STOP the INSANITY! Making My Trades Less Stupid.

Boris Schlossberg

If you trade long enough you know that it’s not the bad trades that hurt you -- it’s the stupid ones that always knock you out. This is especially so in day trading where the opportunity for truly boneheaded moves is available on a constant basis.

Tell me if this ever happened to you. You see a setup, but you are late to the chart. Maybe you were off the desk for coffee or someone IMed you and you had your eyes off the ball or you just hesitated to pull the trigger. Trading is timing and day-trading is the Swiss watch precision of timing. But you shrug off the feeling and plow into the trade anyway and like a weak tennis player that is wrong-footed you are almost always stopped out.

How about this. You see the setup forming. It right there, but not quite, According to your valuation model its a bit too early, but you can’t wait. You. Need. To. Be. In. That. Trade. Again like a tennis player that lunges too early and misjudges the ball, you get into the trade only to see it stop you out, and then reverse and hit your take profit.

Now, those are common mistakes, that all of us make. But what happens afterward -- at least with me, and perhaps with you -- is the true pinnacle of stupidity. Angered at the idea of an unforced error you double up and try to smack market right back. Of course, the market smacks you. Once. Twice. Sometimes even three times before you come to your senses and stop shoveling money into revenge trades. Now that is truly stupid and yet I do it all the time. So, here are my thoughts from the school of hard knocks on how to stop the insanity.

1. Define BEST. In the calm of the Asian session, after the day to day combat has ceased, mentally replay every trade you made. Go back to the charts and FORCE yourself to see what worked and what didn’t. Very quickly you will see the common properties of all your winners. Now slow it down and write out step by step what happened in each winning setup. Look at that list. Circle it. And then start each day writing out by hand. Yeah I know that sounds stupid, but that is the only way you will absorb the knowledge, Typing does not work. Memorizing does not work. Only writing out by hand will help you correct your behavior.

2. Separate all trades into BEST and REST. No ambiguity. No subtlety. No gradations. It’s either best or rest. In the heat of the trading day, we don’t have the luxury to be nuanced. As human beings, we are naturally binary animals. So play to your instincts. Now here comes the most important part. Trade REST at one-fifth the size of the BEST trades. That means if your normal size is 50,000 units, trade REST setups at 10000 units. (I am assuming that in case of day trading all your setups have the same stop and take profit criteria.) Note I am not telling you to not take garbage trades. You will do it. I will do it. Everyone who trades will do it. I am just telling you to take garbage size. In trading there are only three ways to avoid bad losses -- you can wait it out. You can widen out and average out or you can stop out small. The first two choices will always lead to blow out. The third is the only pragmatic solution to trading.

3. Never trade without a ROBOT. I never let an EA select my trades, but I always let an EA manage them. This does two things. It always protects my risk once I am ahead on the trade and it gives me the peace of mind to hold the trade completion. As I’ve said many times before, trailing trades is the least efficient way of trading except for all others. But here is where all of us get into trouble. How many times have you been away from the desk, take a look at your phone, see a setup and jump right in using the MT4 app. Don’t do it. Almost every major blow up I’ve ever had, started exactly that way. You are basically trading manually which almost always results in adding to the positions until the size swells and the losses mount into the thousands of dollars. Want a better way to trade by mobile? Put Microsoft Remote Desktop on your smartphone. Configure your VPS and place every trade via a Robot. This way risk will never get away from you.

4. Never add money to your account. (This assumes you haven’t blown up, in which case by all means) This is actually a great piece of advice from Marty Schwartz -- an old 1980’s trader who wrote one of the best books on the subject. Marty believed that you never increased the size until you could recoup and then double your capital. This forced you to focus on your setup and hone it mercilessly until you had the skill to trade larger. Remember the only thing greater than winning is coming back from losing.

5. Love your losses. If you took the BEST trade and it stopped out that not only natural but good. The best day trading systems are only 70%-80% accurate. That means every day at least 2 out of 10 of your best trades will be losers. Expect them. Accept them and know that control is the biggest trading skill of all.

Keeping Stupid at Bay – Making Trading Decisions That Matter.

Boris Schlossberg

There is a common and all too painfully true cliche that most Americans spend more time planning their vacations than their retirement. We simply focus on the wrong things and then wonder how did we screw up our life so badly.

Yesterday, I had my own vacation-to- retirement moment and it slapped me into stone cold sober into a becoming a much more serious trader.

Every Wednesday I have to pull myself from the desk to run over to 30 Rock to do a couple of hours of hits for CNBC. I always take the subway, because no real New Yorker would be dumb enough to get caught in midtown traffic. But NYC subway has been a disaster lately. The system is a victim of its own success as ridership is at all time highs, while capital spending has lagged for a decade. This results in track fires, train delays and produces a never ending cat and mouse game between commuters and the system.

Although, I am only 20 minutes away from the studio the trip can take an hour because I have to time the trains, brave the tourists and get through NBC security. I’ve developed all sorts of shortcuts from using the MTA app, to following the employee paths around the former Time-Life buildings in order to avoid the sidewalk hogging tourists, to getting to know all the NBC security personnel by name so I can jump the line every time I am there. All of these elaborate logistics are in place because I CANNOT AFFORD TO FAIL. I can’t be late to the studio because we shoot live. In ten years of doing this, I only missed one hit when the subway train just stopped dead in its tracks and trapped me. If this was trading you could say I’ve only had one losing trade.

But here is the interesting thing.

Yesterday I realized that I actually spend more time and care on my weekly trip to 30 Rock than I do on my trading plan and I bet many of you are guilty of the same crime.

Ask yourself a simple question.
Why am I in this trade right now?

Because price was running and I wanted to get in.
Because the markets haven’t moved for hours and I am bored.
Because I just lost money and I want it back
Because I am right.

