Wanna Day Trade? Be Like Donald Trump

Boris Schlossberg

Last night as US tomahawk missiles rained on a Syrian airbase while my four-year old kept dancing around me an hour past her bedtime, and CNBC producer screamed in my ear over a poor phone connection, I felt completely calm and in control. That was particularly ironic because whole day prior I was miserable and ill at ease. The markets yesterday were flatter than a Florida landscape and I spent the entire day sulking making exactly one trade in the BK chat room.

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But now, with USDJPY dropping like a stone, I knew exactly what to do. I waited for the small, but inevitable bounce, eyeballing the levels because I didn’t have my Trendy algo turned on and fired off some sell orders across a couple of levels covering everything back for profit a few minutes later. No parent of the year awards for me, as the four-year old continued to dance happily around my office, but I had my mojo back.

What makes good day trading?

This.

What’s this?

Reacting.

Good day trading is reactive by its very essence. That’s why it defies classification. It defies “methodology” and it most certainly defies consistency. You can’t “make” $1000/day day trading. Some days you can make $3000. Some days you make nothing. Good day trading is all about synthesizing the news of the moment and then adjusting your trading approach to exploit the short-term flows in supply and demand.

If you are a positional trader you are by definition -- prognosticating. It doesn’t matter if your reasons are fundamental (Non-Farm Payrolls will be weak because ISM employment index sank 5 points) or technical (USDJPY broke 200 SMA, it’s in Elliott Wave III of abc correction, it’s bouncing off Fib resistance -- blah, blah, blah). You are trying to forecast the distant future. That is the implicit bet you are making each time you trade. Trading forces you to have an opinion on the market whether you realize it or not, and the longer your time frame, the stronger your opinion must be. That’s why it’s so hard to be a great swing trader.

Good day-traders on the other hand generally have no opinions. They look at what is happening NOW. Five minutes ago may as well be five years ago, as their focus is on the next 10 pips of profit regardless of the intellectual foundation of their views. In short, good day traders are exactly like Donald Trump -- willing to change their position on a dime and completely abandon their previous views. The very things that drive both the right wing and the left wing absolutely insane about our current President are actually qualities that we must embrace to daytrade successfully in the market.

Today, for example, I was able to avoid the massive short squeeze is USDJPY despite the fact that “job numbers were horrible and yields were low!” because I saw the pair hold the 110.20 level in post news trade and realized that shorts were in danger of getting squeezed. Did my fundamental skills honed by four years of economics at Columbia help me? Did my knowledge of pivot points, or fib lines or moving averages help me? No. It was pure price action. It was watching what was happening rather than what I thought would happen that helped me make the right decision. It was the Trumpian ability to read the “mood in the room” that kept my P/L positive today. Now that certainly may not be the right way to run a country, but it is definitely the right way to day trade.

React, don’t prognosticate.

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When to Trade Raw

Boris Schlossberg

With the exit of FXCM out of the US FX market, it looked like the last of the US raw price dealers was gone. Fortunately, Oanda stepped up to the plate and this week revealed that it will be rolling out raw pricing first for its FXtrade platform and then eventually for MT4. So I thought this is a perfect time to examine when traders should choose one or the other type of brokering service.

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

What is raw price dealing? That is simply the wholesale price feed from the Interbank market. In a dealing desk model, all retail FX brokers markup, the wholesale price feed the get from the big banks before they display it to their customers. So in the Interbank market, the EURUSD typically trades 0.1 pips wide -- a normal quote would be 1.06801 by 1.06802. Most retail dealing desk firms would quote that out as 1.06795 by 1.06809. Some might even quote 1.0679 by 1.0681.

The raw spread comes with obvious advantages. When the spread is only 0.1 pips wide versus 1.5 pips wide, it is a lot easier to get trades done. Limits get hit faster and more frequently. Stops are given more room and can sometimes even be avoided. But the raw spread trade comes with a catch. Every time you trade you have to pay commission. Typically the commission is about 1 pip round trip (half a pip to buy and half a pip to sell).

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

That may not sound like much, but it can quickly add up. When I traded with FXCM my monthly commissions were often larger than my profit. That’s ok when you are making money, but it can add up quickly to your costs of you are not. So we go back to the original question -- when should traders trade raw and when should they accept paying the full spread.

