The Only Money Management System that Works in Trading

Boris Schlossberg

By now, everyone should be familiar with the Pareto distribution. Named after an Italian economist from the late 19th century it is colloquially known as the “80-20 rule”. In many disciplines in life, 80% of results come from 20% of factors.

Pareto first noticed the phenomenon with respect to land ownership in Italy where 80% of the land was owned by just 20% of the population. The distribution is not always exact but it is a good general approximation for how things work in real life. The Pareto principle shows up in phenomena as diverse as geography (80% of the population lives in 20% of cities in the US) software (80% of all computer errors in Microsoft products was caused by 20% of bugs) to of course income distribution (where roughly 80% of all assets in the US are owned by 20% of the population).

The Pareto principle is part of the larger structure called power laws and love it or hate it is an inextricable part of life that we need to accept if we are to understand how the secret of success.

Nowhere is the Pareto principle more evident than in financial markets which are the very quintessence of power laws in action with most spoils going to the very few. In trading, the universal truth is that 80% of your profits will come from 20% of your trades, or conversely if you choose to trade like an insurance company 80% of your losses (more like 90% in real life) will come from just 10%-20% of your bets.

This is precisely what makes trading so challenging for most people. It is psychologically impossible to accept losing 8 out of 10 times only to make everything back on just 2 big bets. It’s especially so because after losing 3 or 4 times in a row most traders pass up on a setup -- which inevitably turns out to be the one trade that is the winner that pays for all the losers.

Essentially trading is the art of looking for lottery tickets -- just read the history of any of the great traders from Soros to Tudor Jones to even Jesse Livermore and that fact become obvious.

So how do you create a money management system to accommodate the Pareto principle and at the same time make it psychologically palatable? The only way I know how to achieve that goal is with a short exit/long exit structure or as K and I always call it T1/T2. The idea is to always trade with 2 units. The exit on the 1st unit should be slightly less than the stop and in an ideal world allow you to win 60% of those trades. Then you move the stop on the 2nd unit to breakeven and aim for at least two times risk and maybe even three times risk on the second part of the trade.

This week in my coaching webinar we ran test after test of our trading strategy against a variety of major currency pairs looking at the past 100 trades in each. Inevitably the T2 target was hit between 19%-25% of the time, proving the Pareto principle right.


Although on the face of it such payout odds would seem to be a losing system (run 10 trades with 50 pip stops and 100 pip targets and only win 2 out of 10 times) the blended strategy actually proved to be very profitable.

The reason the T1/T2 strategy worked was that the short exit eliminated about 20% of additional losses. As Warren Buffett and Charlie Munger often say the key to their success is not picking winners, but avoiding as many losers are possible.

The T1/T2 structure offers two key benefits. First it skews the math in your favor making the overall results positive or far less negative because it minimizes the number of losses, but more importantly, it creates a much more human-friendly trading environment by increasing the total number of winning trades.

By the way one final note on our tests this week -- only two out of ten currencies we tested produced positive results that were responsible for the vast majority of the overall pip profit, proving that the Pareto principle operates on the portfolio level just as it does on the single trade level.

There is nothing we can do about power laws in nature, but to accept their presence. But we can survive and thrive in the market environment if we start using the T1/T2 money management system to conquer both Mother Nature and our own behavioral biases.

Trade Like Tiger

Boris Schlossberg

(I wrote this about goalies but it might as well be about Tiger)

In the world of sports, there is no more paranoid position than being a hockey goalie. You are, for intents and purposes, a human shield used for target practice. Your job is to stop the angry sting of rubber puck flying at you at more than 100 mph as you try to make sense of the constant swirl of motion in front of your goal. You play on a team but are essentially alone. You cannot win games but only lose them.

Little wonder then that hockey goalies tend to be a bit “peculiar”. In my own misspent youth minding the net, I wouldn’t hesitate to throw my mask, glove, stick -- anything that I could get my hands on -- at my poor defensemen, when I was even slightly displeased with their positioning. I would heap a torrent of verbal abuse on them that I would never unleash on my worst enemy. And yet these big, beefy guys, who under different circumstances could snap my neck in two without breaking a sweat, meekly absorbed all of my rants. Such is the power of a hockey goalie.

