The Only Money Management System that Works in Trading

Boris Schlossberg

By now, everyone should be familiar with the Pareto distribution. Named after an Italian economist from the late 19th century it is colloquially known as the “80-20 rule”. In many disciplines in life, 80% of results come from 20% of factors.

Pareto first noticed the phenomenon with respect to land ownership in Italy where 80% of the land was owned by just 20% of the population. The distribution is not always exact but it is a good general approximation for how things work in real life. The Pareto principle shows up in phenomena as diverse as geography (80% of the population lives in 20% of cities in the US) software (80% of all computer errors in Microsoft products was caused by 20% of bugs) to of course income distribution (where roughly 80% of all assets in the US are owned by 20% of the population).

The Pareto principle is part of the larger structure called power laws and love it or hate it is an inextricable part of life that we need to accept if we are to understand how the secret of success.

Nowhere is the Pareto principle more evident than in financial markets which are the very quintessence of power laws in action with most spoils going to the very few. In trading, the universal truth is that 80% of your profits will come from 20% of your trades, or conversely if you choose to trade like an insurance company 80% of your losses (more like 90% in real life) will come from just 10%-20% of your bets.

This is precisely what makes trading so challenging for most people. It is psychologically impossible to accept losing 8 out of 10 times only to make everything back on just 2 big bets. It’s especially so because after losing 3 or 4 times in a row most traders pass up on a setup – which inevitably turns out to be the one trade that is the winner that pays for all the losers.

Essentially trading is the art of looking for lottery tickets – just read the history of any of the great traders from Soros to Tudor Jones to even Jesse Livermore and that fact become obvious.

So how do you create a money management system to accommodate the Pareto principle and at the same time make it psychologically palatable? The only way I know how to achieve that goal is with a short exit/long exit structure or as K and I always call it T1/T2. The idea is to always trade with 2 units. The exit on the 1st unit should be slightly less than the stop and in an ideal world allow you to win 60% of those trades. Then you move the stop on the 2nd unit to breakeven and aim for at least two times risk and maybe even three times risk on the second part of the trade.

This week in my coaching webinar we ran test after test of our trading strategy against a variety of major currency pairs looking at the past 100 trades in each. Inevitably the T2 target was hit between 19%-25% of the time, proving the Pareto principle right.


Although on the face of it such payout odds would seem to be a losing system (run 10 trades with 50 pip stops and 100 pip targets and only win 2 out of 10 times) the blended strategy actually proved to be very profitable.

The reason the T1/T2 strategy worked was that the short exit eliminated about 20% of additional losses. As Warren Buffett and Charlie Munger often say the key to their success is not picking winners, but avoiding as many losers are possible.

The T1/T2 structure offers two key benefits. First it skews the math in your favor making the overall results positive or far less negative because it minimizes the number of losses, but more importantly, it creates a much more human-friendly trading environment by increasing the total number of winning trades.

By the way one final note on our tests this week – only two out of ten currencies we tested produced positive results that were responsible for the vast majority of the overall pip profit, proving that the Pareto principle operates on the portfolio level just as it does on the single trade level.

There is nothing we can do about power laws in nature, but to accept their presence. But we can survive and thrive in the market environment if we start using the T1/T2 money management system to conquer both Mother Nature and our own behavioral biases.

How to Make Money When Your Business Depends on Luck

Boris Schlossberg

Let’s be honest, trading is a very volatile business. Probability is just a fancy word for luck and the variability of returns is order magnitude greater than in any other retail business.

Imagine that you decided to go into the coffee cart business. You staked out a corner on a busy New York street and set up your stand. Within a month – at most three – you would have a very good idea of how many coffee cups you would sell each day. Believe me, I know. I talk to my local coffee guys every day and they all have a very good grasp of the market. Now, like with any other business the coffee cart stand could face an existential threat – there could be a natural disaster or a city maintenance project that could curtail all traffic for a certain period of time – but that is a different issue. On day to day basis, if you are selling coffee cups and pastries you know within 5% either way just how much revenue you will do per day.

