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.

Don’t be a Dilbert Trader

Boris Schlossberg

This is not a column about politics, it about trading. So please save your Libtrad insults for another time and try to focus on what I am about to say.

Donald Trump is very likely to lose the race for the Presidency. Not because I desperately want him to, but because he has managed to piss everyone in the electorate who is not male, middle aged and white.

In fact there is a good chance that he may not get even 100 electoral votes in November creating one of the greatest blowouts in Presidential politics since Reagan v. Mondale.

Which brings me to Scott Adams. Adams is the creator of the enormously popular Dilbert comic strip and by all measures a very talented and intelligent man. His ability to gauge and accurately read the social mood of Americans proved highly prescient when he was one of the earliest pundits to understand the Trump phenomenon predicting that the man would go all the way. This was at a time when most conventional wisdom thought that Trump would gone after insulting the war hero John McCain.

Adams was brilliant in comprehending that Trump’s appeal transcended reason and logic and hit the electorate directly on an emotional level. (As my 20 year old son said to me this weekend, “Dad the reason Hitler and now Trump appeal to people is because they both offer simplistic solutions to complex problems, and since most people just want to hear a solution but don’t want to think too hard about its ramifications they offer him support.”)

For a very long time Adam’s thesis looked brilliant. Trump was truly the Teflon candidate, able not rebound from scores of political gaffes that would have forced any other politician to quit. But then came “p-ssygate”. Now whether you think the Trump tape was just the way men talk or the confessions of a brutal sexual predator, it really doesn’t matter. It was a TAPE. It showed him in the worst possible light as a human being and it made even the most diehard of Republican women ( and many men) throw up in their mouth when they heard those words over and over again.

So here is where it gets interesting. Did Scott Adams change his mind in the wake of this new evidence? Not at all. In fact a few hours after the “grab her by the p-ssy” scandal broke Adams penned a 5000 word blog post about how he was 98% confident that Trump would win the election.

And this is how very intelligent, highly talented people lose all their money in the capital markets.

Scott Adams is the classic case of a trader who is married to his position. Think back at how many times you’ve acted like Scott Adams in the past. How many times you were convinced that your point of view would prevail in the markets. Even as evidence in the form of price and news turned against you, you stubbornly held your losing trade until all hope and money was gone.

And just like Scott Adams you also created a litany of reasons as to why you were still absolutely right. Of course in the cold harsh light of the margin call, those reasons looked like pathetic excuses, but at the time you believed them fervently, because they were all that you had.

Scott Adams may even turn out to be right. In politics as in markets you never know what could happen from one moment to the next. But if he is, it will be due to luck rather than skill, because if we were to run the US election in one hundred alternative universes today, it completely improbable that Mr. Trump would win in 98 out of 100 cases.

Scott Adams is making a classic trading mistake. He is basing his decision on ideological, rather evidentiary principles. This is how very smart people lose all their money. We’ve all been there. The key for us as traders is to not repeat those mistakes going forward.

In short, don’t ever be a Dilbert trader.

Five Things to Learn from the Cable Flash Crash

Boris Schlossberg

What can we learn from the cable flash crash?

  1. That if you really want to move prices -- early Asia is as good a time as any.
  2. That bad news rarely ends when you think it will and buying dips in a downtrend is generally a suckers game.
  3. That human traders will always underestimate how modern day computerized markets will amplify the magnitude and the speed of the move.
  4. That markets always work worst when you need them the most.

But most importantly the main thing that we can learn from from the cable crash is to
always
always
always
attach a stop to every trade.

It’s Random Baby

Boris Schlossberg

One of the greatest books on trading I ever read contained no practical advice about the markets whatsoever but it described price action better than a thousand hedge fund managers ever could. The Drunkard’s Walk by Leonard Mlodinow details how virtually all aspects of life are ruled by randomness.

In fact just today I came across a paper by professor from Hebrew University that eviscerates the concept executive performance compensation by proving with a high degree of statistical certainty that 90% of CEO performance is a function of luck rather than skill. Watching the recent Congressional hearings of Wells Fargo CEO John Stumpf only proves professor’s point.

