What Makes Day Trading Successful?

Boris Schlossberg

It’s been an amazing month in my chat room. Trader after trader put up double digit returns this month, during some of the worst volatility in years. Even I, who trades with all the risk tolerance of an old lady from Pasadena, managed to bank a 10.14% gain beating my own target of 4%.

So what did we do at the start of 2016 that made so many traders profitable in the room?

I would love to say that the profit came from my ideas, but the truth is that everyone has bastardized my strategies so much, that sometimes I don’t even recognize what they are doing. Indeed even I went off into my own corner for the past two weeks and traded my own variation of my strategy that actually worked very well.

The truth is that there is no uniform way of trading. Everyone adds their own touches to even the “best” trading strategies that you devise and pretty soon the trading room looks like a Middle Eastern bazaar with everyone hawking their unique wares.

And that’s exactly the way it should be. Trading is very much an exercise in personal expression as opposed to investing which can reduced to one simple formula (Dollar cost average into an index every month of your life and never look at the statement until 30 years have passed). And its it precisely because trading is personal that it is such a pleasure and a challenge at the same time.

Yet despite all the differences, despite all the little personal quirks and analytic flourishes, there were several inviolable rules that every successful trader followed which were responsible for their amazing performance.

1. NO LEVERAGE.

This is pretty much the only rule you ever need to follow yet it is the most commonly broken rule in trading. I can talk til I am blue in the face why trading more than 2X equity is pretty much a guarantee of ruin – but it wouldn’t matter one bit. I’ve finally figured out that the NO LEVERAGE rule should actually be called the NO GREED rule, because ultimately it’s greed that makes everyone fail in this business. Why trade for nickels and dimes when you can turn $10,000 into a $1 million in 1 year! The siren call of that idiotic fantasy is what built both Wall Street and Vegas on the oldest con in the book.

The irony of our business is that we spend all our days chasing money, but it’s only when we stop paying attention to dollars and start focusing on risk that real money comes your way. No one in my room who made money this month traded with any kind of leverage. For most FX traders who consider 10X lever a light position that will probably come as a shock. But most of the traders in my room will be here next year and the year beyond whereas anyone on 10X lever factor will be long gone from the game.

2. LOSE.

Every trader who made money this month was a great loser. They lost money on various currencies. They lost money on various strategies. They lost money for several trades, several days, even weeks in a row. One trader made more than 300 trades this week alone racking up massive consecutive wins on Monday only to bleed everything out midweek as the gyrations of the oil market wreaked havoc with his CAD trades. Did he stop and cry like a little baby? Did he throw up his hands and scream that the game was rigged? Did he blame my strategy for being so inconsistent this week? No. He just made 300+ trades and when the dust settled he was up more than 2% for the week.

Mike Tyson once said that everyone has a plan until you get punched in the face. That’s doubly true with trading. Most people can’t take 3 losers in a row. But we lose every day. If you don’t like losing – don’t day trade – but if you learn how to cope with the vicissitudes of the market that skill will be far more valuable to you than any strategy you ever develop.

3. STAND DOWN.

“I got the horse right here. His name is Paul Revere. Can do…”

Every time I watch new traders in room, I always think about that song from Guys and Dolls. The itch for action is the single biggest destroyer of wealth. Everyone wants to bet the big event – but that’s exactly when most traders will lose the most money. The guy in my room who banked more than 30% this month did something remarkable this week. On FOMC day he simply stopped trading 7 hours before the event and didn’t resume until 2 hours post the release. While everyone else was trying to feverishly bank every last pip before Ms. Yellen and company released their statement, he sat on his hands and watched. This kept him from being whipsawed in EUR/USD and USD/JPY and kept his day green while many other accounts quickly turned red.

Taking a page from his book, I went dark on all my positions ahead of the BOJ the day following. The BOJ meeting was expected to be snoozer, but instead they became the second G-3 central bank to go negative rates and USD/JPY would have decimated even the biggest stops on my strategy. Instead I kept all my money and cleaned up in the aftermath of the release.

Discover the Joy of Team Trading

Most traders think that day trading involves taking risk. Like the glorious ALL IN bets in poker. The reality couldn’t be less exciting. Successful day trading is the art of avoiding risk as much as possible. We make all our money during the boring times and leave the cowboy bets to the amateurs.

The Three S’s of Successful Speculation

Boris Schlossberg Uncategorized

So the old joke about real estate is that the key to success is location, location, location. And like all jokes this one contains more than a grain of truth. There is perhaps no greater example of that idea than the intersection of 96th street and Lexington Avenue in New York. On the south side of the street you get the final edge of the Upper East Side – one of the most expensive neighborhoods in New York where 1000 square feet will easily cost you 2 Million dollars. On the north side of the street you have the start of of East Harlem (which has improved markedly over the years, but where the cost of real estate can be 1/5th the value of the Upper East Side). Maybe 200 feet separate the housing stock but it might as well be 200 miles.