Now let’s consider FX day trading. Projecting your daily revenue within +/-5% margin is a laughable notion. Markets are incredibly lumpy – even if you engage with them on an hour by hour basis. Some days the activity is torrid and all set ups are working. Other days there are literally no trades and yet on other days, the volatility wreaks havoc with your best-laid plans and nothing works.

The hardest part of being an FX day trader ( or any trader for that matter) is the very high level of uncertainty that surrounds the day to day operations of your work. So how do you succeed in a business that often depends on luck? First of all by accepting and coming to terms with that very fact.

Almost all the energy and effort in trading is spent on finding “the secret” – a sure fire way to bank money with the certainty of gasoline station owner on a busy interstate highway. Sorry, no such secret exists unless you are Virtu, have hundreds of millions of dollars of hardware and software at your disposal and can make up to 100 million trades per day allowing the law of large numbers drop all those sub penny profits into a big fat wad of money. For us regular retail traders such possibilities are out of reach.

In fact, I would argue that this obsession with consistency is the single most toxic idea in trading and is responsible for almost all the failure in the business. It has certainly been true with me. It’s taken me years to realize and slowly accept the near constant element of luck in everything we do.

In order to help me deal with the emotional reality of the market, here are some concrete things I do to put the odds in my favor as much as possible every single day.

  1. Control size. This is the ONLY variable over which traders have full control, yet this is often the first and the worst mistake most people make. Remember rule #1 of trading – you can’t trade if you don’t have the capital to trade. In FX where leverage can run as high as 400:1 the first thing most rookies do is put the pedal to the metal and gun for the highest possible return. Their chance of flame out is 100%. Sometimes it takes seconds, sometimes it takes days sometimes it takes months – but they always get margin called. My preferred size is 1X lever – literally no leverage on the opening trade. SInce I will often add several trades to the same position or will open several positions at once and will turn over my account as much as 10 times each day, all of those factors create more than enough leverage for me. In addition, I have an EA that will automatically close out all trades the moment a certain dollar threshold is reached (-$1000.00 in my case). I highly recommend you do the same. Pip stops are fine but dollar stops are definitive and keep you alive when the natural temptation is to avoid taking a manageable loss.
  2. Trade you plan. Make a checklist of all the factors that trigger a trade. If just one variable is not checked off then don’t trade – because then you are not trading your setup, you are just gambling aimlessly like a drunken sailor at the casino. What are the chances that you can do that and survive? Don’t be a sucker. Trade. Your. Plan.
  3. When the markets get tough – don’t abandon your plan – adjust. Speculation is observation. All your initial trading rules came from observing the behavior of the market and then creating a model to trade it. The more you observe, the better your model will become. For me, sometimes tiny little adjustments such as easing the point of entry by half a pip in order to allow for the spread, or widening out the parameters to allow for higher volatility movements have made all the difference. Markets change constantly, so you must adjust accordingly. This is what makes trading so challenging but also rewarding.

Despite the fact that this business is often driven by luck, it is also one of the few places where almost all decisions are within your control. That is power that doesn’t exist in any other aspect of life so use it to the fullest and have fun in the markets.

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How Losing Makes You Win

Boris Schlossberg

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How much money should we lose?

That’s not a question that most traders ask before they press the buy/sell button, but it is perhaps the only question you need to answer if you want to trade well.

Nobody ever starts trading because they want to lose. Everyone gets involved in the markets because of the tantalizing prospect of big wins. But the reality is that most traders lose big precisely because they never think about losing properly.

If you are day trading like we do in the BK chat room, losing is simply part of each day. The more trades you take, the more stops you’ll have. That’s just the nature of the markets. The key is always to control the losses.

The first and easiest way to do that is to automatically wrap each trade with a stop and a take profit using the simple buy/sell scripts I shared a few weeks ago. Doing that will ensure that you don’t have a “dangling” order whose loss can quickly grow out of control due to some “news bomb”.

One of the most common mistakes traders make is that everyone wants to fight sentiment. When markets turn against you the universal instinct is – “it will come back”. And 8 out 10 times it usually does. But the 20% of the time that it doesn’t, comprises 100% of the cases of all blown accounts. Having an auto stop attached goes a long way towards avoiding that nasty scenario.

