Trader… Control Yourself

by Boris Schlossberg Boris Schlossberg

What do you need to succeed at trading?

A great setup?
Lightning-fast execution?
Steely risk management skills?
All those nice-sounding ideas are utterly irrelevant to your success.

Why?

Because you will never follow the setup, speed is pretty much the same for everyone across the advanced industrialized world and no one has steely risk management skills.

We approach trading education all backward.

We focus on setups, backtests, leverage, execution, correlation risk and a million other factors that we think may give us an edge. And sure, if we turn those ideas into an automated system these become the primary elements of success. I just released a system that checks all those marks. K and I have been trading another system for many months already and it is by far the most profitable account I have.

But… all those systems have the sex appeal of a Vanguard index fund. They are slow. They are deliberate. They can be quiet for days or suddenly explode into an array of trades. If I ever had to actually trade the way my systems do I would blow brains out.

And that is the key element that we always miss.
The human element.

If we want to trade the market for fun as well as profit if we want to engage with the crazy, irrational, fascinating, thrilling, frustrating, infuriating, electrifying mess that is the global financial market we need to do it on our own terms.

Whaaaaaaat?

How can you make the market adapt to you? The market adapts to no one!

That’s true. But the key succeeding in its wild ocean of trades is to find a space where you can thrive under your own rules.

Can I tell you about my week?

All week long I have been trying to trade stock index futures the “right way” – trading with trend, waiting for the retrace, using proper risk structure. Just like the system I designed.

One small problem.

I am an inveterate top and bottom picker. No matter how hard I try I always abandon continuation trades and look for the “turn”. Naturally, when I am trying to trade one way but actually trade the other, I also get into massive trouble with risk control. I abandon my stops, lever up on size and effectively turn semi-intelligent trades into mindless gambles.

Sound familiar?

So after a week of bleeding money and feeling totally out of control, I finally decided to forget the “right way” and decided to day trade indices “my way”.

First and foremost it meant short, small exits since no matter how good a trade I have I am never able to hold it for a long time. In fact, the longest I am able to hold a position in something like NQ (the Nasdaq futures) is for 20 points (or basically one-fifth of the typical daily range). Indeed my sweet spot is about 10 NQ points or between 20-40 minutes per trade. I am a guy who always goes for small dopamine hits. I never go for the big move.

Also, I don’t like to get stopped out a lot. Of course, no one likes to get stopped out, but there are plenty of traders who are comfortable losing 1 out of 2 trades. I am not one of them. If I lose more than 3 trades out of 10 I get very antsy and my “discipline” goes right out the door.

So what did that mean in practical terms?

That meant that my stops had to be bigger than my targets but not too big.
Ultimately I settled on the following ratios – in NQ I traded 10 targets 20 stops in YM 25 targets 50 stops in ES 3 targets 6 stops.

Those numbers felt right to “me”. The market couldn’t give a flying f- about my ratios. But that didn’t matter because now I had control of myself and that in turn allowed me to be much more in control of my trading.

Suddenly I felt a much greater sense of calm because each execution became a semi-intelligent trade rather than a mindless gamble. In fact, by doing what I wanted to do rather than what I was “supposed” to do, I made less and less mindless gambles. My inveterate top and bottom picking throughout the day remained, but because I was much calmer now, doing things the way I wanted, I suddenly became much more patient, looking for key telltale signs of turn during the day. I stopped trying to accommodate to market and started instead to exploit it within my own means.

Did I make money? Hellz yes. I went 8 for 1 doing actually better than my win percentage goal. But that’s not really the point.

The point is that you need to make the market your own. You will never change. No motivational talks, no browbeating, no self-loathing or hatred will ever change your trading habits. If you want to have fun in the markets and actually try to make money you need to stop listening to anyone to tell you what to do and discover what it is that you ACTUALLY do. From there you can start to design an approach that makes emotional sense to YOU.

If we want to trade “properly” we should use robots.

If we just want to trade, we need to know who we really are and make peace with that.

You Have to Be A Horrible Human Being to Be a Good Trader

by Boris Schlossberg Boris Schlossberg

There was a fascinating article in Institutional Investor last week arguing that money managers actually generate alpha and outperform the market. In other words, just like in other areas of life research and hard work pay off. However, almost all of that alpha is squandered because money managers fall in love with their positions.

