The Incredible Power of Having a Losing Mindset

Boris Schlossberg

Trading to Win.
The Winner’s Attitude.
Five Ways to a Winning Mindset.

Trading blogs are littered with advice about winning and while their intent is noble, they couldn’t be more wrong and their advice is actual poison to your success.

Take a step back and think about any competitive human activity. It is basically a study in failure and losing. In FIFA 2018 World Cup Croatia took 115 shots on goal -- the most of any team in the tournament. Care to guess how many actual goals they scored? 14. That works out to an 88% fail rate. Croatians, the Cinderella story of the summer only succeeded 12% of the time.

In American football, Alex Smith of the Kansas City Chiefs is considered to be the most accurate passer of 2017 season. His completion rate? Just a bit better than half at 56%.

In poker, Phil Hellmuth is one of the greatest players of the game. He has been playing professional poker for 30 years. Each year there are at least 50 WSOP tournaments which means since he started playing there have been more than 1500 events. He holds the most bracelets of anyone who has ever played the game. How many? 15. How many times has he been at the final table? 58 times. Basically, he fails 97% of the time.

The biggest winners in the world lose. They lose a lot. And if we want to have any chance of being like them, we need to understand that losing is not just part of the game. It IS the game.

Yet when it comes to trading we suspend all rational thinking and approach the market with the ridiculous expectation of winning every trade. Or 9 out of 10 times. Or at worst 8 out of 10 times. But even if we had a great trading system that won 80% of the time, the reality of probability means that we could have 100 trades where the win rate was only 50% and another 100 trades where the win rate was 90%. We could go on for months underperforming the win rate percentages by 20, 30 even 40 percent and not be doing anything wrong. Despite that reality, most retail traders will they stop trading the system if they hit 3 losers in a row. If they hit 10 they quit altogether.

Developing a winning mindset does little to fix this problem. In fact, it hurts you immeasurably. A winning mindset creates the false expectation of a win, so just one or two losses completely destabilizes your psyche. You double up on the position. You pull you stop. You punch your screen. In short, you lose control, not because your execution is bad, but because your expectation is completely at odds with market reality.

Now imagine if you approached each day expecting to lose money. Let’s say you are day trading. You set a total risk budget of 50 pips while trading positions with 15 pips stops and every trade you take you FULLY EXPECT TO LOSE.

What happens then?

Well for starters you let your strategy be. You don’t second guess every pip of adverse movement and close out positions too early. You TRADE TO PLAN because you have given yourself the permission to lose. You are not annoyed, angered or frustrated. Your mind is actually clear and calm which means you can analyze the next setup with a much better attitude. If a winner comes, it’s a pleasant surprise, rather than your God-given right and you can continue to look for the next trade and work on improving your process.

Think how much better it is to have a LOSING MINDSET. You are unfazed by a losing day, a losing week or even a losing month. It all becomes part of the job and it allows you to stay in the game much longer than the average retail trader, which in the end is how winning is really done.

EURGBP – Losing Steam at .8600?

EURGBP – Losing Steam at .8600?

Chart Of The Day

After a nice correction to below .8400 EURGBP has bounced back as cable continued to weaken on renewed concerns about Brexit. However, GBPUSD appears to have found a bottom for now at the 1.2950-1.3000 corridor while EURGBP looks to be running out of steam as it once again tests the highs near .8600.

Tomorrow the market will get a look at EZ Flash PMI data which is the single freshest read of economic conditions in the Eurozone. Readings over the past few months have declined as the slowdown in the region and the turmoil caused by Brexit cast a pall on economic activity. Still, the reports remain above the 50 boom/bust line. Yet if the number surprises to the downside, and worse yet slip to below 50, the selling in the euro could accelerate and drag EURGBP back towards .8500 carving out a clear double top in the pair.

ECB April Meeting Preview – What to Expect

ECB euro forex blog Kathy Lien

Thursday’s ECB meeting is one of the most important event risk this week.  EURO has been biding its time trading between 1.1235 and 1.1475 pre-ECB. Which end of this range breaks hinges upon Mario Draghi’s tone. If he’s concerned about the strong euro and talks about the possibility of more stimulus, then 1.1235 could give.  If he simply says they need more time to see the effects of stimulus and points to recent data improvements as a sign of their easing measures working, euro could break 1.1400 and aim for recent highs.

The following table shows how the eurozone economy changed since the ECB last met -- from a data perspective, the central bank has less to worry about in April vs. March when there was significantly more deterioration than improvement.  So the question is whether the 3 to 6 cent rise (depending where you’re measuring from) in EURO since easing rings alarm bells for the central bank.

 

ecb0416

How To Win From Losing

Boris Schlossberg

In the world of sports there is no more paranoid position than being a hockey goalie. You are, for intents and purposes, a human shield used for target practice. Your job is to stop the angry sting of rubber puck flying at you at more than 100 mph as you try to make sense of the constant swirl of motion in front of your goal.You play on a team, but are essentially alone. You cannot win games, but only lose them.

Little wonder then that hockey goalies tend to be a bit “peculiar”. In my own misspent youth minding the net, I wouldn’t hesitate to throw my mask, glove, stick -- anything that I could get my hands on -- at my poor defensemen, when I was even slightly displeased with their positioning. I would heap a torrent of verbal abuse on them that I would never unleash on my worst enemy. And yet these big, beefy guys, who under different circumstances could snap my neck in two without breaking a sweat, meekly absorbed all of my rants. Such is the power of a hockey goalie.

