Making Pips is not Like Making Donuts

Boris Schlossberg

Trading is a very tough challenge because the relationship between effort and success is almost non-existent. You can do almost everything right and lose or you can do everything wrong and win. While luck plays a role in almost all human endeavors ( you just need to see last week’s American football matches to see how a random bounce made all the difference) in trading the variance is far greater than in any other field.

There is absolutely no way, for example, that a pudgy 5 foot 6 teenager with coke bottle glasses could walk on a professional football field (be it American football or soccer ) and score. Yet in trading, that very same novice who knows nothing about finance or markets could easily beat the pros, at least for a little while.

Part of the reason why this is possible is simply the unpredictable nature of news. At any given time newflow can flip price action completely around. This does not happen in the real world where 99.9% of the newsflow has no impact on price whatsoever. Imagine if your donut businesses were affected by every new Trump tweet, and you get the idea of why trading is very different from making donuts.

Precisely because trading is so arbitrary you need to create a system of control that is ironclad. We can’t control price, but here are some of the things that we can control and should.

  1. Control size. Of all things that get traders in trouble, size is the biggest problem. Trading 0.01 lots for as long you need is still the best trading advice there is. Trading 1X equity max is a close second.
  2. Control entry. We can control exits, but we can always control entries by either letting price come to us or waiting til price touches a key point of momentum.
  3. Control how we exit. We can’t know where the market will take us, but we can control the trade once it’s in the money by using a dynamic stop. This a terrible method mathematically, but the best method physiologically and since trading is as much about keeping your psyche sound as it is about keeping your account positive controlling how you exit is the only way to control yourself.
  4. Control your approach. What makes you trade better -- defined strategy or discretionary trading? Discover your inner truth and you will be much more successful at controlling the game.

I Can Definitely Improve Your Trading

Boris Schlossberg

Here is what you have to understand.

We are all deeply flawed human beings. We never really change. Our personalities are set in stone from our childhood. Deep down what we were in high school is what we are today. Not only that but all our attempts at self-improvement are destined to fail. That’s not my opinion. That’s the latest scientific view backed by reams of data from cutting-edge brain research.

Our attempts at self-discipline sap so much mental and physical energy from us -- especially as we constantly try to censor ourselves and live up to the “standard” -- that in the end we crumple and revert to our old habits. That’s why losing weight is so hard. That’s why quitting smoking is so hard and that’s why “disciplined” trading is so hard.

Modern science teaches us that the only way we change behavior is if we make it as pleasurable as possible. Punishment and sacrifice, while very nice, proper Calvinist concepts, do not work in real life.

I started thinking about behavior modification after reading a Business Week article in which a professor was able to quit smoking by substituting another pleasurable activity (in his case it was sucking on hard candy) every time he had the urge to smoke. After a long period of time, the urges lessened then disappeared and he dropped the candy habit and was smoke-free.

Nicotine is one of the most addictive substances on earth. Its rate of recidivism is higher than that of heroin, higher than cocaine. In fact, the only substance more addictive than cigarettes is crack cocaine, so to beat the habit with a simple candy trick was quite an achievement and it confirms the latest scientific findings that in the long run, we can only change our behavior through pleasure, not pain.

Which brings me to trading. Forget every bullshit piece of advice ever given by a trading guru. You will never let your profits run and cut your losses short. You will never take only those trades that qualify for your setup. You will occasionally lift your stop and you will sometimes revenge trade.

But despite it all you can still win and prosper as long you don’t let the perfect be the enemy of the good.

First and foremost you need to ask yourself -- are you fearful of greedy? And be brutally honest with your answer. I am the biggest wussy that ever lived. Kathy, on the other hand, is greedy beyond belief. She never met a trade that she did not want to take.

So here is how each of us improved our own trading style without forcing a change in the underlying behavior.

Kathy overtrades horribly. When it comes to day trading she can easily do 20-30 round turns a day in just 3 hours of North American trade. She is excellent at cutting her losses but never lets her profits run. A while back we noticed that her 3 to 4 first ideas of the day were always the best trades of the bunch, and if she simply let those ideas run to target she would have often banked 50-60 pips for morning’s work. Easier said than done. No matter how many times she told herself that she needs to hold to target, she would always fiddle with the positions and collect half as much winnings as possible.

Finally, we hit on the idea of separating her trading. We created an account where she just traded the 4 initial trades to target -- do or die. We also created a separate account where she was able to take discretionary trades to her heart’s content. After that, trading improved markedly and she was able to hold most of her initial trades to target because she found a psychological valve to satisfy her strongest fear-of-missing-out desires.