But back to randomness. If we are honest with ourselves randomness is a massive part of market price action. It’s one of the principal reasons that almost every backtest fails miserably under real market conditions. And it is also the reason that I consider tactics to be much more important than strategy when it comes to making money day trading the market.

My favorite tactic is what we in our chat room call, the Boomer entry, where we will enter the trade at one level and if it goes against us we will add to the position allowing us to exit the trade at the original entry rather than the original take profit.

I know. I know. The horror! I am breaking one of the sacrosanct rules of people who never- actually-trade-with-real-money-but-like-to-peddle-trite-theories-of-risk-and-reward. Yes of course, I am increasing my risk and capitating my reward. Yes of course. such tactics require much higher win percentage to be profitable. And yes of course, they can lead to disaster if you don’t properly balance the ratios. But instead of having a religious argument about risk and reward ( I am an atheist anyway) just do the following.

Open a demo account. Place 50 random trades with 5 pip stop and 10 pip take profit then another 50 trades with 10 pip stop and 10 pip profit, then another 50 trade with 20 pip stop and 10 pip profit. You’ll notice something interesting -- the win/loss ratios are not proportional. At 5TP/10 stop you could lose 90% of the time but at 20st/10tp you may win 55% maybe even 60% of the time. You will still lose, but much less and over a much longer period of time than through the “traditional” way of trading.

Why?

Because of something called path dependence. In the bulls-t world of trading gurus where trend spotting is easy apriori and price moves linearly from point A to point B, using 2-1 risk reward ratios is…obvious! But in the real world where every price tick is subject to random variables the path is almost never smooth nor linear. Add to that the fact that the market, like a skilled poker player, is almost always trying to trick you into the wrong move and your chances of accuracy at any given price are actually more like 25% for to 75% against versus the 50%/50% that is commonly assumed.

That’s why single entry tactics are the height of arrogance, especially in day trading where the stops are small and the margin for error is tiny. On the other hand, our day trading tactics are designed for maximum possibility for success in a real market environment that is more like the undulating waves of the ocean, than the hard certitude of a concrete floor. Over the year these tactics have made me more pips than all my day trading strategies combined because randomness rules.

Warren Buffett Does Not Trade Trend

Boris Schlossberg

The other day I came across an article about Warren Buffett’s office. The writer catalogued in full detail all of the knick knacks that Buffett has in what was described as “the domain of a mid-level executive in a generic corporation.” I knew that Buffett was frugal, but the fact that one of the world’s richest men still watches television on cathode ray TV really surprised me.

Yet what really caught my eye about the article was that Buffett had a picture of Ted Williams in his office. I wrote about trading like Ted Williams several years ago and it appears that Buffett is a fan of the baseball great for the very same reason that I am. As Buffett tells the writer the picture of Williams is there to remind him to “wait for the right pitch”.

If you really think about what Buffett is saying, it means that you must let price come to you. It means effectively that Buffett never trades trend. As a value investor he is always buying when everyone is selling and selling when everyone is buying. He, of course, is not alone. Almost all great investors do this including Seth Klarman whose book sits on Buffett’s desk.

Yet think about the idiotic cult of trend that pervades all retail trading. From the moment you are newbie to the very last penny that you lose from your account you are told by every paper trading guru that you “must trade with trend”. Now there is no doubt that some -- few -- traders can trade with trend successfully, but the vast majority of traders lose all their money following that useless advice.

Why?

Because trading trend puts you at a disadvantage from the moment go. You are chasing price, you are following the crowd and that strategy only works if the wave continues to swell. But hurricanes are rare and most of the time the wave crests and you just crash into the rocky bottom of unforgiving ocean wondering what you did wrong.

Currency markets -- and for that matter all capital markets -- are just like the ocean. On a day to day basis prices crest and fall and rise again. That’s why in my day trading room we trade counter-trend almost all the time. Trading counter trend by no means guarantees success. In fact, if you do what most retail traders do, which is -- add to the position and trade without a stop -- you will most certainly go bankrupt. But counter trend trading with a robust entry model and an intelligent trade management system is a much better way to day trade. It puts odds in your favor.

Just ask Warren Buffett.

Trade with BK for $59