Three Trading Truths I learned This Year

Boris Schlossberg

1. “Never” and “always” are the two most dangerous trading words in the English language.
Idiotic statements like “smart money is never wrong” or “this setup always works” are a straight path to a blowup. The other day I was watching a YouTube video with more than 150K views where the guy was arrogantly pitching as his own the SSI strategy that K and I helped develop back in our FXCM days. Basically, the FXCM SSI index measures the client positioning in any given currency pair and then takes the opposite side especially as the positioning goes to the extremes. Now generally that is mostly a good idea. Most of retail is usually on the wrong side of the trade most of the time. But not always. In the case of SSI the FXCM brass was so sure of their new little indicator that they convinced a large French bank to trade the model with a very sizable prop account. Unfortunately, at that time the euro went on about a 3000 pip slide with no stops along the way and as retail kept getting shorter, the bank kept getting longer and blew out more money than you can imagine. So no. The “dumb money” is not always wrong and you can lose even on “never-gonna-happen” bets. The only proper way to use those words in trading is: “There is always a chance I am wrong,” and “I will never bet my whole bankroll on this one trade idea.” In short, the most important things I learned in 2018 is to be humble. Always. And arrogant. Never.

2. Robots trade better than I.
After years and years of resisting rules-based trading, I finally realized that my strategies are much more profitable when they are executed systematically. Robots don’t hesitate on entries. Robots don’t pull stops. Robots don’t sleep and miss out on trades. Robots don’t accidentally hit a buy instead of a sell button and robots don’t trade ten times the intended position size (unless you configured them wrong). None of this means that systematic trading will automatically make you profitable, but it does offer you a multitude of advantages over point and click trading. One of the traders in my chat room noted that we should view our trading robots as assistants – and I think that a perfect analogy for how we should view the systematic process. There is no such thing as set it and forget it trading. Robots help you with execution and logical structure, they free you from the tyranny of looking at every tick on the screen but it is still up to you to analyze and adjust the strategy and always be aware of the market. The future of retail trading is robot. The sooner you realize that the better a trader you will become.

3. F- passive. After several years of ranting against the mindless advice of Bogleheads that passive investing is the only way to get rich, we are finally seeing the disaster that it truly is as we close out the worst December in market history. The pain is just starting. If you have all your retirement money in equities prepare to possibly lose 50% of your money, just like Bitcoin traders. The worst part is that passive investors couldn’t do anything about it even if they wanted to because they don’t have the skills to manage risk. They’ve been taught to ask no questions and drop money in their retirement account every month, with the same monolithic fervor of a North Korean people’s rally. Even if I am 100% wrong ( and I certainly can be – see #1) most passive investors will not survive this dip because they are completely unaccustomed to risk and they certainly capitulate at the bottom. On the other hand, we retail traders live and breathe risk every day and at very least know a thing or two about position sizing and stops. So let the passives enjoy a few more months of illusion. As market regime changes from an unending one-way rally, we retail traders will be ready to surf the price waves and keep risk under control. Here is to a great 2019!

Happy Trading everyone.

What I Learned From Making 10,000 Trades in The Currency Market

Boris Schlossberg

A few years back Malcolm Gladwell wrote a book called Outliers which became an instant bestseller forever etching the value of the 10,000 hour rule in our social consciousness. In the book Gladwell stated that practice far more than talent was responsible for a person’s success and that to achieve mastery in any field it was necessary to practice the skill for at least 10,000 hours.

The 10,000 hour rule has since been proven to be bunk (sorry talent and luck really do matter more), but it’s easy to see how in our Puritan work ethic society the concept took a life of its own. In any case practicing something for 10,000 hours certainly doesn’t hurt and does in fact make you at least proficient in your field of study so Gladwell was on to something.

The other day I realized that I had completed approximately my 10,000th trade since I started in the FX business, so I thought it may be worthwhile to see what if anything I learned from the experience. I can’t say I’ve discovered the secret to a perpetually rising equity curve or that I have learned how to fully master all of me demons, but after so many trades there are a few tricks of the game that I think are worth knowing.

First and foremost most people will ask – do I really need to do 10,000 trades to learn how to day trade? The answer is yes. It’s not that 10,000 trades will give you the magic answer to how to master the markets, it’s more that after 10,000 trades you will learn just about every way you can possibly fail which is a value in and of itself.