“Active managers … can generate alpha of 1.2 percent annually, on average, at the portfolio level. That’s enough to beat their benchmarks after an average fee of 75 basis points (0.75 percent), the consultant found.

After evaluating about 10,000 “episodes” — full cycles of a given position from first entry to last exit — across 43 portfolios over 14 years, Essentia Analytics found that “alpha starts out strong and fades sharply with age.”
According to the report, “Investors often hold on to positions too long (a consequence, we believe, of the endowment effect), diminishing or eliminating whatever excess returns they were able to generate early on.”

The endowment effect is a nice sounding academic term, but I believe it masks what’s really going.

Since we are toddlers we are taught the following things.

Love those around you.
Be loyal to your friends.
Forgive and forget the errors of others.
Always give everyone a chance.

If we are any kind of a decent person these are the values we hold. They are so ingrained in us that we don’t even realize how they permeate our life and affect everything we do.

Trading, on the other hand, requires the exact opposite set of beliefs. It requires you to be a complete jerk.

Don’t marry your position.
Cut your losers.
Press your edge and annihilate those on the opposite side of the trade.

Trading requires a mercenary and transactional mindset that on some deep level is very much the opposite of how we perceive ourselves to be. That’s why “the forget and forgive” pep talk we constantly give ourselves inside our head never works.

Successful trading requires you to be ruthless. And the person you need to be most ruthless to is …YOU.

Until we stop making excuses for lifting stops, taking out-of-setup trades, trading way beyond our risk sizes and chasing trades after the signal has passed we will never master the game.

So here is to being a total asshole in the markets while trying to be a decent person in real life.

Poker Trader

by Boris Schlossberg Boris Schlossberg

Aside from making a $1.10 from a $1.00 bet at the Barnaby Coast casino, I’ve never played poker in my life. In fact, that single electronic bet is the only gambling I’ve ever done. Having hit it big on my first try, I decided I would retire at the top.

I don’t even know the full rules of poker, much less the mathematical payout odds.

I’ve seen all the poker movies from Rounders to 21 but my favorite film isn’t even about poker. It’s about cheating at poker. The movie is called Shade and it’s one of the most underrated Sylvestor Stallone films ever made with an absolutely great tag line – “When betting is your life, leave nothing to chance.”

I’ve tried to live by that motto ever since.

But although poker holds no interest for me per se I am fascinated at how the game informs trading. That’s because poker and markets are essentially about lying.

Think about it. If there was no lying in poker or the financial markets, the games would be mind-numbingly boring and easy to win as it would all come down to numbers. Indeed, without lying there would be no way for us to play the game at all as machines would handily beat us every time.

A while back I read a study that showed hedge fund managers who played poker performed better than those who didn’t. Their advantage wasn’t mathematical, it was psychological. They were able to “read the market” after years of “reading the table” and that edge helped them outperform.

That’s why trading is such a fascinating game. Far from the common perception that it is all “hard numbers”, it’s actually much more soft clues that provide the true edges. Being in sync with the market isn’t about understanding the data. It’s about understanding how the market will understand the data. That’s what Keynes – who was the greatest trader economist who ever lived- meant by the idea of a beauty pageant.

In any case, once you realize that the market is constantly trying to trick you into the wrong move, the idea of stops becomes much easier. You stop viewing stops as a referendum on your character and intelligence and take them for what they are – successful bluffs. After all, you don’t turn suicidal or despise your very existence every time you get bluffed out at the poker table. You generally shake your head and smile in admiration at the chutzpah of your opponent.

Once you consider stops in the same light it becomes a lot less stressful to trade.

The key, of course, is to minimize being bluffed out of a trade. That is a skill that we all try to master and its a never-ending journey for all of us who trade, but the key – in both poker and the market is to not fall for the bait.
To that end, at least when it comes to markets I’ve developed some ideas.

Watch the video here.

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The Perfect Time Frame for the Retail Trader

by Boris Schlossberg Boris Schlossberg

I’ve been running a variety of my algos, both for the BK chat room and for my own account and the longer I trade the variations the more it becomes evident that the one hour chart is the perfect frame for the retail trader.