The other great risk control tool is simply size. Size however is not just a function of your risk tolerance but of the frequency of trading as well. A trader who has a 10,000 account and trades once a day at 10:1 lever factor could trade 100,000 units of currency. The very same trader who day traded 10 times that day would only be allowed to trade 10,000 units per trade in order to maintain his leverage factor. This is something that most rookie traders miss completely. If you day traded 10 ten times at 100,000 units each – your total turnover would be a 1M and you would have basically levered 100:1. (Yes I know that mathematically that is not quite true, but for trading purposes it’s much closer to the truth than not, which is why everyone should think of leverage this way)

My own personal preference is to trade no more that 1 times my equity on any given trade (that includes all the add-in positions I may employ). Generally, my starting trade on my 25,000 IRA account is 5,000 units which may be too conservative for some but suits me just fine, since I expect to make 20 trade each day (there is that frequency lever multiplier).

The very last question you want to ask yourself is how much am I willing to lose each day? Again that is a function of personal preference, but my hard rule is never more than 1% of the account. So far, I have not come close to hitting that limit (mainly because my initial opening size is small) but if I ever do – I will close all positions and stop trading for the day.
A 1% equity stop on your account may not seem like a lot, but if your goal is to make 10 basis point per day than it is just right. In fact that is a very good rule of thumb to use. Take your daily goal target (assuming it is realistic of course) and multiply that by 10. Put a hard stop on your equity at that level and never, ever, question or doubt that move. Any loss that takes more than 10 days to recover is going to be a very difficult task to achieve. Don’t make trading any harder than it is.

Know your losses ahead of time and you will set yourself up for the wins.

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How To Make Money Trading When You Are 100% Wrong

Boris Schlossberg

The past week has been a rollercoaster ride for us all. I am too exhausted for bon-mots of trading wisdom this week but I did want to show you how traders always need to trade what they see rather than what they want to see.

I walked into the US election armed with exit polling data that assured me Clinton was going to win. The markets had already rallied ahead of the result and frankly, I expected a boring night of little action. But about half and hour into the session real results started to deviate from the models and I made one fateful little move that saved the night for us and ballooned our P&L even as it deflated our spirits.



Your Most Precious Capital is Not Money

Boris Schlossberg

Trading by definition is uncomfortable. You are taking risk on an unknown outcome betting money each time. It doesn’t matter how many times the setup worked in the past. The market has no memory and the future is never quite like the past. That’s why every trade is tension. Every trade is pressure. Every trade is stress.

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A lot of gurus will try to convince you that trading can be easy and relaxing. They’ll claim that you can just get into “the flow” and succeed without worry. I’ve done more than 20,000 trades over the past decade and I don’t think I’ve ever felt relaxed during any of them, unless I was dead asleep. (Even then I have an uncanny ability to wake up on demand when a trade triggers in Asia – a trait that has saved my account unnecessary losses on more than a few occasions).

Trading may be exciting, it may be challenging, it may be intoxicating but it is never “fun” the way floating on the ocean in Miami Beach is fun or the way drinking an espresso at a sidewalk French cafe is fun. Trading always requires focus and effort. Which is why your most precious capital is not money.

The term “mental capital” is bandied about by traders all the time – but what does it really mean? It simply means that you have only so much intellectual and emotional focus on any given day and if you spend all your time nursing a losing trade, you are not only wasting money but much more importantly depleting all your mental resources as you set yourself up for market slaughter.

For those of you who saw “The Big Short” – Mike Burry, the Asperger challenged hedge fund protagonist of the movie is portrayed as the lone hero who stood up to Wall Street and made a killing shorting subprime debt.

In truth, he was a lucky idiot.

It didn’t matter that Burry was ultimately right on the market . It didn’t matter that Goldman and Morgan outright cheated him by keeping the marks against his positions artificially high. It didn’t matter that he ultimately collected more than a billion dollars. Mike Burry would have been swept into the dustbin of history if he didn’t have the quirk of fate to lock down his investors’ funds and essentially keep them hostage, avoiding a capital outflow that would have liquidated all his positions before they paid out. The scene in the movie of Mr. Burry lying on his office floor staring at the ceiling in despair anguish as his Net Asset Value contracts by double digits is a classic example of “mental capital” being depleted.

