Three Trading Truths I learned This Year

Boris Schlossberg

1. “Never” and “always” are the two most dangerous trading words in the English language.
Idiotic statements like “smart money is never wrong” or “this setup always works” are a straight path to a blowup. The other day I was watching a YouTube video with more than 150K views where the guy was arrogantly pitching as his own the SSI strategy that K and I helped develop back in our FXCM days. Basically, the FXCM SSI index measures the client positioning in any given currency pair and then takes the opposite side especially as the positioning goes to the extremes. Now generally that is mostly a good idea. Most of retail is usually on the wrong side of the trade most of the time. But not always. In the case of SSI the FXCM brass was so sure of their new little indicator that they convinced a large French bank to trade the model with a very sizable prop account. Unfortunately, at that time the euro went on about a 3000 pip slide with no stops along the way and as retail kept getting shorter, the bank kept getting longer and blew out more money than you can imagine. So no. The “dumb money” is not always wrong and you can lose even on “never-gonna-happen” bets. The only proper way to use those words in trading is: “There is always a chance I am wrong,” and “I will never bet my whole bankroll on this one trade idea.” In short, the most important things I learned in 2018 is to be humble. Always. And arrogant. Never.

2. Robots trade better than I.
After years and years of resisting rules-based trading, I finally realized that my strategies are much more profitable when they are executed systematically. Robots don’t hesitate on entries. Robots don’t pull stops. Robots don’t sleep and miss out on trades. Robots don’t accidentally hit a buy instead of a sell button and robots don’t trade ten times the intended position size (unless you configured them wrong). None of this means that systematic trading will automatically make you profitable, but it does offer you a multitude of advantages over point and click trading. One of the traders in my chat room noted that we should view our trading robots as assistants -- and I think that a perfect analogy for how we should view the systematic process. There is no such thing as set it and forget it trading. Robots help you with execution and logical structure, they free you from the tyranny of looking at every tick on the screen but it is still up to you to analyze and adjust the strategy and always be aware of the market. The future of retail trading is robot. The sooner you realize that the better a trader you will become.

3. F- passive. After several years of ranting against the mindless advice of Bogleheads that passive investing is the only way to get rich, we are finally seeing the disaster that it truly is as we close out the worst December in market history. The pain is just starting. If you have all your retirement money in equities prepare to possibly lose 50% of your money, just like Bitcoin traders. The worst part is that passive investors couldn’t do anything about it even if they wanted to because they don’t have the skills to manage risk. They’ve been taught to ask no questions and drop money in their retirement account every month, with the same monolithic fervor of a North Korean people’s rally. Even if I am 100% wrong ( and I certainly can be -- see #1) most passive investors will not survive this dip because they are completely unaccustomed to risk and they certainly capitulate at the bottom. On the other hand, we retail traders live and breathe risk every day and at very least know a thing or two about position sizing and stops. So let the passives enjoy a few more months of illusion. As market regime changes from an unending one-way rally, we retail traders will be ready to surf the price waves and keep risk under control. Here is to a great 2019!

Happy Trading everyone.

Best Articles I Read this Year…

Boris Schlossberg

The Power of Negative Thinking
NY Times

If you are an American your true religion isn’t Christianity, Judaism, Buddhism, Islam or even atheism. It’s Positive Thinking. I still remember the hand printed poster in my high school football locker room that stayed taped to the door for four years. Conceive. Believe. Achieve. As Americans, we are indoctrinated into the cult of Positivity with no less fervor than I was indoctrinated into the wonders of Communism as a Young Pioneer in Russia.

And it is perhaps because that I am Russian and therefore naturally skeptical from birth, that I always suspected that this American obsession with positive thinking was pure bullsh-t. This article opens your eyes not only to the mindless stupidity of always being positive (putting that pasted Tony Robbins smile on your face can actually be counterproductive -- in fact, Tony Robbin’s whole act (much as I love it) is pure bulls-t. Turns out that coals are terrible conductors of heat, so anyone can walk over them as long as they do it quickly -- no special mindset required) but also shows the value of thinking negatively.

Don’t get me wrong. I hate Debbie Downers. I am “American” to the core. I am always willing to try new ideas. But this article teaches you that you shouldn’t fear negative thoughts, but embrace them. It notes, “The Stoics recommended “the premeditation of evils,” or deliberately visualizing the worst-case scenario. This tends to reduce anxiety about the future: when you soberly picture how badly things could go in reality, you usually conclude that you could cope. Besides, they noted, imagining that you might lose the relationships and possessions you currently enjoy increases your gratitude for having them now. Positive thinking, by contrast, always leans into the future, ignoring present pleasures.”