If you answered yes to any of those questions -- you are not trading to plan. None of those answers are in any legitimate trading plan ever. Worse, even if you answered no to all those questions, but still took a trade that sort of, kind of, close to your setup -- you are still not trading to plan.

The only way to trade to plan is
Of your strategy
Sets up.

So if you want to start taking your trading more seriously than your commute make sure you answer these three simple questions every time before you hit send.

What is my opening trade size? I trade at 1X leverage -- never more. That alone has saved me from a whole lot of stupid because no matter how many rules I broke I could only do so much damage to my account. Conversely, if you trade with high leverage and do 99% of things right you can still lose all your money when the market forces a margin call.
What are my trading rules and is THIS trade I am about to take meeting each and every of them? If the answer is no -- then you are not trading -- you are goofing off.
What is my maximum loss in actual, real dollars (or pounds, or yen or francs)? Percentage means nothing. It’s an abstract mathematical concept that you will quickly ignore at the first sign of heat in the market. But tell yourself -- I WILL NOT LOSE MORE THAT $500 on any given TRADE EVER -- and see how much more effective your risk control will become. Money is real. Percent is not.

That’s it. Just those three simple questions will separate you from the vast majority of your fellow traders you will start making real business decisions that matter.

For 2017 – Be Less Stupid

Boris Schlossberg

Here is the trading record of my personal account in 2016. When you look at it the Twin Drawdowns of about 10% each in March and December respectively jump out at you right away.


Was this the result of faulty strategy?
Adverse market conditions?
Bad execution?
None of the above.
This was the result of nothing more than sheer pridefulness and stupidity. In both cases, I traded without a stop and even worse than that I traded at my normal trade size on the initial trade which in turn resulted in massive losses when I eventually closed out the trades.


Let’s once again examine exactly how this slow motion car wreck occurs.

Let’s say your normal trade size is 1X equity and you risk 0.25% per trade. But then you decide Nawww! This trade will come back so you lift the stop and let it float. Soon you are -0.5% underwater so you add another unit and now you are at 2X equity on the position. You keep doing that every 50 pips or so until you are at 6X or 7X equity into the position and in the meantime the currency is in a freefall of 150 pips or more with no retrace in sight. Now in a matter of hours you are down -5% to -7% on your account and essentially starting at the screen like a deer stares as headlights. You have one last fateful choice to make -- double down in size or cut losses now. Inevitably, you will opt out for choice number one, because -- there is no way that the currency can fall 200-250 pips without a retrace -- right?

Of course it does and now you are truly fearful for your account so you just cover at market usually at the low. That’s how you get 10% Drawdowns. They are almost always a function of stupidity rather than some unusual market action.

The only thing I can say for myself is that I was a little less stupid on the second drawdown. I didn’t double down and I exited the long EURUSD trade without trying to break even. Had I not done that my loss could have ballooned to 30% or more and I would have given back the whole year.

As a result of that nasty little loss, I put in a new rule that I only trade without stops for positions 1/10th my usual size. Anything that starts out at normal size or bigger gets a stop. Always.

So my resolution for 2017 is very simple -- be less stupid. That way I could target 30%-40% in 2017.

In the meantime, the overall data for the account was actually quite good. I did about 1600 trades or a run rate of 2000 trades per year and my average expectancy net of all costs was 1.1 pips which brought me to 20% for the year. I’ll take that.


A Guaranteed Way To Control Stupid Trades

Boris Schlossberg

This is going to one of my shortest, but probably most important trading column ever. In all my years on Wall Street I have never, ever used this word before, but today I will. I can guarantee you a way to avoid every stupid, impulsive, account wrecking trade you have ever made from this point on.

Before I tell you how let me be clear. I am not saying I can stop you from losing money. I am just saying I can stop you from losing money in the stupid let-me-just-try-this-trade-because-I-am-bored-and-now-I-am-wrong-and-now-I-am-going-to-add-to-my-position-until-I-get-margined-out way that all retail traders lose their money.

How many times have you had great weeks, months, quarters only to squander it all away on an idiotic idea that made you fight the market in size too large until they carried you on stretcher? I’ve done that at least a dozen times in my career. And guess what? There is no way to prevent it.

But there is a way to control it.

Professionals on Wall Street always use a process when it comes to trading, which means that your entries, exits, sizing and any adjustments are all pre-planned and well established before you click the screen and place a trade. But as traders we are always going to be tempted by risk. Sometimes those ideas will pan out sometimes they won’t, but the unifying factor of all those trades is that they stand outside of your process and are therefore vulnerable to the possibility of ruin.

So here is my solution to controlling the non-process trade. One unit. The minimum trade. Yes for most of you on retail platforms that means .01 of a standard lot and 10 cents per pip. Here is the key point. The one unit rule is INVIOLABLE. It doesn’t matter if you have a million dollars in your account or just one thousand. If you adjust the minimum size to the size of your account you will eventually lose all your money because you will inevitably scale the trade. If you start with 10 cents/pips then even if it goes -1000 pips against you you will not lose more than $100.00 and by that time you will hopefully cover because you will realize how stupid you are being.

Why do we blow up our accounts trading impulsively? Because we hate to be wrong, but also because we don’t like to lose money. When you trade 1 unit you don’t lose money, just your pride and eventually your common sense prevails over your ego and you move on to bigger and better ideas.

The key point is that discipline will never work. We will always be tempted by random trades. And frankly we shouldn’t even try to suppress that urge, because its part of why we get involved in the markets in the first place -- to explore the nature of risk. However using the 1 unit rule, allows you to scratch that itch while keeping your serious capital out of harms way.

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That’s the only guarantee I can offer you when it comes to trading and it may be the best advice I can give.