Day Trade Like Warren Buffett

Boris Schlossberg

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OK. Guilty of click bait as charged. Buffett would never day trade in his life. His holding time is years rather minutes, but that doesn’t mean that we can’t learn valuable lessons from him about trading. There are a few core principles that Buffett holds which we as day traders can adopt for our own purposes.

1. Don’t Lose Money.

How important is this rule? Buffett once quipped that this was his rule #1. When asked what his rules #2 was he said, “See rule #1”. Everybody talks about not losing money, but I think it’s important to understand just why this is the single most important factor in trading success. Losing money is not just psychologically unpleasant, but more importantly, it is mathematically very challenging. It’s the two-steps-back-one-step-forward problem. If you take two steps back, making one step forward isn’t going to cut it. Even two steps forward won’t help you much. You need to make three consecutive steps forward to move beyond the two-steps-back losses.
That’s why the single most underappreciated move in trading is the scratch.

A few days ago I listened to a great interview with Virtu President Doug XX. Virtu is one of the leading high-frequency trading firms in the world, and almost everyone thinks that they make all their money by front running orders -- yet if that were true they would be gone long ago as other faster competitors would beat them to the punch. Virtu’s actual skill is in market marking, and specifically in scratching out trades. They only win about 51-53% of their trades, but unlike amateur traders, they don’t lose on the rest, they simply scratch out at even on most of them. That’s the great secret to winning at the day trading game.

Buffett for his part also knows the value of keeping your drawdown to the minimum. During the 2000 -- 2002 cycle when the S&P was down -11% and -21% respectively Buffett was down just a few percentage points making the recovery in 2003 much easier for him.

2. Let it Come to You.

Buffett is well known for not overpaying for assets. In fact, his favorite dictum is -- Be Fearful When Others Are Greedy and Greedy When Others Are Fearful. The underlying philosophy of this approach is that risk on balance is always lowest when markets dislocate to the downside and always highest when they ramp to the upside. Now there are plenty of individual examples of when this strategy fails. Momentum moves could decimate even the stingiest bid and leave even the most aggressive offer biting the dust. But this is an actuarial argument. Just because some smokers live to 100 years of age and some marathon runners die of heart attacks at 45 does not mean you change your premiums to accommodate the exceptions. If anything exceptions in insurance as well as in investing prove the rule -- don’t f-ing chase price! You may succeed once but you will fail ten times and end up losing in the end.

3. Stick to what you know

Are you good at making 10 pip trades? Do you excel at reactive rather than predictive trading? Do you feel much more comfortable trading with trend than against it? Each trader has personal strengths and weaknesses. Unlike real life where we are taught to constantly “improve” ourselves trading will actually only make you much worse if you go against your natural strengths. Buffett has been adamant about not investing in technology because he did not understand it -- and when he broke his own rules by buying IBM -- he demonstrated just how bad of a tech investor he is. Now he may have missed Google and Microsoft and Amazon, but his performance still remains much better than the vast majority of active managers (though not much better than the S&P). The point being is that by sticking to his formula of buying “old business” companies he still managed to perform very well and found plenty of profit opportunities away from tech. The greatest thing about the market is that it is not a monolithic entity -- there are literally thousands of niche strategies that can be profitable. The key is to find the ones that work best with your personality.

The Greatest Rally of All Time? The Day of 1987 Crash

Boris Schlossberg

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Howard Marks, the famed investor who runs more that 100 Billion at Oaktree Capital, tells a story of a phone call that changed his life. He had a conversation with Michael Milken who was just starting out as the king of junk bonds at the time. Milken told him that, “If you buy AAA or AA bonds they only have direction. If you buy single B bonds, and they survive, all the surprise will be on the upside.”

Out of that brief encounter Marks took away the lesson that all investments are about price. As he tells Business Insider, “There’s no such thing as a good investment idea, until you’ve discussed price.

Investing well is not a matter of buying good things, it’s about buying things well. And people have to understand the difference. And if you don’t understand the difference you are in big trouble.”

Mark’s observation made me think about the great stock market crash of 1987. I am embarrassed to admit that I am old enough to remember it. And ironically enough I was at Drexel Burnham Lambert, the very firm that Milken made infamous, when the crash occurred.