One of the greatest joys of aimless Net surfing is that you get to stumble across some brilliant fresh voices that can help you understand reality with a much clearer and more accurate perspective. Tim Hanson is one such writer I will be following in 2017 as everything he writes is remarkably insightful. This year, however, one blog entry stands out. In Value at Risk he shows not only the need but the absolute necessity for overconfidence. Yes -- overconfidence -- because without it we would never achieve anything. Also, this article is a nice counterpoint to the one above. But please take a look at the Teacher’s grading table and tell me that it doesn’t remind you of the 1 by 10 trading method I wrote about last week.

Lastly here is a story that should make all of us who day trade feel good. Efficient markets? Bulls-t! In How Behavioral Biases Lead To Hard-To-Capture But Sustainable Alpha Michael Kitces shows how investors make the same mistakes over and over again and how savvy traders can take advantage of these mispricings to achieve Alpha. Reading the story on recency bias I realized that most of our Boomer strategies are basically designed to take advantage of that common flaw in human behavior. Note the article doesn’t say profitable trading is easy. Only that it’s possible.

All the best to everyone in 2017.
Peace, joy and love and happy trading
Boris

GBP/USD – Aiming for New 6 Year Lows

GBP/USD – Aiming for New 6 Year Lows

Chart Of The Day

GBP/USD – Aiming for New 6 Year Lows

Sterling started the week at a fresh 6 year low despite stronger than expected consumer credit and mortgage approvals. Brexit remains an overarching concern for the U.K. and its currency but the real test for the pound this week will be data. Manufacturing, service and construction sector PMIs are scheduled for release and if activity weakens, it could be the nail in the coffin for the pound. The PMI reports are some of the most market moving pieces of U.K. data and according to the Confederation of British Industry, manufacturing orders dropped by the largest amount in 4 months. If this data is right in predicting an overall slowdown in manufacturing activity, then data could pressure on sterling this week.

Technically lower highs and lower lows leaves GBP/USD firmly in a downtrend. With the 1.40 support level broken, the next stop for the currency pair should be the March 2009 low near 1.3660. A break above 1.4043 would be needed for a stronger recovery towards 1.4200.

The Only Thing You Need to Do To Make Money Day Trading Next Year

Boris Schlossberg

This week I was going to do the typical end of the the year what-have-I-learned-in-2015 column and talk about volatility regimes, implied bets and exit and entry strategies. Yadda, yadda, yadda.

Then I stumbled across an old thread on Elite Trader called (SIC) What`s your biggest tradeing blunder? and suddenly realized that it contained the answer to the key day trading problem that plagues us all. The thread like so many on Elite is an endless litany of missed analysis, sloppy execution and terrible decision making at key points in the trade. Reading it was like watching a slow motion car wreck you know it’s wrong but you just can’t pull away.

Tolstoy once said that every happy family is the same, but each unhappy family is unique in its own misery. When it comes to trading I think the exact opposite is true. Every happy trader is different but every unhappy trader is depressingly the same. What unites every losing day trader including those in the Elite thread is the woefully misguided attempt to make every win the same size, while making every loss different.

It stems I think from our almost subconscious need for a “paycheck”. Paychecks are of course uniform. They are cut on a weekly or biweekly basis and lull us into the belief that money like lightbulbs, cereal and soap comes in nice uniform units of measure.

But in trading to think this way is pure madness. The markets are never uniform and never provide predictable profits.

Imagine, however, if we smashed this mental model to smithereens and instead did the exact opposite of what every retail trader does. Imagine if we accepted the fact that our wins would be all over the place sometimes banking as little as half pip, sometimes making 20 or even 50 pips per trade. And then suppose that we made a vow in 2016 that no matter what, no matter how, no matter why, our losses would always be the same size.

Last week I talked about the need for a money stop. For a typical $10,000 retail trading account I think a $100 money stop per trade is just right. So suppose that in 2016 you made it your business to never lose more $100.00 on any trade you made. It didn’t matter if you were right or wrong. It didn’t matter if this was a planned trade or simply a stupid fat finger execution. It didn’t even matter if this was your fifth, sixth, seventh loser in a row. The only thing that mattered is that you never lost more that $100 on any given trade idea. I guarantee that if you did that there is almost no way that you will fail as a daytrader. You may not be profitable but you will NOT lose all your capital.

My Top 5 Trades for 2016

So in 2016 we can talk about tactics til kingdom come, but the only thing we really need to do is keep our all our losses at the same size ALWAYS and if we can just do that we will be well on our way to making money next year.

