How To Make Trading Resolutions That Stick

by Boris Schlossberg Boris Schlossberg

They say that by the first week of the New Year 90% of all resolutions are broken. That seems about right. We, as human beings, suck at discipline. It’s hard to start a new routine and even harder to maintain it.

The classic advice that all experts give is to make your resolutions as discrete and precise as possible. For example, instead of saying I want to make money this year, resolve to make 10% on your account – actually go even further than that – resolve to make just 5 pips net each day. That may sound easy, but is actually incredibly hard.

Five pips per day at 250 trading days per year is about 12%. Do that for a decade and you will have developed a skill as valuable as any job out there. Of course no one can make five pips every day. The markets are just not that kind. You’ll have days, weeks, even months where nothing is working and the best you’ll do is just stay even.

Still five pips per day is a worthy goal because it’s a reasonable constant that will keep you on the path towards profitability. If you can just maintain that pace going you will win at trading. But of course we all know that goals are not the problem for most well trained traders – money is. The moment we start losing money, real money, all goals, all discipline goes out the window. At the moment financial press is rife with headlines that George Soros lost a billion dollars since the Trump election as his shorts blew up in his face.

First of all ouch. As famed House Speaker Sam Rayburn used to say, a billion here, a billion there and pretty soon you are talking real money. On the other hand, as Josh Brown tweeted out “If you’re gleefully sharing the headline ‘Soros Loses a Billion’, try to remember he has 30 more of them.”

As enormous a sum a billion is to most of us, to Soros it the equivalent of 10,000 dollar. Sure it hurts, but for most of us it isn’t going to change our life. It’s all relative. It’s why he s able to wage such vast sums of capital and lose it without much concern. Soros has gotten to an age and a level that allows him to operate unintimidated by the risks he takes.

But most of us can’t do that. We are too close to our money and in fact the more money we put into an account, the more of it we tend to lose because we are human – we can’t help it. A loss that is painful but small is inevitably turned into a much deeper and more substantial loss because we just can’t let go of our money, so we pull the stop, we double down and we revert to the vicious cycle of loss.

Is there a way to circumvent that problem? Is there a way to stick to our resolutions and adhere to our goals? There is, bit in order to succeed we need to isolate ourselves completely from our money. Fortunately these days technology can help us do that.

We can trade copy ourselves.

Yes I know that sounds idiotic. Why would you want to replicate your own trades into another account? Not only do you have to pay someone to do this (although there are ways to do it for nothing) but your replicator account will often suffer slippage because of natural delays in signal delivery. And yet for all the problems that trade copying creates it’s psychological benefits are far greater.

Why?

Because it separates you from your money. Think about it for a second. When you trade copy you have a master account and a slave account. The master account can be as small as you like because you can simply apply a multiplier to the slave account to get to proper size. In fact master is often traded at the smallest size possible of 0.01 lots. There is a lot of power in that structure. In fact many traders often trade very well on 0.01, but once they scale they lose all control. It’s a lot easier to take a 50 point stop at 0.01 lots because that’s only 5 bucks of P/L. It’s a lot harder to do that with 500 dollars and harder still with 5000. Yet to be a successful trader that’s what we have to do day in and day out.

By trade copying ourselves – we cheat mother nature. We create a psychological barrier that separates us from our money and prevents us from falling into the vicious vortex of uncontrolled losses.

So if you really want your trading resolutions to stick – stop trading your real money.

Three Trading Resolutions For The New Year

by Boris Schlossberg Boris Schlossberg

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Trade on longer time frames
As a retail trader you have two massive barriers which are the bane to your existence – spread and volatility. If you trade a short term time frame you are vulnerable to adverse movements in both.

Spreads at most brokers are variable and can go to 15 wide on daily basis even when nothing is happening. (Ever see EUR/JPY at 5PM NY Time?). If you are trading with 15 point stop there goes your trade. Volatility is similar. One big exporter order on the fix could flip your trade from a winner to a loser as prices scurry 20 points in 20 seconds and then come tumbling back.

Its all a matter of math. 2 point spread on a 10 point stop is 20% cost of business. Same spread on 100 point stop is 2% cost of business. The higher your costs, the better you have to be to make money and I am not that good – are you?

Focus on avoiding risk rather the chasing reward
Here is a simple exercise to consider. Take a strategy with 15 point target and 15 point risk. Now subdivide the equity into two halves. Trade one half on 15/15 basis and the second with 15 stop and 8 target. You have three scenario you lose on both halves you are -30. You lose on one half and make 1 take profit you are -7 (-15, +8) you will on both halves you are +23 (15+8). In the original scenario you are either -30 or +30.

So let’s compare and contrast. In worst case scenario you lose -30 both way. In best case scenario you win +23 on the 15 and 8 strategy and +30 on pure +15 strategy. So you are -7 on combo. However in the intermediate case you are only -7 on the combo but -30 on the pure +15 strategy. You are actually +21 on the combo. (You only lost 7 points on the combo and -30 on +15 – you would need to make up 21 points just to get equal to combo)

When you look at risk this way you realize that you have some very asymmetric payoffs. In the best case scenario the “bet it all on one target” strategy only gets you 7 more points, but the murky middle (where almost all of life and trading takes place) it loses 21 points. Effectively the combo strategy is a better because its a compromise between cutting risk and chasing reward.

(This is a very simple example to illustrate a point. Spare your emails on expectancy ratios, etc. I am well familiar with statistics. I also know stats often don’t mean jack in a non-static environment like the market)

Mix and Match
We all know that diversification is good because it creates non-correlated returns which are supposed to be less volatile. But here is something to consider. You don’t need two separate strategies to create a diversified portfolio. The same strategy using different stops and take profits can produce wildly different results that are not very correlated and can therefore provide the portfolio effect you seek. So when you mix and match don’t just look at different system look at same systems trading differently.