The Greatest Trading Insight Ever Comes from Benjamin Graham ?!!!

Boris Schlossberg

“By timing we mean the endeavor to anticipate the action of the stock market—to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing, we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.”
Benjamin Graham, The Intelligent Investor.

Ben Graham is the father of value investing and was the mentor of Warren Buffet. So you would think he is the absolute last person in the world that could provide insight into successful day trading – but it’s actually the opposite. Graham’s view stated in plain English is that there are really only two ways to make money in the market. You could focus on timing or you could focus on price.

Value investors, of course, focus only on price. As long as an asset is below “fair value” they will buy it and will hold through thick and thin until it moves above “fair value” and which point they will sell. Let’s put aside the idea of “fair value” which can be as arbitrary as a movie review, and let’s just appreciate Graham’s definition of speculation – trading is timing.

This is a deceptively simple yet highly accurate description of what we do. Graham was convinced that timing is impossible, but I want to sidestep that debate and think about the cardinal sin of trading – switching to a pricing model when you should be trading a timing model.

All of us. Every single one of us is guilty of making the following mistake – I am buying/selling this asset because it is too cheap/expensive.

In trading, there is no such thing as too cheap or too dear. Price as a function of valuation is utterly irrelevant to the success of your trade. They only question that matters in trading is – will it continue or will it reverse? Can my timing model catch the move? The beautiful thing about such an approach is that we have objective points on a chart that could tell us if our timing model is right or wrong. But the moment we anchor ourselves to pricing model we are now trapped into the “Ben Graham/Warren Buffet” mindset.

The quickest way to lose money as a trader is to start thinking like an investor.

Price is only relevant as an input to your timing model. The moment the market blows through that price level you need to close your trade and adjust your timing model for the next trade, otherwise you wind up paying the ultimate price – blow up.

So You Want to Day Trade for $100/Day? I have Thoughts…

Boris Schlossberg

So you want to day trade for $100 per day?
I have some thoughts.

Let’s put aside the idea of strategy for the moment and discuss that topic next week.

But for now, let’s assume that you have a positive “WinSpread” and want to day trade for $100 per day – what next?

How do you actually go about making money every day?

For the better part of the past few months, I’ve been day trading stock index futures for my own account and after about 1000 trades I’ve started to generate between 75-100 bucks a day, pretty much every day and here are few things I learned.

Comfort Capital

Functionally, I need no more than $1000 dollars to make my system work. I trade only 1 or 2 e-micros per trade which carries an intra-day margin of just $50. But of course, what’s mathematically optimal can often be psychologically destructive. I need both a mental and a financial “cushion” because I inevitably “veer off” my path by trading a bigger size when I get behind. In my case, I trade with a $10,000 account which is in reality much more than I need. You may be the opposite and decide to trade with $1000 only treating it as “burn capital” (there is a lot to be said for that approach as the constraint of money will force you to lose only the capital at hand).

Regardless of the approach know your comfort capital – it’s actually more important than you think.

Trade One Product Only.

Are you a “parallel” or a sequential thinker? I am definitely the latter. I hate multitasking and I am strictly do-A-then-do-B type of guy who likes to mark off his checklist. If you are like me, you absolutely must focus on one product only. In my case, I have settled on the SP 500 (ES in futures) because it’s the perfect middle ground of high liquidity and moderate volatility. I love the action of the Nasdaq but it comes at the price of massive volatility that hurts me more than it helps. There is yet one more reason why ES is superior for the day trader. It’s is the only micro contract where just one tick move will pay for your commission. When you day trade you scratch a lot of trades and that one tick scratch really helps with the daily P&L.

Commissions Will Kill You if You Let Them.

It’s astounding at how quickly commissions can add up. (If you are trading CFDs or FX you are still paying them via spread – so be under no illusions). So I have developed a good rule of thumb for what is the maximum tolerable level of expense on a daily basis. I try to keep my commission costs to 25% of my profit target. So if I am trying to make $100/day my comms should be no bigger than $25. If they are consistently bigger than that then I know I am overtrading. That is actually an excellent metric to gauge if you are trading properly or not.

