The Best Trading Advice Comes from A Guy Who Makes Tapas

Boris Schlossberg

Unless you are a foodie the name Jose Andres will mean nothing to you. But in the restaurant world, Mr. Andres is a big deal. He owns 26 restaurants across the world, several of which carry Michelin stars. Ha has also been the face of Puerto Rican relief serving more than 100,000 meals in PR daily.

In short, Mr. Andres is what my grandmother would call -- a mensch -- a good and decent person who also has done well for himself.

Although I’ve known about Mr. Andres for years and have even eaten at his Las Vegas restaurant, I really didn’t give the man much thought until I came across a Business Insider profile of him.

Unlike many Emperor Chefs who brook no criticism, Mr. Andres has stayed humble and in fact, does something remarkable that caught my eye. Every day, before he starts his day Mr. Andres reads every Yelp review of his restaurant. Unlike most chefs who refuse to even consider the words of the hoi-polloi, Mr. Andres takes the reviews seriously and tries to instantly fix matters if he considers the complaints to be legitimate.

This is, of course, easier said than done. No one likes to be criticised, least of all chefs who are some of the most domineering personalities in the world. But Mr. Andres uses a very interesting trick to help him cope. As he tells the interviewer,”Thicker skin is something like, José the person, José the chef, inside me, I’m, like, ‘What the heck do those people think? Who are they? I don’t want them in my restaurant anymore,’ which is good to have, but it’s good that you do that internally.
“And then he’s José the businessman, who says, ‘Man, this is free advice that I should thank the person for, taking the time, and this we will use to communicate.’ Every day on my phone, I receive reports of every restaurant, social media, comments in-house by the guests. We use them. We don’t use them every day, but sometimes maybe something needs immediate attention and other things is information you put together and then three, six months later, you say, ‘Listen, look at the pattern here.’”

Now let’s see how we can apply Mr. Andres’s tricks of the restaurant business to our own little world of trading. What is a stop, but simply a market critique of your trade? It is essentially an instant Yelp review of your actions. Now for Joe the Average Person a stop is a very painful experience that makes him question his worth as a human being. That’s why we all hate stops and why we try to avoid them at any cost, often blowing up our accounts as a result.

But what if we decided that when we engage with the market we become Joe the Trader-Businessman rather than Joe the Average Person? Suddenly a stop is no longer a mark of shame, but a very valuable piece of communication.

Think about it. There are only two reasons why you get stopped. One, you were dead wrong in your analysis and the market went the other way. Two you either mispriced or mistimed your entry. Now while there is precious little you can do about one, there is actually quite a lot you can do about number two. Instead of punching the screen when you get stopped out, ask yourself -- what is the market trying to tell you? Are your setup assumptions still valid? The answers are there. Sometimes it’s a matter of regime change in volatility. Sometimes it’s as simple as taking trades only during the London-New York interchange. Sometimes it’s a question of creating tighter risk control rules.

The point being is that when you start looking at life like Mr. Andres, criticism becomes communication allowing us to improve and make more consistent pips, just as Jose makes delicious tapas.
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Why is All Trading Advice so Contradictory?

Boris Schlossberg

Trading is all about exits.
Nah -- trading is all about entries.
Trade with a minimum of 2:1 risk reward ratio
Nah -you’ll never make money if you don’t let your stops be bigger than your profits -- pigs get slaughtered.
If you want to make money trading follow your system rules.
Nah -- rules are meant to be broken -- they are just guidelines.

Spend an hour on the internet researching trading advice and you can easily conclude that this is a schizophrenic business and that no one has a clue as to what they are saying.

Trading advice may seem contradictory on the surface, but actually, it is not. It’s simply a matter of what trading model people choose to follow.