A few years ago NY Times ran an article talking about what sociologists call “non-normative” traits of being a hockey goalie. There was Bernie Parent, the famed keeper of the Broad Street Bullies, who took a nap with his German Shepard every day. Another NHL goalie compulsively stripped off his uniform between each period to take a shower as an elaborate superstition ritual. My favorite, however, was Gilles Gratton, who as New York Times writes, “bounced around in the minors in the ’70s before ending his career with the St. Louis Blues and the New York Rangers. Gratton liked to skate in the nude sometimes, wearing just his goalie mask and refused to play if the stars did not line up properly. He believed that in a previous life he was an executioner who stoned people to death and that he was fated to become a goalie — someone on the receiving end of a stoning, so to speak — as punishment.”

Although, goalies rarely if ever score a goal, any hockey player worth his weight will tell you that you can’t win the game without a good one which is what makes the story of Martin Brodeur so interesting. Brodeur was the inimitable netminder of the New Jersey Devils who spent more than 20 years in the league. He is no doubt one of the more talented goalies in NHL history, but what makes Brodeur unique is his ability to recover from losses.

In a profile of him by the New York Times, the paper wrote,

“Hockey people say that Brodeur’s particular strength is his ability to bounce back from a bad goal or a bad game and not let it gnaw at him. Hockey was locked out for the first half of this season, and during the Devils’ truncated training camp last month, you could see that he hates to be scored on even in practice, rapping his stick or ducking his head in disgust after letting one in. But the cloud passes in an instant, and then he’s bouncing on his skates and looking for more pucks to swat away. Lou Lamoriello, the Devils’ general manager, says, ‘Marty’s mental toughness, his ability to overcome a bad game, is just phenomenal.’ “

The older I get, the more I realize that there is simply no greater skill in life than the ability to recover from adversity. This is doubly so when it comes to financial markets, which like a hockey puck traveling at 150 miles per hour will do their best to knock you off balance every single day.

When we are young we think we are invincible and therefore never give much thought to recovery, assuming that our body and our mind will just snap back. But as we get older and hopefully a bit wiser we begin to pay more respect to the process of recovery. When I was young I had the bad luck of catching six cases of pneumonia before I was twenty years old. The net result was that my lungs were shot and whenever I caught a cold it usually turned into a month-long bronchial infection that made New York winters a constant misery.

But I as I got older I began to take my condition more seriously. Instead of trying to “gut it out”, I would drop everything at the first sign of sniffles, get in bed, drink 6 liters of water and try to sleep for 12-14 hours at a time. Doing this, I’ve managed to cut my recovery time from an average of three weeks to just a few days and have had far fewer colds in my 50’s than I did in my 30’s.

When it comes to trading, the ability to recover is far, far, far more important than the ability to win. No matter how hard you try, no matter how good you are, no matter how robust your strategy -- you will lose. And it’s at that point that true success will be determined.

Just like with my colds, I’ve learned over time that recovery from your trading losses depends far less on you being “right” and far more on you being “small”. Smaller trades lead to smaller absolute losses which give you time to assess the markets with a much cooler head. You don’t rush into the same trade, you don’t try to win it all back at once and you don’t carry the burden of your losses for days on end. Like Martin Brodeur, you realize that the darkness passes and tomorrow brings another day of opportunity to go toe to toe with the market.

In Trading Losing is a Feature not a Bug

Boris Schlossberg Uncategorized

One of the best things a trader can do is run the strategy tester function in MT4 on any 1-minute chart. Ideally, you’d like the test result to be positive in the end, not because it will show you how to make money, but because of what it will teach you about the nature of trading.

The one minute chart, as I’ve said many times in the past, is an amazing hack that allows you to look at hundreds of trades over just a few weeks of data. So run the strategy in MT4 and watch the graph dynamically build itself in real time as each trade gets added.

One thing you will never see is a straight 45-degree line running from left to right. There are no regular paychecks in trading, What you will see instead is the equity curve rising 10% in an uninterrupted fashion only to drop back to zero and then below it. You may see that a few times during the lifespan of the strategy and every time that happens more than 90% of you will stop trading the system. Yet in the end, after a few months or a year or even a few, the system could end up being incredibly profitable.

