How to Fix the Most Demoralizing Thing About Trading

Boris Schlossberg

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What the most demoralizing thing about trading?


Losing is by far the most demoralizing aspect of trading for anyone who tries it for longer than a week. Rookie traders sometimes catch a burst of beginners luck and will make five, ten, twenty winning trades in a row -- which is just about the worst thing that can possibly happen to them -- because they will then inevitably lose it all on one single trade as they fight the market. I’ve seen it happen so many times that it is basically the trader’s version of Groundhog day.

Losing carries with it all the joy of a sucker punch in the solar plexus when it happens to you. You just can’t believe that the market could be so stupid as to (rally, dive, whipsaw -- pick your choice ) so much that it stops you out (almost inevitably to the pip of a bottom or a top).

It is certainly painful to lose the money, but the damage to your psyche is much, much worse. You start to wonder if the game is rigged, or even if it isn’t -- if you are smart enough to play it. You want to succeed but begin to question if you ever will.

Generally, there are two risk control approaches when dealing with losses. The most common one is the automatic stop loss. For example, I trade with a script that always wraps a stop and a take profit on every entry I make. That way I never, ever hold a position with open-ended risk. I may on occasion adjust my stop, but I never lift it. ( Since doing that, by the way, I have never, ever blown up any account I’ve traded).

Stop losses are ok, but they don’t remove the demoralizing factor. In fact, they can sometimes increase it. You misread the market and then wind up catching three, four, five stops in a row. The death by a thousand cuts can be as painful as the blow from a single punch.

The other approach to risk management has to do with size. Stops are for suckers some traders claim. Trade small and you can ride out almost any move against you. Your account basically acts like a rubber band -- the market throws losses at you but the account bends rather breaks as all your equity absorbs the adverse moves and waits patiently until the market turns around in your favor. So this approach can work, but only if you trade super small. Let define what small is -- that’s basically 1:1 leverage or even 1:2 leverage where you trade a 10,000 unit size for every $10,000 in your account. Let’s understand why that’s important. If you allow the trade “float” it can go against you 5% maybe even 10%. If you are floating 3 to 5 different positions at 1:1 lever you have implicitly levered up 5 times and if the trade moves against you 10%, that effectively makes it a 50% move against your equity. So trading small means trading 1:1 lever MAX.

But even if you let the trade float, you are no less protected from both the monetary or psychic risk. In fact, the WORST losses I ever incurred were the results of letting trades float. The reason is that the market, (like your siblings or your mother) will always push your buttons. As the losses mount the psychological pressure becomes more and more unbearable. This is especially so when several negative positions “add up” and begin to weigh on your equity like a boulder on your chest. When that happens, I guarantee you, you will not sleep well at night, waking up every few hours to glance at the quotes. Furthermore, no matter how small you trade, eventually you will need to cut one or several of your losing positions, generally at a massive loss that will wipe out weeks, months, sometimes even years of gains.

There is nothing more demoralizing than that.

So what’s the solution?

Use stops like you have an OCD complex AND trade ultra-small. That may not sound very satisfying. You may never make 10,000 dollars on a $1,000 account in one single well-placed trade, but trust me you WILL be able to stay in the game for years and years and will get better with every month that passes.

The key to good trading is not winning strategies or brilliant analysis -- both help -- but just mildly. The key to good trading is the speed of the recovery rate. How fast can you recover from drawdown? If you can achieve a recovery rate of one week or less -- you are on your way to success. The money will take care of itself. That’s why trading super small and stopping quickly is the better way go. And just in case you need to motivate yourself consider this.

The best hedge funds in the world do 20% per year.
If you take $10,000 make 20%/year and add $5,000 from saving to you trading pile each year you will have more than 1.5M in your account in 20 years time.

20% is equal to 2000 basis points
There are 250 trading days in a year.
That means you need to make 8bps or 8 pips each day to achieve that long term goal.

Trading Discipline? Waste of Time

Boris Schlossberg

The greatest economist that ever lived was John Maynard Keynes. (All the Austrian School economists, indulge me for a minute). But besides saving capitalism and setting the foundation for our modern world, Keynes was a damn good trader.

Here is how Keynes performed during the depth of the Great Depression managing the endowment of King College, which he managed to increase tenfold over a period of twenty years.


As you can see, for a pointy headed academic, Keynes was a very skilled trader. One of Keynes great quotes is, “I would rather be vaguely right than precisely wrong.” That’s pretty good advice for life overall, but it’s probably the greatest trading advice ever given.

I was thinking about Keynes’s words when I was live trading in the BK Chat room during last night’s UK Retail Sales. As I was furiously moving in and out of the pound, the yen and the various pound crosses I suddenly realized that there are three very distinct states of trading. There is the ideal trading model that you develop after thousand of hours of observation and back testing. There is the live market price action that rarely corresponds to the exact parameters of the model and lastly there is the actual trading that you will do under real market conditions that will only approximate the rules of your model.

Don’t get me wrong. It’s extremely important to have all three components in order to trade successfully. You can’t trade a strategy unless the intellectual foundation is technically valid. But it is naive beyond belief, to think that having a great trading strategy is all you need to make money in the markets. The markets are designed first and foremost to wreak havoc with your strategies and force you out of your trades, usually at the worst possible time. Speculative markets are essentially nothing more than massive poker bluffing machines whose primary function is to transfer the wealth from the weak hands to the strong hands.

The easiest way to become weak is of course to over leverage your trades. But beyond that I think the other way to let the market wear you down and destroy you is by being too disciplined, by faithfully following your model on every single trade, every single day. Doing that will inevitably create two problems. After some period of time your model will begin to lose -- and no matter what you tell yourself -- just like a spouse who cheats on you -- will grow to resent your model and then doubt it and then eventually abandon it, even though in the long run it may prove to be very profitable.

So it’s actually okay to be sloppy, to be imprecise, to make mistakes. In my BK chat room I laid out my run to the 00’s model using crisp, clean instructions that looked wonderfully efficient on the chart. But of course in the mayhem that followed news trading, my execution was off, my first exit was flawed and my second exit was driven more by psychological compunction rather than proper risk control.

And yet it was perfect trading day.

We made money because I got the big thing right -- direction. And most importantly I did not fret about botched executions, or missed opportunities or unfavorable spreads. I focused on the only thing that really mattered -- where was the trade going?

And as John Maynard Keynes made perfectly clear -- in trading and in life that’s the only thing that matters.

Tools to Change Your Trading Life

Boris Schlossberg

This week no words of wisdom. No ruminations on the foibles of human nature and the art of trading. This week I would just like share with you two very simple tools that could very well change your trading life. They are nothing more than an MT4 BUY script and an MT4 SELL scripts that I picked in public domain and modified to my spec. They allow you enter a market buy or a market sell in a flick of an instant. But they also do three very important things.

  1. They always use a default size
  2. They always have a stop
  3. They always have a target

Why is that so valuable? Because 99% of retail forex failures come from using the wrong size and never adding a stop to the position. That almost always devolves into the add-trades-until-I-get -lucky-and-get-out-at-breakeven cycle which in actually always resolves into I-blew-my-account-to-a-margin-call reality.

These two simple tools will stop that from happening.

The defaults in the version here use the smallest size possible and a take profit of 10 pips and stop of -25 pips but the in the video below I show you how to adjust that to your liking.

If you want the dropbox link, just email us at [email protected] and say SCRIPT in the subject heading.