I had a completely different problem. I was very selective in my entries, but very fearful of losing profits, so the net result was that I would let many good setups pass me by and worse when I did find myself floating a trade I never, ever let it reach the target. Like a 13-year-old boy, I was suffering from “premature profit taking”.

Until I started using a dynamic trailing stop on every one of my MT4 robots.

I know.

Trailing stops are for suckers. They are a mathematically inferior strategy. They take you out of the trade too early. Yadda. Yadda. Yadda. All that is true and all of it is immaterial.

Since I’ve instituted a trailing stop strategy with my robots I haven’t interfered with a single trade. Not one. Sure, most of my day trades are 3, 4, 5 pips winners, but at least once every two days or so I hit a 25 pip full target profit and that’s enough. Put 10 of those a month and you are doing 250 pips consistently without any mental stress.

Are K and I trading the best that we possibly can?

Of course not.

Are we trading the best given our individual personalities? Yes, we are. And that is how you really improve your trading.

Organize Your Trading Like Pro

Boris Schlossberg

Surfing the web during the New York Snowpocalipse yesterday I stumbled across a Business Insider video on how to tackle your debts. I am what’s known as a “deadbeat” in the credit card business because I pay my bill in full every month, but the video had some great points to make about how to tackle this difficult issue so I am going to shamelessly steal some of its ideas because I think they can help us in the world of trading.

What’s the biggest problem for traders today? If you were to ask that question 10 or 20 years ago, I would have said scarcity. Scarcity of data, scarcity of products, scarcity of technology. Nowadays we have the exact opposite problem.

Abundance.

Literally, everything we want is available at a click of a button and costs virtually nothing. Data, news, charting, execution software, cloud storage. If you tried very hard you couldn’t spend more than $100/month on services that would have cost you thousands upon thousands of dollars just a few decades ago.

In a world of abundance, the one thing that’s scarce is our attention span. It’s just too easy to play with all the shiny toys and lose your focus. No one is more guilty of that fact than yours truly who never met a gadget or a software program that he didn’t like.

Don’t get me wrong. Experimentation is awesome. In fact, you will never improve unless you experiment with your setups because the markets are ever changing. But experimentation should not dominate your time.

To trade well you need to focus and to ruthlessly eliminate distractions. The Business Insider video states that the first rule of debt reduction is to simply take a full inventory of all your creditors then ranks them on the order of greatest debt and highest interest rate.

As traders, we should do the same with our trading strategies. Inventory all the setups you are trading now and then rank them by your sense of confidence in each one.

The next step is very important.

Set aside all your trade setups except your top three. This is the maximum amount of strategies that most of us can follow at one time. Trading is the exact opposite of investing. Whereas investing is wide and shallow (you just buy a whole swath of assets, look at them once a year and rely on diversification to help you produce a return) trading is narrow and deep. As traders, we make our money on tiny inefficiencies in the markets based on some isolated human behavior relative to some specific instruments. That’s why blanket technical analysis fails so miserably. A breakout in GBPUSD is very different than a breakout in EURCHF. A large move in Asia is much less meaningful than a large move in North America.

Context is key to successful trading and properly understanding context is a direct function of focus. The longer you trade your setup, the deeper your knowledge will be.

That’s the true edge in trading and it starts with the same advice that we give to those who are deep in debt.
Inventory.
Asses.
Eliminate.

And focus on what’s left with all your might.

My motto for 2018 is -- Don’t get mad, get better. This is the way to start.

Big Profits with Small Accounts?

Boris Schlossberg

As retail traders of margined products, we all face the same dilemma. We want to make money but realize that leverage will inevitably wipe out our capital in the end.

When I was at FXCM we used to run the “King of the Mini” contests every month. Every month some guy would turn 5,000 bucks into $25,000 and bask in the glory of recognition.

Yet throughout all those years, all those months of contests all those great attempts at making big returns, not one winner ever repeated his feat.

Not.

One.

The reason, of course, is that most of the winners were the classic “have-a-hunch-bet-a-bunch” traders who caught a big move in some highly trending pair and just kept adding to their position. It didn’t hurt that in those days volatility was three times greater and you often saw 500 -- 800 point moves in a month.

Yet even guys who traded systematically could never repeat their winning ways because leverage always tripped them up. Remember that leverage is the true bet in the currency market. Dealers aren’t betting against your analytical skills to read the market or your facility with execution. They don’t have to. They bet that the law of large numbers will always wipe you out through leverage.