All of us come to trading with an absolutely wrong model of how things work. Sure, we can imagine, one, two maybe even three losses in a row. But after careful study, hard work and discipline we imagine that we can eliminate those mistakes and embark on smooth consistently profitable money making adventure.


To borrow a line from the software business -- losing is a feature, not a bug. In fact, almost all great investors lose or underperform for long stretches of time. Warren Buffett underperformed the market by a whopping 54% in the late 1990s and has had several drawdowns of 40% in his career. Almost no one who tried to copy his trades would have stayed with him through the losing times and yet his long term record is one the best ever.

That’s why the single greatest lesson any trader can learn is not risk management, or strategy selection or market analysis. All of those are crucial to long term success but will be utterly useless unless the trader accepts the fact that stomach-churning losses will never stop.

Here, the Oracle of Omaha can be a useful guide. You can’t make losses disappear, but you can do your best to survive them. To that end Buffet offers two great pieces of advice -- don’t do stupid things and don’t overlever your trades.

Both Buffett and his investing partner Charlie Munger have always claimed that their success came not from making smart choices but mostly from avoiding the dumb ones. If you are running a system and a given instrument is only producing mediocre results -- continuing to trade that instrument on that system is sheer idiocy. There is no guarantee that any of the well-performing instruments will maintain their edge, but there is almost complete certainty that a poorly performing instrument in the past will cause you losses in the future. Sure, there are exceptions to the rule but that’s precisely the point. Strategies are about rules, not exceptions.

Still, the single best advice from Buffett is not to over-leverage. Leverage is the single biggest reason why most retail traders blow up their account. You can survive a lot of adverse market regimes on low leverage but you can’t survive even one mistake on high leverage. That’s why it’s worth it to always start trading with no gearing whatsoever by trading one times equity per trade. The natural leverage of multiple positions will be more than enough to keep you on your toes.

You’ll Never Understand Trading Unless You Read This

Boris Schlossberg

If you’ve run hundreds of backtests over the past few days like I did you come to a startling conclusion.

There are no winning trading systems.

There are only systems that drawdown a little less than they run up.

EVERY SINGLE system you trade will lose money if you trade it long enough and sometimes it will lose a lot.

I call this the Law of Paying the Pip Piper. Basically, the absolute best that you can hope for is that your drawdowns are slightly less or equal to run-ups. So that a system that just made you 300 pips over the past few months will -- as surely as day follows night -- now proceed to lose you 150 to 250 pips over the next few weeks.

Why does this happen? Because market regimes change and every single system is optimized for one or the other set of conditions -- continuity or mean reversion -- or to put in more colloquial terms -- trend or tread. In continuity (trending) markets systems that bet on continuation will thrive. In markets that tread the exact opposite bet pays out. There is only one letter difference between trend and tread but that tiny change is all you need to make a lot of pips or lose them.

Trading is the closest thing we have in the modern world to the natural state of volatility. Our hunter-gatherer ancestors fully appreciated the idea that tomorrow will not at all be like today and more importantly that pleasant comfortable weather will inevitably turn into a miserable multi-week storm or rain and destruction. But the very goal of civilization is to completely annihilate the volatility of everyday life. We built massive furnaces up North which allow us to live in comfortable 65F weather in Sweden and we build massive air conditioning complexes in the south allowing us to do the very same in Las Vegas. We smooth out our income streams through the magic of “salaries” and smooth out our food supply chain through some of the most complex logistics ever imaginable so that it becomes as natural to eat a peach in December as in June regardless of whether it comes from Chile or Georgia. So little wonder that our modern mind, so carefully protected from the vagaries of nature is, so coddled by the myriad of tools of civilization is so ill-equipped to handle trading.

That’s why backtests are so useful. Not because they will provide you with the one answer to true riches. No, they’ll never do that. But they will show us the narrative of the trade. Like time-lapse photography, they will compress thousands of hours of market action into just a couple of minutes of results so that we clearly see how and why we will fail and how and why we will succeed. In short, the backtest will “uncivilize” our minds and open us up to the true nature of the task.

