Do You Want to Run a Business or Do You Want to Gamble for a Living?

Boris Schlossberg


One of Sylvester Stallone’s less known credits is a movie called Shade, set in the world of LA hustlers and poker players that deals with the inner workings of the gambling world. I’ve always loved the tagline for the movie which reads, “When betting is your life, you leave nothing to chance”. The movie is all about intricate cheat schemes that professional gamblers create to make sure they always win the pot -- so its lessons to us as traders go only so far.

But I have always loved the ethos of the movie which was basically that in games chance you leave as little as possible to luck. To me, the message of Shade is that in a highly uncertain business such as trading you must be prepared for every eventuality by limiting your market exposure to the smallest reasonable risk.

That means that as day traders we need to trade small and trade often. We are the pigeons on the market floor. Plucking away at a few easy pips here and a few pips there, fleeing at the first sign of true danger. That may not sound glamorous or noble, but it is much better than either one of those things -- it’s an effective way to make money.

The greatest business columnist working today is Matt Levine of Bloomberg. He is a former M&A lawyer at Wachtell Lipton and a former banker at Goldman so his understanding of market structure and Wall Street machinations is second to none. The other day in his column he made a casual observation that really hit home. Matt said that Wall Street banks are in the moving business, not the storage business. What he meant is that successful trading is inherently about moving inventory whether it be through bid/ask differential, scalping, short term dealing or even agency brokerage business. Banks make their money by moving product from customer A to customer B by passing risk along, rather than storing it.

Almost always the tragic mistake that all of us make is that we suddenly stop being a moving business and become a storage business. Sometimes the change is so subtle that we don’t even notice it. But it almost ends badly as the inventory inevitably turns rotten. These days, whenever I find myself nursing a trade that is long past its stop-out level -- I try to remind myself that I am not in the storage business and let it go no matter how much it hurts.

Keeping things moving is crucial to long-term success and survival, but I think many retail traders fail because do not understand the real nature of this business. The romantic notion of trading is built on the idea of placing a thousand dollar bet on one trade and walking away with a million. Trading books are full of such lore -- The Soros Bank of England trade, the Paulson short mortgages trade -- blah, blah, blah. The reality is much more prosaic. It’s a business of making 1 pip a time.

A few years ago, I horrified another trader when I told him that it took me 100 trades to make 100 pips. (I meant of course net -- after commissions, slippage and all other costs were taken into account) Still, he was repulsed at that notion and couldn’t imagine trading like that and yet if I were to ask him how much Coca-Cola made per ounce of Coke or McDonald’s made per hamburger the numbers would be not much better. Almost all high volume businesses have net margins of 10% or less. Most supermarkets operate on margins of as little as 2% and yet they manage to make money year in and year out. That’s because these enterprises don’t have any romantic illusion about wealth creation, only hard-headed understanding of how money really gets made.

Once we as retail traders, start treating trading as a business, rather than a lottery our chance of success will increase exponentially. As guys in Shade constantly remind me -- when you gamble for a living, you should leave nothing to chance.

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AUD/CAD – Another Run to Parity

Chart Of The Day

AUD/CAD – Another Run to Parity

We are looking for AUD/CAD to make another run for parity. There’s one asset that has benefitted from recent developments including aggressive ECB stimulus, negative interest rates in many parts of the world to the Brussels attack and that is gold. We expect gold to remain in favor in the coming months especially as investors remain nervous about the economic, political and geopolitical landscape. The stability of the commodity should lend support to AUD but more importantly, Australia appears to be weathering China’s slowdown well and there’s a good chance this week’s PMI report will show a recovery in the manufacturing sector. The strength of the AUD should be a problem but so far the central bank doesn’t seem worried. Hence we expect AUD to outperform CAD as oil nears a top. Oil fundamentals don’t match up with the short squeeze driven rally. Supply, demand and inventories point to a move lower for the commodity and while we could see another rise above $40 a barrel, further gains are unlikely.

Technically, even with today’s pullback AUD/CAD remains in an uptrend with a potential inverse head and shoulders pattern in formation. The latest decline could take AUD/CAD as low as .9865 but hourly charts show support between 0.9910 and 0.9920. Parity remains resistance but as a level with extreme magnetism we expect it to be tested. A close above 1.000 would be needed for a run to the year to date high of 1.0085.