Just like dealers in Vegas couldn’t care less about your next roll of the dice or for that matter your next hundred rolls -- all of which you may win -- so too FX dealers could care less about your next trade or your next hundred trades. Both businesses are betting on the asymmetry of the odds in their favor. In Vegas, it’s the closed nature of the games that always makes the house a winner over the long run. That’s why casinos are more than happy to ply you with free drinks and keep you at the tables for as long as they can. The longer you stay at the dealing table, the higher their chances of emptying out your pockets.

Fortunately for us, the markets are not fixed outcome bets with guaranteed payouts to the dealers, but here the dealers are making a very different bet. In levered markets they simply have to bet that you will trade too large just once and that will be enough to wipe out all your prior wins and then some guaranteeing them a profit. And of course, you will. Because no one is 100% accurate ever.

If you trade at 100:1 leverage your chance of survival is 1%. At 400:1 leverage its 25 basis points at best. Put another way your chance of failure at 400:1 leverage is 99.75%. Although this is not really true mathematically, it’s close enough to the actual truth that you should use those numbers as mental shortcuts to assess your chances of success.

So given the crushing nature of leverage is there ever a way to make big money from small accounts?

Maybe.

They say that diversification is the only free lunch on Wall Street so here is an idea.

Diversify both by strategy and product. This Saturday I am teaching a webinar on every BK strategy I ever created. Going back through the strategies in preparation for the show I was shocked to see how many of them were still working well. Their edges weren’t fantastic (on average each strategy was basically banking 200-300 pips a year), but as Senator Dirksen once remarked, “A billion here, a billion there and pretty soon you are talking real money.”

So idea one is to create a separate brokerage account for each strategy. But don’t stop there. Create a separate account for each FX pair per each strategy so that you can sandbox risk as much as possible.

We know that in FX the same strategies could have wildly different results on different pairs. What works on GBPUSD may not work on AUDUSD and crosses are a whole separate issue altogether. So to protect yourself from the idiosyncratic risk of one bad trade blowing up your whole account here is the full idea.

Say you have $10,000 or risk capital. DON’T put it in one account. Create 10 separate trading accounts of $1,000 each. Say you have 3 good strategies to trade. Trade one strategy and one pair per account. So, account 1 has Strategy 1 EURUSD, account 2 has Strategy 2 EURUSD so on and so forth. At the end, you have 9 accounts that are trading 3 strategies on EURUSD GBPUSD and USDJPY the last account is just a cash reserve account. You trade your ideas on 10:1 maximum leverage (because that is the maximum I believe you can ever get away with).

Here is what will happen. One of your accounts WILL BLOW UP. But that’s a good thing. All the damage will be isolated to just that $1000.00 of capital. This is really good news both financially and psychologically. The broker’s margin call software will instantly liquidate you, effectively providing the stop that you are either mentally unwilling or technologically unable to take yourself.

But there is a much bigger psychological value to creating this structure. Every single blow up I’ve seen starts with a refusal to recognize a loss. The more money you have in the account the easier it is to let the loss float and fester like an infected wound until amputation is basically your only choice. Segregating your funds this way makes it much easier to get rid of bad trades. Physiologically blowing up a $1000 account is much easier than taking a $1000 loss in a $10,000 account -- and since you have no say in the matter anyway -- the hard decision is made for you. In the meantime, the accounts that are working could be doubling your money in year’s time -- turning you into The King of the Mini.

3 MT4 Mistakes We DON’T Have to Make

Boris Schlossberg

Speculating in the markets is hard. The psychological and intellectual challenges of producing good trades are immense. Unlike, blackjack, roulette, checkers or chess trading is an open-ended game, which, for now, is the only thing that gives us an edge over the machines.

As inimitable Matt Levine of Bloomberg notes, “The computers won: DeepMind built a program called AlphaZero that learned chess on its own by playing against itself without human input and was the best player in the world within 24 hours. For good measure, it also learned shogi and Go the same way. “The Age of the Centaur is *Over* Skynet Goes Live,” is Tyler Cowen’s headline: A computer is now better off learning these games on its own rather than working with humans.

You will continue to read articles about how Steven A. Cohen or Ray Dalio or other big famous investors are trying to program computers to think like them, but: Why? You wouldn’t program a chess computer to think like Magnus Carlsen; even if you succeeded perfectly, your Magnusbot would get demolished by AlphaZero. In domains like chess and Go, the computers can figure things out on their own, and the humans just get in the way.