There are two principal reasons for this. The one hour is responsive the daily swing flows of the market while at the same time long enough to avoid the random ebb and flow of intraday prices. As retail traders, we simply can’t compete on the sub pip level of market makers and HFT algos. It’s akin to driving the Autobahn in a Chevy Cruze. No matter how hard you try you will never be able to drive against the BMWs, the Audis, the Mercedes’ and the Porsches.

It is fun to try, however, which is why we all gravitate to the 1-minute or the 5-minute chart. But the spread, the commission, the market volatility create an almost impossible execution environment and that’s why we should allocate most of our capital to the longer time frames (say in a 70/30 split) in order to truly optimize the chance of success.

The 1-hour chart is no panacea and certainly won’t guarantee success and is not even immune from news bombs which could flip sentiment in an instant and wipe out perfectly good trades. Still, it is slow enough to catch most of the more meaningful market signals and it allows for larger stops and limits which by their very essence protect you from the randomness of the lower level charts.

Yet even on lower level charts, the algos have taught me that less is more.

There is nothing quite like attaching a new EA on 12 or more pairs and seeing it trigger a multitude of trades on 1 minute and 5 minutes charts. It’s exciting! It’s fun! It’s action packed! But very soon you see one, two, three trades go sour all once and then it’s no longer enjoyable. The profits of the past few hours begin to melt away and then quickly turn to losses and then to truly bad losses, especially if you are trading your regular size. Very quickly you realize that you can’t trade a lot and win. You are not a market maker with infinite capital, split-second execution and access to near choice spreads. You are price taker like it or not and that means you need to choose carefully.

That’s actually one of the great advantages of trading retail. Unlike market makers and HFT algos, you are not compelled to trade. You can step away anytime you want – that’s a huge edge that most retail traders overlook because they just want to be in a game. But an algo, even a very good one quickly shows you the folly of your ways.

On my 1-minute chart, I’ve winnowed myself down to just three pairs and 5 most liquid hours of market trade. That means I may only do 2-4 trades per day. And that’s enough. In fact ideal. The more you trade, the more you lose – it’s the everlasting truth of the markets but algos help you discover it, mighty quickly.

How Cheating Makes You a Better Trader

by Boris Schlossberg Boris Schlossberg

From BBC.com

“Marissa Sharif, an assistant professor of marketing at The Wharton School at the University of Pennsylvania believes that cheating can help you reach your goals.

An all-or-nothing approach to goals is all wrong, Sharif’s research suggests. She says we should instead be building ‘emergency reserves’ into our goal-setting process.

In one field study, 273 people used a smartphone app to count their steps for a month. The first group was asked to reach an individualized specific step goal, for example, 7,000 or 10,000 steps per day, seven days a week. A second group needed to hit their goal on five days or more. A third group targeted their steps over seven days, but with two ‘emergency skip days’ per week (that didn’t roll over). A fourth group’s skip days were spread across the month.
The people who were allowed cheat days reached their step goal more days per week on average than those without them. They also took more steps on average.

Sharif says this type of cheating works in two ways. First, people resist using up their reserves, in case they’re needed later. They also feel bad about wasting them in a non-emergency scenario. Second, if you do need to use your ‘cheat,’ you feel less guilty about falling off the wagon in the first place and are thus less likely to give up on the overall goal, she adds.

This ‘cheating’ mindset helps people to keep sight of their longer-term vision, says Leena Rinne, productivity expert at US consultancy FranklinCovey. “While goals are initiated by making a choice to achieve something, it’s the choices in the moment that get you there. And, one of those choices is to allow yourself some ‘emergency reserves’.”

This week I ran an interesting poll on my Twitter page which collected nearly 400 answers. I asked, “For traders what’s worse – being impatient with wins or impatient with losses?” The responses were almost split down the middle with the latter just edging out the former by 53% to 47% and I’ve got to say that I strongly agree with the majority in this case. It’s worse to be impatient with your losses and the reason has a lot to do with Ms. Sharif’s research.

First of all, I think we can all agree that being impatient with your wins or losses is bad. But that’s really not the point. We are not trying to achieve an ideal. We are trying to find practical ways to generate profit as real flawed human beings. And if that’s our goal then letting your losses run to their stops is actually better than cutting them short.