A few years ago NY Times ran an article talking about what sociologists call “non-normative” traits of being a hockey goalie. There was Bernie Parent, the famed keeper of the Broad Street Bullies, who took a nap with his German Shepard every day. Another NHL goalie compulsively stripped off his uniform between each period to take a shower as an elaborate superstition ritual. My favorite however was Gilles Gratton, who as New York Times writes, “bounced around in the minors in the ’70s before ending his career with the St. Louis Blues and the New York Rangers. Gratton liked to skate in the nude sometimes, wearing just his goalie mask, and refused to play if the stars did not line up properly. He believed that in a previous life he was an executioner who stoned people to death, and that he was fated to become a goalie — someone on the receiving end of a stoning, so to speak — as punishment.”

Although, goalies rarely if ever score a goal, any hockey player worth his weight will tell you that you can’t win the game without a good one which is what makes the story of Martin Brodeur so interesting. Brodeur was the inimitable netminder of the New Jersey Devils who spent more that 20 years in the league. He is no doubt one of the more talented goalies in NHL history, but what makes Brodeur unique is his ability to recover from losses.

In profile of him by New York Times, the paper wrote,

“Hockey people say that Brodeur’s particular strength is his ability to bounce back from a bad goal or a bad game and not let it gnaw at him. Hockey was locked out for the first half of this season, and during the Devils’ truncated training camp last month, you could see that he hates to be scored on even in practice, rapping his stick or ducking his head in disgust after letting one in. But the cloud passes in an instant, and then he’s bouncing on his skates and looking for more pucks to swat away. Lou Lamoriello, the Devils’ general manager, says, ‘Marty’s mental toughness, his ability to overcome a bad game, is just phenomenal.’ “

The older I get, the more I realize that there is simply no greater skill in life than the ability to recover from adversity. This is doubly so when it comes to financial markets, which like a hockey puck traveling at 150 miles per hour will do their best to knock you off balance every single day.

When we are young we think we are invincible and therefore never give much thought to recovery, assuming that our body and our mind will just snap back. But as we get older and hopefully a bit wiser we begin to pay more respect to the process of recovery. When I was young I had the bad luck of catching six pneumonias before I was twenty years old. The net result was that my lungs were shot and whenever I caught a cold it usually turned into a month long bronchial infection that made New York winters a constant misery.

But I as I got older I began to take my condition more seriously. Instead of trying to “gut it out”, I would drop everything at the first sign of sniffles, get in bed, drink 6 liters of water and try to sleep for 12-14 hours at a time. Doing this, I’ve managed to cut my recovery time from an average of three weeks to just a few days and have had far fewer colds in my 50’s than I did in my 30’s.

When it comes to trading, the ability to recover is far, far, far more important than the ability to win. No matter how hard you try, no matter how good you are, no matter how robust your strategy -- you will lose. And it’s at that point that true success will be determined.

Just like with my colds, I’ve learned over time that recovery from your trading losses depends far less on you being “right” and far more on you being “small”. Smaller trades lead to smaller absolute losses which give you time to assess the markets with a much cooler head. You don’t rush into the same trade, you don’t try to win it all back at once and you don’t carry the burden of your losses for days on end. Like Martin Brodeur, you realize that the darkness passes and tomorrow brings another day of opportunity to go toe to toe with the market.

How To Escape From A Losing Trade

Boris Schlossberg

This week the EUR/USD did something extraordinary -- it spiked more than 4% in the aftermath of a dovish FOMC presser -- a move of such ferocity that it hasn’t occurred once in more than one thousand days. If you day trade the EUR/USD like we do in BK chat the lessons of Wednesday’s melt up were invaluable.

Generally we are trend faders on daily basis. We sell highs and buy lows and if you know how to do it properly that can be a very profitable business. Providing liquidity rather taking it is how banks make their money and we simply follow their methods. But of course on days like Wednesday that approach can cost you dearly if you don’t know how to escape.

The key to knowing when “to hold ‘em” and when “to fold ‘em” is velocity. In a regular market
price will generally follow a two way market even if it climbs steadily higher or drifts continuously lower. The most important part to understand is that price trades through time and in the EUR/USD for example it will rarely climb more than 50 points in an hour. (Note I am NOT talking about news based dislocations where price simply skips many levels in reaction to event risk. This is a separate issue and we have many safeguards to avoid such moves).

Therefore if price is moving on a chart like a speeding car on the Autobahn -- BEWARE. The faster the speed, the quicker you must get out of the way. In moments like Wednesday the markets essentially go into a liquidity vortex. Any trades that are offered get sucked up by the relentless demand destroying anything within its path much like a black hole devours anything within its pull.

BIG Trades + News Trades +Day Trades $145 all in

A good rule of thumb is that if price has moved 25 pips in one minute or less (again NOT in a gap like way as it does post-news, but in a normal fashion by chewing through bids or offers) then its best to fold up your tent and go home. Just like it is always much more prudent to pull out of the lane and let the crazy speeding driver pass you by, so too in the markets when price velocity becomes extreme its best to stop trading for the day. In both cases you are much more likely to escape with your life and your money intact.