Organize Your Trading Like Pro

Boris Schlossberg

Surfing the web during the New York Snowpocalipse yesterday I stumbled across a Business Insider video on how to tackle your debts. I am what’s known as a “deadbeat” in the credit card business because I pay my bill in full every month, but the video had some great points to make about how to tackle this difficult issue so I am going to shamelessly steal some of its ideas because I think they can help us in the world of trading.

What’s the biggest problem for traders today? If you were to ask that question 10 or 20 years ago, I would have said scarcity. Scarcity of data, scarcity of products, scarcity of technology. Nowadays we have the exact opposite problem.

Abundance.

Literally, everything we want is available at a click of a button and costs virtually nothing. Data, news, charting, execution software, cloud storage. If you tried very hard you couldn’t spend more than $100/month on services that would have cost you thousands upon thousands of dollars just a few decades ago.

In a world of abundance, the one thing that’s scarce is our attention span. It’s just too easy to play with all the shiny toys and lose your focus. No one is more guilty of that fact than yours truly who never met a gadget or a software program that he didn’t like.

Don’t get me wrong. Experimentation is awesome. In fact, you will never improve unless you experiment with your setups because the markets are ever changing. But experimentation should not dominate your time.

To trade well you need to focus and to ruthlessly eliminate distractions. The Business Insider video states that the first rule of debt reduction is to simply take a full inventory of all your creditors then ranks them on the order of greatest debt and highest interest rate.

As traders, we should do the same with our trading strategies. Inventory all the setups you are trading now and then rank them by your sense of confidence in each one.

The next step is very important.

Set aside all your trade setups except your top three. This is the maximum amount of strategies that most of us can follow at one time. Trading is the exact opposite of investing. Whereas investing is wide and shallow (you just buy a whole swath of assets, look at them once a year and rely on diversification to help you produce a return) trading is narrow and deep. As traders, we make our money on tiny inefficiencies in the markets based on some isolated human behavior relative to some specific instruments. That’s why blanket technical analysis fails so miserably. A breakout in GBPUSD is very different than a breakout in EURCHF. A large move in Asia is much less meaningful than a large move in North America.

Context is key to successful trading and properly understanding context is a direct function of focus. The longer you trade your setup, the deeper your knowledge will be.

That’s the true edge in trading and it starts with the same advice that we give to those who are deep in debt.
Inventory.
Asses.
Eliminate.

And focus on what’s left with all your might.

My motto for 2018 is -- Don’t get mad, get better. This is the way to start.

In FX -Pro Traders are Dying, Retail Traders Rising

Boris Schlossberg

At the beginning of last week, Bloomberg ran a long story mourning the demise of the bank FX trader. “Take the pay cut, “ warned one veteran darkly. “Oh, and don’t wait for the phone to ring.”

The computers have taken over. The algos now do most of the market making and HFT firms like Virtu dominate flow whittling margins to a tenth of pip. Long gone are the days when you could take your mates for a beer and get preferential treatment on client flow. Or better yet when you could simply markup deals 20 pips or more for “non market” sensitive customers like corporates, pension funds and equity mutual funds. It was a great party while lasted, built on insider info, expense accounts and very little economic value.

Dealing FX still remains a cheaters game. Banks continue to pay their multi billion dollar fines for rate fixing and proceed in their tricks and treats. But the party is clearly coming to an end. Customers are much smarter, everyone has access to price information and competition has become fierce. FX will never be a totally clean market until it goes on exchange but it’s good enough at this point so that retail traders can play the game on mostly level playing field.

And therein lies the irony. The very same technology that is killing the pro trader is enabling the retail trader to compete effectively in that most unforgiving of arenas -- the FX day trading market. Right now as I sit and type this, I am looking at nine screens that give me the following services all for free:

Streaming dealable quotes as tight at 1/10th of a pip on euro and yen and 1/2 pip on cable. Just a few years ago I was paying as much as 5 pips spread for GBP/USD and now that’s often my profit on a trade.

Live Squawk box out of London that keeps me up to date on all the breaking macro and central bank news, so I can react quickly to any potential action.

An RSS feed from my buddies at ForexLive that gives me color on the market 7 days a week.

Charts, Charts, Charts -- you name it you can have it and all for either free or a few bucks per month.

A Live News Applet that gives me eco data as quickly as a Bloomberg terminal

MT4 -- my very own algo machine that lets me manage my trade inventory at the speed of light and takes all the sloppy trade entry/logic out of my fumbling hands.

Last but certainly not least -- Slack. The greatest software of the 21st century that allows me to trade in a chat room with traders from all over the world 24 hours a day 5 days a week. All of our trades are instantly uploaded into the room and we can discuss, analyse and get inspiration from each other -- just like a dealing floor but only better.

So as I observe the market changes over the past decade, I can honestly say -- it’s only getting better.

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.

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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.