Now lest you think that these principles matter only to us lowly system traders and don’t apply to stock pickers, allow me to tell you about an exchange I had with the great Eddy Elfenbein this year. Eddy runs a great newsletter called Crossing Wall Street and you probably have seen him many times on CNBC’s Trading Nation. He is truly a great stock picker and his newsletter has beaten the S&P many years running. One time Eddy tweeted out about LUV (Southwest Airlines)

“Here’s a long-term chart of Southwest. Note the log y-axis to see how amazing the stock has been. Up 26,600% since 1980. RIP Herb Kelleher.”

I took look at that chart more closely and realized something and responded back to him,

“And yet Eddie it lost 75% of value between 2001-2010 -- that required real belief to hold on.” (This btw was way before its current troubles with Boeing’s 737).
To his credit, Eddy fully acknowledged that point.

So the point is -- if you trade you always have to Pay the Pip Piper -- even if you don’t trade FX.

How I Gained a Years Worth of Wisdom Trading the 1 Minute Chart for 24 Hours Straight

Boris Schlossberg

Like time lapse photography of the building of the Eiffel Tower, the one minute chart is a thing of wonder. It allows you compress year’s worth of trading into a mere 24 hours and exposes the real dynamics behind how returns in markets are truly made.

Last week, I was teaching a course on one of my new strategies. The strategy was designed to catch big turning points on the four hour, daily and even weekly charts, but on a lark to I put my trading robot on a one minute chart just to see what would happen. The results were so interesting that I quickly did this with my other strategies in a variety of permutations and here are some of the ideas that I unearthed.

Everything is lumpy.
The great lie of finance is to convince investors that it can take the wildly chaotic and uneven lumpiness of real life and turn it into a steady and predictable stream of returns. Nothing can be further from the truth. Perfect 45 degree equity curves only exist in the fantasy of backtests. The reality is that equity almost rises and falls with stomach-churning bumpiness of a rollercoaster even on the most risk-controlled strategies. That’s because all strategies are basically thrown against the market regime. Sometimes they are in sync and sometimes they are out of sync and no amount of risk control will prevent a drawdown when styles clash. Just take a look at the two charts below and you quickly get an idea that like all things in life, trading is a streaky business.



2. Pain is easiest in small bites

When you are trading a daily or weekly chart, every trade can seem like a scene from Hamlet. You double and even triple guess yourself and torture yourself with every slow dripping tick of the chart., When you are doing 150 trades per day the stops are mostly a blur, as long as you control risk. My trade size on all these strategies was .5 lever or 10,000 units per every $20,000 equity. That’s right I was even trading at 1:1 leverage. This made it a lot easier to absorb losses even when they came three, four, five in a row. My worst drawdown was only 75 basis points from equity and just 2.5% from peak to trough. This allowed me to have the psychological strength to trade through the losses and made me realize that the only way to survive in the markets is either through time or size. If you are an investor you simply wait out the adverse price movements sometimes for decades at a time. If you are a trader you take tiny losses until the price action turns your way.

3. Robots are the future.

None of this would have been possible if I didn’t have a robot placing my trades. The robot took every signal, managed multiple entries and exits, dynamically adjusted all the stops and take profits and cleared inventory every time. Over the course of 24 hours it made more than 250 trades without an error -- a feat that even the best human trader would be hard pressed to accomplish and most of us would fail miserably.

Next week I should have more than a thousand samples each and will return with my thoughts on what this experiment teaches us about the delicate balance between risk and reward.

Can Retail Traders Trade like the World’s Biggest Hedge Fund? Yes!

Boris Schlossberg

Ray Dalio built Bridgewater Associates into the world’s largest hedge fund, on one simple idea -- safe assets can give big returns if lever them correctly.

Yes, yes, yes. I know that Risk Parity strategy has been a huge beneficiary of secular yield declines, global yield compressions and that greatest gift of all -- Quantitative Easing.

But details aside, the fundamental insight that made Dalio billions upon billions of dollars was that you did not have to risk your hard earned money on risky stocks. You could just buy nearly risk-free treasury assets and then lever them up so that a one year t-bill yielding a virtually guaranteed rate of 1% levered 5X would suddenly transform itself into a 5% annual return without any of the heart palpitations of holding stock.