Define What Day Trading Means to You.
Are you comfortable trading up to 20 times/day? That’s basically 4-5 times in Asia, 5-6 times in Europe and up to 10 times in North America, scalping for 1-3 ES points all day long. You are pecking at the market like a pigeon. So your P/L run looks like something like this 5.00, 6.25, -26.00, 13.00, 12.50, 6.25, 7.50, 3.75, 2.50, 12.50 5.00, 5.00, 3.75, -20.00 (this is actually a small segment of my run yesterday). If that holds no appeal to you then making $100 CONSISTENTLY is actually very hard. If you are someone who just wants to lay down 2 or 3 trades per day then your P/L will look much more like this 25.00 25.00 -50.00 and you will have many scratch or negative days.

First, if you trade fewer times both your stops and targets will need to be bigger. Secondly, as unintuitive as it may sound, the less you engage with the market the less likely you will be able to quickly recoup the losses. (This is pretty much the mechanics of the HFTs, who trade so many times per day that they allow the law of large numbers to tilt the odds their way). So you may still be positive – in fact, you may be a lot more positive than me on a gross profit basis – but you will not be nearly as consistent. Your P/L will look like something like this 25.00 25.00 -50.00 25.00 25.00 -50.00, 25.0 25.00 25.00 – but you will need to assess it effectiveness on a weekly or even monthly basis.

Consistency requires failing a lot and then quickly recouping your losses. That’s why trading for income is a very different game than trading for return.

Leverage, It’s Personal

Boris Schlossberg

Did you know that in US capital markets options flow is now nearly equal to the underlying flow? As early as 2016 it was just 30% of equity volume. That suggests that the lever factor in the US market may be far higher than anyone imagined since stocks can only be levered 2:1 while options are a defacto 10:1 bet.

Leverage is all around us but it is poorly understood. In FX, for example, you can achieve leverage as high as 400:1 in some jurisdictions and even the most regulated places in the world like Hong Kong, Japan, EU and US offer margin of between 25:1 and 50:1.

Most retail traders, however, confuse the concept of margin and leverage. Margin is the maximum amount of credit that your broker will extend to you. So at 100:1 margin, you can actually trade a 1M EURUSD position with as little as $1000 in your account.

So 100:1 margin is the possibility of trading a Million EURUSD position with very little actual cash. But no one is forcing you to do that. No one is putting a gun to your head. You can for example just trade a 1000 EURUSD position employing no leverage at all.

Margin is what the broker offers you. Leverage is what you choose to take.

What’s the right amount of leverage?

I have no idea. Leverage is a very personal thing and it can vary not just by the trader but by trading instrument and strategy.

I will, however, tell you what is the wrong amount of leverage – anything above 10:1. That may seem extremely modest especially for those of you who trade FX, but I can assure that anything above that number will wipe out your account eventually and often much faster than you think.

Why? Because when most retail traders think about leverage they are thinking in terms of an opening bet. Suppose you have a $10000 account and you decide to trade 10:1. You open up 100K EURUSD trade. A few hours later you may see a setup in AUDJPY and then in EURNZD and then in EURJPY and so on and so on. Soon you have five trades and 500K of open positions subject to market risk and are effectively trading at 50:1 leverage. If all five trades get stopped out for 1% and you just lost 50% of your account. It’s the easiest money the casino – err I mean your broker – ever makes. They don’t have to manipulate prices you are perfectly capable of bankrupting yourself.

So leverage is very personal and perhaps we should ask the question a different way. What’s the minimum amount of money you need to make a minimum bet in the market?

As some of you know after decades of inactivity I started trading US stock index futures again. I am trading the new e-mini micro contracts which have day trading margins of as little as $50 per contract and overnight margins of about $700. For all practical purposes, you only need $1000 to trade the product yet I trade with $5000 per one contract. Why? Because I know myself. My opening bet is never my only bet. I will sometimes average out into position. I will at times increase size depending on the price action at hand. I will sometimes take the same setup in two similar instruments like the SP500 and the Dow which is an effective doubling of the position on the same side of the market.