Now I am really glad Mr. Burry got paid. He seems like a very smart, decent man and he certainly was correct in his analysis. But we as retail traders don’t have a billion dollars of “waiting money” at our disposal. We don’t have the legal right to lock down our brokers “redemptions” of our funds.

Our margin calls are final and generally terminal and the damage they do to our psyche is often far greater than the damage they do to our bank accounts. Which is why nursing a losing trade is NEVER WORTH IT. Even if you win. Because all that means is that you will lose it all and then some – the next time.

There are only two ways I know of preserving your mental capital. Trade a 0.01 lot or trade with a stop. It doesn’t matter how unfair it is. It doesn’t matter how much capital it cost you. It doesn’t matter if it will take you a month of trading to recover the stop loss. The moment you take a stop you free up not only your money but also your mind, and in the end that’s priceless.

How To Double Your Money with Reasonable Risk

Boris Schlossberg

First things first. If you haven’t been able to make 1% per month for at least 6 months running on no leverage then your prospect of doubling your money is slim to none. In order to really “gun it” in FX you need to have well designed day trading system that has stood the test of time under real market conditions.

But if you can upload your results to myfxbook and can show to yourself that you managed to eke out 1% a month for 6 months or more then you have a chance to take your trading to the next level. But not before you do, you need accept a very important fact. In your quest to double your money you must be fully prepared to lose 50% as part of the process. That’s simply the basic math of trading. The best traders in the world have a runup to drawdown ratio of 2 to 1 so that if you realistically look to make 100% on you money then you have to prepare to lose 50% in the pursuit of that target. In short doubling your money is a strategy to employ only with high risk capital, but since many of us in FX are comfortable with such risks here is a couple of ways to make it happen.

Theoretically it may be possible to achieve these results via swing trading, but since I focus squarely on day trading let’s just use that approach in our discussion. Day trading first, foremost and always means small profits and short stops. It’s all about controlling risk, which is why if you haven’t been able to prove to yourself that you can consistently cut your losses you will never be able to double your money. If you managed to produce 1% per month on a non levered basis (meaning that every trade you make is no greater than the value of your account i.e. a 10,000 unit trade in a 10,000 USD account) then the path towards 100% is relatively straightforward. You simply increase your lever factor to 10:1 and if you can replicate your prior success then you will achieve 10%/month or more 100% per year.

Of course that’s easier said than done. First and foremost such high leverage approach should be done in what I call one shot/one kill manner. Ideally you should trade only one currency pair, no more than two times per day with a single entry/single exit approach. Let’s say you make 20 trades per month and each trade has a -20 pip stop and a +10 pip target and 80% win factor. Basically every time you trade in this manner you risk 2% loss to win 1% and if you are successful 8 out of 10 times at the end of the month you made 8% which will get you very close to doubling your money by the end of the year. If you were even more aggressive you could increase the lever factor to 15:1 risking 3% on each trade with 1.5% payoff on each win for a target of making 12% a month. But that would be the absolute maximum level of prudent leverage. At 3% risk per trade you would be down by 15% after 5 consecutive losers – something that can easily occur several times a year even in the highest probability strategies.

If you simply can’t trade in the one shot/one kill manner, if you have to approach each trade in a more probabilistic fashion doing multiple entries in order to achieve a better price for an exit (what I facetiously call the “spray and pray” method) then you have to use a very different leverage scheme. Suppose you use a system that averages into a trade a maximum of three times. Under such conditions you really can’t level more than 1:1 on each trade. That’s because your total lever factor on each full position is actually 3:1 and your total risk reward becomes much more negatively skewed. In the same -20 Stop +10 Target structure with a 3 point entry at 5 pip interval your loss is always a max loss of -45 pips while the gains vary between +10 and +15 pips creating a risk reward skew that is 3:1 rather than the 2:1 of the single entry/exit method. Still some traders swear by the “spray and pray” approach, but if they want to use it to double their money they have to be extra vigilant about leverage and stops.