I am of course simplifying greatly, but Dalio’s success holds lessons for us all. We all have a variety of strategies we trade in FX. Some are lottery type payout ideas that bleed money until one big hit pays out for a year’s worth of work. Others are just the opposite. Insurance like products that provide small but steady profits each day but can wipe out half the equity on one badly stopped trade. And then there are strategies that just tread water.

I have one such day strategy myself. It makes about twenty trades per week and on a good week ekes out about 40-50 pips of profit. It has modest stops and even more restrained profit targets and just the tiniest of an edge to give me a small return. All in all, it takes about 100 trades to make 100 pips of profit from this strategy.

That probably horrifies most of you. I still remember the howls of outrage from some of my members when I told them that most good day trading strategies essentially have a positive expectancy of about 1 pip per trade. This is basically equivalent of walking up Broadway from downtown to uptown and bending up at each street intersection to pick up a penny. After about 10 blocks you will quickly grow tired of the task. But imagine if you had an automatic hoover machine that grabbed those pennies for you. Not only that, it sorted them out, put them in rolls, deposited them in your bank account without you doing any work.

That’s the power of a day trading robot. If I had to hunt and peck my way to 100 day-trades a month, I would have stopped a long time ago. But with my EA working 24 hours a day, I never have to worry about missing an entry, managing my exit or watching the market. This very modest strategy runs by itself and slowly adds pips to my account.

This is where Ray Dalio’s strategy comes in. While my day trading is hardly a Treasury bill, it is the lowest volatility strategy in my portfolio. It rarely declines by more than 50 to 100 pips from peak to trough. That means I can margin it at 5X lever and have decent shot at making 500 pips per month or about 5% on my money. That’s huge! If I even come close to that target that means I can aim for 60% returns with maybe 20% max drawdowns. Such payouts just don’t exist in standard market instruments where the absolute best you can hope for is to lose about half what you seek to gain (so if you want to double your account, be willing to lose half of it -- and very likely more than that).

That’s the power of automated trading in today’s retail markets. It allows you to mimic the risk profile of the world greatest hedge fund, without having a billion dollars in the bank.

What Flip or Flop Taught Me About FX Trading

Boris Schlossberg

I have never owned a house. In fact, in more than half a century of being alive I have never held a deed to anything more valuable than a couple of rusted out 1990 Honda Civics. My life has resembled nothing so much than the classic 30 Rock episode where Alec Baldwin’s Jack Donaghy, interrogates Tina Fey’s character.

“Lemon, where do you put your money?”
“The bank.”
“What?! What are you -- an immigrant?”
(Guilty as charged)

So it’s no small irony that my one big weakness for TV is HGTV. I haven’t had cable for more than a decade, but when I am on the road, there is nothing I like more than binge-watching home renovation shows. I like the Scott brothers, the ever-chipper Chip and Joanna Gaines and Nicole Harris’s rehab, but I love Tarek and Christina el Moussa the most. (And yes I was heartbroken when they divorced).

There is no greater voyeuristic pleasure than watching Flip or Flop episodes as they go through the struggles of buying dilapidated property and then restoring it to its utmost beauty and value. Each show is a mini-drama that happily kept me glued to the TV screen in many hotel stays.

So I was instantly intrigued when a CNBC clip of Tarek popped up my Twitter feed this week, and like the fanboy that I am, I instantly clicked to watch it. What surprised me however was that in his two and half minute appearance Tarek laid down more trading wisdom than I’ve heard in years from seasoned market pros. Here are some of his pointers.

1. It’s not the exits, it’s the entries.

As Tarek says, “You make your money when you buy the house.” What he means, of course, is that every investment (or trade) is only as good as the price you pay for it. This made me step back and re-examine my own trading systems. The default move of my strategy is to go market when the signal sets up. What if, I wondered, I just laid out limit orders 3 pips under the market for day trades, and 10 pips under the market for swing trades? Would the price run away from me? Turns out that no. In fact, I pick up as much as five extra winning trades per week and for a guy who does more than 100 trades each month, that is a massive, massive edge that I intend to explore.