As I’ve noted many times before there are really only two ways to trade -- the lottery model and the insurance model. The lottery model is the traditional approach that looks for 2:1 or greater win ratio, has very few winners but makes sure that they are large enough to pay for the losers.
The insurance model, on the other hand, does the exact opposite, It tries to make almost every trade a winner and avoid losers as much as possible, but when it does get hit the loss is much larger than the wins. Just like the insurance business, it counts on winners (i.e. premium payments) to offset the rare losers.

Once you begin to view trading advice through the prism of these two models it makes much more sense. If you are following the lottery model and every potential trade could be a huge winner while the risk is generally small -- then, of course, you should follow the rules of your system and take every single trade. Discipline is paramount.

On the other hand, if you are trading the insurance way then passing up a single trade means almost nothing -- in fact, it may be hugely advantageous to do so, since you may miss a big loser which is the same thing as banking many winners. Discipline is actually idiotic and discretion is the key to success.

This also goes a long way to explaining why exiting early under the insurance model is actually very smart but under the lottery model can be ruinous. Under the insurance model, you are trying to avoid losses, your wins are practically guaranteed. So an early exit that avoids a major loss is the right move. On the other hand, an early exit from the lottery model can be devastating -- it’s the equivalent of losing your ticket before you can cash it.

The lottery/insurance duality also plays into trade selection. Lottery model traders should be very promiscuous with their entries (their risk is limited, but their payoff is large) but must be very disciplined with their exits (you need to bank massive wins to pay for a large number of losers.) Insurance model traders are just the opposite. They need to be extremely cautious with entries (the last thing you want to do is sell a life insurance policy to an overweight, chain smoking, motorcycle rider who doesn’t wear a helmet), but generally free to exit as they choose.

So when you hear two traders on the Internet yelling at each other, very often they are talking past each other.They are operating under completely different logic regimes. Therefore, before seeking anyone;’s advice or taking anyone’s criticism seriously understand your strategy and trade accordingly.

No Bulls-t Advice for the FX Trader

Boris Schlossberg

So you want to trade FX?
Forget strategies. Forget fancy charts. Forget listening to TV talking heads like me.
If you want to have any chance at success in trading here are five simple things you need to do.

1. Get a good execution broker.

You can trade on bid-ask spreads or on raw spreads with commission. In the end, the costs all even out. The much more important question is -- how’s your execution? If your trades get slipped and even worse rejected more than once a month. Leave. Leave the broker, because they are clearly not honest or competent and eventually one or both of those sins will cost you all your money.

Speaking of money if you broker is not Licensed with one or several of the following authorities: NFA in US
ASIC in Australia
MAS in Singapore
HMA in Hong Kong

Consider your money gone.

Do a simple experiment. Ask for half your account back. If it takes more than 48 hours to get your money -- leave the broker immediately.

You need to understand that brokers don’t consider your money to be yours, the moment you make a deposit they consider it to be theirs. So unless they have a regulator that makes them act as a fiduciary, your money is their money and all that trading you are doing is strictly for entertainment value -- you are never getting it back. If you are tempted by flashy offshore brokers with high leverage and tight spreads then understand that your trading is most likely imaginary. Your money is never coming back, even if you do manage to beat the market.

2. 4x for Forex

Speaking of beating the market. I had an interesting discussion last night. I was at a party with a lot of industry people including a consultant that sets up a lot of these offshore brokers. What the gentleman told me is that contrary to popular belief most of these brokers don’t even try to scam the clients. The mathematics of the FX business almost insure that 97% of traders will lose all their money. Why? Because of leverage. In FX leverage -- the ability to borrow on your account -- is astronomical. Outside of US leverage can be as high 400:1 or even 1000:1. That means you can trade 400,000 unit position on just 1000 dollars of equity. You may think that’s great but it’s actually financial suicide. Let’s just use a simple example of 100:1 leverage. If you put on a trade that size, just 1% move against you, wipes out your account. Do you know how often currencies move 1%? About 200 times per year. Do you think you can survive 200 days of 1% moves and escape whole? Let me ask you differently. Suppose I told you to run across the race track at Le Mans 200 times while the race was in progress. How confident would you be at surviving that challenge? When you are trading at 100:1 you are doing the exact same thing except with your money rather than your body. The end result is a disaster either way.

