The High Profit of Low Expectations

Boris Schlossberg

I had no intention of making a good trading system. I just wanted to create an EA that would trade a lot and pretty much stay at break even after commissions so that I could collect rebates. The idea was just to see if I could create a low volatility system that would spin off 5 or 10 pips in rebates every day -- all of which could compound to a nice 10% cash on cash return per annum.

But a funny thing happened. As I traded the system more and more I kept tweaking and refining the original concept and the system suddenly morphed into an actual alpha maker albeit at about one half the trade frequency rate of my original idea. Now I may actually have a genuine money making EA that also throws off some rebate pips along the way.

How did this come about? How did I create such a good EA? Precisely because I wasn’t trying to make money. By not focusing on profit, I could relax and just pay attention to process. That, in turn, helped me align the logic with my “ideal” setup and eliminated a lot of false entries. Add to that some unusual risk mitigation techniques (what my wife derisively calls the “half-half stop”) and suddenly the EA that wasn’t supposed to make money, did.

My friend Rob Booker tells his novice traders that they should focus on making $1 per week. He gets a lot of ridicule for this -- but it’s actually very good advice. Sure, almost anyone could probably make a $1 on a trade -- they goal is in KEEPING that $1 from slipping out of your account as the market tempts you at every turn. As the saying goes, the key to getting rich isn’t how much money you earn, but how much you keep.

The $1 per week trick is all about learning to protect profit -- a lesson that takes a lifetime to learn and that only the greatest traders fully master. But by setting expectations so low, Rob makes that task accessible to anyone -- even traders who’ve just started to trade forex. And that is the most interesting lesson of all.

Trading, in so many ways, is completely counterintuitive to real life. The law of low expectations is just one example of that. In all other aspects of life, we are taught to “reach for the sky”. To set our goals high and once reached, set them higher. But trading is not like playing the piano or learning how to cook or even writing a book. Trading is an activity so fraught with uncertainty that there is very little correlation between effort and result. That’s why the harder you try, the worse you will do. The rules of real life fail miserably in speculative markets. That’s why the completely non-intuitive approach of very low expectations can radically improve your performance. So for now, maybe don’t aim for a 1000 pip trades and try not to lose this week instead?

100 Trades of Profit

Boris Schlossberg

The other day I stumbled across an amazing YouTube video. Two guys -- both skinny non-athletic nerds challenged themselves to do 100 pushups each day for 30 days straight. The rules did not require them to do 100 pushups consecutively -- just cumulatively -- as long as the total ended up to be 100 at the end of the day.

This was a fascinating experiment. Push-ups require no equipment and can be done anywhere (they did push-ups in parking lots, conference rooms, etc.) Push-ups take very little time and need almost no athletic skill. It is perhaps the simplest human exercise there is.

Their journey was eye-opening. Neither man was in good shape. Neither man was ever an athlete. During their first week of attempts, they could barely do 5 push ups consecutively. One of them failed to achieve the 100 goal until the 7th day of the experiment. Yet,l they persisted.


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Here is the absolutely remarkable thing. After 30 days, both men were visibly stronger and more muscular. Each one had changed his diet to a much more healthy regime and their overall posture and presence was decidedly more confident. All of this was achieved through the lowliest, most humble of exercises simply because they set a modest goal and stuck to the plan.

The hundred push-up experiment made me realize that we can achieve the same type of radical improvement in trading if we adopt their methods. Let’s do a simple experiment. Let’s commit to making 100 profitable trades of 10 pips each over a period of 30 trading days. The only rule is that you must honor your stops (whatever they are). You cannot let losing trades float. The purpose of this experiment to not necessarily make you money (though that would be nice) but to get you to engage with the market in a proper way.

