the game and innate intelligence have taken him to the heights of success. He is a very good day trader in the ES (emini S&P) which is like saying he is a very good Olympian in the track and field. The ES is notorious for being one of the most difficult instruments to day trade and the fact that Davis is so good at it is a testament to his skill and discipline.

However my favorite part of the interview has nothing to do with tactics or strategy. The part I loved the most is Davis recollection of his early days of being a prop trader in New York. Like many traders who worked on Wall Street he commuted every day from the suburbs and grew friendly with many of the NYSE specialists who took the train in with him every morning. This was occurred before electronic trading laid waste to much of the profession but the lessons he took away from that experience were timeless.

The most amusing anecdote that he recounts is that every day all of his trading buddies always piled into the last car on the train. One day he asked them why they did this and they replied -- Have you ever seen a train piled up? The only people that survive are in the last car. As Davis notes they were thinking about risk way before the NYSE opening bell ever rang.

I love this story because it has nothing to do with the markets and yet it perfectly encapsulates the mindset of every profitable trader out there. Worry about risk first, foremost and always. Reward will take care of itself. Want to really understand why that is so important?

Take a look at the chart below. That’s one of my trading accounts for this year. What’s the reason for the difference in performance? In the first half of the chart I was stupid enough to pull my stops and kept buying the market lower until it finally broke me and I exited the trade at a massive loss. In the second part of the chart I just traded the BK Boomerang strategy that we developed in our chat room and I took every stop without fail.

But here is the most important takeaway.

It took me just 10 days to lose all that money and more than 40 days to make it back. That’s a pretty ratio to keep in mind. For every day that you abandon risk control it will take you at least 4 days just to get back to even. Think about that the next time you decide to pull a stop.

Download My Best FREE Resources for the FX Trader

Screenshot 2016-07-01 03.45.39

How To Trade All The Brexits of Your Life

Boris Schlossberg

First of all props to George Soros who at 80 plus still has more trading skill in his head then all the armies of quants and fraternity boys at every bank trading floor in the world. He saw the asymmetrical risk and he took it and I think I understand why. Like all East Europeans (yours truly included) he has a particularly dark view of human nature. He always bets on the unfortunate tendency of most human beings to make the absolute worst choice possible. Given the fact the many of the low information voters in UK are apparently only now starting to google the words “European Union” and only now starting to understand the full implications of the actions, Soros is once again proven right in his views.

But this is not a column about “have a hunch, bet a bunch”. In fact quite the opposite. Last night K and I hosted a 4 hour live trading session that was undoubtedly the best of our lives. Not because we made a huge amount of pips. We did well (blotter below) -- but many of traders in the room made four, five even six times the amount of pips we banked.
Screenshot 2016-06-23 23.52.30

The thing that made last night’s session especially sweet was that we finally put all of our trading skills to work in what was surely the test of the century.

So allow me to deconstruct the key ideas that made trading Brexit such a success so that we may all make them our best practices for the future.

1. Trade small.
Yes, yes, yes I know that I drone on about this point to the level of ridiculousness but it cannot be overestimated. Brexit night was the single most volatile night in the history of the pound. If you traded with so little as 5X leverage you would have been margined out at least 10 times in a period of three hours. I traded at 0.5 lever all night long and never once felt any pressure in what was the most turbulent market in years. In fact the proudest moment of the night for me wasn’t in hitting 10 trades in a row, but in blowing out of my position the moment I realized that was 4X too large by accident. You can hear me on the video saying, “I don’t care if I am right or wrong I just want to be out.” Which was probably the smartest thing I said in years and will forever now become my mantra when I trade these events. Making the wrong size trade and then stubbornly trying to trade your way out of it is precisely how all traders fail. Nick Leeson anyone?

2. Trade the facts not your opinions.
Like almost everyone in the financial markets K and I came into the event convinced that Remain would win. In mature democracies the status quo generally always has the upper hand as people are loathe to vote for the unknown. So we were fully with the bookies and even had the plan to buy the dips as the inevitable profit taking kicked in. But very soon into the results Leave started to edge ahead. Having followed many political campaigns in America, I instantly grew weary of my opinion. I knew from watching so many results trickle in over the years, once one side gets the lead -- especially one that is not supposed to be ahead -- the odds of the consensus win begin to dwindle radically. So you can hear K and I saying if London doesn’t cut the lead by X, if Birmingham doesn’t cut the lead by X -- odds are the Leave will win. Wequickly changed our view as facts challenged our assumptions. When you trade event risk it’s vital to have no ego.

3. Trade with Trend.
Once you have the right assessment it is vital to stay on the right side of the market. All of our trades were short risk and while some of the traders in the room tried to buy the turns we vehemently held them back because we knew that when it comes to event risk the trend is your friend and you fading it is a low probability choice.

4. Think fundamentally, trade technically
This perhaps was the key to our success. We had a fundamental view and traded in direction of the trend, but we almost never chased price. Instead we waited for inevitable short covering rallies and keyed off the near term resistance levels that were popping up on the charts. This was actually the best thing we did as our positions saw very little drawdown on a night when volatility was at a historic high.

Here is the video of the event. Hope you enjoy it as much as we did.

Want to Trade Well? Pay a Lot of Commission

Boris Schlossberg

Ask anyone with any financial savvy about making money in the markets and the first thing they will tell you is -- keep your costs down.

And they would be absolutely right.

A few weeks ago John Oliver made a Herculean effort to explain to his viewers how even a 1% annual savings in costs could make you an extra million dollars in return over your lifetime. Mr. Oliver is perhaps the only human being on the planet who can make compelling television out of dissecting the nuances of 401-K plans. For that as well as just for being John Oliver he should be commended.

There is no doubt that for 95% of people who invest the single best plan of action is 60/40 purchase of a Vanguard stock and bond fund that they rebalance once a year. An even better strategy is dollar cost average into those two assets every single month. Your cost per year is less that 10 basis points and you will own the market return which will outperform 85% of active managers.

But for the 5% of us who actually trade the rules are completely different. Below is a snapshot of my personal account for the past 30 calendar days. It was a good month. I made nearly 12%.

Screenshot 2016-06-15 13.27.41

But what that graphic doesn’t show is that I paid fully 50% of my money in commissions. In other words for every $1000.00 of profit I paid $500 in commissions, no doubt making Drew Niv very happy. Looking at those numbers most of you would be outraged. But that’s because all of you are conflating the world of investing with the world of trading.

When you are investing the goal is to eliminate as much friction as possible. That means transaction costs should be minimized as capital grows at the natural market rate.

But trading is all about friction!

What do we do all day, but take advantage of the tiny ebb and flows of price action than in the greater scheme of things is nothing but noise? In fact, if markets were only open to investors prices would not change for weeks or months on end.

So if you accept the fact that friction is what we do then it becomes obvious that more friction means more profits. If you look at some of the greatest traders over the past half century from Michael Steinhardt to Steve Cohen you will realize that they were also the biggest commission generators of their time. Did that stop them from being profitable? Quite the opposite. Both men generated returns in excess of 30% per year NET, far outstripping the market averages for decades.

So if you are in the trading business the LAST thing you should be worrying about is commissions. As long as you have the edge the more you pay the more you make.