In Trading – Great is NOT Good

Boris Schlossberg

In our winner take all world, we are often told to try the best, do the best, be the best.

That advice is a road to ruin in most aspects of life and very certainly in trading.

The very latest in research suggests that human accomplishment does not come from trying to push ourselves to the limit, but rather from gradual and consistent repetition and improvement.

As Brad Stulberg writes, “Take the case of Eliud Kipchoge, who just shattered the marathon world record. He’s literally the best in the world at what he does. Yet Kipchoge says that the key to his success is not overextending himself in training. He’s not fanatical about trying to be great all the time. Instead, he has an unwavering dedication to being good enough. He recently told The New York Times that he rarely, if ever, pushes himself past 80 percent—90 percent at most—of his maximum effort during workouts. This allows Kipchoge to string together weeks and weeks of consistent training. ‘I want to run with a relaxed mind,’ he says.”

The paradox of performance is that when you push less you achieve more. Stulberg again, “This mindset improves confidence and releases pressure because you don’t always feel like you’re coming up short. It also lessens the risk of injury — emotional and physical — since there isn’t a perceived need to put forth heroic efforts every day. The result is a more consistent performance that compounds over time. Research shows that sustainable progress, in everything from diet to fitness to creativity, isn’t about being consistently great; it’s about being great at being consistent. It’s about being good enough over and over again.”

This is certainly true with trading. We are always pushing for more -- more edge, more leverage, more trades when we should all be pushing for less. It’s perfectly ok to take profits early. It’s perfectly ok to miss some setups. It’s perfectly ok to trade on very low leverage for as long as you want. Every one of those behaviors will push you toward success whereas the exact opposite of those behaviors will guarantee failure. Trading -- like marathon running -like almost everything in life -- is a test of endurance.

There is an old movie with Paul Newman and Robert Wagner called Winning. It’s about the 24 hour race at LeMans. (It was actually the catalyst for Newman becoming a professional race car driver later in life). In the movie, Wagner plays a hot shot driver who “breaks things” because he always pushes everything -- the car, himself, the people around him too far. Wagner is the quintessential example of what not to do in trading. In his quest for excellence, he winds up only with failure.

It’s easy to see how that can happen in trading. Hell, I’ve been the Robert Wagner character many times in my life. Always looking to “optimize”, always looking to push trades beyond their limit. But recently I created a process to change that behavior. And it all starts with the 0.01 lot.

Basically anytime I have an idea for a setup or strategy I start trading it with 0.01 lot. My iron clad rule is to trade at least 10 times at that tiny size, but the more I do it, the more I realize that at least 30-50 times is best (this assumes you are day trading, which is all that I do). The money is real, the quotes are real but the size is so tiny that it does not dissuade you from pursuing the setup even after multiple stops out. More importantly, it is truly amazing how many things you notice the more you trade. Every setup and I mean EVERY setup will change its rules as it develops under real market conditions. That’s because even if you have years of market experience your original notion of how the trade should proceed will come with preconceptions that actual market price action will very quickly destroy. But here is the thing. The more you trade your set up. The more you adjust it to actual market conditions. The more accurate it becomes. The more confident you will be.

That confidence will allow increasing the size to the next level which in my case is 0.1 lot -- and inevitably when the losing streak appears you will not abandon ship. You will have that reservoir of confidence from the 0.01 lot days to ride out the drawdowns. This is where the power of gradual improvement really pays off. This is where you realize that good is not the enemy of the great, but rather its basic building block and at that point, you can finally step up to your regular trading size knowing that you have created a truly durable setup to trade.

How the Great One Would Trade FX

Boris Schlossberg

If you want to treat yourself to ten minutes of pure unadulterated joy, just pull up the Wayne Gretzky highlight wheel on Youtube. You really don’t have to know anything about hockey to appreciate the athletic majesty of the Great One.

You can’t help but be amazed as you watch the grainy footage from the late 1980’s and early 1990’s at Gretzky’s ability to control the puck, outskate his competition and score seemingly at will.

Wayne Gretzky, of course, is famous for saying, “ I skate to where the puck is going to be, not where it has been.” Which is probably one of the greatest sports quotes of all time but is also unbelievably relevant to the world of trading.

I’ve been thinking about Gretzky a lot lately as I work on my scalp set up. Scalping is probably the hardest part of trading to master because it requires laser quick entry and exit techniques and a very high level of accuracy in order to overcome the massive commission costs that you rack up every day. But if you can master scalping you have true control because then you are able to make money in any type of market regime.

