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
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.


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.


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

Always Be Wrong

Boris Schlossberg

What is the single biggest reason for failure in trading?

Is it strategy?


Is it bad analysis?


Is it costs and execution?

No and no.

Those are all just excuses that every trader uses to justify their losses. I’ve modified my strategies a dozen times. I’ve mis-analyzed markets almost on a daily basis. My costs are often as much as 50% of my gross profits. And yet I have been consistently profitable this whole year and haven’t had a losing trade since Brexit.

Why? Because I always assume I am wrong.

When you go back and study all the great blow up trades in history from Nick Leeson to Long Term Capital to the Whale Trade of JP Morgan there is only one factor that unites them all.


They all thought they were right and they kept fighting the market until it broke them.

In fact I bet if you were to do your own “greatest hits” of blow up trades the dynamic that ties them altogether would be the same. You just couldn’t imagine an outcome opposite your expectations and as result you were margined called. I certainly was. I can’t even begin to count how many times I blew up my FX accounts when I first started trading. And in fact that behavior didn’t just go away. It took years of hitting my head against the wall, before I finally tried another way.

Now I look at the market differently. I only have two impulses whenever I put on a trade -- win right away, or get the f- out with minimal loss. As a result of this approach I often miss successful setups and even more often leave lots of pips on the table.

Any trading “guru” would shake his head in disgust at my three-yards-and-a-cloud-of-dust style of trading. And I am the first to admit that I leave too much pips on the table. But I also know that I wouldn’t change my approach for a million bucks because I know that all trading books and other fables set up a false dichotomy. “Sell your losers and let your winners” run they say. But in real life 9 out 10 of your winners will turn into losers if you hold them long enough, especially in a two way market like FX. So all you will end up doing is cutting losses, until such time when you will get tired and annoyed and will make the biggest mistake of all which is letting losses run uncapped.

That pretty much is the story of every blow up in FX. It starts with bad advice and then proceeds with bad behaviour and ends up with stubborn refusal to admit you are wrong.

How much easier would it be, if being wrong was your default assumption? If you stopped trying to make trades and just started to make probabilistic bets, keeping every loss to less than 2% of your capital?

In trading being wrong is being strong, but for most of us it takes years to realize that idea.

Casino vs. Insurance – Who Trades it Better?

Boris Schlossberg

Right after last week’s column, I got an interesting email from a long time reader and in order to fully appreciate its value I am going to something I never do. I am going to quote his email in full.

He wrote, (quoting me)” ‘In short Las Vegas, is basically a multi-billion dollar bet on the fact that you are incapable of an early exit, and that’s certainly reason enough to believe that it’s a good strategy.’

Lets flip it around. We know that all (if not most) casinos make lots of money consistently. But casinos never stop taking bets & that means they don’t & never exit. They can lose 20 hands in a row to a full table of blackjack/baccarat players but cannot & would not stop play. No matter how many bets or how large the bets are (subject to table limits) are placed the casino will accept the bets & continue dealing the cards. So basically zero exit strategy even when the casino is going through a huge & extended losing streak. But in the end, long term, they still come up tops by the billions.

So how do they do it? One of the reasons is that every game the casino offers has an inbuilt edge that ensures long term profitability.

Applying this ‘casino model’ to trading, if you (ie any trader) have an inbuilt edge in your trading strategy/approach can’t you then go on trading without early exits & come out tops long term ie be the casino? If you can’t then does that mean your trading strategy/approach doesn’t have an inbuilt edge & you therefore have to rely on ‘early exit’ as your ‘edge’?

I would very much appreciate your thoughts on this.”

He then included a very useful table of comparison that I am attaching as well.


Certainly his logic is highly seductive and he concludes with final pointed criticism of my approach, “So why do casinos still win in the end year in year out? Why do traders (99%) fail? And among those traders who win – their wins are nowhere close to the casinos’ profits (billions).

Is discretion killing traders? Should traders be more mechanical? Even continuing to trade despite long losing streaks?

Unlike the ‘insurance model’ which takes many small wins & a few large losses, casinos take all small losses, all large losses, all small wins, & all large wins. And they win in the end – big time.”

This is the argument of highly mechanistic traders and in principle it certainly sounds superior to my hunt-and-peck-make-3-pips-and-a-cloud-of-dust method of getting rich slowly and carefully. In practice however, it is not. Let’s start with the underlying foundation of the casino model.

The game is RIGGED. By definition you cannot win at casino games. The rules are such that odds, no matter how small are always stacked against you. Casinos have absolute control because they control the rules of the game and create a fully closed end system. They know as surely as day follows night, as certain as death and taxes that given enough occurrences they will always win, because they have the edge -- because they MANUFACTURED that edge.

