Investing Discipline is Total Bulls-t

Boris Schlossberg

As an investor, how do you know if you are disciplined or stubborn?
If you go broke you are stubborn.
But if you survive and make money you are disciplined.
That’s laughably stupid if you think about it for longer than a minute.

Yet every single day you are bombarded with the conventional pablum that all you need to do is be “disciplined”, buy an index fund and keep buying more on a regular basis and 30 years later you will be rich. The underlying assumption is that the upward drift in stocks will continue infinitely. But the future is almost never just a slightly different version of the past.

Today, America is quickly losing economic power to China. It is destroying the only competitive advantage it has by banning immigrant labor which is responsible for almost all the intellectual contribution to the country’s economy. And it’s getting old. Everywhere you look the United States is a country of fat, old people in wheelchairs sucking up all the available tax dollars of Social Security and Medicare benefits, while the young struggle to live two to a room as they attempt to pay off their student loan obligations from which they can only escape through death.

So yes -- there is every possibility that the American Empire is following the path of Rome and that the wonderful 200 year plus run of progress and innovation that translated into a ever rising upward drift of equity prices could come to an end. And of course now that we find ourselves at the apex of equity valuation, not one person is thinking about the end of Pax Americana, just like the Romans submerged in their orgy of sex and violence of the Colosseum couldn’t possibly imagine that their way of life would be smashed to smithereens by hordes of primitive barbarians.

But I am getting too dark and frankly a bit off point. I have no idea when the US growth party will end, but it sure feels like it could be soon. More importantly, if it does end there will be literally nothing you can do to help yourself if you follow the conventional investing wisdom of the day. Discipline will lead to ruin as you just keep buying an ever falling asset.

The laughably false distinction between discipline and stubbornness (there is no way to judge which is which until you get the final result) was made very vivid this week by the tragic travails of David Einhorn -- a one time a hedge fund God, a Master of the Universe, the King of Value and the present day owner of Greenlight Capital who is suffering the humiliation of seeing his fund lose 20% this year. Again. Einhorn, who for the past ten years has been busy losing all the money that he made in the ten years prior, wrote a letter to his investors noting that, “Right now the market is telling us we are wrong, wrong, wrong about nearly everything….And yet, looking forward from today we think this portfolio makes a lot of sense… We have been accused of being stubborn, but one person’s stubbornness is another person’s discipline.”

To which the inimitable Matt Levine of Bloomberg, the best writer in finance today, responded, ”Yes! Correct! Let me make that a bit more explicit: If you have a plan, and you do the plan, and it makes money, people are like “good job being disciplined in sticking to your brilliant plan.” If you have a plan, and you do the plan, and it loses money, people are like “bad job being stubborn in sticking to your dumb plan.”

I mean! This is wrong! In fact, people regularly distinguish stubbornness from discipline, and evaluate the quality of your plan, without reference to current results; they care about the process by which the plan was arrived at and the quality of your reasoning and the convincingness of your explanation of how the plan will make money in the future. It is not incoherent to say “my strategy is good, and I am right to stick with it, even though so far it has lost money.” It is just kind of funny. And of course, in the long run, how would you distinguish stubbornness from discipline other than by results?”

Exactly.

But it doesn’t have to be that way. You don’t have wait until you lose 75% of your money -- whether you are a buy and hold Mom and Pop investor or hedge fund titan to find out if you are “disciplined” or “stubborn”. If you day trade and if you do it right (not correct, but right, meaning that you slice risk into teeny, tiny pieces by making lots of small trades, you will never put yourself into such a no-win situation. You will have near instant feedback on whether you are correct or not and more importantly you will have much greater control over your drawdown. My pal Robbie Booker showed me an account today where he made 12% return while drawing down just 3%. The best part is that he did it by trading 1000 unit size on a 10,000 dollar account.

That’s right he traded 1/10th leverage and STILL beat the S&P! But that’s not unusual. I have seen many traders in my chat room achieve 20% returns with 3% drawdowns all because they traded small and controlled risk on every trade.

That’s the beauty of day trading. The discipline is in the size and in the stop. You don’t need to come up with excuses. You don’t need to wait years to be proven right or wrong. Your results are there every day and you have much better control of your financial destiny.

No Bulls-t Advice for the FX Trader

Boris Schlossberg

So you want to trade FX?
Forget strategies. Forget fancy charts. Forget listening to TV talking heads like me.
If you want to have any chance at success in trading here are five simple things you need to do.

1. Get a good execution broker.

You can trade on bid-ask spreads or on raw spreads with commission. In the end, the costs all even out. The much more important question is -- how’s your execution? If your trades get slipped and even worse rejected more than once a month. Leave. Leave the broker, because they are clearly not honest or competent and eventually one or both of those sins will cost you all your money.