As I delve deeper and deeper into short-term trading I realize that the key to succeeding in scalping is the same as in hockey. You need to go where the puck will be. You need to anticipate price and position yourself accordingly. That’s of course much harder than it looks. Longer term traders can afford to be wrong for long stretches of time as their wide stops allow for massive market slippage before price finally turns their way. Scalpers don’t have that luxury. They are either right or stopped out, So they have to decide quickly if the trade is worth the risk.

If you anticipate something, you will inevitably be wrong. Professional tennis players are a perfect example of this dynamic in play. Watch any Grand Slam tournament and you will see the best players in the world get wrong footed countless times during the match. They run one way, while the ball goes the other.

But here is the thing.

You never see pro tennis players stop anticipating. Being wrong-footed, once, twice, ten times never stop any of these athletes from anticipating the next ball. That’s because there is no other way to achieve success. If you want to win you need to go where the puck, the ball, the pip will be. Not where it is now.Sometimes you will look like an idiot, but you just get right back up and try again. Because the key to sports and to trading is to get better at your reflexes -- not to stop playing when you lose.

The Great One had one last quote that helps sustain me as I refine my setup. Gretzky said, “You miss 100% of the shot you do not take.” So even if you are doing badly, even if you miss your targets, keep shooting. The process of trading itself will make you better, will make you sharper and will hone your skills.
The more you play, the better you see the rink -- the field of play. Just like the more you trade the more you see the market. My scalping hasn’t turned consistently positive yet, but my long term trading has improved tremendously as my “field of vision”, my feel for the market is much, much better.

For this, as well as for sheer joy of watching some of the greatest feats of athleticism in history, I have the Great One to thank.

BK Big Trades – Stopped out of NZD/CHF

Swing

BK Big Trades -- Stopped out of NZD/CHF

NZD/CHF Big Trade -- The Ultimate Carry Trade

The Trade:

NZD/CHF


Buy NZD/CHF at market (now 0.6715)

Stop for whole position at 0.6500

Targeting move to and above 70 cents

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.

—--

We Like the New Zealand Dollar

A few weeks ago, we bought ourselves some NZD/CAD on the premise that dairy prices would bottom before oil. Today, oil prices are down 4% while dairy prices settled at higher levels for the third auction in a row. We traded the currency pair, taken money off the table and are now shifting our focus to the ultimate carry trade -- NZD/CHF.

Lets start with the New Zealand dollar. NZD fell sharply today on the back of a more modest increase in dairy prices. While it would have been nice to see dairy prices rise by a larger amount, the fact that prices increased at the last 3 auctions is GREAT news for New Zealand. Earlier this month, dairy prices rose 3.6% the biggest increase in 12 months -- matching that pace would have been unrealistic. Considering that dairy is New Zealand’s biggest export earner, accounting for approximately 30% by value, this increase will bolster the confidence of the RBNZ who meets next week.

The last time we heard from the central bank, they were surprisingly comfortable with the current level of monetary policy and while they felt that the New Zealand dollar value was unjustified and unsustainable, they also believed that further policy adjustment will be necessary after a period of assessment. In other words, they are still looking to raise interest rates -- eventually. Their hawkish monetary policy bias and 3.5% interest rate will prevent NZD from falling much further and instead lead to a recovery in the very near future especially if the ECB rolls out Quantitative Easing, forcing investors to look elsewhere for yield.

NZD/CHF -- The Ultimate Carry Trade

Buying the New Zealand dollar against the Swiss Franc is the ultimate carry trade. In addition to abandoning their 1.20 peg, the Swiss National Bank also deepened the negative rate environment by cutting rates 50 basis points to negative 0.75%. Last week, the SNB made the conscious decision to shift from exchange rate to interest rate driven monetary policy. If the recent appreciation in the Franc poses a major threat to the Swiss economy, they could lower interest rates further -- increasing the attractiveness of selling Francs. Even if they don’t and other central banks lower rates, NZD will become more attractive as a result. We also believe that most if not all of the long EUR/CHF trades have been flushed out with all stops already triggered.

Chart -- NZD/CHF Headed for 70 cents.

We think NZD/CAD is eventually headed for 0.70 or higher and our stop of 0.6500 is well below pre-SNB levels. Here’s the trade:

NZD/CHF

Buy NZD/CHF at market (now 0.6715)

Stop for whole position at 0.6500

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.

Great Lessons On Trading From a Poker Pro

Boris Schlossberg

This week Business Insider had a great profile of a professional poker player called Andrew Seidman. He has been playing the game since 2006 and has had massive success as well as some setback since then -- but perhaps what makes his story so compelling is that he is basically a regular self-taught guy rather than some Mensa math genius. I am taking the liberty of snipping parts of the interview (.. so apologies if some of the quotes appear as though you’ve entered the room mid-sentence) and affixing my own comments to his observations.