What very few people realize is that the 1987 crash was also the day of one of the greatest stock market rallies of all time. At around noon, after a vicious sell-off in the morning, stock staged a massive rally that brought the indices almost to breakeven. All in all, the move from the bottom to its apex was more that 200 Dow points or greater than 10% gain in matter or hours. Trader who bought the bottom and exited midday made a fortune. Of course, equities then faded into the afternoon and ended up down more than 500 points on the day or more than a 22% drop -- still the biggest one-day decline in US stock market history. But if you were a trader, there was almost as much money to be made from the long side as there was from the short side. All of which leads me to conclude that in trading just as in investing price entry is everything.

So as traders, we should banish the concept of oversold or overbought. We should stop worrying if we are aligned with trend or not. The only real question to ask whenever you make a trade is -- did I get a good entry or not? The answer to that query will determine your chance of success far more than any strategy you use.

Wanna Day Trade? Be Like Donald Trump

Boris Schlossberg

Last night as US tomahawk missiles rained on a Syrian airbase while my four-year old kept dancing around me an hour past her bedtime, and CNBC producer screamed in my ear over a poor phone connection, I felt completely calm and in control. That was particularly ironic because whole day prior I was miserable and ill at ease. The markets yesterday were flatter than a Florida landscape and I spent the entire day sulking making exactly one trade in the BK chat room.

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But now, with USDJPY dropping like a stone, I knew exactly what to do. I waited for the small, but inevitable bounce, eyeballing the levels because I didn’t have my Trendy algo turned on and fired off some sell orders across a couple of levels covering everything back for profit a few minutes later. No parent of the year awards for me, as the four-year old continued to dance happily around my office, but I had my mojo back.

What makes good day trading?

This.

What’s this?

Reacting.

Good day trading is reactive by its very essence. That’s why it defies classification. It defies “methodology” and it most certainly defies consistency. You can’t “make” $1000/day day trading. Some days you can make $3000. Some days you make nothing. Good day trading is all about synthesizing the news of the moment and then adjusting your trading approach to exploit the short-term flows in supply and demand.

If you are a positional trader you are by definition -- prognosticating. It doesn’t matter if your reasons are fundamental (Non-Farm Payrolls will be weak because ISM employment index sank 5 points) or technical (USDJPY broke 200 SMA, it’s in Elliott Wave III of abc correction, it’s bouncing off Fib resistance -- blah, blah, blah). You are trying to forecast the distant future. That is the implicit bet you are making each time you trade. Trading forces you to have an opinion on the market whether you realize it or not, and the longer your time frame, the stronger your opinion must be. That’s why it’s so hard to be a great swing trader.

Good day-traders on the other hand generally have no opinions. They look at what is happening NOW. Five minutes ago may as well be five years ago, as their focus is on the next 10 pips of profit regardless of the intellectual foundation of their views. In short, good day traders are exactly like Donald Trump -- willing to change their position on a dime and completely abandon their previous views. The very things that drive both the right wing and the left wing absolutely insane about our current President are actually qualities that we must embrace to daytrade successfully in the market.

Today, for example, I was able to avoid the massive short squeeze is USDJPY despite the fact that “job numbers were horrible and yields were low!” because I saw the pair hold the 110.20 level in post news trade and realized that shorts were in danger of getting squeezed. Did my fundamental skills honed by four years of economics at Columbia help me? Did my knowledge of pivot points, or fib lines or moving averages help me? No. It was pure price action. It was watching what was happening rather than what I thought would happen that helped me make the right decision. It was the Trumpian ability to read the “mood in the room” that kept my P/L positive today. Now that certainly may not be the right way to run a country, but it is definitely the right way to day trade.

React, don’t prognosticate.

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3 Tips for Day Traders

Boris Schlossberg

1. Trade in 100 trade batches.
You need at least 100 trades to determine if a strategy works or not, but unfortunately most traders won’t even make past 10. We get bored. We get scared. We absolutely hate bleeding money NOW even it means making money LATER. Mostly we just love to tinker. No one is more guilty of that than yours truly who would be much better off if I just let my systems trade.