Having a $5000 buffer per one tiny e-micro contract gives me the flexibility – both emotional and financial to control the worst of my impulses and stay within the relative bounds of my trading plan. In my first month of trading Sniper, I made a little more than 10% on my account, but I would never have been able to achieve that if I didn’t understand my personal leverage ratio.

What’s a Stop For?

Boris Schlossberg

What’s a stop for?

Risk control obviously. Blah. Blah. Blah.

We all know that stop is the only thing that stands between you and financial ruin and yet we ALL ignore that advice once, twice, a million times over the course of our trading.

Why?

Because most of us don’t understand stops and see them only as a source of pain.

A stop is there only for one purpose only.

To. Make. You. Money.

That’s right. You heard me. A stop is there to make you money. If you are not making money – you are doing it wrong.

The stop’s only function is to answer the following question – how much room do I need for my trade to hit profit at a bigger expectancy than my stop? To review the idea of winning edge read my column from last week, but meanwhile, understand that you WILL LOSE. YOU WILL ALWAYS LOSE. The key to winning is to make that loss either much less frequent or just less than you profit.

It is in my view much easier to make the stop be less frequent rather than absolutely less money than your target. But that depends entirely on your personality. If you are the type of person who can hold for a 200 pip gain – then sure you can have 50 pip stops and still win. Still, in all my testing experience it is much easier to find a positive setup with 1-4 risk-reward profile (risk 200 make 50) rather 4-1 profiles (risk 50 make 200). 4-1 profiles usually payout 18-20% of the time which makes them a loser (4-1 has a breakeven of 20%) 1-4 profiles can be accurate 85-87% of the time making them profitable.

But that is neither here nor there. The point is not to start a religious war about risk-reward ratios but to find a sweet spot for YOU.

In my day trading, I have found 1-2 risk-reward is just the sweet spot I need. I worked out my stop after I figured out what I can accept as a take profit. As you all know I have zero impulse control so I can only take 2 points in ES 20 in YM and 10 max in NQ before I start getting the joneses. So the question I had to answer was – what was the reasonable stop on such a set up that gave me a winning edge? The answer was twice my risk putting my breakeven at 67%. Since I’ve been hitting 75%-80% of my trades I am very comfortably ahead.

Now here is the amazing thing that happens once you understand the purpose of the stop. You never again lift it. You not only accept it but you actually expect it as it all becomes part of your trading plan, just like food spoilage is part of a restaurant’s business plan.

Of course, you do your best to minimize it, but honestly, most of the time you don’t even think about it because you are focused on what really matters most – the next good set up. This is the way it should be and I can’t tell you how much less stressful this becomes on a day to day basis.

You stop agonizing over every market beat and instead ask the only question that matters – is my plan working in the current environment?

So, taking my last three columns together, here is what I think works in the market.

1. Don’t contort yourself to the market. Know your comfort level. Find your sweet spot profit and start from there.

2. Understand expectancy and the winning edge. Be realistic. (5% above breakeven is AWESOME!)

3. View your stop as a key part of a profitable trading plan and work on entries – cause trading is timing and that’s all there is.

Happy Trading Guys!

How to Tell if Someone is Lying About Their Trading

Boris Schlossberg

I listen to scores of trading podcasts every week and here is one quick way to tell if someone is lying about their trading.

“I trade with 1:1 risk-reward ratio and I win on 80% of my trades”

100% bullshit.

Let’s first define what we mean by trading. Trading is the act of frequently buying or selling financial instruments in capital markets for the purpose of speculative gain. Let’s for the sake of argument say that a trader makes 2 trades per day. (The average is somewhere between 10-20 per day, but let’s indulge this claim made on podcasts all the time)

Ok, so I have a 10,000 account. We’ll trade at 10:1 lever for 15 pips target 15 pips stop twice per day. (This is actually the example I heard the other day on a podcast, so I am even making this up).

There are 250 trading days in a year.
I make 500 trades.
At 80% win rate I make 45,000 by year one.
Rinse and repeat.
By year two I now have $280,000 in my account.
By year three my account has swollen to $1,120,000.

In three years I have increased my account by 10X. Give me a decade and I will own the world.