Investing is, of course, different: It is not deterministic, market regimes evolve over time, humans need to provide the data, etc. AlphaZero is not going to go off and master the investing game in the next 24 hours, despite having “alpha” right in its name. Still, it feels like special pleading to say that just because markets change over time, only human intelligence can really master them. It’s not like humans have any obvious innate talent for spotting market inflection points or whatever. They have just played the game a lot and learned from their experience some rough ways of spotting patterns. That’s what the computers would do too, except maybe better.”

That may very well be the case, but profitable edges still exist, especially for relatively slow frequency, limited scale setups that retail traders tend to exploit. While the big players are engaged in an increasingly futile arms race, we as little guys like us can still collect crumbs off the table that can more than feed our needs.

Still, although retail traders now have access to extremely sophisticated technology for essentially no cost they use that technology badly and often the technical mistakes that retail traders make create bigger problems than poor analysis. I can’t count the number of times I hit the wrong button, resulting in a losing trade I never meant to make which in turn destroyed my focus and ushered in a vicious cycle of more losing trades as I tried to “make it back.”

So without much ado, here is my list of 3 stupid mistakes we don’t have to make in MT4.

1. Enable Auto-trading. 99% of all errors stem from just forgetting to turn the system ON! Make sure the button is green before running any EA on MT4

2. Make sure the buy/sell panel is set to the smallest size of 0.01. By Default, MT4 sets the size to 1.00 which is 100,000 units. There is no worse feeling for point-and-click trader than to click on bid or offer and realize that he has just bought/sold 100,000 units when he meant to only do 1000.00

3. DO NOT Close out your MT4 platform with any EAs still attached to the chart. Make sure that all the charts are wiped clean and set to your default view. If you don’t do this, the moment you re-open the program it will begin spitting out whatever buy/sell orders your EA has programmed and you will spend the next few minutes scrambling to close out unnecessary losses.

There are probably a million other rules that we should keep, but these are the three of the most egregious mistakes that yours truly has done, so learn from my mistakes and avoid the totally unnecessary losses.

How To Trade Like a Gambler

Boris Schlossberg

In the world of gambling and trading, Ed Thorpe is a legend. He is the man who essentially perfected card counting and managed to beat a roulette table with the help of the first handheld computer ever invented. Then he moved on to Wall Street starting one of the earliest quant funds in the business and pioneering fields like convertible arbitrage.

He wrote several books, including Beat the Dealer all of which are worth reading for their entertainment value alone. But his greatest contribution to the world of trading is popularizing the Kelly Criterion which is essentially a formula for optimal bet size.

The mathematics for the Kelly Criterion along with a deep discussion of its various permutations can be found here http://www.elem.com/~btilly/kelly-criterion/. But if your eyes glaze over the moment you see a Greek letter, don’t worry, the key thing to take away from the Kelly Criterion principle is the idea of proportional betting.

The two cardinal sins of all traders are 1. Betting too large. 2. Increasing size when you have lost money. The Kelly Criterion deals with the first issue by calculating optimal opening size and deals with the second issue by betting only a fixed percentage of equity each time. This way when equity declines, the trader naturally trades smaller and when it rises the trader naturally increases size. This creates a disciplined structure to your trading without any conscious effort on your part.

But while the fundamental idea of proportional betting is truly one of the best practices in trading, the Kelly formula in its original form is full of problems. First of all, Kelly was designed for games with fixed outcomes and is, therefore, an imperfect fit for the open-ended world of trading where nothing is fixed and odds are perpetually shifting. People generally adjust for this reality by relying on the law of large numbers, but that idea assumes that you as a trader must survive ten’s of thousands of trades in order for the Kelly math to bear fruit. As Yogi Berra once said “In theory, there is no difference between practice and theory. In practice, there is.”

In trading, therefore, Kelley grossly overestimates the odds and makes trading bets too large, leading to a risk of ruin albeit it a proportionally slower rate than the normal “have-a-hunch-bet-a-bunch” approach most of us use. Many traders like to degrade the Kelly number by half or even by three quarters to establish a more realistic basis for trade size and that’s a good start but I prefer to look at the whole problem of trade size from the other end. Kelley, after all, deals with maximizing reward. In essence, it can be renamed the “Greed Formula”. I, on the other hand, believe that as traders we should always focus on the “Fear Factor”. Wins take care of themselves. It’s controlling losses that requires true skill in trading. So to that end, I’ve come up with my own proportional betting approach that makes sense for me.

