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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How Big is Your Pip Donald Trump?

Boris Schlossberg

How big is your pip? The answer to that question will determine many things including whether you can survive the markets for more than a week to how much you can realistically expect to make on your capital.

Now if you were Donald Trump -- you would no doubt say that your pip is HUUUUGE. But then Donald Trump went bankrupt four times and any equity investment in his companies lost 90% of its value so I really don’t want to trade like Donald Trump because I don’t get to play with other people’s money.

I risk my own capital so my pip is tiny. For every 10,000 of capital my opening trade is 2,000 units. That means my pip is worth just 20 cents. A typical profit on my day trading account of 10 pips earns me just 2 basis points. That’s right you don’t misread me. I make 2/100th of 1% on any given 1st trade I make. On the second level trade I earn a whopping 8.5 basis points. Of course when I lose I only lose 30 basis points of just 1/3 of 1%.

Why is my pip so small? Because I day trade and I make money from volume not size. When you are doing a lot of volume (trades) you need to make sure that any one loss is very small. On a typical day I try to do 10-15 trades and make 10-20 basis points. That may not sound like much but at 250 trading days a year it can add up to 50% on your money. More importantly it produces equity curves like this.

Screen Shot 2015-07-24 at 2.35.49 PM

My gains may be small but my drawdowns are very controlled. If I do earn anywhere between 25-50% this year, my drawdown should not be any worse than -15%. Now you may think I am a wuss. You may want to try to double your account in which case you’ll have to trade 3 times as large as me or make your pip worth 60 cents per every 10,000 of capital. But beware -- you may indeed be able to make 50 basis points a day that way -- achieving 100% annual gains but at the risk of drawing down -50% or more of your equity. More reward always means that there is more risk involved and the key question you need to ask yourself is whether you’ll continue to trade if you lost half your money.

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When the money is not yours the answer is easy, but when it is I am not so sure most of us could take such pressure. As someone in my room remarked today “I’d rather be trading small forever than trade big for a week.”