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In the end like all things trading the goal of doubling your money is simple but not easy. First and foremost you need to develop a strategy on low leverage that actually proves its mettle under real market conditions. Then you can ramp up the lever factor in a judicious fashion and make a play for the 100% return but you must always take your stops and be willing to lose 50% of your account in the process.

Ignore Money – Get Rich

Boris Schlossberg

In his wonderful blog a Ben Carson tackles the day to day frustrations of life in the markets. One of my favorite Carson posts is called “How to be Wrong as an Investor” where he literally lists a litany of problems that can befall an individual investment idea:

You can pick the right stock but in the wrong industry.
You can pick the right asset class but in the wrong geography.
You can pick the right country but in the wrong currency.
You can nail the direction of a trade but not the timing.
You can time things perfectly but invest in the wrong stocks.
You can invest in the right market but in the wrong style of stocks.
You can nail the macro but miss the micro implications.
You can optimize your asset allocation based on past experiences but be blindsided by new risks in the future.

The list goes on and on and it’s worth reading in its entirety because it rings so true. Anyone who has ever tried to make money from capital markets has been victim of several if not all of those failures and has certainly paid the price at the school of hard knocks. Yet for those of us who day trade the true problem lies with money rather than being wrong.

Allow me to explain.

A few years back I overheard an old time Chicago options market maker describe in complete detail exactly how he would win money from a golf player who was much more skilled than he. “First” , the market maker said, “you never play for penny ante odds. You put serious money on each hole and then you keep raising the pot by doing double or nothing with the guy. Eventually even the best players will crack because they are not longer playing the game but thinking about the money.”

This guy was a master manipulator who understood human psychology better than an Harvard professor I’ve met. And in the day to day battle of pit trading he excelled precisely because he knew how to make other traders “think about the money rather than the game.”

Although the floor days are long gone, the principles of trading remain the same. Think back to your worst trading mistakes and they inevitably turn out to be a pathetic melodrama of chasing the market at the worst possible moment because you wanted to “get the money back”.

The best traders have an almost ethereal ability to separate their decision making process from the P&L statement. For the rest of us – that’s not so easy, which is why I recently started to do something interesting with my account that has helped a lot. I literally cover up the money. Or more accurately I remove the P&L module from my software so that I have no idea what my account is worth at any given moment. Yes, it’s a cheap psychological trick but it helps because it forces me to focus on the only thing that matters on a day to day basis – making pips.

A pip (percentage in point) is the fundamental unit of measure in the currency market and as long as I focus on my pip count I retain a certain level of control. Of course there are still terrible days when I may lose a hundred pips on a series of ill advised trades, but it is far easier to regain your composure by focusing on making a few pips back a time rather than obsessing over the loss in your account.

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The great irony of the financial markets is that money – the very thing we all seek – is truly the root of all evil when it comes to trading. To win you need to trade for process not profit and that literally means that money doesn’t matter.

How to Make Ten Times Your Money By DayTrading

Boris Schlossberg

Want to make 10 times you capital by daytrading?
It’s much easier than you think.
You don’t have to lever your account 100:1.
You don’t have to time the euro perfectly.
You don’t need the luck of the Powerball winner.
You just need to learn how to grind it out and take a long term view.

Let’s do the math first.
If you have $10,000 of speculative capital it will take you approximately 5 years to grow that account to $100,000 if you can consistently make 4% month or 20 pips per day.
Now I am not going to lie to to you and tell you that it is easy.
But it’s definitely doable.

For the past year I’ve been doing about half that grinding out about 200 pips per month in 2015. So I am not quite there myself, but many, many traders in my room are doing much better than me. Some are up as much 20% year to date and we are only at the 15th day of 2016.

But here is the thing. No one my room who is successful trades more that 2 to 3 times leverage. No one risks more than 2% maximum on any given trade ( I keep it to 1% myself).
But everyone is really hitting out of the ballpark this year.

Well, we do have a great strategy but also day trading provides its own leverage. By flipping our account 5-7 times a day we are actually achieving 10-15 lever factor without ever assuming such monumental risk.

Most traders are always dreaming about “making it big” and the internet is replete of “if-you-just-bought-here-and-sold-there you too would be a millionaire!” examples. But in real life wealth is build 20 pips per day and daytrading,when done right, is actually one of the best ways of achieving that goal.

