Trading Both Sides of the Market

Boris Schlossberg

Last weekend I was in Madrid for David Aranzabal’s annual Forex Day conference and as always it’s my favorite trip of the year. I love the food. I love the people. I love the city. I love the casual elegance of European way of life. But mostly I love hanging around traders talking markets.

Two of my colleagues Asharf Laidi and Rob Booker were presenting as well. In the heyday of retail FX growth before the GFC we were on the road always and used to see each all the time. Now we are all older, settled with kids and don’t around as much anymore. So it was a pure pleasure to catch up.

Each one of us trades in a radically different style. Each one of us has seen almost every imaginable market possible. And I think it is fair to say that as we grew older, each one of us has become much more humble in our approach to trading. That humility was evident when we sat down for coffee to discuss our specific techniques and discovered that we all do the same thing – trade both sides of the market.

Ashraf is a classic techno-fundamentalist macro trader who can hold positions for months at a time. Such tactics require not only patience but the ability to withstand being wrong for hundreds of pips until your thesis plays out in the market. Ashraf noted that unlike in his younger days when he would stubbornly hold his view through long periods of drawdown, now he fully accepts being wrong in the near term and actually scalps ⅓ to ½ of his position in the opposite direction. This way he constantly reduces his cost basis on the initial idea making it even profitable when the market finally turns his way.

Robbie has a completely different approach essentially trading mean reversion with tiny, tiny size and a portfolio approach that often puts him on the opposite side of the market with similar pairs. He does not use stops and lets the offsetting trades net out to a positive return. He also does something very clever. He always makes sure that he is on the positive side of the carry. He told us a story of a short EURTRY trade that took 2 YEARS to resolve. During that time he lost 2,000 pips on the position as the lira disintegrated, but at the same time collected 3,000 pips in swap making the net position profitable in the end.

Unlike Asharf and Rob, I am much more of a classic algo-driven trader with exact entry and exit rules. And since I have the attention span of an ADD-addled 5-year-old, I generally never hold my trades more than 24-48 hours so my algos operate on a much shorter time frame. Yet, I too often find myself on both sides of the market. At least once or twice a week, one of my algos will open a long in some pair and when the price action goes against me will open a short in the same pair in a different account. This freaks BK members out as they can’t understand why I do that – but the fact of the matter is that algos have picked up the signal that market conditions may have changed and while my “wrong” trade will most likely be stopped out – my offset trade will take some of the string out of the loss by banking pips the other way. This by the way not only works on a granular level but on the portfolio level as well as sometimes Kathy’s strategies will take the opposite side of mine and will mitigate losses as well. It is, I think, the primary reason why the retooled BK service has been so successful lately making 1300 pips in past four weeks as contravening positions keep drawdown to a minimum and overall return positive.

They say that a true sign of intelligence is to be able to hold two contradictory concepts at the same time. There is no doubt that that principle holds true in trading as well where mental flexibility and psychological humility are the two key factors in long term success.

You are a F-ing Idiot to be Long the Market

Boris Schlossberg

I was bearish Nasdaq in ‘99. I was bearish New York real estate in 2005. So I was early which in trading terms means that I was wrong. But I wasn’t trading stocks or real estate. I was looking at those assets an investor and while everyone else was getting margined out of their stock accounts or turned upside down on their mortgage, I (like some 19th-century immigrant) stayed in cold, hard cash. For a while, in 2008-09 I didn’t even keep my money in a bank and bought T-bills directly from the Treasury instead.

Now if you are the type of person who never sells your investments, never needs liquidity and always buys every dip in the market you can ignore every word of this column. I am sure you will be richer than Warren Buffett and I commend you on your ability to not need your money.

If on the other hand, you are looking to use your money for stuff like food, housing, travel, medical bills, you know, – life, then just as day follows night, there will come a time when you will wake up in the morning and half your savings will be gone before you could even login into your Ameritrade account.

I don’t want to rehash all the old arguments – that FAANG+M are the new Nifty Fifty. That my Upper West Side Apple store which routinely did more than 100M+ in business per year is now barren most of the time (yes it’s just the kind of bullshit anecdotal evidence that usually isn’t worth much – except when you are trying to gauge relative rather than absolute change.) There are many analysts much smarter than me that have made much better arguments as to the stretchiness of valuation.

No. What I want to tell you exactly how the crash will happen since I’ve lived through all of them starting with the “Big One” in 1987.

There will be some unexpected catalyst, or perhaps no catalyst at all – just a price cascade that will take the S&P down by 100 points in less than a minute. At first, the algos will step in and try their usual mean-reversion, vol-dampening routine but traders spooked by the move and investors looking to cash out long held profits will create customer flows that will quickly overwhelm the machines. The Spoos will start to dive again. Then, ignition algos seeing momentum will start to mercilessly pound the bids and drive the futures even lower. HFTs which only like to handle a couple of hundred shares at a clip will instantly turn off and suddenly all equity bids will disappear from the market. The exchanges will trigger circuit breakers and stop trading altogether. Now you will not be able to sell out at any price.