Let’s assume the following things. I have a $10,000 account. I make 10 trades each day. Each trade has a risk of 85 pips (or 85 basis points). I set my daily loss limit to 1% or $100. I trade a very high probability set up that is 80-90% accurate, but let’s assume on my worst days it will be only 50% accurate ( Note this is not the WORST assumption I can make, but I am comfortable with the risk-reward implications of my approach. At very worst, if I was totally wrong I would wind up losing 2.5% of my account on any given day which is very much a survivable event.)

Let me show you why. Using my original settings I would bet 0.03 lots on any given trade. That means that if I lost 5 trades in a row I would lose $125.00 or just a bit more than 1% of my account. At that scale, if I lost 10 trades in a row I would lose $250 or 2.5% of my account -- hardly a blow up in the world of FX. Once I made 10% on my account (equity grew to $11,000) to keep the proportionality in place I would increase my bet size by 0.01 lots to 0.04. Conversely, if my account declined by 10% to $9,000 I would decrease my bet size to 0.02 lots until I could rebuild the equity.

Now, this is hardly the classic Kelly approach, but it does stay true to the idea that you should bet proportionately. It also, I believe, is a more realistic approach to how we all actually trade on a day by day basis. If nothing else, the Kelly Criterion shows us that in trading, bet size is the single most important decision you can make and yet most of us -- including yours truly -- have been cavalier about choices for far too long.

Be Thankful for “Fortune’s Formula”

Boris Schlossberg

There is perhaps no greater skill in trading than losing. To be successful you need to be comfortable with the idea of either losing small amounts frequently or large amounts rarely. In either case, the psychological impact is less than pleasant and almost every single trading error ever made stems from not being able to lose well.

Losing well is the fine art of not giving a f-. This is exceedingly difficult to do. Markets have novel and unexpected ways of torturing you, no matter how well prepared you think you are.

One very good trick to try is to walk back through any backtest you have and look at losing trades only. Quite often you will find that they can be clustered -- a sure sign of regime change in the market. However, the point of that exercise is not to tweak or curve fit the trades, but rather to imagine your reaction in the midst of the losing streak.

Athletes, gurus and all self-improvement books always teach you to visualize your winners. That may work in sport or real business, but in the Alice-in-Wonderland world of the markets, it’s much better to visualize your losers because that is where the real strength lies. If you can walk through the losing periods in your head, it makes it a lot easier to walk through them in a real trading environment.

Of course, The only ultimate defense against losses is small size -- mainly because small size make you honor your stops and therefore control risk. I’ve mentioned in the past the great benefits of trading any system on 0.01 lot for a good period of time, just so that you can become comfortable with its quirks.

Impatience is the enemy of all traders -- but there are two types of impatience that I generally see. The first is getting into trades at unfavorable prices as FOMO (fear of missing out) kicks in. That’s very common but can be overcome with strict entry and exit rules.

The second is far more insidious -- which is the impatience to make big money. That always causes traders to size up right away, which puts double pressure on them when the trade goes wrong -- the pressure of size and the pressure of losing. The pressure of loss is bad enough so it’s little wonder that the standard cycle of trading is -- lever up, get stuck in a losing trade, get margined out or close out in dejection losing more than 50% of equity and walk away with head bowed.

Trading tiny is a great way to start, but even when you are ready to trade bigger size, there is a great tool that all traders should use called the Kelly Criterion. Dubbed, “the fortune’s formula” in popular trading literature, it actually has some serious weaknesses that I will discuss in next week’s column, but its central thesis is pure gold -- and should be seared into every trader’s mind.

The principle idea behind Kelly Criterion is that a trader should never bet a fixed amount of capital per trade, but rather some percent of equity. This way when your equity declines you will bet less and when your equity increases you will bet more.

I’ll go through the Kelly Criterion in more detail next week, but for now, this is my holiday gift to you -- adopt a proportional trade size to whatever setup you are using, and your risk of ruin will decline markedly.

The True Risks of Trading

Boris Schlossberg

  1. You had an argument with your spouse.
  2. You woke up with a vicious headache or a head cold.
  3. Someone you know belittled your judgment about a trade.

Tell me, after each and every incident above did you trade worse or better?

How about.

  1. You missed a target by 0.1 pip and the got stopped on the trade
  2. You hit three stop outs in a row
  3. You were in a trade when a news bomb hit and you suffered -100 pip slippage off your intended stop

Did you trade better or worse then?