The reason, of course, is that the more we cut our losses short, the more losses we will have. Only someone who has never traded in the markets is under the illusion that having tiny stops and large targets is the way to trading riches. If you have a 10 pip stop and a 100 pip target your chance of losing is 95% or more. You chance of winning is about as good as lotto. Markets simply don’t give you money for nothing. Prices ebb and flow all day – FX dealers do their best to make sure of that because that’s how they make their money. Add on top of that the general randomness of newsflow and your chances of timing a 10/100 trade are virtually nil. Maybe you’ll get lucky for the first few times but eventually, the market will just grind you out with a thousand paper cuts. Try it for a month and see for yourself.

But cutting losses short is not only bad math, it’s also bad behavior. Remember, what Ms. Sharif’s experiment proves – if we give ourselves a small reservoir of failure we are much more like to continue our tasks. The single biggest problem with being impatient with your losses is that it will quickly drain the reservoir of failure. In my experience, most traders can only tolerate 3 stops in a row. By the fifth consecutive stop they begin to question the whole enterprise and by seventh most quit.

That’s why if you are going to cheat in trading, it’s much better to do it on the profit side. It’s better to take profits early (even though that is of course not optimal) simply because it will encourage you to stay in the game. And the longer you stay in the game, the better you’ll become at reading the market and the better trader you will be. Being patient with losses will not guarantee profits, but it will buy you time and build the emotional reservoir to persist in your pursuit of trading mastery.

PS – let me just be perfectly clear. Being patient with losses DOES NOT mean letting losses float indefinitely. It simply means not closing out prematirely before trades hit their stop.

Trader – Get Ready for Takeoff

by Boris Schlossberg Boris Schlossberg

What do you think is the third largest cause of death in the United States of America?

Respiratory disease?

Stroke?

Accidents?

Nope.

The third largest cause of death in America is medical errors.

BK.7.31-08.04

Try us out

That’s an astounding fact because it means hundreds of thousands of people in America die needlessly.

The number would be even higher if it weren’t for Peter Pronovost a critical care specialist at Johns Hopkins Hospital who 2001 decided to make a checklist to tackle just one problem that killed many patients – line infection. As detailed in the New Yorker article, “On a sheet of plain paper, he plotted out the steps to take in order to avoid infections when putting a line in. Doctors are supposed to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. Check, check, check, check, check. These steps are no-brainers; they have been known and taught for years. So it seemed silly to make a checklist just for them. Still, Pronovost asked the nurses in his I.C.U. to observe the doctors for a month as they put lines into patients, and record how often they completed each step. In more than a third of patients, they skipped at least one.

The next month, he and his team persuaded the hospital administration to authorize nurses to stop doctors if they saw them skipping a step on the checklist; nurses were also to ask them each day whether any lines ought to be removed, so as not to leave them in longer than necessary. This was revolutionary. Nurses have always had their ways of nudging a doctor into doing the right thing, ranging from the gentle reminder (“Um, did you forget to put on your mask, doctor?”) to more forceful methods (I’ve had a nurse body check me when she thought I hadn’t put enough drapes on a patient). But many nurses aren’t sure whether this is their place, or whether a given step is worth a confrontation. (Does it really matter whether a patient’s legs are draped for a line going into the chest?) The new rule made it clear: if doctors didn’t follow every step on the checklist, the nurses would have a backup from the administration to intervene.

Pronovost and his colleagues monitored what happened for a year afterward. The results were so dramatic that they weren’t sure whether to believe them: the ten-day line-infection rate went from eleven per cent to zero. So they followed patients for fifteen more months. Only two line infections occurred during the entire period. They calculated that, in this one hospital, the checklist had prevented forty-three infections and eight deaths, and saved two million dollars in costs.”

The checklist became standard operating procedure in many hospitals across the US and is probably responsible for saving countless lives. It is also an idea borrowed from the aviation industry which despite all of our complaints is the safest mode of transportation in the world precisely because of its near religious adherence to the checklist.

Over my more than twenty years in the business, I’ve met a lot of pilots who were also traders. The job, with its large layover times (pilots on average only work 10 days per month) lends itself to trading. Pilots were fascinating because generally, they were very good traders. This wasn’t because they were necessarily more creative or more knowledgeable about the markets, but because to the man (they were all men) they followed a checklist and only took trades that met all of the setup criteria.

Although trading problems are trivial in comparison to those of critical care professionals, the process of failure is the same in both disciplines. How many of our trades die an unnecessary “death” because we enter them by mistake – i.e. when all of the rules of the setup have not been met?

