How to Make Money When Your Business Depends on Luck

Boris Schlossberg

Let’s be honest, trading is a very volatile business. Probability is just a fancy word for luck and the variability of returns is order magnitude greater than in any other retail business.

Imagine that you decided to go into the coffee cart business. You staked out a corner on a busy New York street and set up your stand. Within a month – at most three – you would have a very good idea of how many coffee cups you would sell each day. Believe me, I know. I talk to my local coffee guys every day and they all have a very good grasp of the market. Now, like with any other business the coffee cart stand could face an existential threat – there could be a natural disaster or a city maintenance project that could curtail all traffic for a certain period of time – but that is a different issue. On day to day basis, if you are selling coffee cups and pastries you know within 5% either way just how much revenue you will do per day.

Now let’s consider FX day trading. Projecting your daily revenue within +/-5% margin is a laughable notion. Markets are incredibly lumpy – even if you engage with them on an hour by hour basis. Some days the activity is torrid and all set ups are working. Other days there are literally no trades and yet on other days, the volatility wreaks havoc with your best-laid plans and nothing works.

The hardest part of being an FX day trader ( or any trader for that matter) is the very high level of uncertainty that surrounds the day to day operations of your work. So how do you succeed in a business that often depends on luck? First of all by accepting and coming to terms with that very fact.

Almost all the energy and effort in trading is spent on finding “the secret” – a sure fire way to bank money with the certainty of gasoline station owner on a busy interstate highway. Sorry, no such secret exists unless you are Virtu, have hundreds of millions of dollars of hardware and software at your disposal and can make up to 100 million trades per day allowing the law of large numbers drop all those sub penny profits into a big fat wad of money. For us regular retail traders such possibilities are out of reach.

In fact, I would argue that this obsession with consistency is the single most toxic idea in trading and is responsible for almost all the failure in the business. It has certainly been true with me. It’s taken me years to realize and slowly accept the near constant element of luck in everything we do.

In order to help me deal with the emotional reality of the market, here are some concrete things I do to put the odds in my favor as much as possible every single day.

  1. Control size. This is the ONLY variable over which traders have full control, yet this is often the first and the worst mistake most people make. Remember rule #1 of trading – you can’t trade if you don’t have the capital to trade. In FX where leverage can run as high as 400:1 the first thing most rookies do is put the pedal to the metal and gun for the highest possible return. Their chance of flame out is 100%. Sometimes it takes seconds, sometimes it takes days sometimes it takes months – but they always get margin called. My preferred size is 1X lever – literally no leverage on the opening trade. SInce I will often add several trades to the same position or will open several positions at once and will turn over my account as much as 10 times each day, all of those factors create more than enough leverage for me. In addition, I have an EA that will automatically close out all trades the moment a certain dollar threshold is reached (-$1000.00 in my case). I highly recommend you do the same. Pip stops are fine but dollar stops are definitive and keep you alive when the natural temptation is to avoid taking a manageable loss.
  2. Trade you plan. Make a checklist of all the factors that trigger a trade. If just one variable is not checked off then don’t trade – because then you are not trading your setup, you are just gambling aimlessly like a drunken sailor at the casino. What are the chances that you can do that and survive? Don’t be a sucker. Trade. Your. Plan.
  3. When the markets get tough – don’t abandon your plan – adjust. Speculation is observation. All your initial trading rules came from observing the behavior of the market and then creating a model to trade it. The more you observe, the better your model will become. For me, sometimes tiny little adjustments such as easing the point of entry by half a pip in order to allow for the spread, or widening out the parameters to allow for higher volatility movements have made all the difference. Markets change constantly, so you must adjust accordingly. This is what makes trading so challenging but also rewarding.

Despite the fact that this business is often driven by luck, it is also one of the few places where almost all decisions are within your control. That is power that doesn’t exist in any other aspect of life so use it to the fullest and have fun in the markets.

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Do You Want to Run a Business or Do You Want to Gamble for a Living?

Boris Schlossberg

One of Sylvester Stallone’s less known credits is a movie called Shade, set in the world of LA hustlers and poker players that deals with the inner workings of the gambling world. I’ve always loved the tagline for the movie which reads, “When betting is your life, you leave nothing to chance”. The movie is all about intricate cheat schemes that professional gamblers create to make sure they always win the pot – so its lessons to us as traders go only so far.

But I have always loved the ethos of the movie which was basically that in games chance you leave as little as possible to luck. To me, the message of Shade is that in a highly uncertain business such as trading you must be prepared for every eventuality by limiting your market exposure to the smallest reasonable risk.

That means that as day traders we need to trade small and trade often. We are the pigeons on the market floor. Plucking away at a few easy pips here and a few pips there, fleeing at the first sign of true danger. That may not sound glamorous or noble, but it is much better than either one of those things – it’s an effective way to make money.