Alas, no such certainty exists in the financial markets. Markets are the exact opposite of casinos. They are an open end system where the edge is always fluid and always changing. No system is certain for any length of time. The best example of that in my life occurred very early my career, when as a young broker at Drexel Burnham I helped raise money for commodity fund run by Richard Dennis. Dennis was considered to be a trading god, a man who was one of the original Turtles who was profiled in Market Wizards as the king of trend trading, a man who took $200 and turned it into $100 Million. After we raised money for him Dennis proceeded to lose almost all the funds trading worse than the most rookie retail trader I’ve ever seen. When it was all over he lost something like $75 Million in a matter of months. Why? Because he was stupid enough to believe that he had a permanent edge. In reality, the great boom in commodity prices was over and trend trading failed to work for more than three decades after that.

You know doesn’t believe in permanent edge? Insurance companies. They, better than anyone, understand that life evolves and changes. They constantly research, constantly adapt and constantly change their products. For example in the 1970’s it was a no brainer to sell annuities because most people died of smoking-related illness or cancer and the actuarial table hugely favored in the sellers. But the odds have changed, Better medicine, less smoking and healthier lifestyle have extended the lifespan considerably, so you better believe that insurance companies are not going to “trade that strategy” anymore.

That I think is my answer in a nutshell.

Casino model is highly seductive because it is static. All you need to win is to repeat the algorithm ad infinitum. Real world is the farthest thing from being static. It is dynamic, always evolving and always demanding reevaluation of your assumptions on a near daily basis. That’s why the insurance model is the much better path for traders. Both casinos and insurance companies rely on the law of large numbers, but that’s where the similarity ends and to believe that your edge is stable much less permanent is to fall for a Richard Dennis scale of folly.

Trading’s Little Secret

Boris Schlossberg

The scariest decapitation of my life happened when I was ten, when the KGB cut off the head of my teddy bear before they allowed us to board the Aeroflot flight from Moscow to Vienna, delaying the plane on the tarmac for over an hour. Of course they found nothing inside, but it was just the final message on our way out of the Soviet Union.

My mother, who has the beauty of Catherine Deneuve and the steely sangfroid of Vladimir Putin remain stoic throughout the ordeal, but as the plane finally lifted off the ground she let out a tear. She had survived two tense years of waiting to emigrate which included snatch and grabs off Moscow streets and endless rounds interrogation by the KGB. But in the end she finally engineered her greatest exit. We left the miserable sh-thole of a country that was the Soviet Union and started a new life in America, where I was able to grow up and prosper beyond our wildest dreams.

My mother is the master of the exit. She is utterly unsentimental when it comes to making the needed change in herself or others and never wavers in her resolve. A while back after she had not seen me in a few months she simply looked at me up and down and as a way of greeting said, “Bob -- you are fat and you will die and leave your children fatherless if you don’t lose this weight right now.” Mind you I had gained a whopping five pounds, but needless to say they were gone within a month.

Like all Russians she harbors no illusions about human nature, and basically believes that people are incapable of fundamental change, but can improve through minor behavior modification. She taught me the single best way to diet, a method that she used herself to shed 25 pounds at the age of 78 after surgery had made her immobile for a while. Her trick? Leave 10% of the food you eat on the plate and ultimately work your way leaving 25%. That’s it. Just do that every meal and I guarantee you will lose weight better than any diet you ever try.

My mother’s diet trick is simply just another example of her exit strategy, but thinking about it I realized that in a very ironic way it has also been responsible for all my trading success this summer. Just like my mom I am the master of the early exit, except in my case instead shedding pounds I have been gaining pips all summer long.

Those who trade with me in the chat room know that I am the worst when it comes to early exits. I almost never honor my take profit targets. I will blow out of the trade at the earliest hint of trouble. The net result is that many traders in my chat room trade my Boomer strategy far better than me, but no one in the room trades it more accurately. Since May of this year I’ve had only one full losing trade in more than 190 trade cycles, and that occurred post Brexit when I foolishly decided to trade the GBP/USD.

Nothing looks uglier or more pathetic than my trade runs which sometimes show 2.9 pips, 3.4 pips and so on per trade. But those pips add up and more importantly my early exits often get me out of losing situations which in the end if far more important for my strategy. Indeed, I think that really is trading’s little secret. Good traders are really masters of the exit. If you trade the insurance model, like I do, which depends on many small wins and few large losses then early exits are key. Just think back to the real insurance industry. In the term life insurance business, 40% of customers forget or unable to renew their premiums. Insurance companies love that. It allows them to collect all the reward without assuming any of the risk. It’s the real insurance world of an early exit.

If however you trade the lottery model of many small losses and few large wins, then your exit strategy must be the exact opposite. You have to exit as late as possible in order to make up for the multitude of losses you will incur.

Since I don’t trade the lottery model, I’ll leave it to others to comment on its inner workings. However, I do have an idea of why traders fail in the insurance model and it all goes back to my mother and food. Just think how simple her advice is and yet how hard it is for most American’s to follow. In a land of all-you-can-eat buffets do you really think most people can leave any food on the plate, much less part of their first serving?

Las Vegas casinos exploit this weakness for all its worth, by offering gamblers free drinks, food, anything to keep them gambling because they know that no matter how much a person may be up, they will always try to go for more and will inevitably go bust. In short Las Vegas, is basically a multi-billion dollar bet on the fact that you are incapable of an early exit, and that’s certainly reason enough to believe that it’s a good strategy.

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.