The most common trading mistake – and one that I still make to this day ( though far less frequently) – is moving your stop. The Murphy’s Law of Life and Trading is that no matter how far or how frequently you move your stop, the market will always rise or fall just to the point of taking you out and will then snap back in your direction. You may escape the market’s sting once or twice or even three times, but in the end the stop will always get you and usually at the worst possible moment and at the biggest possible cost to your equity.

That’s why if you are daytrading and losing it is always better to stop out and get back in with bigger size that to continue adding to your position in hope of a turnaround. Stopping and starting may not feel good and may not even turn out to be profitable – but trust – me it will be far less un-profitable than adding to a trade.

After years and years of trading I have narrowed my stop down to just 25 pips. If you stick to that level it’s amazing how well you can survive in the market long enough to maybe even become profitable.

The next common mistake is that most traders start out way too large and get even larger if they add to the position. My starting trade is never more than one times my equity and I never scale up to more than four times equity at any given time. That means my biggest loss should never be more than 1% (25 pipsX4). Again, you can do a lot of foolish trades at 1% max and still live to fight another day.

Lastly, the key to winning as a daytrader does not lie in your ability to forecast direction (in fact the less you think about direction the better) but in your ability to maintain proper market posture. That means you let the market come to you rather than chasing it like a dog.

I am old enough to have survived the 1987 stock market crash and what almost no one remembers about that day is that it was the single biggest stock market rally in the history of S&P. A little after noon that day stocks stabilized and started to stage one the most vicious momentum rallies ever. If you had gotten long at that time and let it run until about 2PM New York time the gain was more than 10%. In daytrading it’s not important if you are long or short. The only thing that really matters is the quality of your entries. The better your entry, the better your trade.

Which is why after 10,000 trades in the market I still spend all of my time researching and trying to improve my entries. It’s not glamorous, it’s not thrilling but it’s what works. Every thousand new trades I get better.

Three Things I learned from a Superstar Hedge Fund Trader

Boris Schlossberg

Last night I hosted a webinar with Turney Duff, the New York Times bestselling author of The Buyside and former trader for Galleon, Argus and Jim Cramer’s old hedge fund. Turney is a natural raconteur and he told many wild stories of the gogo 90’s and 00’s in hedge fund business when young men and women of Wall Street felt like they owned the world.

Turney had access to the very center of power on Wall Street and was witness to all of the insider games that went on in the markets. But last nights conversation did not dwell on the women-drugs-money excess of the era. Instead we talked shop for an hour and a half and his insights into what makes a successful trader were fascinating. So I thought this week and next I’d share his ideas with you.

1. There is NO ONE STRATEGY for success.

One of Turney greatest skills is his ability to improvise and adapt. His greatly appreciates the fact that financial markets are always changing. In fact change is the only constant in the markets. Markets change not only in style (going from trending to choppy and vice versa) but in structure as well (from human voice trading, to computerized entry, to robot to robot trading). He readily conceded that some of his fast news trades would now not work in a market when robots beat you to the punch. So to be successful today, a trader needs to have a longer horizon and compete on analysis rather speed.

2. Never let your Profit and Loss Statement Determine Your Trading

This is such a common mistake that many of us are not even aware that we are making it. How often do you find yourself selling your position just because its profitable and “you made enough” or holding on to a loser “until it gets back to even”. By doing this we let the account equity drive our entry and exit orders. The end result is that all of us wind up cutting our winners short and letting the loser bleed. Indeed every study of retail trading accounts shows this pattern repeats over and over. According to Turney, the only question you need to ask yourself is “IS THIS POSITION A BUY OR A SELL RIGHT NOW?” If you did not have this trade on – what would you do? If the answer is opposite of what you are doing then make the change.

3. You are not trading stocks, you are not trading currencies, you are not trading options – you are trading INFORMATION

When you are speculating you are engaged in the art of trading information. We tend to objectify our trades and because as human beings we need to relate to something concrete we will often find ourselves attached to a position because we “believe” in the particular stock or currency pair. In reality they are just abstract symbols. It is very important to realize that when we trade we are simply speculating about the value of the information to the marketplace. That’s all. If the information isn’t valuable, our trade won’t work. That is why it is not worth it to obsesses or get emotional about any specific trading idea in your account. Its just a bet on information and no matter how much you cheer or curse it – it really doesn’t care. The trade will do what the trade will do.

Next week I discuss why Turney thinks you should cheer and celebrate all your losses and how anyone can find strong trading ideas without resorting to insider info.

The video of the webinar can be found here