The greatest business columnist working today is Matt Levine of Bloomberg. He is a former M&A lawyer at Wachtell Lipton and a former banker at Goldman so his understanding of market structure and Wall Street machinations is second to none. The other day in his column he made a casual observation that really hit home. Matt said that Wall Street banks are in the moving business, not the storage business. What he meant is that successful trading is inherently about moving inventory whether it be through bid/ask differential, scalping, short term dealing or even agency brokerage business. Banks make their money by moving product from customer A to customer B by passing risk along, rather than storing it.

Almost always the tragic mistake that all of us make is that we suddenly stop being a moving business and become a storage business. Sometimes the change is so subtle that we don’t even notice it. But it almost ends badly as the inventory inevitably turns rotten. These days, whenever I find myself nursing a trade that is long past its stop-out level – I try to remind myself that I am not in the storage business and let it go no matter how much it hurts.

Keeping things moving is crucial to long-term success and survival, but I think many retail traders fail because do not understand the real nature of this business. The romantic notion of trading is built on the idea of placing a thousand dollar bet on one trade and walking away with a million. Trading books are full of such lore – The Soros Bank of England trade, the Paulson short mortgages trade – blah, blah, blah. The reality is much more prosaic. It’s a business of making 1 pip a time.

A few years ago, I horrified another trader when I told him that it took me 100 trades to make 100 pips. (I meant of course net – after commissions, slippage and all other costs were taken into account) Still, he was repulsed at that notion and couldn’t imagine trading like that and yet if I were to ask him how much Coca-Cola made per ounce of Coke or McDonald’s made per hamburger the numbers would be not much better. Almost all high volume businesses have net margins of 10% or less. Most supermarkets operate on margins of as little as 2% and yet they manage to make money year in and year out. That’s because these enterprises don’t have any romantic illusion about wealth creation, only hard-headed understanding of how money really gets made.

Once we as retail traders, start treating trading as a business, rather than a lottery our chance of success will increase exponentially. As guys in Shade constantly remind me – when you gamble for a living, you should leave nothing to chance.

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How To Run Your Trading Like a Real Business

Boris Schlossberg

In my life I’ve always wanted to do only two things – trade and run a food business. To this day whenever I find myself in a Walter Mittyesque reverie I imagine running a restaurant or a food store (Montreal bagels in New York is my favorite fantasy) – but running a startup investment firm pretty much sucks up all my time so I put the idea aside for the time being.

Still, whenever I get a chance to talk to a store owner or a restaurateur I inevitably pump them for any information I can. Having spent most of my ill advised youth working front and back of the house I am well familiar with the arcana of the restaurant business.

Sometimes however I’ll strike up a conversation with a more modest establishment – like the guy who sells me coffee from the cart every day. My coffee guy is one the nicest and hardest working businessmen I know. I don’t even have to say a word – in a typical New York fashion he starts preparing my order when I am halfway down the block.

With Easter and Passover falling around the same time this year, New York has been a ghost town this week as almost everyone in my neighborhood has taken their kids to Florida or Colorado. So business was a bit slow and we had a chance to chat. Of course we got into a discussion of daily volume, peak flow and a million other things that would bore normal people to death.

However, the more I talked to my coffee guy the more I realized that what he and I do for a living is really not that different. Here was a businessman who worked hard every day, tried to execute as close to perfection as possible, but who also understood that his success was often dependent on forces outside of his control. He didn’t whine or cry when business was slow. He certainly didn’t throw temper tantrums and try to destroy his inventory and assets in a fit of rage, or suddenly decide to offer everything below cost in hopes of improving his business. He remained calm and disciplined in the face of adversity and was perfectly willing to accept the fact that some days, some weeks and even some months were not going to be profitable.

It always amazes me how disciplined most of us are when we run a physical business, yet how emotional and hysterical we become when we start trading a forex account. How many of us treat trading as a business? How many view each trade as a simple business transaction rather than as symbol of our intelligence, masculinity or self worth? Imagine if you were selling coffee – would you really give a sh-t if you spilled a few cups? Yet we spent inordinate amount time obsessing over every trade. Its just a business transaction. Its not a reflection of our omnipotence or lack thereof.

Looking at trading as business really helps to put it in perspective. You understand that there are planned costs ( spread, stops ) and unplanned costs (slippage, wrong execution etc). After all, anyone who runs a restaurant business understands that spoilage is part of the game, so why do we get so pissed when our orders are executed imperfectly? Its just business. In fact talking to my coffee guy I realized that not only should we look at our trading as just another small business but we should consider each trading strategy as a separate storefront that sells a different product. If you owned multiple stores would you expect each one to work perfectly all the time? Of course not. By treating each algo as a retail “box” we can hopefully stop obsessing over every pip and focus on running our trading like a real business.

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