The answer as is the case with so many of these things is complicated and not necessarily intuitive. Generally, you would think that if you have a high-frequency strategy that requires exact execution and quick in and out tactics then trading on raw spreads would be the way to go. Not necessarily so. A high-frequency strategy is basically a massive commission generator. If you can make money on a high-frequency strategy with full spreads or even if you can break even -- the full spread broker may be a better way to go.

Let me explain why. When you pay full spread, you not only pay nothing in commissions, but you can actually -- in fact, you should by all means -- collect rebates from your broker. There are several very good IBs who will set up a rebate program for you. I work with the best in the business -- feel free to email me for info. In any case, a typical rebate is about 0.2 pip per trade. If you do 25 trades per day on NO LEVERAGE. In other words, if you have $10,000 account you trade 10,000 units per trade, then in 20 trading days, you will have earned 100 pips in rebate. That’s 1% per month or 12% per year on your account even if you fail to make one single pip.

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

On the other hand, if you have a strategy that trades 2-5 times per day with 10 to 20 pip targets, you are probably much better off with a raw spread strategy. That type of “in between” trading can really benefit from the raw spread difference. Let’s say you have a strategy that has a stop of -20 and a target of +15. If just one out of 20 trades flips from a loser to a winner (i.e. you avoid getting stopped on raw pricing and eventually make target or you make target on raw pricing and bank profit, but miss doing so on markup spreads then you essentially have a +35 point swing in your P/L (you make +15 and avoid losing -20) that more than makes up for the 20 pips of commission you would pay on your volume.

80% of the Time Markets Do Nothing -- Learn to Pull Pips from Quiet Markets

So trading raw versus markup is really a question of style as much as cost and every trader should consider his individual condition before making the move. Fortunately, it doesn’t have to be a binary decision. Most brokers let you have both accounts and that’s probably the best way to go.

Trade Like General Patton

Boris Schlossberg

One of my all time favorite wartime movies is “The Guns of Navarone” which tells a quasi-biographical story of an attempt to sabotage a seemingly impregnable German fortress in Greece that threatens Allied naval ships in the Aegean Sea, and prevents the rescue of 2,000 stranded British troops.

It starts a motley crew of British and American actors, including Gregory Peck, but by far my most favorite actor in that movie is Anthony Quinn who plays Colonel Andrea Stavrou from the defeated Greek army. There is a scene in the movie where the whole team is captured by the Nazis and Quinn begins to grovel obsequiously in front of the German officer. The imperious officer lets down his guard as he pushes away Quinn with disgust, but he lets Quinn get a little too close to him and is instantly stabbed to death.

It’s one of the greatest fight scenes in the movies precisely because it is not heroic. Quinn essentially lets go of his ego and as a result, he saves the whole team and the mission. It shows that in life you win by wile rather than force.

That same idea is also present in another great war movie -- Patton. The film starts with George C Scott playing the famed US general, staring directly into the camera as makes a devastatingly simple proclamation, “No bastard ever won a war by dying for his country. He won it by making some other poor dumb bastard die for his country.”

What does this have to do with trading?

Just about everything.

Both movies are about winning. And their message is that winning is the exact opposite of our romantic view of heroism. Heroes don’t win because they get slaughtered running straight into a stream of bullets. Heroes may be noble, they don’t achieve their goals.

How many times have we played “the hero” with the market? How many times have we tried to sell rallies or buy dips and kept on doing it to the bitter end? How many times have we played Tony Montana taking on bullets (or in our case losses) until we bleed out in the end?

Has that “hero” fantasy ever worked? Maybe once or twice, but in the end you go down bigger and harder than ever. The market always wins because we are never willing to grovel.

Lately, however, I’ve started to let go of the hero mentality. Not only have I started to trade much more with the flow rather than against it, but I have been willing to walk away from bad trades rather that try to “repair” them. The net result is -- yes I do have more stop losses -- but they are basically harmless scratches now rather than life threatening wounds.

To paraphrase General Patton, “No bastard even made money in the market by blowing up his account. He won by making some other dumb bastard blow up his.”

Warren Buffett Does Not Trade Trend

Boris Schlossberg

The other day I came across an article about Warren Buffett’s office. The writer catalogued in full detail all of the knick knacks that Buffett has in what was described as “the domain of a mid-level executive in a generic corporation.” I knew that Buffett was frugal, but the fact that one of the world’s richest men still watches television on cathode ray TV really surprised me.

