In Trading – Great is NOT Good

Boris Schlossberg

In our winner take all world, we are often told to try the best, do the best, be the best.

That advice is a road to ruin in most aspects of life and very certainly in trading.

The very latest in research suggests that human accomplishment does not come from trying to push ourselves to the limit, but rather from gradual and consistent repetition and improvement.

As Brad Stulberg writes, “Take the case of Eliud Kipchoge, who just shattered the marathon world record. He’s literally the best in the world at what he does. Yet Kipchoge says that the key to his success is not overextending himself in training. He’s not fanatical about trying to be great all the time. Instead, he has an unwavering dedication to being good enough. He recently told The New York Times that he rarely, if ever, pushes himself past 80 percent—90 percent at most—of his maximum effort during workouts. This allows Kipchoge to string together weeks and weeks of consistent training. ‘I want to run with a relaxed mind,’ he says.”

The paradox of performance is that when you push less you achieve more. Stulberg again, “This mindset improves confidence and releases pressure because you don’t always feel like you’re coming up short. It also lessens the risk of injury — emotional and physical — since there isn’t a perceived need to put forth heroic efforts every day. The result is a more consistent performance that compounds over time. Research shows that sustainable progress, in everything from diet to fitness to creativity, isn’t about being consistently great; it’s about being great at being consistent. It’s about being good enough over and over again.”

This is certainly true with trading. We are always pushing for more -- more edge, more leverage, more trades when we should all be pushing for less. It’s perfectly ok to take profits early. It’s perfectly ok to miss some setups. It’s perfectly ok to trade on very low leverage for as long as you want. Every one of those behaviors will push you toward success whereas the exact opposite of those behaviors will guarantee failure. Trading -- like marathon running -like almost everything in life -- is a test of endurance.

There is an old movie with Paul Newman and Robert Wagner called Winning. It’s about the 24 hour race at LeMans. (It was actually the catalyst for Newman becoming a professional race car driver later in life). In the movie, Wagner plays a hot shot driver who “breaks things” because he always pushes everything -- the car, himself, the people around him too far. Wagner is the quintessential example of what not to do in trading. In his quest for excellence, he winds up only with failure.

It’s easy to see how that can happen in trading. Hell, I’ve been the Robert Wagner character many times in my life. Always looking to “optimize”, always looking to push trades beyond their limit. But recently I created a process to change that behavior. And it all starts with the 0.01 lot.

Basically anytime I have an idea for a setup or strategy I start trading it with 0.01 lot. My iron clad rule is to trade at least 10 times at that tiny size, but the more I do it, the more I realize that at least 30-50 times is best (this assumes you are day trading, which is all that I do). The money is real, the quotes are real but the size is so tiny that it does not dissuade you from pursuing the setup even after multiple stops out. More importantly, it is truly amazing how many things you notice the more you trade. Every setup and I mean EVERY setup will change its rules as it develops under real market conditions. That’s because even if you have years of market experience your original notion of how the trade should proceed will come with preconceptions that actual market price action will very quickly destroy. But here is the thing. The more you trade your set up. The more you adjust it to actual market conditions. The more accurate it becomes. The more confident you will be.

That confidence will allow increasing the size to the next level which in my case is 0.1 lot -- and inevitably when the losing streak appears you will not abandon ship. You will have that reservoir of confidence from the 0.01 lot days to ride out the drawdowns. This is where the power of gradual improvement really pays off. This is where you realize that good is not the enemy of the great, but rather its basic building block and at that point, you can finally step up to your regular trading size knowing that you have created a truly durable setup to trade.

How to Take the Fear Out of Trading

Boris Schlossberg

What is the biggest problem in trading?

It’s fear.

That’s because trading is the only business in the world where every decision you make has a 100% chance of uncertainty. Unless you are cheating, there is literally no way to know how the next moment in the market will unfold.

Sure other businesses have variance. If you own a donut store you don’t know if one day you’ll sell 100 or 500 donuts. Weather, seasonality, competition all have their say in almost any business, but I doubt you’ll find a donut shop owner who’ll tell you that today he may sell zero donuts or he may sell 500. Such a wide variance just doesn’t exist in any other sphere of business life yet in trading it is a daily occurrence.

You can go days, weeks, sometimes months selling zero donuts in trading and that sense of extreme uncertainty is responsible for more mistakes than just about any other aspect of the business.

Ever taken a trade, got stopped out and then got spooked from taking the next one which in retrospect proved profitable?

Of course, you have. Trading may be the business of uncertainty, but I am 100% positive that everyone who is reading this sentence has had that experience.

So what to do?

How do we conquer that fear?

I don’t think we ever fully overcome the problem, but here are a few ideas that can help you stay calm amidst the perpetual uncertainty.

Trade in sets. This is especially true if you are day trading as 80% of FX retail traders do. Don’t think of a single trade as a distinct individual event. If you are a trading a system, estimate how many times that system should trade during a given week.

Let’s say your system trades 20 times per week and on average generates 16 winners and 4 losers. If you hit a losing trade then just think of it as part of the weekly set.

Understand also that not every week is a winner and you could have a run of bad sets. If the week is a loser examine each trade -- was it done to spec? If so then there is no need to change anything. You simply hit an expected losing cycle.

You see what I’ve done there? I’ve actually made my field of vision more blurry. I’ve moved away to an eagle’s eye view of trading. I’ve stopped obsessing about every pip on the chart, every tweet, every noise from my squawk box. I look at the system as a broad narrative story rather than the drama of the minute.

The other thing that helps with controlling fear and uncertainty is to understand just how little you need to make in order to double your money. If you are trading a $10,000 account you only need to make $40/day to turn the account to $20,000 by the end of the year that’s actually pretty hard) but if you made just $10/day you would make 20% on your money and become top 1% of all traders in the world.