After a period of some time, the exchanges will once again reopen and once again investors will clamor to sell in order to salvage the profits build up over the years. Because really – who at this point is not long the market? Do you REALLY think that at 18,000 Dow someone will step in and say – “Wow – what bargain!” No – that’s going to happen later, much later, when the Dow is at 10,000 and you are left to wonder how 10 years of investment profits could be erased in a matter of 10 days.

I have absolutely no idea of when this will happen, but I do know that like all the other times before I will be safe rather than sorry and will stay in cold hard cash and let the rally pass me by.

The Biggest Sucker Bet in the Market

Boris Schlossberg

A CBOE options market-maker once said something that has stuck with me forever. “Take any athlete you know”, he said, “and I bet I can make them miss. Suppose you are playing with a great golfer and he is about to putt for par. Now before he makes a move, tell him that you’ll pay him $10,000 dollars if he sinks it, but he will have to pay you $10,000 if he misses.”

Gun for 100 per week – Trade the BK Way (+3 Free Courses)

“Most people,” said the market-maker, “will miss, because they stop thinking about the shot and start thinking about the money.” The market-maker was simply expressing the truth about financial markets that is almost always overlooked. Amongst all the talk of strategies and tactics, statistics and backtests everyone forgets that none of those things matter, once money comes on the line. Every single mistake we make (and I don’t mean the mistakes we make on individual trades, but rather structural mistakes such as changing the stop, lifting it altogether and trading unprotected or adding to a position beyond your strategy limits – all those mistakes – are always the result of money playing games with our psyche.) The bigger the money, the bigger the games.

That is of course what makes trading FX such a challenge. It’s not just the need to find an edge on the market, but it’s also the will to ignore the minute by minute pressures of watching your money rise and fall. Even if we master the first part, the second part usually takes years to perfect.

Yet as tough as it is to trade FX spot, there is one product that I think should never be traded at all.

Binary options.

That is truly an instrument from hell. Now let’s just set aside all the regulatory issues with the product. There are actually plenty of places you can trade it in a fully secure, fully regulated manner including several US exchanges. Let’ put aside the few traders who actually have the superhuman skills to succeed at trading this product. Let’s just understand why most of us will fail miserably at trading it.

Binary options contain three variables – price, volatility and last but definitely not least – time. Time is the killer variable here that most traders woefully underestimate. When you make a spot trade you only need to be right about direction. In theory, you can hold your trade forever until it resolves. Not so for binary options. You need to be right about both time and direction. That second condition makes it inordinately harder to win at the game. Time is an ever wasting asset, and much like money on a sports shot it acts as a relentless pressure point in every trade you do.

That’s why binary options are a sucker bet.

Gun for 100 per week – Trade the BK Way (+3 Free Courses)

Don’t waste your time.

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.

USD/JPY Big Trade +125


Close USD/JPY at market here 124.18 for +125 on the trade

Second entry into USDJPY Triggered. Average price now 124.93

SELL 1 lot USD/JPY at market (now 124.12)

Place order to SELL 1 more USD/JPY 125.75

Stop 127.40

USD/JPY has had a very strong run and we think that it is due for a correction. Recent US economic reports have been mixed and concern that non-farm payrolls may not live up to expectations could lead to profit taking ahead of Friday’s release. If USD/JPY fails to close above 125 in a meaningful way, the currency pair could retrace back to 122. Technically, 125 is a very significant resistance level and even if it spikes above this price, gains should be capped below 126

“FOMO=FUP” or How Warren Buffett Taught Me to Take Money From The Market

Boris Schlossberg

Is there a better business in the world than the insurance business? Not if you ask Warren Buffett. While he fools you with his aw shucks friendly grandfather routine, the man actually makes all his real money not on his investment acumen (which is extraordinary of course) but on his ability to lever the massive daily cashflow that he receives from his insurance operations.

The other day in our trading room I blurted out that real traders learn how to take money rather than make money from the market. The more I think about it the more I am convinced that it is probably the smartest thing I said.

Is there a better business in the world than the insurance business? Not if you ask Warren Buffett. While he fools you with his aw shucks friendly grandfather routine, the man actually makes all his real money not on his investment acumen (which is extraordinary of course) but on his ability to lever the massive daily cashflow that he receives from his insurance operations.

The other day in our trading room I blurted out that real traders learn how to take money rather than make money from the market. The more I think about it the more I am convinced that it is probably the smartest thing I said.

Allow me to explain.

Let’s go back to insurance. The insurance business is the only business model based on the idea of taking your money first while making a murky promise of delivering a payout sometime later. In fact, in a perfect scenario the insurance company would love to collect money from you in perpetuity and never pay you out a dime.

I am always amused at the fact that people find interactions with the insurance companies to be so confrontational. Of course they don’t want to pay you! In all other businesses they need to deliver the goods before they get your money. That’s why they are so nice to you. In insurance, they already have your money, so everything else that follows is pure annoyance and cost for them.

