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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Trading for a Living Versus Trading for Life

Boris Schlossberg

Many times when I meet BK traders in person I often hear the very same thought expressed over and over again – “Man I wish I could do this for a living!” My response is always to wince. Don’t get me wrong – it’s certainly possible to make all your money exclusively from trading, and there are individuals who have made the transition to full time trader, but they are few and far between.

Trading for a living is a feast or famine business. Kind of like sales except much worse. Not only do you not get a monthly draw, but very often Mr. Market will take away last months and the prior month’s paycheck and you have to trade for two or three months forward just to get your money back to even.

That’s why I always recommend that anyone who contemplates a trading career have a side stream of income that is not market dependent. It doesn’t have to be much. But it really must exist, not only to help you cover the basic monthly expenses of living, but much more importantly to give you the peace of mind for those very tough periods when drawdown inevitably kicks in.

But rather than aiming to trade for a living, I think everyone who is involved in the financial markets should actually set a much more useful goal for themselves – trading for life. Let me explain why that skill, here and now maybe the most important skill you can acquire.


A few weeks back I tweeted out a graph (see above) that I called the scariest chart in finance that I’ve ever seen. The basic premise is that we are all going to live a lot longer than we think and will all have a lot less money than we hope, because QE and ZIRP have basically destroyed any long term investing options. For all practical purposes bonds all yield zero and will do so for possibly decades to come. Real estate is a highly capital intensive business that is utterly illiquid and could goble your savings faster than a Florida sinkhole. (Tokyo apartments anyone?). And stocks? Well stocks are the last great hope of all investors. But I keep having that sinking feeling that the future isn’t what it used to be. Maybe, just maybe the Dow will be 30,000 by 2030 or maybe like the Nikkei it will just range trade and wallow at 18,000 leaving most of us with nothing to show after decades of investing.

I do know one thing. All those S&P compounded index returns that everyone touts are total bullshit. Unless you buy every month, rain or shine, year after year after year you have virtually no chance of making serious money from stocks when you buy at the highs. Back when my older kids were in elementary school we started two 529 accounts for them for college. We used Fidelity and we bought the basic equity/bond index match like the good savers we were supposed to be. Our only problem was that we bought at the start of 2000.

16 years later guess what that patience got us? After fees, the REAL return on that money was something like 2.1% per annum. Imagine if I had to count on that for my retirement income.

We are living in a very different world now. And yet all the advice that we get about financial guidance might as well come from the set of Mad Men. it’s literally that outdated and just about as relevant.

In my chat room, I see traders making 50, 80, 100 pips. Every. Single. Week. Let’s just imagine that they use no leverage whatsoever. That’s 50 basis points per week or 25% per year. Let’s degrade that by half once again and say that when the dust settles, after all the drawdowns and all the transaction costs they make 12% per year without any leverage and while seeing drawdowns of less that 5%. Do you think you could even remotely approach such consistent returns as an investor? Today I read that Carl Icahn and Bill Ackman – the Titans of Wall Street! – are down -18% each this quarter. So much for smart money. So much for trusting other people with your savings.

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The future no longer belongs to the organization man. You can’t punch a clock, do what’s asked and expect to live a safe and happy life. The future belongs to those who make the effort to learn and to engage with the financial markets. That’s why trading for life will become a skill we will all need if we want to achieve any semblance of financial security in the new millennium.

Will Aug NFPs Help or Hurt USD/JPY?

forex blog Japanese Yen Kathy Lien US Dollar US Economy

The focus now shifts to the U.S. dollar.  Non-farm payrolls are scheduled for release tomorrow and ahead of this key event there was very little consistency in the performance of the dollar.  The greenback traded lower against JPY, AUD, NZD and CAD but moved higher versus EUR, GBP and CHF.  After the strong increase in June, there’s no doubt that job growth slowed in July and the big question is by how much. Economists are currently calling for job growth around 180K and any reading greater than 200K will be positive for the dollar as long as the unemployment rate improves and average hourly earnings rise as expected.  Any miss in the headline or underlying components will send the dollar tumbling lower.

While the leading indicators for non-farm payrolls point to a decline, the number may not be that bad.  The 4 week moving average of jobless claims declined, continuing claims are lower, Challenger Grey and Christmas reported a sharp drop in job cuts and corporate payrolls increased slightly according to ADP.  Although the employment component of non-manufacturing and manufacturing ISM declined, the dip was small and consistent with the drop in payrolls already forecasted. Consumer confidence is also down marginally according to the Conference Board’s survey, leaving the only major deterioration reported by the University of Michigan.  There’s no doubt that the U.S. economy is outperforming its peers, which should make U.S. assets and the U.S. dollar more attractive in comparison.  For these reasons and the fact that Japan’s big event risks are over, we anticipate a stronger recovery in USD/JPY.


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