Now let me explain why such claims are total bullshit.

Every trading strategy has something called the winning edge. It’s easy to calculate. The winning edge is basically the percentage difference between your win rate and your break-even point.

For example, if you traded with a 1:2 risk-reward ratio (risking 2 to make 1) your breakeven would be about 67%. If you won 70% of your trades your winning edge would be 3%.

Some points of reference. In blackjack casino edge is about 2%. In roulette, the edge is somewhere between 2-4%. Renaissance Technologies, the world’s most famous and longest-running quant fund has a winning edge of about 2% on the millions of trades it takes. Virtu and Citadel – the biggest HFT market makers in the world – are similar.

So, when someone on a podcast tells you they win 80% of their 1:1 risk trades that means they are claiming a 30% winning edge. (80% – 50% breakeven rate).

They. Are. F-ing. Lying.

The reason why I get so upset about this is that it does a terrible disservice to many new traders who are trying to succeed at this game. It’s a Bernie Madoff type of hustle precisely because it seems so reasonable and attainable. Remember, Madoff ran his Ponzi scheme by being modest. He didn’t claim multi-hundred percent returns. He simply claimed a steady 1% gain every single month. His hustle was so toxic because it was so believable. Same with every BS artist on the web who claims they “rarely lose on their trades”.

Real trading is about losing all the time, every day. It’s about clawing out a 3% edge and trying to keep it for as long as you can.

Just for fun, I decided to take a look at the winning edge of someone who trades for real – my partner Kathy. K has been on a blazing hot streak for the past six months putting up positive results 3 out of every 4 weeks while banking 1800+ pips in the process. Kathy basically trades with a 2.5:1 risk-reward ratio (these figures are rough estimates because she often cuts losers quickly but I was being specifically harsh in my estimates) for a 72% breakeven rate. Her win rate, however, is about 77% so she has been able to maintain a 5% winning edge for the better part of 2019. That may not sound glamorous but that was enough to produce one of the best streaks in FX over the past six months.

So don’t be fooled. Trading is a game of inches. Its rewards build over time but they are rich in experience and knowledge. So anchor your expectations properly, please.

Also, the next time you see a trader on Youtube and he is driving a Tesla – then for SURE he is lying.

Trader… Control Yourself

Boris Schlossberg

What do you need to succeed at trading?

A great setup?
Lightning-fast execution?
Steely risk management skills?
All those nice-sounding ideas are utterly irrelevant to your success.

Why?

Because you will never follow the setup, speed is pretty much the same for everyone across the advanced industrialized world and no one has steely risk management skills.

We approach trading education all backward.

We focus on setups, backtests, leverage, execution, correlation risk and a million other factors that we think may give us an edge. And sure, if we turn those ideas into an automated system these become the primary elements of success. I just released a system that checks all those marks. K and I have been trading another system for many months already and it is by far the most profitable account I have.

But… all those systems have the sex appeal of a Vanguard index fund. They are slow. They are deliberate. They can be quiet for days or suddenly explode into an array of trades. If I ever had to actually trade the way my systems do I would blow brains out.

And that is the key element that we always miss.
The human element.

If we want to trade the market for fun as well as profit if we want to engage with the crazy, irrational, fascinating, thrilling, frustrating, infuriating, electrifying mess that is the global financial market we need to do it on our own terms.

Whaaaaaaat?

How can you make the market adapt to you? The market adapts to no one!

That’s true. But the key succeeding in its wild ocean of trades is to find a space where you can thrive under your own rules.

Can I tell you about my week?

All week long I have been trying to trade stock index futures the “right way” – trading with trend, waiting for the retrace, using proper risk structure. Just like the system I designed.

One small problem.

I am an inveterate top and bottom picker. No matter how hard I try I always abandon continuation trades and look for the “turn”. Naturally, when I am trying to trade one way but actually trade the other, I also get into massive trouble with risk control. I abandon my stops, lever up on size and effectively turn semi-intelligent trades into mindless gambles.

Sound familiar?

So after a week of bleeding money and feeling totally out of control, I finally decided to forget the “right way” and decided to day trade indices “my way”.