Try our Forex Trading Signals and Trading Club for:

button

On capital and law of large numbers
“However, it doesn’t usually work that way. Usually people play with 20-40 times the buyin, well within a risk-of-ruin scenario in which a person could just get crushed by luck and bust out. Also, sample size matters. Can I go to Vegas and be assured of a winning weekend? No. Can I move to Vegas and be assured of a winning year? Probably.”

Divide the “20-40 times buyin” line and you quickly come up with 5% of 2.5% bet size. This very close to what professional traders use to size their own trades. In fact I would argue that in FX you would want to be even more conservative and use 1%-2% risk limit per trade. Why? Well as Seideman explains by chopping up your bet size to small chunks you stand a better chance of avoiding risk of ruin -- a situation where the market, or the cards simply produce a very long string of negative outcomes.

Next. Size matters. In FX and in poker the more trades/bets you take the less likely you are to fall victim to a bad string of outcomes. Mind you if you strategy in trading or in poker is flawed from the outset, you will still lose. But if your probabilities are accurate the longer you trade/play the more likely the outcome will line up with expectation.

Good trading/playing means knowing the probabilities as well as the behavior patterns of your opponent.
“First, you have to psychologically profile your opponent (everyone fits into one of three general profiles); second, you have to understand basic probabilities (e.g. if I have two pair and my opponent has a flush draw, I win 65% vs his 35% and these are relatively easy to memorize); third, you have to predict your opponents likely holdings.”

What’s absolutely key about understanding this passage is that Seidman not only focuses on the basic probabilities, but on the likely reaction of the opponent. That’s why just knowing the news in FX is never enough. You have to understand if the market is ready to accept the news ( its in a momentum mode ) or reject the news (it in a mean reversion mode). Profiling the state of the market is just as important as acting on the immediate newsflow.

Adjustment is key
“Good poker players go through all of that process and are really mentally engaged trying to determine those things. Weaker players really don’t do any of that and make purely emotional decisions (conservative players never really bluff, crazy gamblers basically always bluff, etc.)”.

This is SUCH an important point. Good traders/players always continue to learn and observe adjust their strategy within a properly designed framework. Bad traders simply repeat their emotional behavior over and over until they are bust.

Last but not least -- successful players compete with those who are weaker than them. This is a very common mistake that retail FX traders do all the time. By trying to trade right after the news retail traders are playing against much stronger opponents and institutional algorithms shred them to bits as a result.

How To Get Great Trading Ideas

Boris Schlossberg

Let’s face it, trading can can be a miserable lonely existence. You spend your days in the glow of flickering monitors with only CNBC to keep you company. Your triumphs and failures are largely taken in silence and the solitude will often drive you to make horrible impulsive trades out of either anger or boredom.

Last week when Kathy was in Sydney, I gave a live webinar on the advantages of group trading. I used such models as Alcoholics Anonymous and Weight Watchers to show how groups can positively affect behaviour and instill proper habits through accountability and support.

At BK we put our money where our mouth is and at the start of this year we decided to conduct daily webinars for our subs to see if this thesis really holds up to reality. I’ve been doing them for almost three months now and while the group dynamic is undeniably beneficial on an emotional level what surprised me the most was the fount of intellectual creativity that it has spawned.

When it comes to trading two heads are truly better than one. Regardless of how smart, how experienced, how profitable you are -- you ideas can always be improved by the scrutiny of the crowd. On my Twitter feed you may occasionally see some bursts of excitement from my followers as one or another of our trading setups banks some pips.

All of these strategies arouse out of us just BSing around, looking at some key market behaviors and constantly challenging each other with better and better refinements. As a result we are now building a very impressive portfolio of short term trading algorithms that many of us trade live and that may eventually become a permanent part of the BK signal service.

Much as I would like you to join us at BK- the more important I am trying to make is that if you are a trader -- DON’T BE ALONE. Find a group, share your ideas and enjoy the mind meld. Don’t worry about disclosing your “proprietary” edge. Trust me there is nothing that you have thought of that has not been done by someone else already. You won’t lose out, most likely you will improve your execution and refine your techniques even more.

Great trading comes from great ideas and great ideas are always a collaborative process.

Like to trade the EUR/USD? So do we!

At BKForex, a large part of our trading is short term and the EUR/USD is one our favorite currency pairs to trade.

The EUR/USD is the world’s most actively traded currency pair and for many forex traders, this activity provides opportunity.

Sign up to receive our FREE 17 Page EUR/USD Trading Strategy


*By signing up for this strategy you agree to receiving promotional emails from BKForex.com