Speaking of money if you broker is not Licensed with one or several of the following authorities: NFA in US
FCA in UK
ASIC in Australia
MAS in Singapore
HMA in Hong Kong

Consider your money gone.

Do a simple experiment. Ask for half your account back. If it takes more than 48 hours to get your money -- leave the broker immediately.

You need to understand that brokers don’t consider your money to be yours, the moment you make a deposit they consider it to be theirs. So unless they have a regulator that makes them act as a fiduciary, your money is their money and all that trading you are doing is strictly for entertainment value -- you are never getting it back. If you are tempted by flashy offshore brokers with high leverage and tight spreads then understand that your trading is most likely imaginary. Your money is never coming back, even if you do manage to beat the market.

2. 4x for Forex

Speaking of beating the market. I had an interesting discussion last night. I was at a party with a lot of industry people including a consultant that sets up a lot of these offshore brokers. What the gentleman told me is that contrary to popular belief most of these brokers don’t even try to scam the clients. The mathematics of the FX business almost insure that 97% of traders will lose all their money. Why? Because of leverage. In FX leverage -- the ability to borrow on your account -- is astronomical. Outside of US leverage can be as high 400:1 or even 1000:1. That means you can trade 400,000 unit position on just 1000 dollars of equity. You may think that’s great but it’s actually financial suicide. Let’s just use a simple example of 100:1 leverage. If you put on a trade that size, just 1% move against you, wipes out your account. Do you know how often currencies move 1%? About 200 times per year. Do you think you can survive 200 days of 1% moves and escape whole? Let me ask you differently. Suppose I told you to run across the race track at Le Mans 200 times while the race was in progress. How confident would you be at surviving that challenge? When you are trading at 100:1 you are doing the exact same thing except with your money rather than your body. The end result is a disaster either way.

What’s the maximum leverage per trade? Four times. That’s right. That’s not a typo. Not ten times, not twenty times, not forty times. Four times -- and that is MAXIMUM not starting position. You starting leverage should be 1 or 2 times equity. That means that if your account is 10,000 the starting trade should only be 10,000 or 20,000 units.

Go ahead and snicker. But if you don’t follow that rule, the chances of you losing all your money are virtually 100%.

3. Get a Rebate
Every single broker in FX will pay you money to trade with them. They won’t tell you that up front and they may not even be willing to give it to you on an individual basis, but every broker has a rebate program that will pay you back anywhere from 0.1 to 0.5 pips back. If you do 5000 trades a year that’s 1000 pips of profit for doing nothing. That’s why you need to connect with a good introducing broker who will advise you what FX broker would be best for you. If you want some names just email me.

4. Discover Metatrader 4.

If you are trading FX on a proprietary platform rather than MT4 -- you are already at a disadvantage. MT4 is an almost universal piece of FX software that is available from any major broker. It allows you to create software programs that can trade for you. But you do not need to be a programmer to get the full value of MT4. The platform has hundreds of thousands of trading robots (called Expert Advisors) -- including those that we develop in our chat room, that can help you place trades at the right time, at the right amount and with the proper risk control. The future of life is robots. If you are not using them for trading you are already way behind all because you are subject to massive human error. You will hit the buy button instead of sell, you will buy 10 times the size you wanted and you will miss the exit price because you were looking at something else away from the screen.

Don’t worry, that’s totally normal -- we’ve all done it. But traders who trade with MT4 -- don’t do those things often, so they have an edge on you because they are making fewer mistakes. One very simple thing to do is to trade with buy/sell scripts so that any market order you place is always automatically wrapped around with a limit and a stop and never creates a risk problem for you down the road. Robots are the future and that fact is especially true in trading.

5. Get a good education (like our BK chat room) Trade with us

Yea ok, shameless self-promotion. I gave you four pieces of good advice so I get to toot my own horn a bit. Actually, it’s not even my own horn I want to toot. Most of the time I am just the sideshow in our chat room. The true value for you comes from interacting with other like-minded traders who will very often improve and refine the trading ideas and strategies that I suggest. Trading in a team environment completely transforms the game and gives you hundreds of different and creative ways to look at the market. Trading is not a solo sport. Make it a lifetime pursuit and join a team to trade with.

Discipline is Bulls-t.

Boris Schlossberg

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

Wrong.

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

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

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

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

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

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

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

10v1

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

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

Bulls-t Trades vs. Real Trades

Boris Schlossberg

What’s a real trade?

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

All other trades are bulls-t trades.

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

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

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

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

How to Win At DayTrading

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

Screenshot 2016-07-26 20.39.03