But setting the ethics of the business aside, the financial rewards of running an insurance company can be enormous IF you price the risk correctly. And this is where Warren Buffett comes in. If you read anything about Mr. Buffett’s insurance operations he is the farthest thing from being a low cost provider. In short, Mr. Buffett never cuts his premiums to attract more business. Indeed if you follow all his recent market deals be they insurance or not – the primary principle by which he operates is get paid first, worry about making money on the investment later. Preferred stock anyone?

But back to the insurance business. There are basically two components to making it wildly profitable – take the money in and make sure you give as little of it back as possible. (Buffett’s Rule #1 of investing – Don’t lose money. Rule #2 – see Rule #1) By assiduously focusing on both sides of the equation Buffett has learned how to take money from the market rather than just make it.

What does that mean for us as traders? It means that under no circumstance ever, do you chase business. You let the business come to you, on your terms or no terms at all. Over the past week or so I have been extraordinarily selective in picking out VT levels for us to trade. The net result is that of course we made far fewer trades, but those trades were all winners and we wound up the week up about 1% with no drawdown whatsoever.

Its not glamorous. It’s not sexy. It’s hard to sit on your hands and deny yourself the lower quality trades even as you watch them go to profit. But it undeniably works. We have a saying in the room – “FOMO=F*up” ( i.e. Fear of Missing Out will kill you in the end).

BK Trading Room+Kathy’s Big Trades+News Trades $145 All In Discount

I think Mr. Buffett will agree with the spirit if not the tone of that message as his lesson of taking money from the market rather than making money from the market reverberates with all us in the BK trading room.

BK – Stopped out of NZD/USD


**Update NZD/USD Second lot TRIGGERED at 0.7470 for an average entry of 0.7420

Big Trade NZD/USD – Sell at Market

RBNZ Governor Wheeler is speaking tonight and we think he’ll be dovish, reinforcing the market’s expectations for RBNZ easing. We are laying out the following orders to take advantage of this opportunity

1. Sell 1 lot NZD/USD at market now 0.7370

Place order to sell 1 more lot NZD/USD at 0.7470

Stop 0.7580

BK Big Trades – Stopped out of NZD/CHF


BK Big Trades – Stopped out of NZD/CHF

NZD/CHF Big Trade – The Ultimate Carry Trade

The Trade:


Buy NZD/CHF at market (now 0.6715)

Stop for whole position at 0.6500

Targeting move to and above 70 cents

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.


We Like the New Zealand Dollar

A few weeks ago, we bought ourselves some NZD/CAD on the premise that dairy prices would bottom before oil. Today, oil prices are down 4% while dairy prices settled at higher levels for the third auction in a row. We traded the currency pair, taken money off the table and are now shifting our focus to the ultimate carry trade – NZD/CHF.

Lets start with the New Zealand dollar. NZD fell sharply today on the back of a more modest increase in dairy prices. While it would have been nice to see dairy prices rise by a larger amount, the fact that prices increased at the last 3 auctions is GREAT news for New Zealand. Earlier this month, dairy prices rose 3.6% the biggest increase in 12 months – matching that pace would have been unrealistic. Considering that dairy is New Zealand’s biggest export earner, accounting for approximately 30% by value, this increase will bolster the confidence of the RBNZ who meets next week.

The last time we heard from the central bank, they were surprisingly comfortable with the current level of monetary policy and while they felt that the New Zealand dollar value was unjustified and unsustainable, they also believed that further policy adjustment will be necessary after a period of assessment. In other words, they are still looking to raise interest rates – eventually. Their hawkish monetary policy bias and 3.5% interest rate will prevent NZD from falling much further and instead lead to a recovery in the very near future especially if the ECB rolls out Quantitative Easing, forcing investors to look elsewhere for yield.

NZD/CHF – The Ultimate Carry Trade

Buying the New Zealand dollar against the Swiss Franc is the ultimate carry trade. In addition to abandoning their 1.20 peg, the Swiss National Bank also deepened the negative rate environment by cutting rates 50 basis points to negative 0.75%. Last week, the SNB made the conscious decision to shift from exchange rate to interest rate driven monetary policy. If the recent appreciation in the Franc poses a major threat to the Swiss economy, they could lower interest rates further – increasing the attractiveness of selling Francs. Even if they don’t and other central banks lower rates, NZD will become more attractive as a result. We also believe that most if not all of the long EUR/CHF trades have been flushed out with all stops already triggered.

Chart – NZD/CHF Headed for 70 cents.

We think NZD/CAD is eventually headed for 0.70 or higher and our stop of 0.6500 is well below pre-SNB levels. Here’s the trade:


Buy NZD/CHF at market (now 0.6715)

Stop for whole position at 0.6500

Risk on our BIG TRADES is large, so make sure your position is small.

We will manage the take profit dynamically and send out alerts on when to take profit and/or move your stop.