First and foremost it meant short, small exits since no matter how good a trade I have I am never able to hold it for a long time. In fact, the longest I am able to hold a position in something like NQ (the Nasdaq futures) is for 20 points (or basically one-fifth of the typical daily range). Indeed my sweet spot is about 10 NQ points or between 20-40 minutes per trade. I am a guy who always goes for small dopamine hits. I never go for the big move.

Also, I don’t like to get stopped out a lot. Of course, no one likes to get stopped out, but there are plenty of traders who are comfortable losing 1 out of 2 trades. I am not one of them. If I lose more than 3 trades out of 10 I get very antsy and my “discipline” goes right out the door.

So what did that mean in practical terms?

That meant that my stops had to be bigger than my targets but not too big.
Ultimately I settled on the following ratios – in NQ I traded 10 targets 20 stops in YM 25 targets 50 stops in ES 3 targets 6 stops.

Those numbers felt right to “me”. The market couldn’t give a flying f- about my ratios. But that didn’t matter because now I had control of myself and that in turn allowed me to be much more in control of my trading.

Suddenly I felt a much greater sense of calm because each execution became a semi-intelligent trade rather than a mindless gamble. In fact, by doing what I wanted to do rather than what I was “supposed” to do, I made less and less mindless gambles. My inveterate top and bottom picking throughout the day remained, but because I was much calmer now, doing things the way I wanted, I suddenly became much more patient, looking for key telltale signs of turn during the day. I stopped trying to accommodate to market and started instead to exploit it within my own means.

Did I make money? Hellz yes. I went 8 for 1 doing actually better than my win percentage goal. But that’s not really the point.

The point is that you need to make the market your own. You will never change. No motivational talks, no browbeating, no self-loathing or hatred will ever change your trading habits. If you want to have fun in the markets and actually try to make money you need to stop listening to anyone to tell you what to do and discover what it is that you ACTUALLY do. From there you can start to design an approach that makes emotional sense to YOU.

If we want to trade “properly” we should use robots.

If we just want to trade, we need to know who we really are and make peace with that.

Failure

Boris Schlossberg

Have you ever had to write an important sales letter, a vital business presentation or maybe even a eulogy for a loved one? How many drafts do you think you did? When I first started writing weekly research reports at FXCM I did maybe twenty to thirty templates before we settled on something we liked.

Bill Maher, who has been a comedian for decades and has been doing his weekly HBO show for most of this century says that to this day he often does twenty rewrites for his signature 2-minute monologue at the end of every show.

How about golf? Or tennis? Or basketball? How many putts, how many strokes how many shots have you taken in your life just to achieve a modicum of mastery?

Now imagine if we thought of every re-write, every missed putt, every double fault as a stop out trade. How many of us would achieve anything in life?

All human errors are basically mistakes in judgment or execution and all of us understand that we need to practice over and over and over and over again before we can achieve even a small measure of control. But trading is different. It’s the one activity most people quit within three months of trying. People will play golf badly their whole lives. People will practice singing or dancing for years and years. People will become obsessed with barbeque to the point of spending a small fortune on smoking equipment to produce a piece of meat they could buy for a few bucks from a restaurant.

But trading is different.
Why?

A few reasons I think, but one of the most underappreciated ones is that trading despite its lonely reputation is fundamentally a very public activity. There is no practice stage for trading. If you are trading futures, for example, your first trade is made on the Chicago Mercantile Exchange against literally the smartest people in the world. Imagine if you wanted to learn singing and your first lesson consisted of getting up in front of a sold-out crowd at Madison Square Garden competing against the cast of Hamilton.

How many people would succeed under those conditions? How many people would quit after three months of humiliation? Pretty much 90% – which are the stats in trading.

The other reason is that trading is different is that the cost of failure is so much more acute. Imagine if every time you missed serve in tennis, or a putt in golf or misspelled a word on your report someone took out a whip gave you a couple of lashings. How motivated would you be to try again?

That’s pretty much what the market does to you every time you get stopped out. Maybe the physical pain isn’t the same but the psychological sense of humiliation and rage are identical. And of course the bigger the loss the more vicious the whipping.