Or.

  1. You watched the currency rise all night long and were convinced that it was a long bias and then it reversed all of its gains and more so./li>
  2. You been trading a set up you were sure would work, but when you did a quick backtest it turned out to be a massive loser./li>
  3. You missed a trade that was a winner and so decided to do another trade in hopes of replicating the experience./li>

Did you trade better or worse?

I think we all know the answer to that question. The funny thing is that none of the issues I raised above have anything even remotely to do with a particular strategy you are trading. Yet they can all sabotage your long-term results far more than any specific setup you choose.

Every trading guru likes to pretend that trading is logical. Just do A when B occurs and voila you will be rewarded with endless and consistent pips. It just like making widgets. Stamp them out and collect the revenue.

Of course, nothing can be further from the truth. Trading is not at all logical. Its psychological both in the market structure and in the way that the whole process works, and while we obsess endlessly about this indicator or that one, this exit level or that one -- the true risk in all of our trading lies in the day to day issues above.

Each one of those pressure points is about losing control. Indeed, the whole purpose of the market is to FORCE YOU TO LOSE CONTROL SO IT CAN TAKE AWAY YOUR MONEY.

That’s why it’s important to be aware of the real risks in trading. If you just had an argument, don’t trade. If you feel sick don’t trade. If you got stopped on a bad market break, don’t trade. But frankly, we all know that is advice that we will ignore. Nobody in life ever obeys’s DON’Ts. Not consistently anyway. That’s why the only way to combat those risks is to follow the only DO that can help you stay in control -- trade small. Angry at the world and want to punch your computer screen? Trade the 0.01 lot. You will be very glad you did. It will hurt a lot less than the 100K lot you waste on the market in revenge.

There is no Such Thing as a Winning System

Boris Schlossberg

I’ve often made the argument that there are only two types of trades. Continuation or Reversal. Flow or anti-Flow. Trend or Fade. Call it whatever you want, but whenever anyone places a trade they are always implicitly making a bet that prices will extend in the prior direction or will reverse.

That’s why there is no such thing as a winning strategy. All strategic success depends on a market regime. In trending markets momentum strategies perform great. In choppy markets reversal strategies bank pips. You can do all sorts of things to finesse returns around the edges by using fancy money management techniques, but ultimately if you are caught in the wrong market environment you will get stopped out and sometimes even slaughtered.

They key is not to make things worse. And as traders we often do. That’s because we are obsessed with the idea of a “winning system”. That’s probably the single biggest lie ever told in the trading business. The only guy in the history of the markets who had a “winning system” was Bernie Madoff. For decades he fooled investors that he had the magic formula. And we all know how that turned out.

Indeed the key to winning in trading lies much more in NOT TRADING when the regime is against you than in forcing your system on the market that will chew it up alive. No doubt that’s hard to do with any degree of accuracy ahead of time and that’s why you have to accept the fact your great money making system will lose. Sometimes for days, weeks, even months on end. It does not mean it is not working. It just means it is not working NOW.

These days, I spend 90% of my time trying to figure out the most probable cases of when my set up will fail. Then, I try to studiously avoid making trades during those times. Again that’s not easy and answers change because market conditions change, but even if I can avoid three negative days per month, that could be the difference between winning big or just getting by.

Understanding that there is no such thing as a winning system should also help you to understand that there is no such thing as a winning trade. There is just the set-up and at any given time it can go either way. That’s why great traders trade positions not opinions. Opinions should be made before each trade. In fact, each trade is nothing more than an opinion. Once it’s in the market however, it becomes a position and that position either resolves to profit or a loss.

Most of us, however, develop opinions once the trade is in the market, which means that at that point we are no longer trading but practicing religion by relying on hope and faith. Hope and faith are very powerful human drives but they have nothing to do with trading.

Yet even the most atheist of us have prayed when a trade turned against us, especially if we changed its initial parameters with a post entry “opinion”. In fact the more we’ve changed the initial position the more intense our prayers become.

Tell me -- how’s that worked out for you in the past?
I thought so. The market can be crueler than the meanest of the Greek gods.

That’s why it all starts with understanding that there is no such thing as a winning system. Once you can come to terms with that you can start trading positions not opinions and save your prayers for when they can help.

Trading Tiny

Boris Schlossberg

After I graduated college I took my father’s advice to “rent everything from underwear on out” and have never owned a home, a car or a boat my whole life. But whenever I am on the road at some hotel killing time, I turn the remote to HGTV and like a visitor from another planet watch with fascination the endless house renovations on the channel. I love Tarik and Christina.I love Chip and Joanna and I love the crazy twins. I love everybody who flips houses and turns garbage into gold.