Why do most traders fail? Because they have no defined plan for how they will trade. In fact, most traders quit simply because they hit 3 losing trades in a row. Here is my prediction if you do this experiment. I predict that you will begin to realize what trades work and what trades don’t. I bet you will become a lot more selective in your entries. I predict that you will become a lot less greedy in your exits. I bet you will develop a healthy respect for risk. I bet you will begin to feel joy and then confidence at winning 5 and maybe even 10 trades in a row and will begin to understand how winning is possible.

If two nerdy guys can transform themselves into strong confident young men just by doing 100 pushups each day for a month, then we as traders can certainly improve our skills by focusing on making 100 profitable trades in 30 days. Give it a try and even if you are making 20 losers in a row, keep going. The lesson of the pushup experiment is that success lies in simply trying for a meaningfully long time.

Dieting Your Way to Profit

Boris Schlossberg

Dieting and trading are pretty straightforward activities. In the US trillion dollar businesses are devoted to both subjects and yet 95% of people who attempt to either trade or diet fail miserably.
Why?

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Allow me to suggest an answer. Those of you who have been reading me for years know, I have tried to shed weight for the better part of last decade. I was hardly fat -- but I was getting a belly, the old suits did not fit, and my sense of pride demanded that I return to the trim fighting shape of my college glory years.
Yet nothing I tried worked. At best I’d lose 5 pounds over a period of months and then essentially gain them all back.
About three months ago I decided to stop eating carbs. That’s it. No portion control. No special cooking directions. No pills. No additional exercise save for the once a week weight lifting session that I’ve been doing for more than a decade.
But here is the thing. When I say I stopped eating carbs. I mean stopped totally.
No.
Carbs.
Ever.
I haven’t touched a bagel. I haven’t eaten any pizza. I never have any dessert. I was known as a Jew who cooked Italian like a “Neopolitano”, but I haven’t had an ounce of pasta since I started my little experiment.
The net result is I dropped more than 15 pounds. The old suits fit and I even had to add a notch to my belts to keep the pants up.
Somewhere along the line, I realized that dieting wasn’t an extracurricular activity or a hobby. It was a permanent lifestyle choice. That realization dawned on me slowly but powerfully.
When can I have dessert?
Never.
When can I have pizza?
Never.
When can I eat muffins-bagels-donuts?
Never.
That may sound harsh, but I am actually fine with it. I like being lean and mean and I am willing to give up the carbs to maintain my weight.
The unvarnished truth in life is that there is no such thing as balance. There are always costs to achieving your goals and most people are simply not willing to pay them.

So what does this have to do with trading?
Just about everything.

Trading like dieting is a discipline of a few simple rules and just as with dieting you need to find the program that works best for you. I am a day trader by nature. I make five to ten pips and move on to the next idea. The thought of holding positions for weeks on end does not appeal to me at all.
If someone told me that the only way I could lose weight is by eating porridge I would never diet. So just as with dieting, you need to find a trading strategy that will work for you. Something that you will be glad to do every day rather than be forced to do every day.
That’s the first and foremost task because nothing else will work if you are not comfortable with your trading style.
But, just as with dieting, once you find your methods you need to COMMIT.
When do you trade without a stop?
Never.
When do you size up beyond 2 times equity?
Never.
When do you revenge trade?
Never.
When do you take a random setup?
Never.
Once you realize that trading is a lifestyle and not a just a sideline hobby it is amazing how your approach to the markets changes. You stop trying to win every moment and focus on becoming better at the game. Losing trades still hurt, but far, far less because you now see beyond the next pip and that vision keeps you from doing all the stupid things we that we do in the markets to sabotage our success.
There is no magic to losing weight or banking profits. It just a matter of deciding if you really, really want to succeed. I don’t mean if you really want to be skinny or be rich. We all want that. I mean if you are willing to do the things to move you in that direction. 95% of people don’t and that’s why they fail.
It’s that simple.

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(PS. This article is obviously meant as a parable for trading. I fully realize that there are people with serious metabolic and genetic issues for whom simple dieting does not work and I do not want to minimize the seriousness of such chronic conditions. I am not offering medical advice, just market observation)

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