Keeping Stupid at Bay – Making Trading Decisions That Matter.

Boris Schlossberg

There is a common and all too painfully true cliche that most Americans spend more time planning their vacations than their retirement. We simply focus on the wrong things and then wonder how did we screw up our life so badly.

Yesterday, I had my own vacation-to- retirement moment and it slapped me into stone cold sober into a becoming a much more serious trader.

Every Wednesday I have to pull myself from the desk to run over to 30 Rock to do a couple of hours of hits for CNBC. I always take the subway, because no real New Yorker would be dumb enough to get caught in midtown traffic. But NYC subway has been a disaster lately. The system is a victim of its own success as ridership is at all time highs, while capital spending has lagged for a decade. This results in track fires, train delays and produces a never ending cat and mouse game between commuters and the system.

Although, I am only 20 minutes away from the studio the trip can take an hour because I have to time the trains, brave the tourists and get through NBC security. I’ve developed all sorts of shortcuts from using the MTA app, to following the employee paths around the former Time-Life buildings in order to avoid the sidewalk hogging tourists, to getting to know all the NBC security personnel by name so I can jump the line every time I am there. All of these elaborate logistics are in place because I CANNOT AFFORD TO FAIL. I can’t be late to the studio because we shoot live. In ten years of doing this, I only missed one hit when the subway train just stopped dead in its tracks and trapped me. If this was trading you could say I’ve only had one losing trade.

But here is the interesting thing.

Yesterday I realized that I actually spend more time and care on my weekly trip to 30 Rock than I do on my trading plan and I bet many of you are guilty of the same crime.

Ask yourself a simple question.
Why am I in this trade right now?

Because price was running and I wanted to get in.
Because the markets haven’t moved for hours and I am bored.
Because I just lost money and I want it back
Because I am right.

If you answered yes to any of those questions – you are not trading to plan. None of those answers are in any legitimate trading plan ever. Worse, even if you answered no to all those questions, but still took a trade that sort of, kind of, close to your setup – you are still not trading to plan.

The only way to trade to plan is
if
Every
Single
Parameter
Of your strategy
Sets up.

So if you want to start taking your trading more seriously than your commute make sure you answer these three simple questions every time before you hit send.

What is my opening trade size? I trade at 1X leverage – never more. That alone has saved me from a whole lot of stupid because no matter how many rules I broke I could only do so much damage to my account. Conversely, if you trade with high leverage and do 99% of things right you can still lose all your money when the market forces a margin call.
What are my trading rules and is THIS trade I am about to take meeting each and every of them? If the answer is no – then you are not trading – you are goofing off.
What is my maximum loss in actual, real dollars (or pounds, or yen or francs)? Percentage means nothing. It’s an abstract mathematical concept that you will quickly ignore at the first sign of heat in the market. But tell yourself – I WILL NOT LOSE MORE THAT $500 on any given TRADE EVER – and see how much more effective your risk control will become. Money is real. Percent is not.

That’s it. Just those three simple questions will separate you from the vast majority of your fellow traders you will start making real business decisions that matter.

Don’t Ever Tell Me Entries Don’t Matter

Boris Schlossberg

Of all the white lies we always hear – “it’s not you it’s me”, “size doesn’t matter”, “the food is interesting” – none is more pernicious than the old trading maxim “entries don’t matter, only exits do.”

Could. Not. Be. A. Bigger. Bull-t. Statement. If it tried.

Here is the truth about trading. Exits are FIXED. You never, ever, ever know if the move will go 10 pips or 100 pips or a 1000 pips in your direction. So you chose the highest probability exit for the time frame you operate on and YOU STICK TO IT. All those idiotic tricks you see about “trailing your exits” never work in real life because prices always slide to your break even points and all those huge profits on the chart are mostly an illusion. So if you want to be a pro at this you fix your exits to your time frame. I, for example, take profits at 10 pips on my day trades. Kathy looks for 70-80 pips on her swing trades. We do this over and over and over – because like all professionals we seek to replicate best practices.

Entries on the other hand are everything. I spend all of my time working and refining my entries. In my trading room we call it “posture”. The better your entry, the stronger your posture – the easier it is to manage the trade to profit.

Did you know that one of the greatest intra day LONG trades in the history of the stock market was during the 1987 market crash? I am old enough to actually remember it as I sat mesmerized staring at my Quotron at 60 Broad Street in the old Drexel Burnham Lambert headquarters. That day – the greatest percent decline day in the history of the market – stocks rallied more that 10% off their lows right after lunch before fading once again into the close. If you bought that bottom as some futures traders in Chicago managed to do, you made a fortune on a day when everyone else was losing their life’s savings.

Entries of course are notoriously difficult. It’s hard to time the price to one or two ticks of a turn. That’s why as a trader you ultimately resort to probabilities and usually do an array of entries in order to get a blended price as close to the turn as possible. That little trick works in investing too. There is simply no better way to make money in the long run that to dollar cost average into an index. That strategy will beat any hedge fund return over a decade or more of application.

To give you an idea of the power of blended entries, I downloaded a random set of daily Dow Jones Industrial Average data from Google. It just so happened that I pulled down 18 months of closes from start of 2008 to mid year 2009. So I ran a little Google sheets experiment. There were 125 trading days in 2009. If I invested 125,000 on Jan 2, 2009 by mid year my stake was worth about $120,000 as the DJIA slipped a bit. If, on the other hand, I invested 1000 dollars each day, by mid 2009 my $125,000 stake was worth $130,000.

That was nice, but it was truly mind blowing to run the numbers through 2008 – a year when the Dow collapsed from about 13,000 to about 8,500. There were 253 trading days in 2008 so $253,000 invested at the start of the year withered to just $165,000 by the end of it. Buying 1000 dollars at a time I still lost money, but considerably less – my stake declined to $200,000. Overall in the 18 month period from 2008 to mid 2009 there were 378 trading days. If I poured all that money in at the start of 2008 my $378,000 investment would have declined to less than $240,000 after 18 months of being in the market.

Ouch.

However buying 1000 dollars each day that same $378,000 stake was worth $325,000.

Now you tell me – which investor would have the mental strength to stay in equities to take advantage of one of the greatest bull markets in history that was to follow – the guy with 85% of his money left or the guy with 63% of his funds?

Don’t ever tell me entries don’t matter.