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.

In Trading Winning Means Nothing – Part 2

Boris Schlossberg

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How does the statement go? Fool me once shame on you, fool me twice shame on me. That idiom was written for trading. In no other discipline in life are we fooled more often than the market which can lay the best designed plans to waste in a matter of minutes. Which is why in trading guarding against loss is much more important that planning for gain.

This week was just another in a long series of examples of markets flipping sides faster than a Chicago politician. We started out the morning with EUR/USD making fresh three year highs and ended the day with the currency at session lows. Every trade that looked great in morning was looking miserable by close of New York markets.

If you were long risk you were wrong and the simplest, easiest wisest thing to do was to cut your losses and stop out. Unfortunately for traders a stop is never easy and never simple. We hate the finality of losing money so we do everything in our power to avoid the loss. One of the most common delay tactics that I hear over and over again is “ I keep a mental stop.” To which my response is always -’Really? Do you keep a mental FX account as well?” While your stop may be mental and exists only in the reality of your mind your money is very real and it will not be protected with a “mental” stop.

If having a stop is near impossible then you need to do the next best thing. You need to trade small. How small? Cash on cash or less. (That means if you have 10,000 in your account each trade must not be larger than 1 mini lot). Unfortunately in FX where 100 to 1 leverage is common, such positioning seems laughably small. But its no laughing matter. Currencies rarely move more than 10% in one direction. At cash on cash you can survive a very bad trade and still remain in the game. At even a “modest” lever factor of 10:1 you are totally wiped out.

Trading small covers up a lot of sins and allows you the luxury of time to adjust your trades, but few traders in FX even consider this tactic.

Next week I’ll discuss how small size and trade adjustment could help you turn losers into winners -- UP TO A POINT. Stay tuned.

In Trading Winning Means Nothing – Part 1

Boris Schlossberg

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The more I trade the more I am convinced that winning is almost all luck and losing is where the true skill lies. In the Alice in Wonderland world of trading that we live in where at at any given moment the market can change direction on a dime can anyone honestly claim that they have a “bullet proof” system for winning?

Trading is tough because its has no analog in the real world. There is no true repetitive process for success. In any other business activity you simply need to produce a good product or service and replicate it a billion times. In trading, there is no such thing as a uniform product. Every trade situation is different. For example the other day I realized that just by making our take profit 10 pips less we would have picked an extra +1000 pips on our P/L since the start of the year.

That’s trading for you, where a random 10 pip target can make difference between huge gains and big losses. Imagine if Mcdonalds was subject to such capricious rules. A patty that was just one degree cooler than certain temperature would result in a loss on the whole burger. Would MickeyDs be able to make billions of profits on trillions sold? Of course not.

If you are really honest with yourself, you will admit that all your winning trades are pure luck. This week we had four winners in BK and they all followed same path -- great entry, almost no retrace and a near vertical line towards our target. We could have left them all on auto-pilot and those trades would have landed themselves. Were we brilliant? Of course not. We caught the breakout wave and rode it for all its glory. But how many times in the past have the breakout failed this year? How many times have we been clipped into trades that went nowhere except straight to our stop loss?

Our process of selection was the same in both cases but results were vastly different- and therein lies the essence of trading in my opinion. In trading your long term success does not depend on short term selection skills, but rather on your continued ability to avoid losses at any cost. That is why both in personal account and in our BK strategies I am always looking for ways to neutralize risk.

This Friday we traded the NFPs live. Now the BK NEWS is a very accurate set up that has been winning 90% of the time. However recently I realized that it could be improved by moving by stops to breakeven once price moved a certain amount of pips into the money. On Friday we did just that and managed to get out of the trade with no loss. Now no loss may not sound like much, but its was actually the best trade we made all week. Why? Because we DID NOT LOSE MONEY. That helped us preserve our profits from the other trades and go into the weekend in much better financial shape.

Next week I will discuss some the ways that we can neutralize risk and improve our skills as traders.