Forex Trading Strategies – Make A Bet Not A Trade

By Boris Schlossberg • July 30th, 2010
Boris Schlossberg

Make A Bet Not A Trade

When it comes to trading my partner and I could not be more different. While I sit behind six computer screens eyeing every single headline that scrolls by as I watch prices move up and down tic by tic, she is perfectly content to follow the markets from her little MacBook Pro with only an occasional glance at the flow. Our reactions to trading are different as well. While she displays typical Asian equanimity whether we win or lose, I demonstrate all the histrionics of my Russian ancestry, my mood soaring or sinking with every change in price action like some maudlin character out of a bad Dostoevsky novel.

For a long time I didn’t appreciate the financial damage caused by my mood swings until I realized that during my bouts of anger I would inevitably resort to “revenge” trading which in turn would often decimate months worth’s of profits in a matter of hours. After my last trading binge I decided to try something different. I decided I would treat each position as a bet rather than as trade.

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This may sound like nothing more than an exercise in semantics but in fact it has proven to be a very powerful tool to correct my bad behavior. A trade implies an investment thesis behind the idea and once we begin to think in terms of economics the position inevitably turns into a battle of the wills between you and the market. Perhaps nothing is more painful in such a situation than being right on data and wrong on price – a dynamic that happens all the time on the speculative spectrum of the market where we operate.

This Tuesday’s USD/JPY call was a perfect example. We were completely correct in our analysis of US fundamentals but simply ran into a wave of risk buying that stopped out by a few ticks. A day later, the position was well in the money, but alas without us. The USD/JPY whipsaws occur all the time a speculative market like FX and if you do not learn how to emotionally cope with them they will ultimately destroy you as a trader.

This is where the gaming model can be helpful. For example everyone knows that poker is a game of luck as well as skill. Watch the World Series of poker and you will see even the greatest names in the game occasionally get taken out of the championship on a “bad beat”. “Bad beats” – a low probability event that sabotages your strategy -- are as common to speculative markets as they are to games of chance. Professional poker players are fully aware of this dynamic and rarely get upset when a well played hand goes wrong because of a bad beat.

Thinking of every new position as a bet rather than a trade puts you the realm of probabilities rather than economics which is the right place to be mentally. You stop “arguing with the tape” and hopefully move on to the next idea if the current bet does not pan out. Sometimes trading like poker is just a painful series of bad beats, but of you recognize that each position is just a bet rather than a trade you can survive even the most trying of drawdowns

Comments

Boris,

Please keep writing on your mental/emotional experiences on the desk. It gives us a window into pros like yourself, something that we home gamers are trying to emulate (in small doses, at least). This post has made you look human, which makes someone like me appreciate all your success and hard work. You are not just some market savant that comes early in the morning on CNBC, put on a smile and discuss FX. You are a guy, just like us home gamers, who, at your level, continues to make mistakes and learn from them. Fr eg — I was in the money on some EUO calls and was making a whopping return. My plan was to get out of them around the Friday that the Euro stress tests were released. For some reason, I engaged in delusional economic fundies (just like you have referred to) and am now losing a lot of money on that trade. My ego did not even allow me to cut my losses. It does get frustrating (as you very eloquently put in one of your recent posts) — but for someone like me, who is playing with very small amounts and does not have your level of experience and wisdom, in some way it is humbling to see a real pro like you go through a lot of different emotions in a market like this. Thanks for showing us that human side of you. I love the cultural nuggets you insert from time to time, esp how different you are from Kathie. I had a chuckle at this gem of yours — “…..my mood soaring or sinking with every change in price action like some maudlin character out of a bad Dostoevsky novel”. That’s a classic.

Very good article, Keep posting. I Love it.
Cause its true. It helps us all and yourself! good energy keep it going Boris.

Oh, Boris, as Russian how I understand You! Thanks for good advice!

 

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BORIS
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April 18, 2014 • by: Boris Schlossberg

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KATHY
USD/JPY March Seasonality

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USD/JPY March Seasonality

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Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.

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