What Flip or Flop Taught Me About FX Trading

by Boris Schlossberg 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.

How the Great One Would Trade FX

by Boris Schlossberg Boris Schlossberg

If you want to treat yourself to ten minutes of pure unadulterated joy, just pull up the Wayne Gretzky highlight wheel on Youtube. You really don’t have to know anything about hockey to appreciate the athletic majesty of the Great One.

You can’t help but be amazed as you watch the grainy footage from the late 1980’s and early 1990’s at Gretzky’s ability to control the puck, outskate his competition and score seemingly at will.

Wayne Gretzky, of course, is famous for saying, “ I skate to where the puck is going to be, not where it has been.” Which is probably one of the greatest sports quotes of all time but is also unbelievably relevant to the world of trading.

I’ve been thinking about Gretzky a lot lately as I work on my scalp set up. Scalping is probably the hardest part of trading to master because it requires laser quick entry and exit techniques and a very high level of accuracy in order to overcome the massive commission costs that you rack up every day. But if you can master scalping you have true control because then you are able to make money in any type of market regime.

As I delve deeper and deeper into short-term trading I realize that the key to succeeding in scalping is the same as in hockey. You need to go where the puck will be. You need to anticipate price and position yourself accordingly. That’s of course much harder than it looks. Longer term traders can afford to be wrong for long stretches of time as their wide stops allow for massive market slippage before price finally turns their way. Scalpers don’t have that luxury. They are either right or stopped out, So they have to decide quickly if the trade is worth the risk.

If you anticipate something, you will inevitably be wrong. Professional tennis players are a perfect example of this dynamic in play. Watch any Grand Slam tournament and you will see the best players in the world get wrong footed countless times during the match. They run one way, while the ball goes the other.

But here is the thing.

You never see pro tennis players stop anticipating. Being wrong-footed, once, twice, ten times never stop any of these athletes from anticipating the next ball. That’s because there is no other way to achieve success. If you want to win you need to go where the puck, the ball, the pip will be. Not where it is now.Sometimes you will look like an idiot, but you just get right back up and try again. Because the key to sports and to trading is to get better at your reflexes -- not to stop playing when you lose.

The Great One had one last quote that helps sustain me as I refine my setup. Gretzky said, “You miss 100% of the shot you do not take.” So even if you are doing badly, even if you miss your targets, keep shooting. The process of trading itself will make you better, will make you sharper and will hone your skills.
The more you play, the better you see the rink -- the field of play. Just like the more you trade the more you see the market. My scalping hasn’t turned consistently positive yet, but my long term trading has improved tremendously as my “field of vision”, my feel for the market is much, much better.

For this, as well as for sheer joy of watching some of the greatest feats of athleticism in history, I have the Great One to thank.

No Bulls-t Advice for the FX Trader

by Boris Schlossberg 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
FCA in UK
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.

In FX 10 is the Magic Number

by Boris Schlossberg Boris Schlossberg

Over the past few weeks, I must have made more than 1000 short term trades. Some were on demos. Most were live accounts. Some trades were done on raw spread, others used a full spread broker. Here is what I discovered.

It doesn’t matter what strategy you use. It doesn’t matter if you trade chop. It doesn’t matter if you trade trend. It doesn’t matter if your spread is 0.2 wide or 1.4 wide. It doesn’t matter if your target is just 3 pips or even 1.5 or 5 or 6 or even 7 -- you can’t make money in FX day trading unless you target is 10 pips.

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The reason is -- to paraphrase Bob Dylan is that you got to pay somebody. It may be the Devil or it may be the Lord, but you’ve got to pay somebody. Regardless of how you make your trade your average cost per trade is 1.5 pips (either spread or 1 pip commission + raw spread). That translates to about 15% cost of doing business.

When you factor in the vagaries of the market, the risk/reward payoffs, the various news bombs that blow up your trades, that frankly is about as much cost as you can absorb. If you go down the 5 pip level, the transaction cost becomes too large at 30%. Basically, you give up a third of your gross profit right off the bat and few businesses can survive that math over the long haul.

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10 pips is also a very reasonable distance for a day-trade. The average true range for a major pair is about 100 pips (yes, yes I know that’s wishful thinking in these low volatility times -- but it is still a decent rule of thumb). That means that a 10 pip trade is about 10% of the daily move which is very achievable 2-3 times each day. Like a perfect bowl of porridge, 10 pips is not too cool, not too hot. For those of us who like to day trade -- 10 pips is juuuuuuust right:)

As to all the snarky position traders who constantly berate day traders for just churning our accounts -- feel free to ridicule all you want, but some traders in my chat room have been trading for years with drawdown profiles of less than 10% -- and that’s basically what? -- a bad week in your world :).

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Forex Trading Tip – #1 Driver of FX Flows this Week

by Kathy Lien forex blog Forex News Kathy Lien

Between an emergency Fed meeting, the Bank of England and Bank of Canada monetary policy announcements, US retail sales, Chinese GDP, Australian employment, UK consumer prices and a host of other tier 1 event risks, there are no shortages of events that could drive big moves in currencies.

However, the #1 driver of FX flows this week will be risk appetite. That could be driven by the swings in commodity prices, the volatility in equities, Chinese and/or US data. At the end of this week on Sunday there’s a production freeze meeting in Doha and we are already beginning to see headlines about some producers refusing to cut production. One of the main reasons why commodity prices are performing so well this morning is because crude oil is above $40 a barrel.

Chinese data will also be important. Consumer prices were released last night and the stronger report propelled AUD/USD above 76 cents. Tuesday evening, Wednesday morning local time Chinese trade numbers are scheduled for release and on Thursday evening / Friday morning, Chinese industrial production, retail sales and Q1 GDP numbers are due. We are beginning to see signs of stabilization in the world’s 2nd largest economy but according to China Premier Li, the downside pressure on the economy remains.

And of course there’s Wednesday’s U.S. retail sales report – the market detests dollars but a blowout report could help to turn things around.

Keep an eye on the VIX:

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