There is no Such Thing as a Winning System

Boris Schlossberg

I’ve often made the argument that there are only two types of trades. Continuation or Reversal. Flow or anti-Flow. Trend or Fade. Call it whatever you want, but whenever anyone places a trade they are always implicitly making a bet that prices will extend in the prior direction or will reverse.

That’s why there is no such thing as a winning strategy. All strategic success depends on a market regime. In trending markets momentum strategies perform great. In choppy markets reversal strategies bank pips. You can do all sorts of things to finesse returns around the edges by using fancy money management techniques, but ultimately if you are caught in the wrong market environment you will get stopped out and sometimes even slaughtered.

They key is not to make things worse. And as traders we often do. That’s because we are obsessed with the idea of a “winning system”. That’s probably the single biggest lie ever told in the trading business. The only guy in the history of the markets who had a “winning system” was Bernie Madoff. For decades he fooled investors that he had the magic formula. And we all know how that turned out.

Indeed the key to winning in trading lies much more in NOT TRADING when the regime is against you than in forcing your system on the market that will chew it up alive. No doubt that’s hard to do with any degree of accuracy ahead of time and that’s why you have to accept the fact your great money making system will lose. Sometimes for days, weeks, even months on end. It does not mean it is not working. It just means it is not working NOW.

These days, I spend 90% of my time trying to figure out the most probable cases of when my set up will fail. Then, I try to studiously avoid making trades during those times. Again that’s not easy and answers change because market conditions change, but even if I can avoid three negative days per month, that could be the difference between winning big or just getting by.

Understanding that there is no such thing as a winning system should also help you to understand that there is no such thing as a winning trade. There is just the set-up and at any given time it can go either way. That’s why great traders trade positions not opinions. Opinions should be made before each trade. In fact, each trade is nothing more than an opinion. Once it’s in the market however, it becomes a position and that position either resolves to profit or a loss.

Most of us, however, develop opinions once the trade is in the market, which means that at that point we are no longer trading but practicing religion by relying on hope and faith. Hope and faith are very powerful human drives but they have nothing to do with trading.

Yet even the most atheist of us have prayed when a trade turned against us, especially if we changed its initial parameters with a post entry “opinion”. In fact the more we’ve changed the initial position the more intense our prayers become.

Tell me -- how’s that worked out for you in the past?
I thought so. The market can be crueler than the meanest of the Greek gods.

That’s why it all starts with understanding that there is no such thing as a winning system. Once you can come to terms with that you can start trading positions not opinions and save your prayers for when they can help.

You Will Never Make Money With a Trading System …

Boris Schlossberg

Let’s start with the basic fact of trading. No system -- no matter how good you think it is -- will ever make you money otherwise every EA buyer in the world would be a millionaire. And yet… hard as I look I can’t seem to find any EA millionaires in FX. There are plenty of demo millionaires. There plenty of ads that promise an EAs will make you a million for only $9.99 plus a tub of tupperware, but … There. Are. No. Actual. EA. Millionaires. Like unicorns they seem to be creatures only of our imagination.

Ok. Let me set my snark aside and tell you right up front that I actually LOVE trading systems and I use EA’s for every single trade I make. Yet I am not foolish enough to believe that this is the source of my profit. A system like a scalpel is simply a tool. In the hands of a gifted surgeon it can do marvels. In the hands of klutz it will just cut you badly and make you bleed out.

One of the greatest joys of my trading life this year was to create a live trading room that allows me to observe on a daily basis the variety of ways that the same system can be used by many traders. In our Slack room we now have more than 400 traders from across the world all trading essentially the same old fashioned market making method that I adopted for retail trading We all use the same EA, look at the same currency pairs and follow similar risk management rules. Yet while someone like me may only lay down out 3-5 trades per day another trader in our room will do as many 40 trade cycles in a 24 hour period.

Here is the kicker. We both make money, we both follow the rules and we both trade the same system -- but you would never know it if you just looked at the P/L runs of our accounts. The reason is that no matter how mechanical we want to be -- we are all human, all different in temperament, style and philosophy.

I trade essentially like someone with PTSD -- firmly believing that old Andy Grove observation that just because you are paranoid it doesn’t mean they are not out to get you. I view the market as field full of landmines and try cross it as quickly possible avoiding a misstep at any cost. That means that I often pass up many profitable trades or get out too early, but I live to trade another day.

The 40 trade per day trader on the other hand operates with the stoicism of Marcus Aurelius. He trades every set up to its full conclusion -- good, bad or ugly. And he does it with a sense of serenity that I can never hope to achieve. He makes 1%-2% per day like clockwork- but when he gets clipped -- he can lose 4% of his capital in the blink of an eye.

Here is the thing though. Instead lamenting our particular foibles we should embrace them. It is after all our individuality that makes us unique and valuable. Instead forcing ourselves to adjust to the system which is what so many traders try to do, we should adapt the system to our own personality.

Here is a discount to team trade with us

That’s why no system can make you money until you make it your own. So no, all those EAs sitting in your Experts folder aren’t going to “make it rain”. Not until you begin to understand not only the science, but the art behind their algorithm.