Yet what really caught my eye about the article was that Buffett had a picture of Ted Williams in his office. I wrote about trading like Ted Williams several years ago and it appears that Buffett is a fan of the baseball great for the very same reason that I am. As Buffett tells the writer the picture of Williams is there to remind him to “wait for the right pitch”.

If you really think about what Buffett is saying, it means that you must let price come to you. It means effectively that Buffett never trades trend. As a value investor he is always buying when everyone is selling and selling when everyone is buying. He, of course, is not alone. Almost all great investors do this including Seth Klarman whose book sits on Buffett’s desk.

Yet think about the idiotic cult of trend that pervades all retail trading. From the moment you are newbie to the very last penny that you lose from your account you are told by every paper trading guru that you “must trade with trend”. Now there is no doubt that some -- few -- traders can trade with trend successfully, but the vast majority of traders lose all their money following that useless advice.

Why?

Because trading trend puts you at a disadvantage from the moment go. You are chasing price, you are following the crowd and that strategy only works if the wave continues to swell. But hurricanes are rare and most of the time the wave crests and you just crash into the rocky bottom of unforgiving ocean wondering what you did wrong.

Currency markets -- and for that matter all capital markets -- are just like the ocean. On a day to day basis prices crest and fall and rise again. That’s why in my day trading room we trade counter-trend almost all the time. Trading counter trend by no means guarantees success. In fact, if you do what most retail traders do, which is -- add to the position and trade without a stop -- you will most certainly go bankrupt. But counter trend trading with a robust entry model and an intelligent trade management system is a much better way to day trade. It puts odds in your favor.

Just ask Warren Buffett.

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July FOMC – Reason for Fed Optimism

Fed Rate Cut Federal Reserve forex blog Forex News Kathy Lien US Dollar US Economy

Taking a look at the day to day change in the U.S. dollar, it may seem that there was very little consistency in the performance of the greenback ahead of Wednesday’s monetary policy announcement. However if we isolate the price action to the U.S. session, the dollar moved higher against most of the major currencies. This morning’s U.S. economic reports were mostly better than expected with consumer confidence beating expectations and new home sales rising sharply. Service sector activity slowed according to Markit Economics and house prices dropped slightly but that was not enough to deter investors from buying dollars pre-FOMC. During a time when central banks around the world are actively talking about and planning for easing, the Federal Reserve’s hawkish bias will shine a bright light on the dollar. Many feared that the Fed would give up on the idea of tightening after Brexit but as we have seen U.S. markets and the U.S. economy have proven to be fairly resilient.

The following table shows more improvements than deterioration in the U.S. economy since the June Fed meeting. Retail sales increased, non-farm payrolls rebounded strongly with job growth rising 287k in June, the housing market is chugging along, manufacturing and service sector activity are on the rise. U.S. stocks also hit record highs while plunging U.S. yields provide support to the economy. The currency has strengthened across the board but the strongest gains were against the British pound. We’ve also heard from a number of FOMC voters since Brexit and they still seemed to support the idea of tightening. The FOMC statement generally reflects the views of the Fed leadership (Yellen, Fischer and Dudley) and it is likely to recognize the improvements in the economy since June. Of course, there will still be notes of caution and everything will be “data dependent” but we expect the main takeaway to be that a 2016 rate hike remains on the table. The Fed needs to move forward with policy normalization and they can’t wait around for the U.K. to invoke Article 50 which could take up to 2 years. So we expect the dollar to trade higher into and after FOMC. There won’t be fireworks but there could still be some quick trading opportunities.

FOMC_July2016

The Easy Way to Trade Like Soros

Boris Schlossberg

In Alchemy of Finance, the legendary trader George Soros recalls his short of the home builders in the 1970s. He notes that he profited handsomely from the trade, but then did something interesting -- he looked at his own notes for the original thesis for the trade which discussed how the sector would dive then rebound and then collapse once again. Revisiting his own words Soros decided to re-short the builders and once again walked off with a handsome profit.

Out of that little story Soros ultimately developed his theory of reflexivity of the markets which has allowed him to make billions over the years.

So what’s the most important thing that we can learn from one of the greatest traders of all time?

Take half an hour this weekend and write out your trading setup.

Soros, who is steeped in European tradition writes because he fancies himself a Renaissance man and craves the intellectual approbation almost as much as material wealth.

But for us as day traders writing has a decidedly more practical application. It will literally make you trade better. Forget indicators, forget EAs, forget systems, forget gurus. Mark my words the single most important improvement you can do right now is to write out your trading plan on paper.