2. Less positions, more money.

When asked about how many flips he had going at one time Tarek noted that at his peak he was running as many as 74 properties which stressed him to no end. Currently, he runs less than half that amount but his profitability is actually higher.

This is a problem I struggle with all the time. Like everyone else in the FX market, I want -- More! More! More! And yet when I look at my P/L at the end of the week I realize that more strategies actually means more risk.

Did you know that finance academics determined that you can achieve 95% of the benefits of diversification with just 15 stocks? That’s why trading the 30 Dow stocks over the long run pretty much produces the same return as trading 500 stocks in the S&P.

When I look at my basket of algos I realize that just a few medium term swing strategies produce the vast bulk of profits. The rest just keep me glued to the screen and torture me with their seesaw swings in equity.

3. Trading is timing in more ways than one.

As Tarek says, instead of ultra-high-cost projects that could tie up his capital for months or years, he likes the “turn and burn projects” in the 300K-700K range. The risk of the market “shifting” in a long term project is really high and the prospect dead money could be detrimental to your “trading” capital. Much like him I find that the 4 hour chart is the perfect “turn and burn” sweet spot for my algos. The risk is very clearly defined so the drawdowns are bearable, and while the rewards are modest they truly add up as you flip those trades.

Here is the full interview -- hope you enjoy it.

Trade a Strategy Not a Stock

Boris Schlossberg

I’ve said this over and over that if you are not reading Matt Levine’s free daily newsletter you are really not an informed market actor. The man writes so well about so many complex financial issues that his daily missive is often the highlight of my day.

This week in a riff on Bill Gross and the meaning of Alpha, Matt truly outdid himself and I am going to shamelessly quote a very large piece of his note because I think it carries so many important lessons to those of us who switched to algorithmic trading.

Levine writes, “Did Bill Gross generate alpha? Well, and what if he didn’t? What is “alpha”? Often you read that alpha is an investment manager’s return above a benchmark—if the S&P 500 returns 10 percent and a stock manager returns 12 percent, he has added 2 percentage points of alpha—but academics and allocators tend to take a stricter view. If he just bought riskier stocks to get that extra return, that’s not really alpha; he’s not demonstrating any extra skill or “really” outperforming the market.
One stricter approach goes something like this:

1. Look at the manager’s returns over time, and get a rough sense of what he actually did to get those returns.

2. Construct some smallish number of mechanical investing strategies that are sort of similar to what he actually did. These strategies could be as simple as “buy all the stocks in the S&P 500 index” or as complicated as “use an optimal trend-following strategy of buying lookback straddles”; they could involve a passive buy-and-hold approach or constant trading; but the point is that they can be totally specified in advance and a fairly simple robot could carry them out.

3. See how much of the manager’s actual performance could be explained by those mechanical strategies: That is, if you had just replaced the manager with a handful of simple robots programmed to carry out straightforward strategies, how close would the robots have come to his actual performance?

4. If the robots’ performance looks nothing like the manager’s, then you have just chosen the wrong strategies: If there is little correlation between the mechanical strategies and the manager’s results, then that means that the manager is doing something very different from what the robots are doing, and you have learned nothing.

5. If the robots’ performance looks a lot like the manager’s—if the correlation is high—but the manager outperformed the robots, then he is adding alpha: He has demonstrated skill that your simple robots can’t match. His strategy is not as simple as “buy all the stocks” or “buy all the stocks with high book values” or “buy all the stocks that went up yesterday” or anything else that you can fully describe in a sentence; his strategy instead involves buying stocks that are good and not stocks that are bad, based on his own mystical intuition or hard work or whatever.