One piece of advice that may help. See what is the minimum amount of parameters that would make you leave the trade the f- alone and try to reduce your system to those factors. Then just trade win, lose or draw.

Remember if you don’t have 100 of the same trade -- you got nothing.

2. 4X 4 Forex
What’s the maximum lever factor you should use for forex? You are looking at it. Four times. Four times MAX. So if you are trading $10,000 of capital your maximum trade should be 40,000 units. This assumes that your maximum stop is 25 pips. If your stop is bigger than that then you are not day trading -- you are day praying.

Why 4X? At maximum size and maximum size you lose 1% per trade which is not going to bankrupt you even if you lose 10 times in a row.

Try this for the next 100 trades you will do with your system and I am pretty confident you will still be in the game when the experiment is over.

3. Don’t lift the stop -- Ever. Chip away at your losses.
Oh it’s soooo easy. The FX market is always whippy. Prices almost always reverse and that loss almost always turns to profit if you -- Just. Let. It. Float.

Except when it doesn’t. And you keep adding and adding until the account is gone and you don’t even know how you got to that point from one single, stupid trade. When losing it’s ALWAYS better to stop out. If you like the trade you can always get back in and you won’t be carrying dead inventory if you are wrong again.

Painful as it is to take a loss, it always better to chip away at it even one pip at a time. It took me 6 trades today to recover from a loss and it was worth every pip, both mentally and financially. Resolve to never lift a stop and you will always live to trade another day.

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.

Day Trading for Newbies

Boris Schlossberg

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

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

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

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

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

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

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

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

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

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

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

My favorite FREE resources for FX Traders

The Chocolate Chip Cookie Day Trade

Boris Schlossberg

If you are a red blooded American male of a certain age eventually your metabolism will simply stop working. It doesn’t matter that you bench press 350 pounds every week. It doesn’t matter that you take 20,000 steps each day. It doesn’t matter that you eat only boiled eggs for breakfast. You will start getting fat. The belly will expand, the suit pants will be a little tighter and you will look nostalgically at those high school photos of yourself when you could swallow a whole pizza for a snack and still maintain body fat of less than 5%.

Such is life. If you want to stay anywhere near your fighting weight you will have to become much more disciplined about your diet. You will eat only two meals a day. You will avoid desserts like the plague and carbs will now become your enemy number one, even though without them you turn into a raging maniac at work and home.

But no matter how well you diet. No matter how healthy you eat. No matter how committed you are to your daily regimen you will come across the magic smell of a chocolate chip cookie sooner or later and unless you have the willpower of Gandhi you will take a bite of it and wolf it down like the red blooded American male that you are.

If you day trade 20 hours a day like I do than this is what to do.

You keep your size small. You always honor your stop. You keep an ear out for news and have one eye on price action at all times. And most importantly you trade your setup. Over and over again.

But sometimes the markets are slow. There are no setups to trade. You get restless. Antsy. You become bored and you need to connect with the market to keep your focus sharp. So you start playing the “what if” game. What if I went long here? What if I went short the cross to offset it? Looks good -- let me just give it a try…

There is no day trader in the world that hasn’t done the “bored trade” at least once every few days or weeks. The “bored trade” is the chocolate chip cookie of day trading. You know it’s bad for you. You know you will just pay for it with empty calories or lost dollars but in the end you don’t care. You need to do it. You need that small hit of guilty pleasure.

And you know what?

That’s ok.

In trading as in life you should never let the perfect become the enemy of the good. We are not robots and don’t have to be in order to succeed. As long you eat just one or two cookies, or make just one or two dumb trades a week you’ll still maintain your fighting shape and will be ready to tackle both life and markets no worse for the wear.

Trade with us

My 30 Day Trading Plan

Boris Schlossberg

In a wonderful little TED video Matt Cutts talk about the joy of trying out a new behavior for the next thirty days. From giving up sugar, to doing 10,000 steps daily to even writing a 50,000 word novel -- he makes the point that you will be amazed at what is possible to achieve within that time frame.

Cutts also notes, that the 30 day challenge creates a much more intense experience for the person. Instead of days just blending one into the other you really remember the month much more clearly as the experience and challenge of change engages you both physically and mentally.