USD/JPY Headed for Fresh 7 Year Highs

USD/JPY Headed for Fresh 7 Year Highs

Chart Of The Day

USD/JPY Headed for Fresh 7 Year Highs

USD/JPY took out the 120 level with ease today despite a lack of U.S. data. Talk of tighter monetary policy drove the U.S. dollar higher against most of the major currencies. This morning Dallas Fed President Fisher said that early and gentle rate increases would be wise. This follows yesterday’s comments from Fed President Lacker who believed that June was an attractive time to raise rates. Based on these comments and our general outlook for US monetary policy, we believe that USD/JPY will hit and exceed last year’s high of 121.85. U.S. rates are on the rise and stocks are performing well, making U.S. assets even more attractive. A softer retail sales report on Friday could sap some of the gains but we view any pullback in USD/JPY as an opportunity to buy at lower levels.

Taking a look at the daily chart of USD/JPY, the break above 120 puts the currency pair on track for further gains. However there are a 2 main resistance levels to be mindful of – 120.80 and 121.85. These levels halted previous rallies in the pair. Support is at 120.

Euro At 12 Year Lows

Euro At 12 Year Lows

Chart Of The Day

Euro At 12 Year Lows

Euro has now hit 12 year lows breaking through the 1.1400 level after ECB announced its QE program. After hemming and hawing the market finally decided that the program was not going to be enough to revive the EZ economy plus its convoluted structure has given market little confidence that it can succeed. However the lower euro may be doing the work of ECB for it as the decline in euro and decline in oil prices should have a positive impact on EZ businesses. Tonight’s EZ PMIs will give us the first hint of whether the demand is picking up.

Having broken all the key levels the long term target on the euro now looks to be the 1.1000 level. However for now the pair could find support at 1.1300 and rebound to 1.1500

Why EURO Could Hit Fresh Lows Before Year End

Why EURO Could Hit Fresh Lows Before Year End

Chart Of The Day

Why EURO Could Hit Fresh Lows Before Year End

Fundamentals

Typically investors expect the last 2 weeks of the year to be the quietest periods in the foreign exchange market and rightfully so because of the lack of participation and thin liquidity. However it is in this very environment that currencies could see big moves that can drive them to new highs and lows. In 2013 for example, EUR/USD climbed to a fresh 2 year high on December 27th and in 2012 it revisited its 1 year high on January 2nd. In both cases, this was an extension of a trend that began in early December. So if history can be a guide, euro could drop to fresh lows before trading kicks into high gear at the beginning of the year. Fundamentally, we believe that the decline in EUR/USD is far from over. Just as the market is growing more confident in Fed tightening, they are also feeling more certain that the ECB will announce a broader asset purchase program. QE for the Eurozone is coming and as monetary policy drifts further apart, the pressure on the euro will intensify. From a fundamental and technical basis, we expect the EUR/USD to drop to 1.20 in beginning of the year.

Technicals

1.20 is a very important technical and psychological support level for EUR/USD but the sell-off could also stall near 1.2150, the 50% Fibonacci retracement of the rally that lasted from 2000 to 2008. In the short term resistance is at 1.24 but the main resistance level for EUR/USD is 1.26, the November/December range high.

AUD/USD – Gunning for Fresh 4 Year Lows?

AUD/USD – Gunning for Fresh 4 Year Lows?

Chart Of The Day

Fundamentals

The Australian dollar was one of the worst performing currencies today, falling more than 1% versus the greenback ahead of the Reserve Bank of Australia’s monetary policy announcement. The last time we heard from the RBA was on October 7th and at that time, the central bank expressed concerns about the high level of the currency. Considering that A$ was the only currency to appreciate against the greenback in the month of October, this concern would not have eased. In fact, with inflation slowing in the third quarter, employment declining and home loans dropping, the RBA has every reason to sound more dovish, which would not only be negative for the Australian dollar but also put the currency’s 0.8643 four year low at risk. However if most of the statement remains unchanged and the RBA sounds comfortable with recent developments in Australia and China, the 0.8643 low could hold. Aside from the RBA meeting, retail sales and the trade balance could also affect how AUD/USD trades.

Technicals

Taking a look at the monthly chart of AUD/USD, the 4 year low of 0.8643 is looking extremely vulnerable especially after Monday’s big move. However having tested this level on numerous occasions, significantly weaker data or an intensification of concerns about the level of the currency or the global economy could be needed for this level to break in the next 24 hours. Beyond that, the market’s appetite for U.S. and Australian dollars will be key. A break below 0.8643 opens the door for a move down to the 50% Fibonacci retracement of the 2008 to 2011 rally at 0.8550. If this level holds, AUD/USD could trickle back up towards the top of its month long range near 89 cents.