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The Only Thing You Need to Do To Make Money Day Trading Next Year

Boris Schlossberg

This week I was going to do the typical end of the the year what-have-I-learned-in-2015 column and talk about volatility regimes, implied bets and exit and entry strategies. Yadda, yadda, yadda.

Then I stumbled across an old thread on Elite Trader called (SIC) What`s your biggest tradeing blunder? and suddenly realized that it contained the answer to the key day trading problem that plagues us all. The thread like so many on Elite is an endless litany of missed analysis, sloppy execution and terrible decision making at key points in the trade. Reading it was like watching a slow motion car wreck you know it’s wrong but you just can’t pull away.

Tolstoy once said that every happy family is the same, but each unhappy family is unique in its own misery. When it comes to trading I think the exact opposite is true. Every happy trader is different but every unhappy trader is depressingly the same. What unites every losing day trader including those in the Elite thread is the woefully misguided attempt to make every win the same size, while making every loss different.

It stems I think from our almost subconscious need for a “paycheck”. Paychecks are of course uniform. They are cut on a weekly or biweekly basis and lull us into the belief that money like lightbulbs, cereal and soap comes in nice uniform units of measure.

But in trading to think this way is pure madness. The markets are never uniform and never provide predictable profits.

Imagine, however, if we smashed this mental model to smithereens and instead did the exact opposite of what every retail trader does. Imagine if we accepted the fact that our wins would be all over the place sometimes banking as little as half pip, sometimes making 20 or even 50 pips per trade. And then suppose that we made a vow in 2016 that no matter what, no matter how, no matter why, our losses would always be the same size.

Last week I talked about the need for a money stop. For a typical $10,000 retail trading account I think a $100 money stop per trade is just right. So suppose that in 2016 you made it your business to never lose more $100.00 on any trade you made. It didn’t matter if you were right or wrong. It didn’t matter if this was a planned trade or simply a stupid fat finger execution. It didn’t even matter if this was your fifth, sixth, seventh loser in a row. The only thing that mattered is that you never lost more that $100 on any given trade idea. I guarantee that if you did that there is almost no way that you will fail as a daytrader. You may not be profitable but you will NOT lose all your capital.

My Top 5 Trades for 2016

So in 2016 we can talk about tactics til kingdom come, but the only thing we really need to do is keep our all our losses at the same size ALWAYS and if we can just do that we will be well on our way to making money next year.

You Will Never Make Money With a Trading System …

Boris Schlossberg

Let’s start with the basic fact of trading. No system – no matter how good you think it is – will ever make you money otherwise every EA buyer in the world would be a millionaire. And yet… hard as I look I can’t seem to find any EA millionaires in FX. There are plenty of demo millionaires. There plenty of ads that promise an EAs will make you a million for only $9.99 plus a tub of tupperware, but … There. Are. No. Actual. EA. Millionaires. Like unicorns they seem to be creatures only of our imagination.

Ok. Let me set my snark aside and tell you right up front that I actually LOVE trading systems and I use EA’s for every single trade I make. Yet I am not foolish enough to believe that this is the source of my profit. A system like a scalpel is simply a tool. In the hands of a gifted surgeon it can do marvels. In the hands of klutz it will just cut you badly and make you bleed out.

One of the greatest joys of my trading life this year was to create a live trading room that allows me to observe on a daily basis the variety of ways that the same system can be used by many traders. In our Slack room we now have more than 400 traders from across the world all trading essentially the same old fashioned market making method that I adopted for retail trading We all use the same EA, look at the same currency pairs and follow similar risk management rules. Yet while someone like me may only lay down out 3-5 trades per day another trader in our room will do as many 40 trade cycles in a 24 hour period.

Here is the kicker. We both make money, we both follow the rules and we both trade the same system – but you would never know it if you just looked at the P/L runs of our accounts. The reason is that no matter how mechanical we want to be – we are all human, all different in temperament, style and philosophy.

I trade essentially like someone with PTSD – firmly believing that old Andy Grove observation that just because you are paranoid it doesn’t mean they are not out to get you. I view the market as field full of landmines and try cross it as quickly possible avoiding a misstep at any cost. That means that I often pass up many profitable trades or get out too early, but I live to trade another day.

