The other day someone on Twitter posted the following quote from Victor Niederhoffer that went
“But life, like the markets, offers the greatest rewards to those willing to assume risk. Assuming risk brings uncertainty, anxiety, and occasional loss, but it also brings out the best in us. In becoming a speculator in life, each person embarks on a heroic quest, becoming more than he or she already is. Heroism is a potent antidote to the cynicism and alienation so many of us accept.”
Instantly, I thought it was the stupidest thing I ever read and went a long way towards explaining why Niederhoffer blew up not once, not twice but THREE TIMES.
In trading, there is a false belief that large reward requires massive risk, when in fact successful speculators do everything in their power to minimize risk always and forever. Some of the most successful speculators like HFT giants Virtu and Citadel literally never lose. You can hem and haw and scream that they do this by cheating -- by front-running orders -- but at this point, there are lots of competitors for speed and if speed was their own advantage they would have long ago been taken out of the market. Virtu and Citadel win because they are excellent at professional speculation. They win because they trade very small size and allow the law of large numbers to tilt the odds in their favor.
Unlike gamblers -- speculators never, ever “have a hunch bet a bunch”. They always control their size and always assess risk with fresh eyes. Even the very picture of a swaggering speculator George Soros is not what he seems. Take the great GBPUSD trade of 1992 when Soros broke the Bank of England and collected a cool Billion dollars in a day. The story has become its own myth and most people assume that Soros gambled all his capital on this one amazing trade. That’s not at all what happened. In 1992 Soros’s Quantum fund was having a good year across a variety of asset classes when the GBP trade presented itself. Soros then decided to take all the profits of the year -- and ONLY THE PROFITS -- and lever them into the bet that cable would have to exit the ERM. If he was wrong, Soros wouldn’t have been close to bankrupt, he would have just been even for the year. Which goes a long way towards explaining why he continues to make money after 50 years in the business and Niederhoffer is just a footnote of history.
The better I trade the more I realize that intelligent speculation is the opposite of gambling. It is the art of saying NO and eliminating risk at every turn. My latest Trend trading strategy has been working well, but recently I discovered (with the help of traders in my chat room) that it actually exposes itself to unnecessary volatility during what I dubbed the “Bermuda triangle of FX trading” (the Tokyo -- Frankfurt -London interchange between approximately 0500-0800 GMT -- when prices are subject to sudden spikes and quick retraces. Now I try to avoid that time zone like the plague and it my risk will decrease as a result.
And that’s how it goes. The truly heroic traders are not the ones that take outsized bets with their capital, but ones that assiduously remove risk from the process and live to trade and win day after day after day.