In Trading Strategies Don’t Work – But This Does

Boris Schlossberg

Over the years I’ve amused many if you with my never-ending battle of the bulge. I’ve gone through the salad and sardines diets, the paleo diets, the intermittent fasting diets in my many attempts to lose the extra 15lbs.

Nothing ever worked. Or rather it worked for a little bit but never worked for long.

Until now.

Happy to say that I am near my high school fighting weight, have held steady at that level for more than three months without any effort whatsoever and generally feel good.

What’s my secret?

I went on a European diet. What’s a European diet? That where I eat anything I want anytime I want but at 1/3rd the lardass American portion. Not 2/3rd’s not 1/2 but 1/3rd – because that is actually how Europeans eat.

I stumbled across this idea after my tenth visit to David Aranzabal’s annual forex conference in Madrid. As always, when there I fully enjoyed myself, eating and drinking everything that was put in front of me.

When I came back to New York I was certain that put on at least 10lbs, but was shocked to find out that I gained nothing. This made me rethink my whole approach and the rest is history.

I’ve written about the similarities between trading and dieting before. Both enjoy a 95% rate of failure. Both have millions of gurus trying to sell you their “secret” solution and both are multi-billion dollar industries based on hope rather than results.

This time I realized that there is even a deeper connection between the two. Just as there is no “diet” that will help you lose weight in the long run, there is no trading strategy that will make you money for life. This actually explains why books on some of the world’s greatest traders sound like interviews with idiot-savants. That’s because there is no “secret” strategy there.

First of all, when you read accounts of the greatest traders you always walk away amazed at the variety of their approaches. Some trade trends. Some are pure mean reversion traders and some are momentum riders often on the opposite side of the trade from the other guys. Furthermore, often they will contradict themselves in an interview and will talk about how they’ve switched their approaches mid-stream to adjust to market conditions.

What becomes clear is that all great traders are consistent at only one thing – execution. Just as with “dieting” the only thing that really matters is portion control and natural non-processed ingredients, so too with trading there 2-3 things that will determine long term success.

  1. Take a stop. – This always the hardest thing to do ALWAYS. You can stop out once, twice even three times, but eventually, you get stubborn or angry or both and fight the move. That’s why the most important execution skill for winning, in the long run, is to lose in the short one.
  2. Position size – this is actually exactly the same as portion control in dieting. The bigger your size the greater your chance of dying (metaphorically speaking). Position size in levered markets can also be highly deceptive. 5 simultaneous positions at 3:1 lever factor are equivalent to 15:1 gearing for your account.
  3. Letting the trade come to you – It doesn’t matter if you trade momo or mean reversion, every great trader trades only when the setup manifests itself. Chasing price for the sake of action is perhaps the greatest difference between amateurs and professionals and the less you chase, the better you will become.

That’s it. Just as my “European” diet is very simple so too is most trading success. Strategies change, but tactics are forever.

All Trading Strategies Are Worthless Without This One Thing

Boris Schlossberg

Long, long time ago when Michael Milken was still king of Wall Street I used to know an old crusty, broker at Bear Stearns. Whenever a customer would call him with a question on the direction of the market, Bob would pause and then in his most earnest TV-announcer voice utter, “The market will be up or down unless it stays the same.” That line never failed to crack me up as it perfectly encapsulated all there is to know about trading.

Trading despite all of the complex strategies that we employ is actually extremely simple and only boils down to three bets. You can bet on continuity. You can bet on mean reversion. You can bet on volatility. That’s it. Everything else we do is just decoration. That’s why traders obsession with strategies is laughably absurd. 90% of the success of your strategy will have nothing to do with its rules and everything to do with the market environment.

That’s why in a strongly trending market the simplest moving average crossover system will reap outlandish profits while in choppy environments you can just sell and buy Bollinger band tops and bottoms with remarkable success.

Don’t get me wrong, I don’t mean to imply that strategies do not matter at all. Of course they do and a well thought strategy is still better than a random one, but in truth they matter far less than we think. The key to good trading is good process, rather than good strategies. In short it is much better to learn how to bet rather than what to bet.

A few weeks ago I wrote a column about how my results improved dramatically this year (from -4% loss and -8% drawdown to 5.5% gain with -0.20% drawdown) when I started to make much smaller, more frequent trades – that’s an example of triumph of process over strategy. As mentioned then many of my trades were completely impulsive yet I was able to succeed despite the randomness.

The difference between strategy and process is that the former focuses on how much can I win, whereas the latter is primarily interested in how little can I lose. When it comes to trading process trumps strategy every time.