So ironically enough the only way to make progress in trading is to accept that you will fail miserably every step of the way and enjoy it for all its worth. You are in front of a big crowd at MSG and you can’t sing? Who cares, tell them a joke, read a poem, tell them a story – find a niche that plays to your strength. You may bomb, once, twice, twenty times but eventually, you will find something that resonates and by that time you will be a veteran at performing in front of the biggest, most important crowd in the world, while others (read demo traders) would have only practiced in front of three drunken customers at their local bar.

Next, you need to make the punishment less painful. Turn a whipping into a mild punch by trading smaller – that only works by the way only if you drop $1,000 into your account instead of $100,000. It doesn’t matter what you tell yourself, whatever money you put into the account you will lose, which is why the single best way to learn is to drop $1000 into your account ten times rather than deposit $10,000 all at once.

But the bottom line to mastering trading is that you really need to enjoy the game. If you come to trading with the attitude of “I am only here for the money” you are essentially saying – I will only play golf if I win the Masters. You’ve already lost before starting. That is the true failure in trading, everything else is just feedback.

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How to Win in 2020

Boris Schlossberg

Ivan Lendl.

Not a name that any millennial will recognize, but if you were a tennis fan during the golden age of the sport in the late 1970’s and early 1980s that name will be very familiar to you.

Lendl was a towering 6 foot 2 Czech with a dour disposition and all the warmth of Count Dracula who dominated the sport holding the #1 ranking for 270 consecutive weeks during the decade. He had one of the best serves and the strongest, most vicious forehand in the history of the game.

One time when an opponent came to the net off a short volley Lendl launched a volley straight the guy’s body that literally blasted the guy with a force of a bullet. When he was asked about the sportsmanship doing such a thing in a post-game presser, Lendl ever the charmer replied, “I did not ask him to come to the net.”

Yet for all this prowess and intimidation Lendl had one glaring flaw. He had no power backhand. He would routinely run around his backhand during rallies and the truly top players at the time used to exploit that weakness mercilessly preventing Lendl from winning the major tournaments.

One day Lendl got sick and tired of coming up short during match play and took a few months off tour to learn how to hit a topspin backhand. Basically, he spent 6 to 8 hours each day on the court and didn’t allow himself to hit anything BUT a backhand while his opponents ran him ragged. During those sessions, he must have hit 2,000 or more backhands per day and after that training period, Lendl was never afraid to hit a backhand again.

In fact, his backhand became so fearsome that it was actually easier to hit to his forehand if you wanted to stay in the rally with him from that point on.

Lendl literally changed the neuroplasticity of his brain. Through endless repetition of a task, he taught himself a new skill.

When we are little kids our brains are very malleable and we teach ourselves everything through endless repetition, from walking to talking to reading to writing. As we get older and our need for new skill acquisitions diminishes our ability to train ourselves declines as well.

But it never goes away.

It simply requires time and patience and Lendl is perhaps the most dramatic example of an adult athlete already in his full prime and maturity teaching himself a new skill to become a champion.

So what does the dour Czech have to do with trading? Actually everything. All of us come to trading as adults, some of us are already well into our middle age. Our ability to learn new skills is deeply diminished but the time we take up the activity.

Furthermore, the skills we need to succeed are not the ones we are taught. Almost everyone who starts in the markets thinks that the key skill to learn is THE SETUP. Find the right formula and you’ll be making bank in no time.

Clearly, good setups require some time and education to develop. But setups are literally a dime a dozen. Talk to enough traders and you soon discover there are a hundred different ways to find an edge in the market.

What’s much harder – and where almost everyone fails – is in the ability to actually execute the setup to plan. Ask yourself these three simple questions:

Did I wait for my setup signal?
Did I take my setup signal?
Did I stick to the risk-reward targets of my set up signal?

Now ask yourself one last question.

Did I do it every time?

My guess, if we are honest about it, is that most of us only do all three 20% of the time. That’s why the single biggest key to winning in trading is the actual execution of the setup, not the setup itself.