In fact, the best exercise for the trader is simply write out all the times that he will NOT trade during the day. One of the best traders in my room -- a guy who hit 50 winners over the past three week while taking only 1 stop -- did just that yesterday sending me a text of his thoughts.

It was an amazing document, showing crystal clear reasons for why he would and would not engage with the market and made me understand why he has been so successful using my Boomerang system.

Writing forces discipline. Discipline creates structure. Structure leads to efficiency and efficiency leads to profits.

Screenshot 2016-07-22 07.47.16

Want stop flailing in your trading? Write your thoughts out this weekend -- it will be the best trading hack you can do.

AUD/NZD Breakout – Trade or Fade?

AUD/NZD Breakout – Trade or Fade?

Chart Of The Day

AUD/NZD Breakout – Trade or Fade?

The Australian dollar traded sharply higher today but the New Zealand dollar underperformed leading to a 1% rise in AUD/NZD. There was no news to explain the divergence outside of yesterday’s marginal drop in dairy prices. We still believe that if one of these central banks were to ease after Brexit, it would sooner be the RBA than the RBNZ. Both currencies represent great yield plays but Australia is still mired in political uncertainty and suffer greater from a weaker Chinese economy / currency. Australia provides hard commodities to China, which will be cut first when the economy slows whereas New Zealand provides soft commodities such as milk and meat that will see growing demand as the country shifts from an export to consumption based economy. For all of these reasons we don’t believe that AUD/NZD deserves today’s strong gains and would not be surprised to see a pullback before the end of the week.

Technically the July low of 1.0383 is support in AUD/NZD. The top of the recent range is at today’s high of 1.0550. If AUD/NZD breaks above this level in a meaningful way, it should squeeze to 1.0600 and find resistance below the 50-day SMA at 1.0630. That’s where we see this move stopping. A pullback should take the pair back to 1.0425 and possible even the July low.

How To Trade All The Brexits of Your Life

Boris Schlossberg

First of all props to George Soros who at 80 plus still has more trading skill in his head then all the armies of quants and fraternity boys at every bank trading floor in the world. He saw the asymmetrical risk and he took it and I think I understand why. Like all East Europeans (yours truly included) he has a particularly dark view of human nature. He always bets on the unfortunate tendency of most human beings to make the absolute worst choice possible. Given the fact the many of the low information voters in UK are apparently only now starting to google the words “European Union” and only now starting to understand the full implications of the actions, Soros is once again proven right in his views.

But this is not a column about “have a hunch, bet a bunch”. In fact quite the opposite. Last night K and I hosted a 4 hour live trading session that was undoubtedly the best of our lives. Not because we made a huge amount of pips. We did well (blotter below) -- but many of traders in the room made four, five even six times the amount of pips we banked.
Screenshot 2016-06-23 23.52.30

The thing that made last night’s session especially sweet was that we finally put all of our trading skills to work in what was surely the test of the century.

So allow me to deconstruct the key ideas that made trading Brexit such a success so that we may all make them our best practices for the future.

1. Trade small.
Yes, yes, yes I know that I drone on about this point to the level of ridiculousness but it cannot be overestimated. Brexit night was the single most volatile night in the history of the pound. If you traded with so little as 5X leverage you would have been margined out at least 10 times in a period of three hours. I traded at 0.5 lever all night long and never once felt any pressure in what was the most turbulent market in years. In fact the proudest moment of the night for me wasn’t in hitting 10 trades in a row, but in blowing out of my position the moment I realized that was 4X too large by accident. You can hear me on the video saying, “I don’t care if I am right or wrong I just want to be out.” Which was probably the smartest thing I said in years and will forever now become my mantra when I trade these events. Making the wrong size trade and then stubbornly trying to trade your way out of it is precisely how all traders fail. Nick Leeson anyone?

2. Trade the facts not your opinions.
Like almost everyone in the financial markets K and I came into the event convinced that Remain would win. In mature democracies the status quo generally always has the upper hand as people are loathe to vote for the unknown. So we were fully with the bookies and even had the plan to buy the dips as the inevitable profit taking kicked in. But very soon into the results Leave started to edge ahead. Having followed many political campaigns in America, I instantly grew weary of my opinion. I knew from watching so many results trickle in over the years, once one side gets the lead -- especially one that is not supposed to be ahead -- the odds of the consensus win begin to dwindle radically. So you can hear K and I saying if London doesn’t cut the lead by X, if Birmingham doesn’t cut the lead by X -- odds are the Leave will win. Wequickly changed our view as facts challenged our assumptions. When you trade event risk it’s vital to have no ego.