6. If the robots’ performance looks a lot like the manager’s, but the robots outperformed him, then he has negative alpha. Perhaps this just means that he’s terrible and keeps losing money, but if you’ve come this far that is unlikely to be the explanation. Instead, what is more likely is that he has mostly made money, and has attracted investors and made a name for himself, but the way that he has made money is not primarily through mystical intuition about what stocks to buy. His intuition about what stocks to buy is mostly bad—worse than the robots’ mechanical selection—but his choice of strategies worked out fine. “

Now the money line in this whole long explanation is the very last sentence. “His intuition about what stocks to buy is mostly bad -—but his choice of strategies worked out fine.” Substitute the word currencies for the word stocks and the concept can be applied to any one of us. THIS is the key insight that makes me so excited about algo trading. The beauty of algo trading is that you do not have to make great trades. All you need to do is just make good enough trades -- AS LONG AS YOUR STRATEGY IS THE RIGHT ONE. This now turns you from a trade idea generator to a manager of strategies, which you can then compile into portfolios to make pips something like this.


Ages ago, when K and I worked for FXCM and ETFs were just becoming mainstream I got excited about the whole idea of “Trade a strategy not a stock.” As usual, I was way ahead of myself, but now, more than a decade and a half later the technology is there and the possibilities for us retail traders are endless.

If You Aren’t Willing to Drink Your Own Pee – Don’t Trade

Boris Schlossberg

“Never depend on those luck moments -- they are gifts -- but instead always build your own back-up plan.”
— Bear Grylls
“Look, sometimes, no matter how hard you try, sometimes you need a bit of luck.”
— Bear Grylls

A trader friend of mine posted these two statements by Bear Grylls on his Facebook feed trying to point out the often contradictory things that people say.

But I looked at those statements as instantly posted, “Moral of the story -- unless you are willing to drink your own pee don’t trade!”

My snark received more a few laughs, but I was actually dead serious.

I am a huge Bear Grylls fan. I’ve watched all the shows. I’ve seen him drink his pee in the desert, swim naked in ice-cold waters of the Arctic and bury himself in the snow to survive the night. Here is the thing. Grylls didn’t do any of these things because he liked them but yet he did them willingly -- more than willingly -- joyfully because he knew that there was a greater psychological truth to his actions that would result in his survival.

Last week I told you I was bitten by some mysterious flu/stomach/norovirus combo that basically had me crawling on the bathroom floor for 24 hours straight.

Now prior that incident I drank 10 cups of coffee per day. That’s about 70 cups of coffee per week.

Ask me how many cups of coffee I had this week?


Now if you were to tell me two weeks ago that I would be drinking less than one cup of coffee per day and sipping hot water with lemon for the other 20 hours I am awake each day, I would have laughed you out of the room. I don’t drink. I don’t smoke. I don’t even eat fatty or sugary foods. But the one thing I was certain of was that I was a caffeine addict. And yet here I am perfectly fine. No withdrawal symptoms, no headaches, no irritable behavior and most importantly no coffee. (Sidenote -- wow did I burn a lot of money on coffee!)

Why was it so easy to stop? Because there was a greater psychological truth to my actions. Post my illness my stomach simply can’t handle any irritants at all so giving up coffee was easy because it made me feel good.

Psychological truth ( something that seems true to YOU rather than being objectively true) is the single most overlooked aspect of trading. I realized that last week when I came back from my battle with the germ gods and looked at my trading system with a fresh pair of eyes.

I had designed my systems with the best possible logic and the most robust empirical evidence there was and yet I found myself overriding the system more and more frequently. Why? Because my psychological truth is to take profits early. I don’t care about giving 300 pips of possible profit. I care about not losing the 15 pips of certain gain. There are some traders who love the long ball and some who like to grind it out with base hits. I am definitely the latter type of player.

So instead of trying to fit myself to the system, I decided to see if I could make the system fit me. I asked myself what is the shortest possible take profit that would satisfy me, allowing me to trade the system to trade without interference. Then I adjusted the parameters to make mathematical sense within the new structure. I didn’t make one single change to my logic. I simply adjusted the odds to suit my personal behavior. I aligned the mathematical truth with the psychological truth and the end result was 22 trades without interference and a net positive week at that.

Now I am looking at the longer term time frames with the same mindset, adjusting the edge to fit my personality, rather forcing myself to trade to someone else’s idea of risk stricture. I am pretty certain that next week my longer term strategy will trade much closer to its intended plan. Align the mathematics with your personality and I bet the same will happen to you.