What’s the maximum leverage per trade? Four times. That’s right. That’s not a typo. Not ten times, not twenty times, not forty times. Four times -- and that is MAXIMUM not starting position. You starting leverage should be 1 or 2 times equity. That means that if your account is 10,000 the starting trade should only be 10,000 or 20,000 units.

Go ahead and snicker. But if you don’t follow that rule, the chances of you losing all your money are virtually 100%.

3. Get a Rebate
Every single broker in FX will pay you money to trade with them. They won’t tell you that up front and they may not even be willing to give it to you on an individual basis, but every broker has a rebate program that will pay you back anywhere from 0.1 to 0.5 pips back. If you do 5000 trades a year that’s 1000 pips of profit for doing nothing. That’s why you need to connect with a good introducing broker who will advise you what FX broker would be best for you. If you want some names just email me.

4. Discover Metatrader 4.

If you are trading FX on a proprietary platform rather than MT4 -- you are already at a disadvantage. MT4 is an almost universal piece of FX software that is available from any major broker. It allows you to create software programs that can trade for you. But you do not need to be a programmer to get the full value of MT4. The platform has hundreds of thousands of trading robots (called Expert Advisors) -- including those that we develop in our chat room, that can help you place trades at the right time, at the right amount and with the proper risk control. The future of life is robots. If you are not using them for trading you are already way behind all because you are subject to massive human error. You will hit the buy button instead of sell, you will buy 10 times the size you wanted and you will miss the exit price because you were looking at something else away from the screen.

Don’t worry, that’s totally normal -- we’ve all done it. But traders who trade with MT4 -- don’t do those things often, so they have an edge on you because they are making fewer mistakes. One very simple thing to do is to trade with buy/sell scripts so that any market order you place is always automatically wrapped around with a limit and a stop and never creates a risk problem for you down the road. Robots are the future and that fact is especially true in trading.

5. Get a good education (like our BK chat room) Trade with us

Yea ok, shameless self-promotion. I gave you four pieces of good advice so I get to toot my own horn a bit. Actually, it’s not even my own horn I want to toot. Most of the time I am just the sideshow in our chat room. The true value for you comes from interacting with other like-minded traders who will very often improve and refine the trading ideas and strategies that I suggest. Trading in a team environment completely transforms the game and gives you hundreds of different and creative ways to look at the market. Trading is not a solo sport. Make it a lifetime pursuit and join a team to trade with.

The Best Diet is Also the Best Trading Plan

Boris Schlossberg

The Only Place to See Me Live this Year -- and its TOTALLY FREE!

It never ceases to amaze me how dieting and investing are the two great social problems of the modern age. Basically it all boils down to this. In the advanced industrialized world we are all fat and none of us save enough money for our golden years.

Just 50 years ago this was not really a problem. Most of us did not work in sedentary jobs with our butts glued to chair for 12-14 hours per day and we did not consume highly refined sugary foods that deposited 2000 unnecessary calories in our stomachs every day. Cinnabon did not exist.

As to retirement, well smoking and cancer pretty much took care of it. Most of us died within a year or two of retirement so depleting savings wasn’t really an issue.

Now we live forever, speeding around in ridiculous motorized wheelchairs too fat and too weak to walk even a few steps as we worry just how long our money will last. What all of us in OECD world desperately want is to be less fat and more rich, so that we can enjoy our longer lifespan in good health and ample wealth.

Of course the reason that both dieting and investing have failure rates of more than 90% is because they both require Herculean efforts of willpower. They go against all of our human impulses hardwired into our psyches by thousands of years of evolution.

Even when we succeed in either endeavor over the short term we inevitably fail over the long term as our greed for both food and profits derail us from achieving our goals in a sustainable basis.