About two weeks ago I forced both K and myself to write out a checklist for each one of our setups. It wasn’t a very complicated checklist, but it made us focus on trades that were truly legitimate rather than just “close enough”. Much like with Dr. Pronovost the BK results have been nothing short of remarkable. This week and last I have gone more than 20 straight trades without a loss and K has been profitable almost every single day since then. Furthermore, as I continued to focus on only taking the trades that checked every box, I was able to refine my exits strategies allowing me to reduce the risk even further. And best of all, I was able to program these tweaks into my EA so that now they are part of the overall trading structure.

At its most basic level, the checklist helps every trader to create best practices for each setup which ultimately creates sustainable, repeatable profit opportunities.

So, trader, get ready for takeoff with a checklist in hand – otherwise, it’s going to be a bumpy ride.

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No Bulls-t Advice for the FX Trader

by Boris Schlossberg Boris Schlossberg

So you want to trade FX?
Forget strategies. Forget fancy charts. Forget listening to TV talking heads like me.
If you want to have any chance at success in trading here are five simple things you need to do.

1. Get a good execution broker.

You can trade on bid-ask spreads or on raw spreads with commission. In the end, the costs all even out. The much more important question is – how’s your execution? If your trades get slipped and even worse rejected more than once a month. Leave. Leave the broker, because they are clearly not honest or competent and eventually one or both of those sins will cost you all your money.

Speaking of money if you broker is not Licensed with one or several of the following authorities: NFA in US
FCA in UK
ASIC in Australia
MAS in Singapore
HMA in Hong Kong

Consider your money gone.

Do a simple experiment. Ask for half your account back. If it takes more than 48 hours to get your money – leave the broker immediately.

You need to understand that brokers don’t consider your money to be yours, the moment you make a deposit they consider it to be theirs. So unless they have a regulator that makes them act as a fiduciary, your money is their money and all that trading you are doing is strictly for entertainment value – you are never getting it back. If you are tempted by flashy offshore brokers with high leverage and tight spreads then understand that your trading is most likely imaginary. Your money is never coming back, even if you do manage to beat the market.

2. 4x for Forex

Speaking of beating the market. I had an interesting discussion last night. I was at a party with a lot of industry people including a consultant that sets up a lot of these offshore brokers. What the gentleman told me is that contrary to popular belief most of these brokers don’t even try to scam the clients. The mathematics of the FX business almost insure that 97% of traders will lose all their money. Why? Because of leverage. In FX leverage – the ability to borrow on your account – is astronomical. Outside of US leverage can be as high 400:1 or even 1000:1. That means you can trade 400,000 unit position on just 1000 dollars of equity. You may think that’s great but it’s actually financial suicide. Let’s just use a simple example of 100:1 leverage. If you put on a trade that size, just 1% move against you, wipes out your account. Do you know how often currencies move 1%? About 200 times per year. Do you think you can survive 200 days of 1% moves and escape whole? Let me ask you differently. Suppose I told you to run across the race track at Le Mans 200 times while the race was in progress. How confident would you be at surviving that challenge? When you are trading at 100:1 you are doing the exact same thing except with your money rather than your body. The end result is a disaster either way.

What’s the maximum leverage per trade? Four times. That’s right. That’s not a typo. Not ten times, not twenty times, not forty times. Four times – and that is MAXIMUM not starting position. You starting leverage should be 1 or 2 times equity. That means that if your account is 10,000 the starting trade should only be 10,000 or 20,000 units.

Go ahead and snicker. But if you don’t follow that rule, the chances of you losing all your money are virtually 100%.

3. Get a Rebate
Every single broker in FX will pay you money to trade with them. They won’t tell you that up front and they may not even be willing to give it to you on an individual basis, but every broker has a rebate program that will pay you back anywhere from 0.1 to 0.5 pips back. If you do 5000 trades a year that’s 1000 pips of profit for doing nothing. That’s why you need to connect with a good introducing broker who will advise you what FX broker would be best for you. If you want some names just email me.