Death by a Thousand Cuts is the Best Thing Ever

Boris Schlossberg

Imagine you go to bed one day feeling fine, having just set up your algo to super “sensitive” setting that you are certain will generate winning trades and then wake up in the middle of the night -- as you usually do -- but this time unable to move. With the family away in Florida on a winter break, it’s just you and your 12-year chihuahua struggling to make sense of it all.

You are hit with dizziness, waves of nausea and your muscles ache like you’ve been stretched on a medieval rack. What is it? The Flu? Food sickness? Norovirus? In the end, you never really know, but you spend the next 48 hours crawling from your bed to the cool porcelain floor of the bathroom, drifting off into delirium which broken every thirty minutes or so by the ding-ding-ding of your algo making trades. You are just too sick and too disinterested to walk over 10 feet and turn off the machine so you let it trade as you wallow in your misery.

So that was my start of the week. By Thursday I’d finally managed to break the fever and drag myself to the screens to see what happened. I had bet on the idea that the new “super sensitive” setting would get me in earlier into intraday trend moves but instead the choppy FX markets this week whipsawed all my positions, once, twice -- about a million times. It was truly death by a thousand cuts.

And yet this was the greatest thing that happened to me this week.

When all was said and done I was down just 4.5% in my account because of two things. One, I kept my size small. Two, the algo took every stop.

If I was trading this manually I am certain that I would have lifted stops, I would have added to size and my overall loss would have ballooned to a much bigger size. That’s because most traders (and I am not an exception) can’t take more than 3 stops outs in a row, at 7 stops most traders simply give up. We hate the pain. We hate being told that we are wrong and we hate losing money. Over the years I’ve heard every possible elaborate excuse for not taking stops and always the most common argument is that stops are just a death by a thousand cuts. Yes! Exactly. The longer you can stave off the actual death of your account the greater your chance to fight another day.

As I was walking my dog still groggy from whatever virus hit me this week I came across a sign on a church. It was a quote from James Baldwin. “Not everything that is faced can be changed, but nothing can be changed until it is faced.” The beautiful thing about markets is that sometimes they help us crystallize the bigger lessons of life. Not facing stops is simply the refusal to admit that your timing was wrong, your system was wrong, your analysis was wrong. Stops are not the enemy. They are a protection mechanism to help you become better.

I realized that my “super sensitivity” setting was the stupidest decision ever. I stopped the algo immediately and reset the old time tested settings and by end of the week, one of the accounts was already back to break even for the week as both my health and wealth turned for the better.

The Monotony of Trading

Boris Schlossberg

MT4Traderfest 2019 -- A FREE Weekend Webinar Spectacular for All Retail Forex Traders

Someone on Elite Trader posted this the other day, “People never realize the monotony of trading. Making money is exciting but can you go stay in and day out with the same repetitive discipline and not get bored when the market is slow or you are accumulating losses.”

Of course not.

Which is why so many of us get in trouble with prop trading, which above else requires the discipline to NOT trade. Take a walk down memory lane and it’s almost certain that most of your biggest losers were simply bored trades gone wrong.

Which is why it’s been such a pleasure lately to hand over most of my trading to my robot who has no problem with boredom and can sit in a position for a day, a week, a month -- whatever it takes.

We’ve had an extraordinary week in BK so far, capturing 500 pips in our little algo land. And sure, most of it is due to the confluence of strategy and market regime and when things change we can puke up just as much (hopefully less) but the thing that struck me the most about the past few weeks is how robots have made us much better prop traders.

I was sitting at lunch with K today (who has been absolutely killing it with her prop calls in the chatroom this week) and remarked how much better her market vision has been recently. Same with me. My own little prop account in which I putz around on the side has been consistently green every day since the start of the year.

And then it hit me.

The robots have taken all the pressure away. There was no longer a need to “find fresh” trades every day. The robots found them, took them, managed them. This gave us the time to think, to react intelligently to the news putting us on the right side of the trade more often than not. The prop-trading got better without much effort on our part.

Mind you, this isn’t an argument for 100% algo trading (although you do NEED to COME to my MT4 Traderfest this weekend) rather this is just a simple observation that sometimes the best benefits of algo trading are ones you didn’t even consider.