So we need to practice the setup endlessly until every step comes as naturally as the topspin backhand came to the towering Czech. Fortunately, in retail trading, we now have access to micros in futures and 1000 unit lots in spot FX that allows us to hit as many “balls” as we need until we can train ourselves to execute properly.

Happy trading everyone!

Let’s make 2020 a championship year!

BKAcademy

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The Most Important Thing in Trading

Boris Schlossberg

What the most important trading lesson I learned in 2019?

It wasn’t a new set up.
It wasn’t a new algo.
It wasn’t a new indicator.

All three came in handy – but the lesson that really helped me trade better in 2019?

The need to forgive yourself.

There are no good or bad trades. There are only wrong or right trades. If the trade is wrong it must be stopped. But our inability to admit that we are wrong results in runaway losers that destroy our accounts.

It’s a tale as old as time and repeats itself over and over again because we are unable to forgive ourselves for being wrong so we make things much worse by trying to force the market to be right.

Trying to turn a bad trade into a good one is no way to live

But the power of forgiveness is extraordinary. Not only does it clear our mind and salve our conscience, but when done right it actually helps to improve our discipline. Because to forgive is not to forget. And once you’ve given yourself permission to forgive you are much more likely to accept your mistake, learn from it and not repeat it again.

In the end, it’s kind of ironic that in order to achieve discipline and excellence you actually have to accept and forgive your ineptitude and absence of control.

Happy Holidays to all

B

Your Chart is the Body of Proof

Boris Schlossberg

This week when we were Live Trading FOMC I uttered the following words:
“It doesn’t matter what you think.
It only matters what the market thinks.
If the market doesn’t think the way you do
You don’t move”
Not exactly Shakespeare, but like all great ideas it just channeled through me and I thought about it long after the webinar was over.
It seems such a simple thing and yet we almost never follow that rule.
I know I certainly didn’t and often paid a dear price for my arrogance.
But recently I started to watch “Body of Evidence” and suddenly a lightbulb went off in my head…

Well let me tell the story this way

PepperSmaller

This Blew My Mind

Boris Schlossberg

If you’ve been around capital markets as a New Yorker for a long time you’ve heard of Steven Schonfeld who has been prop trading for decades first as a classic day trading shop and now a full-fledged quant hedge fund. He is not nearly as well knows as Ray Dalio or Paul Tudor Jones but while the two titans of trading have barely been able to carve out single-digit numbers Shoenfeld has put 20% annual returns for past 6 years running – an especially impressive accomplishment against a one way market that has managed to slaughter most of the hedge fund industry.

One of the great things about Schonfeld is that he is the quintessential New York character – a no bullshit, salt of the earth guy from Long Island just like Josh Brown or even Stevie Cohen. This profile of him on Bloomberg is great and I highly recommend you read it – but the quote that bowled me over had nothing to do with trading.

Schonfeld loves games of probability and is apparently an avid gin rummy player (so is Warren Buffet for that matter) and the article ends with the following vignette…

“Decades ago, after he won more money during a two-year stretch than four better players, they asked how he did it. He told them their mistake was to scold their partners for making bad plays.

“I don’t second guess,” he recalled telling them. “They can make the worst play and I say, ‘I would have done the same thing.’ Because of that, they play infinitely better on my team.”

“I don’t second guess” should be the motto we all live by. Because in trading that is all we do. We constantly torture ourselves for blown calls, late entries, bad executions, and just stupid seat-of-the-pants ideas.

In fact, I am convinced that it is because we are unable to forgive ourselves for our mistakes that we make much bigger ones. Think how much better it would be if we just shrugged off a bad trade and took a stop instead of fighting the market to a much bigger bloody loss.

Schonfeld understands that all games of chance are full of not only bad luck but poor judgments, but his ability to shrug off those mistakes actually makes him a much better trader than most.

He is just a regular guy from the Island who believes in forgive and forget. As we say in New York, he is a mensch that would make his bubbie kvell (a good person that would make his grandma proud)

It’s a classic example of not letting the perfect be the enemy of the good and a lesson we should all take from one of the best traders in the business now.

BlackFriday