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?

Two.

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.

Never Drink at a Vegas Table

Boris Schlossberg

Molly’s Game is a movie that has nothing to do with the markets, but every trader should see it, for this one scene alone.

The movie centers around a life of brilliant Olympic skier, who after a career-ending injury, stumbles into the world of high stakes poker, running games for various celebrities and businessmen in LA and then NY. In this one scene in the movie, a very good poker player gets bluffed by the worst player at the table and completely loses his composure. The poker term for it is “going on tilt”. He starts gambling wildly desperately trying to get his stack back.

It’s truly painful to watch as loses hundreds of thousands of dollars on one bad play after another. Although the scene has nothing do with the markets, it instantly resonated with me as I remembered all my own moments of going on tilt after the vagaries of the market got the better of me. Just one bad fill, a to-the-pip stop that then went on to hit take profit, or one just missed take profit that then went on to stop me out were often all that was needed to trigger a nasty bout of revenge trading that left me considerably worse off than I was before. Molly’s Game will be forever seared in my mind as a testament to the fact that no matter how well you know the game, the true enemy is not the market but your own psyche.

All throughout the scene, Molly is begging the poker player to walk away from the table, but of course, he refuses. This made me think about Vegas and the fact that they love to serve you free drinks on the casino floor. Why do you think they do that? Because they know that the longer you stay at the table the greater the chance that you will give back all your winnings and your starting bankroll as well.

The market is very much the same way. It’s not that most of us can’t win at trading, it’s that most of us can’t keep the winnings we make because we stay at the table too long.

For the past few weeks, I’ve been running a continuous trend EA desperately trying to make it work on a 24-hour basis. The setup was extremely sound but inevitably it gave back all of its winnings on the very last trade of the cycle as it sold the lows or bought the highs. Regardless of the safeguards in place, the EA could not apriori anticipate the change of market regime. Finally, I realized that no EA ever could. That’s why in the history of all EAs there has never been a continuous EA that has ever made money, because as I’ve noted a million times, all algos are simply divided into two types of strategy -- continuity and mean reversion and for an EA to make money continuously would be like saying that a person can sleep and be awake at the same time ( side disclosure -- when I was younger I used to sleep with my eyes open, which freaked out more than one of my camp bunkmates, but that is not the same thing).

Anyway as soon as I realized that the problem with my setup wasn’t the strategy, but the fact that I kept running it too long, I changed my tactics completely and made my EA single trade only, entering the market only when evidence of a new trend was appearing. In a sense I started trading like a good poker player, entering the game only when pot odds favored my cards while perfectly willing to sit out any hands that did not meet my criteria.
End result?

+99.1 pips in live trading on BOE Rate Announcement day in less than two hours of stress-free work.