The Amazing Power of Negative Thinking

Boris Schlossberg

Positive expectancy is a foundational concept in our business. It is the idea that whatever system, whatever algo, whatever visual setup you use will result in profitable trades. The whole point of trading is that you need a method that is not just simply blind luck gambling in order to win in the long run. So backtesting, front testing, live testing are all good and necessary steps to finding something sustainable and robust to trade.

The problem comes with expectancy. Expectation is the single most toxic thing in trading.

Think about what happens. Say you research an idea. Code it. Chart trade it. Maybe demo trade it. Maybe dime pip trade it. Backtest it some more and feel really good about it. The moment you turn it on -- what’s going through your mind? You are excited! You are ready to make money! You are primed for success -- you are Dale Carnegie, Tony Robbins, Michael Jordan all rolled into one!

It doesn’t matter if you are a triple Ph.D. data scientist working on the most complicated market-making algorithm ever or a just a regular Joe retail trader looking to pull some pips from the market. As human beings, we all expect positive results.

And of course, we get the exact opposite. Not only are market conditions different from the backtest or different from the past two weeks of price action, but they are literally transformed into such a challenging environment where every single trade you take turns into a stop.

Suddenly you are 5%-10% in the hole. You a miserable and frantic and teetering on the state of what poker players call “tilt” -- a moment when you lose all rational faculties and start just trading randomly, swinging wildly at the market in a desperate attempt to. Just. Win.


Because you expected success. Think about it. You are never as vulnerable as when you expect something to happen. It’s almost never the results that kill us psychologically it’s always the expectation. The market, which is the ultimate poker game, knows this very well. The very point of all good poker players and market traders is to psychologically destroy their competition through deception and subterfuge. Once your opponent is defeated mentally it’s a piece of cake to defeat them physically.

So the market, in its very perverse way requires skills that are the opposite of everyday life. To win you actually need to walk into the ring expecting to lose -- because lose you will. Sometimes, like in the current Alice-in-Wonderland market for what may seem like an eternity. And the only way you will survive the pressure is to step into the arena expecting to lose. In the market, the power of negative thinking is the greatest superpower of all. Because if you expect to lose, you will trade small size. You will control your bankroll. You will take every trade. You won’t lift stops.

By expecting to lose, you will do all the right things to win in the long run.

I am always amused by financial planners who ask, “What is your tolerance for risk?” Clients always murmur something like “20%”. Do you know what the real answer is? ZERO. Nobody puts money in the market because they expect to lose -- which is why I am certain that Ma and Pa Main Street who have been brainwashed to buy every dip and hold the ETF forever, will puke up all the gains of the past decade at 50% loss because there will be a time when the market does not come back. Not in a month. Not in a quarter. Not in a year. Not even in a decade and none of them will have the trading skills and the mental strength to understand just what kind of a sucker bet they made.

Oh and by the way, if you still believe in the Horatio-Alger-pull-yourself-by-the-bootstraps-power of-positive-thinking approach let me leave you with this quote from Michael Jordan.

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

The Incredible Power of Having a Losing Mindset

Boris Schlossberg

Trading to Win.
The Winner’s Attitude.
Five Ways to a Winning Mindset.

Trading blogs are littered with advice about winning and while their intent is noble, they couldn’t be more wrong and their advice is actual poison to your success.

Take a step back and think about any competitive human activity. It is basically a study in failure and losing. In FIFA 2018 World Cup Croatia took 115 shots on goal -- the most of any team in the tournament. Care to guess how many actual goals they scored? 14. That works out to an 88% fail rate. Croatians, the Cinderella story of the summer only succeeded 12% of the time.

In American football, Alex Smith of the Kansas City Chiefs is considered to be the most accurate passer of 2017 season. His completion rate? Just a bit better than half at 56%.

In poker, Phil Hellmuth is one of the greatest players of the game. He has been playing professional poker for 30 years. Each year there are at least 50 WSOP tournaments which means since he started playing there have been more than 1500 events. He holds the most bracelets of anyone who has ever played the game. How many? 15. How many times has he been at the final table? 58 times. Basically, he fails 97% of the time.

The biggest winners in the world lose. They lose a lot. And if we want to have any chance of being like them, we need to understand that losing is not just part of the game. It IS the game.

Yet when it comes to trading we suspend all rational thinking and approach the market with the ridiculous expectation of winning every trade. Or 9 out of 10 times. Or at worst 8 out of 10 times. But even if we had a great trading system that won 80% of the time, the reality of probability means that we could have 100 trades where the win rate was only 50% and another 100 trades where the win rate was 90%. We could go on for months underperforming the win rate percentages by 20, 30 even 40 percent and not be doing anything wrong. Despite that reality, most retail traders will they stop trading the system if they hit 3 losers in a row. If they hit 10 they quit altogether.