The 40 trade per day trader on the other hand operates with the stoicism of Marcus Aurelius. He trades every set up to its full conclusion – good, bad or ugly. And he does it with a sense of serenity that I can never hope to achieve. He makes 1%-2% per day like clockwork- but when he gets clipped – he can lose 4% of his capital in the blink of an eye.

Here is the thing though. Instead lamenting our particular foibles we should embrace them. It is after all our individuality that makes us unique and valuable. Instead forcing ourselves to adjust to the system which is what so many traders try to do, we should adapt the system to our own personality.

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That’s why no system can make you money until you make it your own. So no, all those EAs sitting in your Experts folder aren’t going to “make it rain”. Not until you begin to understand not only the science, but the art behind their algorithm.

The Worst Trading Habit That Makes You The Most Money

Boris Schlossberg

Ever since I first picked up a trading book – more years ago than I care to admit – the one undying advice of conventional wisdom was “Let your profits run and cut your losses short.” I would venture to say that this “kernel of brilliance” is responsible for more losses than any other trading tenet ever devised.

In actual markets there is absolutely no way to let your profits run while cutting your losses short. You either cut your profits or cut your losses, but you can’t have it both ways. That’s because markets – and especially speculative markets like forex – almost never move in one direction.

Anyone who has ever been able to “let his profits run” is simply a lucky idiot who like a befuddled lottery winner guessing a random number, just happened to catch that one big breakout and then was stupid enough to believe that it would continue without retrace and then was lucky enough to have that once in decade occurrence actually happen and lastly – and this almost NEVER happens – was smart enough to exit before the whole trade went right back to where it started from.

Don’t believe me? Go ahead keep making bets with 3 to 1 4 to 1 5 to 1 payouts and we can talk again when your account equity is down to 10%.

Now “professional gurus” would be horrified at my blasphemy. They would tell you that one of the worst things you can do as a trader is to cut your profits short. After all, how are you supposed to pay for all those stops?

The problem with professional gurus however is that they are great at trading the left side of the chart.They are awesome at picking prime examples of trends AFTER they take place, but I have yet to see any of them succeed in my domain – at the right side of the chart where fear and uncertainty control every tick and real capital is won or lost on your tactics rather than your theories.

In that world – the real day trading world of the markets – taking your wins too quickly is one of the most profitable things you can do.


Because successful day trading is not about making money. It’s about NOT LOSING money. There are three basic classes of day trades. There are trades that make money right away – anywhere between 1 and 30 minutes in duration. There are trades that lose money right away usually in the same short period of time. There nothing much to do about either one of those types of trades and you just take them as they come.

There is however a broad middle ground of trades that appear to be uncertain as to whether they want to be winners or losers and this is where all the bad habits of impatience actually pay off big.

Now as traders whether we are Hindus in New Delhi, a Jews in Tel Aviv, a Moslems in Dubai, Chinese in Singapore or just jolly old rogers in Melbourne – we are in fact all Anglo Saxon at the core. What I mean is that if we live in the advanced industrialized world we have all internalized the Protestant work ethic and with it the core belief that we must sacrifice in order to succeed.

Generally that’s a great rule to live by – except when it comes to day trading. Good things do NOT come to those who wait. We must not endure pain in order to make profit. The speculative markets flip all those long ingrained behaviors on the head.

You got out of the trade a bit early and gave up 10 more pips of upside? Who cares. There is another trade right around the corner. In the meantime, you know what you also did? You got out of trade that could have turned sour and made a 5 pips instead of losing 100. You know what you also did? You freed your capital to look for other opportunities instead sitting in front of the screen paralyzed like a deer in headlights, hoping – nay praying – that you can get back to even while other traders are banking profits elsewhere.

The most important thing that you did was NOT invest. Not invest your time. Not invest your money. Not invest your psychological capital. By selling too early you became a true day trader rather than a quasi investor.

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So go ahead – get out too early. Give up the profits. Once you start doing that on a regular basis the only thing you’ll regret is not picking up this bad habit earlier.