I watch Cutt’s video the same week as I listened to a very interesting podcast interview with Matt Zimberg who is broker that works with many different type of traders. Zimberg’s insight’s into trading may be even more valuable that someone who manages the P&L for his own account, because Zimberg enjoys an outsider status relative to the game and therefore can speak to its intricacies with much more objectivity.

One of the key ideas to emerge from the Zimberg interview is that traders should really trust their system more. The urge to override your system at nearly every single point in the market day is extremely high. Especially if the system is based on mean reversion and forces you to buy or sell at extreme price points of the day when everything looks like it’s going against you. After watching literally tens of thousands of execution reports, Zimberg said that most traders would do better to trust their system more than their gut.

Now I have written extensively about my own predilection towards “system override” and in the back of my mind I am sure that Zimberg is right. I am sure I would probably be even more profitable if I let my systems trade with much less interference. But I also know myself well enough to realize that “hand off” is just not part of my personality.

Furthermore an observation from the other Matt -- Matt Cutts -- kept going through my mind. He noted that small changes undertaken in the 30 day challenge were much more sustainable than large ones. So I decided to combine the wisdom of the two Matts and simply just trade my system for the next 30 days. No “cowboy trades” where I go off the reservation and trade impulsively without any structure. No oh-I-know-this-is-a-perfect-time-to-buy/sell-a-currency-pair trades that have no legitimate foundation in my trading logic. In short no bulls-t. Just trade my system for the 30 days straight.

I’ll let you know how it goes.

Day trade with me

What Makes Day Trading Successful?

Boris Schlossberg

It’s been an amazing month in my chat room. Trader after trader put up double digit returns this month, during some of the worst volatility in years. Even I, who trades with all the risk tolerance of an old lady from Pasadena, managed to bank a 10.14% gain beating my own target of 4%.

So what did we do at the start of 2016 that made so many traders profitable in the room?

I would love to say that the profit came from my ideas, but the truth is that everyone has bastardized my strategies so much, that sometimes I don’t even recognize what they are doing. Indeed even I went off into my own corner for the past two weeks and traded my own variation of my strategy that actually worked very well.

The truth is that there is no uniform way of trading. Everyone adds their own touches to even the “best” trading strategies that you devise and pretty soon the trading room looks like a Middle Eastern bazaar with everyone hawking their unique wares.

And that’s exactly the way it should be. Trading is very much an exercise in personal expression as opposed to investing which can reduced to one simple formula (Dollar cost average into an index every month of your life and never look at the statement until 30 years have passed). And its it precisely because trading is personal that it is such a pleasure and a challenge at the same time.

Yet despite all the differences, despite all the little personal quirks and analytic flourishes, there were several inviolable rules that every successful trader followed which were responsible for their amazing performance.

1. NO LEVERAGE.

This is pretty much the only rule you ever need to follow yet it is the most commonly broken rule in trading. I can talk til I am blue in the face why trading more than 2X equity is pretty much a guarantee of ruin -- but it wouldn’t matter one bit. I’ve finally figured out that the NO LEVERAGE rule should actually be called the NO GREED rule, because ultimately it’s greed that makes everyone fail in this business. Why trade for nickels and dimes when you can turn $10,000 into a $1 million in 1 year! The siren call of that idiotic fantasy is what built both Wall Street and Vegas on the oldest con in the book.

The irony of our business is that we spend all our days chasing money, but it’s only when we stop paying attention to dollars and start focusing on risk that real money comes your way. No one in my room who made money this month traded with any kind of leverage. For most FX traders who consider 10X lever a light position that will probably come as a shock. But most of the traders in my room will be here next year and the year beyond whereas anyone on 10X lever factor will be long gone from the game.

2. LOSE.

Every trader who made money this month was a great loser. They lost money on various currencies. They lost money on various strategies. They lost money for several trades, several days, even weeks in a row. One trader made more than 300 trades this week alone racking up massive consecutive wins on Monday only to bleed everything out midweek as the gyrations of the oil market wreaked havoc with his CAD trades. Did he stop and cry like a little baby? Did he throw up his hands and scream that the game was rigged? Did he blame my strategy for being so inconsistent this week? No. He just made 300+ trades and when the dust settled he was up more than 2% for the week.