But the one show on HGTV that has been getting the most play lately is “Tiny House” where people abandon their complicated, gadget-filled lives in McMansions and exchange them for tiny little affordable homes that look more like toys than actual places of residence. What is perhaps most amazing about the Tiny House phenomenon is that almost no one regrets their decision to downsize. In the end, most people are happier in a Tiny House.

I’ve been thinking about the Tiny House trend a lot recently. There is a huge upside to getting small both in real estate and in trading. Whenever someone asks me what is the first thing they should do to improve their trading, I always tell them -- reduce size. It’s no guarantee of success but it is definitely an assurance of survival. And survival is 90% of the battle.

But let’s take that point further and consider the idea of Tiny Trading. The minimum MT4 size is 0.01 lot -- a dime a pip -- or 1000 units of currency. Lately, I’ve been trading one of my accounts at that 0.01 size and the results have been quite positive. Mostly because I could give a f- about either entries or exits. Stops are easy to take when they are trivial and entries are easy to make because you really don’t fear the stops. The net result is a kind of a virtuous cycle that puts you in the groove with the market and allows you to do all sorts of things that are much harder to do physiologically at a larger size. You can let trades run for a hundred pips. You can trade many pairs at once. You can scale up and scale out of a given trade without feeling any discomfort whatsoever.

Trivial you say? Perhaps not, Today I managed to bang away nearly 20 dollars clicking away at the account in between managing much bigger size elsewhere. 20 bucks may not seem much but think about it for a second. Say you have $10,000 account. There are 250 trading days in a year and you make $20/day with your Tiny Trading. That’s $5000 at year-end. Double that every year and by year seven you are making $360,000 per year in an account that started at 0.01 lots. Granted by that time your size has to rise to 3.2 standard lots but it’s a slow and steady progression to big money.

But let’s just say you simply Tiny Traded for the rest of your life. And every year you put the $5000 in winnings into a 3% carry trade and just let that compound. After 30 years you would have a quarter million dollars trading all those dime pips.

Without stress.
Without care.
And with much better clarity on the market than you probably have now.

Just like Tiny Houses, I suspect Tiny Trading could make a lot of people much happier by getting more with less.

Everything Good is An Accident

Boris Schlossberg

Every “guru” advice about the “secret of success” is pure bullsh-t.

Every success in life is an accident.

No, I really mean that.

Everything.
Is.
An.
Accident.

Penicillin -- the first antibiotic that literally changed life expectancy on earth?

Accident.

(from https://www.healio.com/endocrinology/news/print/endocrine-today/%7B15afd2a1-2084-4ca6-a4e6-7185f5c4cfb0%7D/penicillin-an-accidental-discovery-changed-the-course-of-medicine)

“Sir Alexander Fleming, a Scottish researcher, is credited with the discovery of penicillin in 1928. At the time, Fleming was experimenting with the influenza virus in the Laboratory of the Inoculation Department at St. Mary’s Hospital in London.

Often described as a careless lab technician, Fleming returned from a two-week vacation to find that a mold had developed on an accidentally contaminated staphylococcus culture plate. Upon examination of the mold, he noticed that the culture prevented the growth of staphylococci.”

The iPhone?

An accident. Steve Jobs was trying to create a tablet computer. Only when he shrunk it down to palm size did he realize that he had a smartphone on his hands which became the best selling product of all time. Steve Jobs did not invent the iPhone. It was an accident of an open mind.

Warren Buffett’s wealth?

All accidental.

Seriously?

YES!
(from
http://basehitinvesting.com/case-study-the-story-of-geico-graham-and-buffett/ )

“GEICO, for most of its storied history, was considered a high flying expensive growth stock. Buffett occasionally got interested in growth businesses, more so as his career evolved, but Graham was basically allergic to stocks selling for high price to earnings ratios or high price to book ratios.

So it was ironic that Graham ultimately made far more money in this single GEICO investment than all of the other investments he made during the course of his lengthy career… combined. It was also strange that Graham invested nearly 25% of his partner’s capital into GEICO in 1948, acquiring 50% of the growing enterprise for the small sum of just $712,000. This would eventually grow to over $400 million 25 years later!! That is a 500 bagger. To make an understatement: For a guy who made a living hitting base hits, this was a home run.