4. Discover Metatrader 4.

If you are trading FX on a proprietary platform rather than MT4 – you are already at a disadvantage. MT4 is an almost universal piece of FX software that is available from any major broker. It allows you to create software programs that can trade for you. But you do not need to be a programmer to get the full value of MT4. The platform has hundreds of thousands of trading robots (called Expert Advisors) – including those that we develop in our chat room, that can help you place trades at the right time, at the right amount and with the proper risk control. The future of life is robots. If you are not using them for trading you are already way behind all because you are subject to massive human error. You will hit the buy button instead of sell, you will buy 10 times the size you wanted and you will miss the exit price because you were looking at something else away from the screen.

Don’t worry, that’s totally normal – we’ve all done it. But traders who trade with MT4 – don’t do those things often, so they have an edge on you because they are making fewer mistakes. One very simple thing to do is to trade with buy/sell scripts so that any market order you place is always automatically wrapped around with a limit and a stop and never creates a risk problem for you down the road. Robots are the future and that fact is especially true in trading.

5. Get a good education (like our BK chat room) Trade with us

Yea ok, shameless self-promotion. I gave you four pieces of good advice so I get to toot my own horn a bit. Actually, it’s not even my own horn I want to toot. Most of the time I am just the sideshow in our chat room. The true value for you comes from interacting with other like-minded traders who will very often improve and refine the trading ideas and strategies that I suggest. Trading in a team environment completely transforms the game and gives you hundreds of different and creative ways to look at the market. Trading is not a solo sport. Make it a lifetime pursuit and join a team to trade with.

Three Simple Questions Every Trader Should Ask At The Start of Each Week

by Boris Schlossberg Boris Schlossberg

Plan your trade, trade your plan is an old maxim in the markets that almost everyone ignores.

The reason is obvious, of course. Financial markets are the least predictable environment there is. Every day is different from the last and anything can happen at any given time. Executives at Amazon, for example, can predict within a few packages, the demand for some product from a particular zip code at a particular time of the day. This is especially true for highly consistent products like soap, or cereal, or shaving cream that people reorder all the time.

In real life demand for goods is remarkably consistent since it must satisfy physical needs that are inviolable. In financial markets – especially in speculative ones – demand is totally mercurial. If you still believe that currency markets exist to help corporations and investors to settle their cross-border transactions or that oil markets exist to help producers and consumers find a settlement price – you are woefully naive. More than 97% of all activity in both markets is purely speculative in nature – meaning it does not emanate from an actual economic need for the product. The average daily volume on NYMEX for crude oil is 22 Billion barrels of notional value. The actual daily demand in the real world? 80 Million barrels per day.

Whether this is good or bad is a philosophical question that I will put aside for now. But the wide gulf between how real world markets behave and how financial markets function goes a long way towards understanding why traders have such a hard time “planning” their business. The volatility of trading simply does not have any legitimate parallels in the real world which is why almost all “real world” business advice is worthless.

And yet… the longer I trade the more I begin to appreciate the value of planning. As traders, we can never expect the kind of control that real world business people enjoy, but that doesn’t mean we should operate by the seat of our pants as a result. This is especially true if you are trading some sort of systematic approach on a day trading basis. Day trading systems have the very big advantage of the law of large numbers. The more trades you make, the more likely the possibility that the large volume will smooth out the volatility spikes of the financial markets.

If you are trading a system here are three simple questions you need to ask yourself at the start of each week.

How many trades do I expect to make this week?
How many winners versus losers do I expect will occur?
What is the pip target this strategy will likely produce?

This is hardly the Big Data-regression-driven-sophisticated-stat analysis that exists in the real world, but it’s enough to ground you in making much better trading decisions for the long term. Just asking those 3 simple questions can tell you if you are overtrading or not trading enough. If the volatility of the markets is aiding or destroying your win ratios and most importantly if you are actually following the system that you claim to trade.

Setting expectations doesn’t mean that you are now a prisoner of your rules – quite the opposite. It means that you can now exert a modicum of control over one of the most unpredictable human activities there is.

The Easiest Way to Be A Profitable Trader

by Boris Schlossberg Boris Schlossberg

The easiest way to make money is not to lose it.

Yes I know that sounds banal, but bear with me here.

If strategy was the true determinant of success than most traders would be wildly rich. But in reality all of trading can actually be reduced to two strategies – trend or fade. You either buy the highs in hopes of momentum moving forward or you sell the highs in hopes of a reversal.

Every. Other. Thing. In. Trading. Is. Just. Footnotes.