Developing a winning mindset does little to fix this problem. In fact, it hurts you immeasurably. A winning mindset creates the false expectation of a win, so just one or two losses completely destabilizes your psyche. You double up on the position. You pull you stop. You punch your screen. In short, you lose control, not because your execution is bad, but because your expectation is completely at odds with market reality.

Now imagine if you approached each day expecting to lose money. Let’s say you are day trading. You set a total risk budget of 50 pips while trading positions with 15 pips stops and every trade you take you FULLY EXPECT TO LOSE.

What happens then?

Well for starters you let your strategy be. You don’t second guess every pip of adverse movement and close out positions too early. You TRADE TO PLAN because you have given yourself the permission to lose. You are not annoyed, angered or frustrated. Your mind is actually clear and calm which means you can analyze the next setup with a much better attitude. If a winner comes, it’s a pleasant surprise, rather than your God-given right and you can continue to look for the next trade and work on improving your process.

Think how much better it is to have a LOSING MINDSET. You are unfazed by a losing day, a losing week or even a losing month. It all becomes part of the job and it allows you to stay in the game much longer than the average retail trader, which in the end is how winning is really done.

The Healing Power of the Repair Trade

Boris Schlossberg

“When you are shooting a moving target, a shotgun is more useful than a rifle!” Penelope, one of the best traders in my chat room

It’s been a good month of trading in BK. I’ve managed to bank 20% in my own account which is by far the best monthly performance for myself in years, but looking over the trade blotter, I can’t help but appreciate how many times this month my a-- has been saved by the repair trade.

Those of you who have followed me for a long time know that I always trade with a multi-entry approach. My first entry is never my last entry into any trade I take -- be it swing, news or day trade. Of course, you can sneer and say that I am simply averaging down, and as Paul Tudor Jones once famously said, “Only losers average losers.” But while there is great truth to that statement I take exception with calling what I do averaging down.

Typically when traders average down in their positions they do so out of desperation as they try to rescue a losing position. The average down trade is often done reactively with little thought to the overall size and ultimate stop.

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I, on the other hand, always know ahead of time exactly how many entries I will make, exactly how much size I will use and exactly how much risk I will bear. My systematic approach to trading basically assumes that I will be wrong on price but correct on the general vicinity of entry. I think it’s a more humble way of trading because you admit ahead of time that you will likely be wrong. In fact, often you are wrong more than once or twice and yet can still come out a winner by never committing all of your capital to a single price.

If markets are essentially probabilistic entities then it always amazes me why more people don’t trade probabilistically. To me, it’s the height of arrogance to assume that you can pick a price with a degree of certainty greater than 50/50. However, you MAY BE able to prick a price area with a degree of certainty that often approaches 90/10.

Strategies are important, but even the best ones have a very tiny 55/45 edge which can quickly evaporate in the changing environment of market volatility. That’s why to truly improve your trading you need a multi-entry approach and a humble attitude.

You need the healing power of the repair trade.

AUDUSD – Can It Power Through .7500?

AUDUSD – Can It Power Through .7500?

Chart Of The Day

The Aussie went for a roller coaster ride today dropping 30 pips on news that Current Account data came in softer than expected with net exports printing at -0.7% versus -0.4% eyed. This is likely to cause a downward surprise in the GDP reading later tonight. The market is anticipating 0.2% print but it is quite possible that the reading could actually come in negative.

Nevertheless, the Aussie regained all of the losses after RBA reaffirmed its neutral stance in its monthly statement which kept rates at 1.5%. With US yields continuing to compress, the Aussie is benefiting from carry trade flows, but that dynamic will only last if the market believes that the yield is secure. If the GDP data does turn negative, it will create a fresh set of worries about the prospect of further easing and the pair will be vulnerable to further downside shocks and could test the .7400 figure on any miss to the forecast.

Can Cable Power On?

Can Cable Power On?

Chart Of The Day

The currency market has concluded that Brexit is a non event, and as a result cable has rallied through both the 1.4500 and 1.4600 level as traders squeezed the shorts mercilessly. But is the consensus being too complacent?

The latest ICM poll shows the Leave vote up by 2% and as we noted earlier today, “One of the more difficult aspects of political referenda such as these is that people often lie to pollsters about their true intentions, especially if those intentions are aligned against the conventional view. In short many Britons may state one opinion for the pollsters while doing quite the opposite in the privacy of the booth.

Therefore the risks of Brexit may have diminished, but they have not fully disappeared and the recent rally in the pound could quickly change course if market senses any shift towards the Leave camp. Meanwhile the 1.4600 figure could prove to be stiffer resistance as it carries some overhang from February highs. Having had such a strong rally, cable is due for a pause and with all the good news on the Leave side now fully priced in the upside may be limited.”

For now the 1.4700 level should serve as stiff resistance while 1.4500 is the new support.