Around this same time, a young 21-year-old Warren Buffett became interested in GEICO after learning that Graham was chairman of the board. Buffett famously took the train to DC on a cold winter Saturday morning and luckily met Lorimer Davidson, an executive at GEICO who spent 4 hours with this “highly unusual young man”.

Buffett began buying stock the next Monday after being “more excited about GEICO than any other stock in my life”. He put 65% of his small fortune of $20,000 into Geico (the initial seedlings that would grow into his massive fortune). He also tried to sell the stock to every one of his clients and wrote this excellent research report called The Security I Like Best.

So GEICO caused Graham to put 25% of his capital into the business when no other security ever represented more than 5% of his well-diversified portfolio. And it caused a young Buffett to put the majority of his capital into the stock, also violating his mentor and role model’s investment policy.”

So basically the Buffett value approach investment myth is pure bulls-t. He rolled the dice on one great play and it paid off in spades.

My point is that all great ideas in life are bottom up not top down. They are all a result of trial and error process and those of us who are open to the possibilities we never even imagined existed stand a much greater chance of success that those of us who plan every waking moment of our day.

For us as traders, that means that every part of our trading plan is subject to revision. Constantly, adjusting and refining your trading setups is a sign of strength, not weakness.Adapt or die is both the rule of savannah plain and capital markets. Nothing remains constant. That’ why entries, exits, trailing stops are never sacrosanct. Always question and refine your approach and remember that the best ideas will likely be an accident. So never fear to experiment.

The Best Trading Advice Comes from A Guy Who Makes Tapas

Boris Schlossberg

Unless you are a foodie the name Jose Andres will mean nothing to you. But in the restaurant world, Mr. Andres is a big deal. He owns 26 restaurants across the world, several of which carry Michelin stars. Ha has also been the face of Puerto Rican relief serving more than 100,000 meals in PR daily.

In short, Mr. Andres is what my grandmother would call -- a mensch -- a good and decent person who also has done well for himself.

Although I’ve known about Mr. Andres for years and have even eaten at his Las Vegas restaurant, I really didn’t give the man much thought until I came across a Business Insider profile of him.

Unlike many Emperor Chefs who brook no criticism, Mr. Andres has stayed humble and in fact, does something remarkable that caught my eye. Every day, before he starts his day Mr. Andres reads every Yelp review of his restaurant. Unlike most chefs who refuse to even consider the words of the hoi-polloi, Mr. Andres takes the reviews seriously and tries to instantly fix matters if he considers the complaints to be legitimate.

This is, of course, easier said than done. No one likes to be criticised, least of all chefs who are some of the most domineering personalities in the world. But Mr. Andres uses a very interesting trick to help him cope. As he tells the interviewer,”Thicker skin is something like, José the person, José the chef, inside me, I’m, like, ‘What the heck do those people think? Who are they? I don’t want them in my restaurant anymore,’ which is good to have, but it’s good that you do that internally.
“And then he’s José the businessman, who says, ‘Man, this is free advice that I should thank the person for, taking the time, and this we will use to communicate.’ Every day on my phone, I receive reports of every restaurant, social media, comments in-house by the guests. We use them. We don’t use them every day, but sometimes maybe something needs immediate attention and other things is information you put together and then three, six months later, you say, ‘Listen, look at the pattern here.’”

Now let’s see how we can apply Mr. Andres’s tricks of the restaurant business to our own little world of trading. What is a stop, but simply a market critique of your trade? It is essentially an instant Yelp review of your actions. Now for Joe the Average Person a stop is a very painful experience that makes him question his worth as a human being. That’s why we all hate stops and why we try to avoid them at any cost, often blowing up our accounts as a result.

But what if we decided that when we engage with the market we become Joe the Trader-Businessman rather than Joe the Average Person? Suddenly a stop is no longer a mark of shame, but a very valuable piece of communication.

Think about it. There are only two reasons why you get stopped. One, you were dead wrong in your analysis and the market went the other way. Two you either mispriced or mistimed your entry. Now while there is precious little you can do about one, there is actually quite a lot you can do about number two. Instead of punching the screen when you get stopped out, ask yourself -- what is the market trying to tell you? Are your setup assumptions still valid? The answers are there. Sometimes it’s a matter of regime change in volatility. Sometimes it’s as simple as taking trades only during the London-New York interchange. Sometimes it’s a question of creating tighter risk control rules.

The point being is that when you start looking at life like Mr. Andres, criticism becomes communication allowing us to improve and make more consistent pips, just as Jose makes delicious tapas.
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