Never Let Your Profits Run

Boris Schlossberg

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Tom Sosnoff who runs tastytrade is one of the most colorful guys in the investment business. A former CBOE market maker, he is a guy who made a bet that the average American investor is not nearly as dumb as everyone thinks. Tom believed that regular people could master the difference between gamma and delta, theta and vega, iron condor and stangle and built a very successful retail options firm as a result. He sold it to Ameritrade and could have retired to Tahiti, but instead decided to do a daily trading show on the web broadcasting from Chicago. Imagine Howard Stern giving options advice and you kind of get the gist of his show which is not only intelligent but very funny.

I’ve known Tom since the last century and have always had respect for his renegade views and unorthodox trading style, but the other day Tom said something on air that truly blew my mind. He said that the key to successful trading is to manage winners and not give a damn about losers. This is the exact opposite of what everyone teaches you namely that you should cut your losers and let your profits run. As Tom says this is nice in theory, but never works in practice.

I couldn’t agree more.

If you’ve traded for a while you will quickly realize that the markets do not give you opportunities to “let your profits run”. Markets are very competitive two way platforms and price very rarely takes off in one direction and just keeps on going. (They are kind of like New City subway during rush hour. Sure, once in a blue moon you may find an empty car and ample seating, but most of the time its kill or be killed competition- blink and you lose your chance to sit your weary bones down)

So the key to making money in trading is to bank, bank, bank profits while you can. You have to look at each trade as lottery ticket with an expiration date. As long it keeps making you money you hold on to it, but the moment it starts to lose its value you drop it like a hot potato.

In the past two weeks we made money in 11 out of the last 12 trades, but we only scored one triple digit pip winner and all the other trades were basically singles or doubles ( small to medium size gains for the non-baseball fans). But all those little winners add up and after two weeks we were able to add more than 420 pips in gains into our account.

We have been doing this for five years and in all those years we have never had a trade where we let the winners run. We have always taken profits early and often doing all the things that theory teaches you not to do and yet we have managed to make money 4 out the past years which makes me think that Tom Sosnoff is right and that conventional trading advice is total bull-t.

How To Run Your Trading Like a Real Business

Boris Schlossberg

In my life I’ve always wanted to do only two things -- trade and run a food business. To this day whenever I find myself in a Walter Mittyesque reverie I imagine running a restaurant or a food store (Montreal bagels in New York is my favorite fantasy) -- but running a startup investment firm pretty much sucks up all my time so I put the idea aside for the time being.

Still, whenever I get a chance to talk to a store owner or a restaurateur I inevitably pump them for any information I can. Having spent most of my ill advised youth working front and back of the house I am well familiar with the arcana of the restaurant business.

Sometimes however I’ll strike up a conversation with a more modest establishment -- like the guy who sells me coffee from the cart every day. My coffee guy is one the nicest and hardest working businessmen I know. I don’t even have to say a word -- in a typical New York fashion he starts preparing my order when I am halfway down the block.

With Easter and Passover falling around the same time this year, New York has been a ghost town this week as almost everyone in my neighborhood has taken their kids to Florida or Colorado. So business was a bit slow and we had a chance to chat. Of course we got into a discussion of daily volume, peak flow and a million other things that would bore normal people to death.

However, the more I talked to my coffee guy the more I realized that what he and I do for a living is really not that different. Here was a businessman who worked hard every day, tried to execute as close to perfection as possible, but who also understood that his success was often dependent on forces outside of his control. He didn’t whine or cry when business was slow. He certainly didn’t throw temper tantrums and try to destroy his inventory and assets in a fit of rage, or suddenly decide to offer everything below cost in hopes of improving his business. He remained calm and disciplined in the face of adversity and was perfectly willing to accept the fact that some days, some weeks and even some months were not going to be profitable.

It always amazes me how disciplined most of us are when we run a physical business, yet how emotional and hysterical we become when we start trading a forex account. How many of us treat trading as a business? How many view each trade as a simple business transaction rather than as symbol of our intelligence, masculinity or self worth? Imagine if you were selling coffee -- would you really give a sh-t if you spilled a few cups? Yet we spent inordinate amount time obsessing over every trade. Its just a business transaction. Its not a reflection of our omnipotence or lack thereof.

Looking at trading as business really helps to put it in perspective. You understand that there are planned costs ( spread, stops ) and unplanned costs (slippage, wrong execution etc). After all, anyone who runs a restaurant business understands that spoilage is part of the game, so why do we get so pissed when our orders are executed imperfectly? Its just business. In fact talking to my coffee guy I realized that not only should we look at our trading as just another small business but we should consider each trading strategy as a separate storefront that sells a different product. If you owned multiple stores would you expect each one to work perfectly all the time? Of course not. By treating each algo as a retail “box” we can hopefully stop obsessing over every pip and focus on running our trading like a real business.

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.

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