Mike Tyson once said that everyone has a plan until you get punched in the face. That’s doubly true with trading. Most people can’t take 3 losers in a row. But we lose every day. If you don’t like losing -- don’t day trade -- but if you learn how to cope with the vicissitudes of the market that skill will be far more valuable to you than any strategy you ever develop.

3. STAND DOWN.

“I got the horse right here. His name is Paul Revere. Can do…”

Every time I watch new traders in room, I always think about that song from Guys and Dolls. The itch for action is the single biggest destroyer of wealth. Everyone wants to bet the big event -- but that’s exactly when most traders will lose the most money. The guy in my room who banked more than 30% this month did something remarkable this week. On FOMC day he simply stopped trading 7 hours before the event and didn’t resume until 2 hours post the release. While everyone else was trying to feverishly bank every last pip before Ms. Yellen and company released their statement, he sat on his hands and watched. This kept him from being whipsawed in EUR/USD and USD/JPY and kept his day green while many other accounts quickly turned red.

Taking a page from his book, I went dark on all my positions ahead of the BOJ the day following. The BOJ meeting was expected to be snoozer, but instead they became the second G-3 central bank to go negative rates and USD/JPY would have decimated even the biggest stops on my strategy. Instead I kept all my money and cleaned up in the aftermath of the release.

Discover the Joy of Team Trading

Most traders think that day trading involves taking risk. Like the glorious ALL IN bets in poker. The reality couldn’t be less exciting. Successful day trading is the art of avoiding risk as much as possible. We make all our money during the boring times and leave the cowboy bets to the amateurs.

The Only Thing You Need to Do To Make Money Day Trading Next Year

Boris Schlossberg

This week I was going to do the typical end of the the year what-have-I-learned-in-2015 column and talk about volatility regimes, implied bets and exit and entry strategies. Yadda, yadda, yadda.

Then I stumbled across an old thread on Elite Trader called (SIC) What`s your biggest tradeing blunder? and suddenly realized that it contained the answer to the key day trading problem that plagues us all. The thread like so many on Elite is an endless litany of missed analysis, sloppy execution and terrible decision making at key points in the trade. Reading it was like watching a slow motion car wreck you know it’s wrong but you just can’t pull away.

Tolstoy once said that every happy family is the same, but each unhappy family is unique in its own misery. When it comes to trading I think the exact opposite is true. Every happy trader is different but every unhappy trader is depressingly the same. What unites every losing day trader including those in the Elite thread is the woefully misguided attempt to make every win the same size, while making every loss different.

It stems I think from our almost subconscious need for a “paycheck”. Paychecks are of course uniform. They are cut on a weekly or biweekly basis and lull us into the belief that money like lightbulbs, cereal and soap comes in nice uniform units of measure.

But in trading to think this way is pure madness. The markets are never uniform and never provide predictable profits.

Imagine, however, if we smashed this mental model to smithereens and instead did the exact opposite of what every retail trader does. Imagine if we accepted the fact that our wins would be all over the place sometimes banking as little as half pip, sometimes making 20 or even 50 pips per trade. And then suppose that we made a vow in 2016 that no matter what, no matter how, no matter why, our losses would always be the same size.

Last week I talked about the need for a money stop. For a typical $10,000 retail trading account I think a $100 money stop per trade is just right. So suppose that in 2016 you made it your business to never lose more $100.00 on any trade you made. It didn’t matter if you were right or wrong. It didn’t matter if this was a planned trade or simply a stupid fat finger execution. It didn’t even matter if this was your fifth, sixth, seventh loser in a row. The only thing that mattered is that you never lost more that $100 on any given trade idea. I guarantee that if you did that there is almost no way that you will fail as a daytrader. You may not be profitable but you will NOT lose all your capital.

My Top 5 Trades for 2016

So in 2016 we can talk about tactics til kingdom come, but the only thing we really need to do is keep our all our losses at the same size ALWAYS and if we can just do that we will be well on our way to making money next year.