So are we destined to fail forever at dieting and trading? Not necessarily so. One of the most interesting pieces of recent nutrition research holds insights into how we can succeed on both fronts without radical changes in our behaviour.

What if I told you that you could lose weight without changing anything in your diet? You could eat the greasy tacos, drink the syrupy sweet Southern Iced tea and still have a chance to drop 5% of your body weight.

It’s called an 8 hour diet and it focuses not on what you eat, but on when you eat it. Basically scientists have discovered that reducing the time window for consuming food to just 8 hours a day ( ideally from 9AM in the morning to 5PM at night ) will have greater positive impact on your dieting than all the broccoli you can eat.

The research carried out at the Salk Institute in California showed that mice fed a high-fat diet within an eight hour time frame – for example between 9am and 5pm – were both healthier and slimmer than those given the same number of calories throughout the whole day. Even when obese mice had their eating window reduced to nine hours, they were able to drop 5 per cent of their body weight within a few days – while still enjoying the same amount of calories.

What I find fascinating about the 8 hour diet is how the same advice can be applied to the markets with similarly impressive results.

If nothing else my chat room is an ongoing experiment into the art of day trading and one of our greatest discoveries was that the time you trade is much more important than the strategy you use. In my chat room I have many traders using very different approaches to seek profit. Some use indicator driven strategies. Others use modified versions my fading algorithms that employ several entry and exit points on each trade cycle. And finally other like me have reduced their day trading methods the sparest simplest, single entry/single exit approach. Yet what all of us have in common is that none of us trade round the clock. We all trade very specific hours and then sit still for the rest of the day. That one minor change has had a bigger impact on both the accuracy and the profitability of our ideas than any strategy that we ever designed.

In our world of infinite possibilities, endless resources and round the clock satisfaction of our desires, the ultimate irony is that success depends on knowing when to say no. Less time eating and less time trading can help us become healthier and wealthier without much sacrifice.

In Trading – Good Advice or Bull-t that Just Sounds Good?

Boris Schlossberg

I am going to borrow the title of today’s column from a recent piece of Jason Zweig of the Wall Street Journal who is using to make other points -- but I liked it so much that I will appropriate it for my own means. Mr. Zweig often writes about the various behavioral weaknesses of investors and his advice which leans very heavily towards passive, patient long term investing is generally very valid -- FOR INVESTORS. But if you are going to trade you better forget every one of those ideas.

As the great investor Ben Graham, who Mr. Zweig quotes, once noted stocks have prices companies have values. Exactly. If you ever want to learn how to trade well, the idea of “undervalued” or “overvalued” better be erased from your brain. We don’t trade value. We trade price. And very often the right trade is actually opposite of what the proper value should be. It’s one of the reasons why I never spend a minute of my time trying to prognosticate the “value” of any currency any further than 24 hours forward.

But there is so much bulls-t advice in the trading industry itself that I thought we should try to set the record straight. This week Kathy and I did a live trading seminar on Wall Street with a small group of traders from around the world and some of those very bad ideas cropped up. So I thought I’d summarize the three most odious notions that continue to circulate in trader’s minds.

1. Have a high risk reward ratio (risk $1 of loss for $3 of profit). Bulls-t, bulls-t, bulls-t. Anytime I hear someone on Wall Street pontificating about how they never take a trade unless it has 4-1 r/r ratio I know they have never laid a penny of their own money on the line. You know what has a great r/r ratio? The lottery. As the New York Lotto ad goes -- have a dollar and a dream. And a dream is all you will ever get. The markets are brutally efficient. They don’t leave dollar bills lying on the floor that you can pick up for a quarter. There is a direct correlation between rate of success and the amount of risk you assume. Even most HFT algos trade with a NEGATIVE risk reward ratio because the computers know if you want to earn money you need to work for it and that means assuming more risk than reward.