When it comes to speculation I have my own golden rule – selection, selection, selection. When you strip away all the excuses for a bad trade it all comes down to this one key factor. The reason of course is that as speculators, selection is our only edge in the market. Unlike dealers or investors we are not required to participate. Our power resides in our ability to stand aside and wait for that opportune moment. That is harder than it sounds but there are three key components to the selection process that I think could help us to define the best possible trade.

Selection of size.
Nothing and I mean NOTHING will make you lose money faster and with absolute certainty than selecting the wrong size of trade. In FX where leverage can exceed 200:1 (I buy 2 Million units of currency for $10,000.00 down) selecting the wrong size is 99% of your problem. I mean that literally. Currencies (especially G10 FX that we all trade) rarely every move more than 20% in one direction or another. That means that if you never levered yourself (Buying only 10,000 units of EUR/USD with $10,000) you would never bankrupt yourself.


Of course who wants to trade for pennies? Everyone in FX aims to make millions and that’s why everyone in FX loses thousands.

What’s my MAXIMUM lever factor? 10:1 and I will only employ that size if I am using a very tight stop that won’t lose me more than 1-1.5% of my account.

Want to become a much more successful trader right away? Reduce your size. In FX the bigger you go the more you will lose.

Selection of time
Like war the FX market is hours of boredom punctuated by a few minutes of terror and anxiety. Prices not only appear random – they ARE random.

There are however times in the day when prices take on a semblance of order when they respond to infusion of fresh information that is the global economic calendar. Information is what disrupts the supply and demand imbalance and creates movement in prices. It is NOT moving averages, Bollinger Bands, Fib ratios, Elliott Wave counts or any other artificial overlays on price that have all the predictive power of the daily horoscope. So you can continue to believe in magical thinking or you can trade only when there is more than a random chance of price movement. That’s why following the daily economic calendar (what most retail traders derisively call “the news”) is key to understanding how the selection of your trade will perform.

Does this mean that you must become an ultra short term trader like me who only focuses on predicting whether it will “rain or shine” in the next 5 minutes? No of course not. But it does mean that you must structure your trade around sound thematic ideas and then work very hard at timing the trade so its in sync with the development of those themes.

Selection of Instrument
One of the most overlooked aspects of trading is that we have an array of currency pairs to express our view. EUR/USD is NOT the only trade in the forex market. How you chose your instrument will literally determine if you lose or win. Buying USD/CAD against Canadian data can have very different ramifications than buying EUR/CAD or CAD/JPY. That’s why to become a true master of the game you need to select not just the right size and the right event but also the right instrument to express your view.

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Sounds hard? Of course it is. But at least now you know what it takes to succeed in FX. It’s not about brokers, execution, spread and all the million little excuses we tell ourselves every day. The reality is that success in speculation always comes down to selection.

Win, Lose or Draw – The Road to Successful Trading

Boris Schlossberg

The other day Bob Pisani who has been covering markets for more than 20 years from the floor of the NYSE was ruminating about why investors fail and his conclusion was that most investors never stick to their original strategy. Bob was talking in particular about Bill O’Neill who founded Investors Business Daily and who is known as the father of momentum stock trading.

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O’Neill had two very simple rules. If the stock fell by more than 8% from your purchase price, you sold it regardless of any macro or micro conditions that may have caused the fall. If the stock had quarterly earnings growth of 25% or more – it was candidate for a buy regardless of current valuation.

There were several other criteria that O’Neill used, but Pisani’s point was that it really didn’t matter if O’Neill was right or wrong in the short term. He was consistent with his trading and in the long run that mattered much more.

We all know that when it comes to investing the single best strategy is to buy a very low cost index fund with the same amount of dollars every month. Any investor who followed this strategy from 2000 onward through two brutal bear markets would be much better off than sitting in cash and would be way ahead of most hedge funds who jumped in and out of the market trying to outsmart it.The problem is that very few investors have the strength of mind to remain consistent in the face of risk and to follow the rules.

As traders we fall prey to the same human weakness. Very few of us can follow a strategy consistently through its inevitable drawdowns. Yet if we try there is tremendous value to be gained. First and foremost you becomes a realistic rather than an idealistic trader. If you trade a high frequency day trading strategy long enough you learn that there are days, week even months when you will constantly lose money. Although most us can appreciate this truth intellectually, few of us can accept it emotionally.

That’s why trading a system consistently win lose or draw can be the best training experience for a trader. Once you have gone through the rollercoaster ride of rising and sinking account equity, you can begin to accept your losses with poise, and that is the first step towards becoming a winner in the market.