3. Trade with Trend.
Once you have the right assessment it is vital to stay on the right side of the market. All of our trades were short risk and while some of the traders in the room tried to buy the turns we vehemently held them back because we knew that when it comes to event risk the trend is your friend and you fading it is a low probability choice.

4. Think fundamentally, trade technically
This perhaps was the key to our success. We had a fundamental view and traded in direction of the trend, but we almost never chased price. Instead we waited for inevitable short covering rallies and keyed off the near term resistance levels that were popping up on the charts. This was actually the best thing we did as our positions saw very little drawdown on a night when volatility was at a historic high.

Here is the video of the event. Hope you enjoy it as much as we did.

GBP/USD – Brexit Trade Zones

GBP/USD – Brexit Trade Zones

Chart Of The Day

Well after months of debate and political posturing it all comes down to this. The Brexit results will start trickling in at 23:30 GMT and we’ll be there to trade then.
The remain vote appears to have the edge and the markets have already priced in most of the upside. Should the Remain vote win there will be a reflex relief rally but its is very likely to peter out in the 1.5000-1.5200 corridor where cable has massive over head resistance.

On the other hand -- almost no one is expecting a Leave victory and if that vote should pull ahead the pandemonium could be massive. The first real line of support comes in at 1.4000-1.3800 level a full 1000 points lower from the current prices. The multi-year support comes in at 1.3500 where the longer term buyers are likely to appear.

Either way trade small, expect massive spread widening and be careful out there.

GBP/JPY – The Brexit Trade

GBP/JPY – The Brexit Trade

Chart Of The Day Uncategorized

Of all the currency pairs that are likely to be affected by the Brexit vote none will be more volatile than GBP/JPY. The pair will reflect not only the outcome of the result on UK assets but also on global risk appetite as the yen component should soar on any relief rally if the Brits decide to stay and will sink if the choose to leave.

In fact some analysts are predicting that USD/JPY could swing as much as 300 points either way if the results surprise the markets and put the whole global economic structure into question.

Technically the pair faces the first serious resistance at 160.00 on the upside while the downside could prove to be much more dangerous with the cross dropping to as low as 130.00 should UK vote for Leave.

Want to Trade Well? Pay a Lot of Commission

Boris Schlossberg

Ask anyone with any financial savvy about making money in the markets and the first thing they will tell you is -- keep your costs down.

And they would be absolutely right.

A few weeks ago John Oliver made a Herculean effort to explain to his viewers how even a 1% annual savings in costs could make you an extra million dollars in return over your lifetime. Mr. Oliver is perhaps the only human being on the planet who can make compelling television out of dissecting the nuances of 401-K plans. For that as well as just for being John Oliver he should be commended.

There is no doubt that for 95% of people who invest the single best plan of action is 60/40 purchase of a Vanguard stock and bond fund that they rebalance once a year. An even better strategy is dollar cost average into those two assets every single month. Your cost per year is less that 10 basis points and you will own the market return which will outperform 85% of active managers.

But for the 5% of us who actually trade the rules are completely different. Below is a snapshot of my personal account for the past 30 calendar days. It was a good month. I made nearly 12%.

Screenshot 2016-06-15 13.27.41

But what that graphic doesn’t show is that I paid fully 50% of my money in commissions. In other words for every $1000.00 of profit I paid $500 in commissions, no doubt making Drew Niv very happy. Looking at those numbers most of you would be outraged. But that’s because all of you are conflating the world of investing with the world of trading.

When you are investing the goal is to eliminate as much friction as possible. That means transaction costs should be minimized as capital grows at the natural market rate.

But trading is all about friction!

What do we do all day, but take advantage of the tiny ebb and flows of price action than in the greater scheme of things is nothing but noise? In fact, if markets were only open to investors prices would not change for weeks or months on end.

So if you accept the fact that friction is what we do then it becomes obvious that more friction means more profits. If you look at some of the greatest traders over the past half century from Michael Steinhardt to Steve Cohen you will realize that they were also the biggest commission generators of their time. Did that stop them from being profitable? Quite the opposite. Both men generated returns in excess of 30% per year NET, far outstripping the market averages for decades.

So if you are in the trading business the LAST thing you should be worrying about is commissions. As long as you have the edge the more you pay the more you make.