2. Don’t Overtrade. Bulls-t Bulls-t Bulls-t. If by “don’t overtrade” you mean don’t place many random trades without any thought to entry or exit. Then yes I agree. But if you mean don’t trade a lot because it will cost a lot commission and you will just make your broker rich -- then you are total idiot who doesn’t understand trading at all. You know who made their broker obscenely rich? Steve Cohen. Marty Schwartz. Paul Tudor Jones. Michael Steinhardt. You know who also became obscenely rich in the process? The very same guys I just mentioned. The best traders in my room all have the highest commission bills. High commissions costs guarantee trading success, but they certainly dont guarantee failure and in fact more often than not they are a sign that you are doing something right.

3. Trade with Trend. Almost never is that a good idea. Trend only occurs in the market 20% of the time so that means you have an 80% chance of failure whenever you try that strategy. On an intraday basis the odds are even worse. And it’s almost always better to trade noise rather than trend if you are day day trading. Even if you are position trading it’s better to get into a trend trade on a counter trend move. Ever since I helped Kathy tweak her entries that way she has nailed 54 out of the last 61 trades for nearly 90% success rate trading “with trend”.

The BEST Swing Trades. The BEST Day Trades -$145 All in

Jason Zweig is right. On Wall Street there is a lot of advice that sounds good but really isn’t. In trading the same dynamic take hold. So its about time we actually started to follow good advice, rather than the well worn lies of gurus that just sound good.

How an Admiral Gave Me The Greatest Trading Advice Ever.

Boris Schlossberg

“Every morning in basic SEAL training, my instructors, who at the time were all Vietnam veterans, would show up in my barracks room and the first thing they would inspect was your bed.

If you did it right, the corners would be square, the covers pulled tight, the pillow centered just under the headboard and the extra blanket folded neatly at the foot of the rack- that’s Navy talk for bed.

It was a simple task. Mundane at best. But every morning we were required to make our bed to perfection. It seemed a little ridiculous at the time, particularly in light of the fact that we were aspiring to be real warriors, tough battle hardened SEALs but the wisdom of this simple act has been proven to me many times over.

If you make your bed every morning you will have accomplished the first task of the day. It will give you a small sense of pride and it will encourage you to do another task and another and another.

By the end of the day, that one task completed will have turned into many tasks completed. Making your bed will also reinforce the fact that little things in life matter.”

So begins one the best commencement speeches ever written. It was delivered at the University of Texas last year, by Naval Adm. William H. McRaven, ninth commander of U.S. Special Operations Command.

I’ve been thinking a lot about that speech this week.

On Wednesday, a trader in my room took a big hit on an ill timed GBP/USD trade that wiped out 20% of his account. He is a great guy, loved by all, but I knew that just telling him to buck up move on wasn’t going to help him.

Instead, I didn’t even bother commiserating about failed trade and ordered him to do the following: for the next few days he had to trade with the smallest size available on the platform (in our case that’s 1000 units on MT4) and produce 100 pips before he could do anything else.

Like all good advice this idea was completely spontaneous. It literally went straight from my head to the keyboard. But it seemed to have had the intended impact. The trader quickly forgot about the losing trade and set to work on his given task. His feel for the market returned so fast that he was able to bank 100 pips in a day rather than in a week handily beating the goal I set for him.

From this I learned several things.

  1. We are far more resilient than we realize
  2. Having a well defined, hard target goal is the best antidote against wallowing in self pity
  3. Doing one small thing well is far more important for your self esteem and your skillset than any “self-analysis” you can muster

In fact, I liked this advice so much, that applied to myself. Today I woke up and just couldn’t get into the groove with the market. Everyone in my trading room was banking pips while I stared at the screen numbly missing setups left and right. So I started to trade the smallest size possible using our day trading strategy and just plunged into the market until I was back in sync with the flow.

Guess what?

Learn How to Make 100 Pips Per Day

It worked.