Yes, yes, yes – there are a thousand variations on trade management (Actually much less than you would think) that could increase or decrease your odds of success somewhat, but ultimately if you are buying breakouts in range or fading fresh highs/lows in trend you will not win.

90% of all successful trading is simply stepping aside when your strategy is wrong for the market environment. As many wise floor traders used to say – being flat is a position.

Which brings to Aaron Fifield, the wonderfully gregarious host of the Chat with Traders podcast, that has become a small addiction of mine as I try to walk my daily 10,000 steps.

In the most recent segment, Aaron interviews Adrian Dey a former professional sailor who turned himself into a retail day trader.

They often say that pilots make very good traders because they are trained to be extremely thorough and know how to follow a checklist, but after listening to Adrian I think we would have to add sailors to that list.

The podcast makes for wonderful listening and – aside from the fact that an Aussie interviewing a Brit turns English into a foreign language to an American ear – it contains many interesting insights. But I would just like to focus on one. Adrian makes a very good point that process – not performance – is at the root of all long term success in trading. One of the most interesting parts of the conversation turns to the discussion of how Adrian went from a losing trader to a modestly profitable one, by simply tracking his error trades.

What is an error trade for Adrian?

Here is small sample of what he considers to be error trades:

  1. Not taking a trade when the system provides a signal
  2. Rushing to enter and being early to the trade
  3. Missing the entry and being late to the trade
  4. Putting in the wrong size for you risk control parameters
  5. Lifting your pre-set stop
  6. Putting in the wrong take profit
  7. And the ever popular – taking a trade that is totally outside of your setup.

How many of us are guilty of making error trades?

I would say 100%.

Note that the error trades have NOTHING to do with the actual set up. They are in fact all trades taken outside of the setup.

Marty Schwartz, the great S&P trader of the 1990’s used to say that you can’t go into first gear until you move through neutral. In other words, the easiest way to improve your profitability is not by constantly tweaking the parameters of your strategy, but by actually trying to eliminate the errors you are already making.

Once you are settled on a set up – create a “serious” account where all you do is stick to the rules you developed for yourself relentlessly tracking any “errors” you make. Then create a “play” account where you can make all the errors you want as you experiment with new ideas. You’ll be amazed at what a differnece it will make.

Don’t be a Dilbert Trader

by Boris Schlossberg Boris Schlossberg

This is not a column about politics, it about trading. So please save your Libtrad insults for another time and try to focus on what I am about to say.

Donald Trump is very likely to lose the race for the Presidency. Not because I desperately want him to, but because he has managed to piss everyone in the electorate who is not male, middle aged and white.

In fact there is a good chance that he may not get even 100 electoral votes in November creating one of the greatest blowouts in Presidential politics since Reagan v. Mondale.

Which brings me to Scott Adams. Adams is the creator of the enormously popular Dilbert comic strip and by all measures a very talented and intelligent man. His ability to gauge and accurately read the social mood of Americans proved highly prescient when he was one of the earliest pundits to understand the Trump phenomenon predicting that the man would go all the way. This was at a time when most conventional wisdom thought that Trump would gone after insulting the war hero John McCain.

Adams was brilliant in comprehending that Trump’s appeal transcended reason and logic and hit the electorate directly on an emotional level. (As my 20 year old son said to me this weekend, “Dad the reason Hitler and now Trump appeal to people is because they both offer simplistic solutions to complex problems, and since most people just want to hear a solution but don’t want to think too hard about its ramifications they offer him support.”)

For a very long time Adam’s thesis looked brilliant. Trump was truly the Teflon candidate, able not rebound from scores of political gaffes that would have forced any other politician to quit. But then came “p-ssygate”. Now whether you think the Trump tape was just the way men talk or the confessions of a brutal sexual predator, it really doesn’t matter. It was a TAPE. It showed him in the worst possible light as a human being and it made even the most diehard of Republican women ( and many men) throw up in their mouth when they heard those words over and over again.

So here is where it gets interesting. Did Scott Adams change his mind in the wake of this new evidence? Not at all. In fact a few hours after the “grab her by the p-ssy” scandal broke Adams penned a 5000 word blog post about how he was 98% confident that Trump would win the election.

And this is how very intelligent, highly talented people lose all their money in the capital markets.

Scott Adams is the classic case of a trader who is married to his position. Think back at how many times you’ve acted like Scott Adams in the past. How many times you were convinced that your point of view would prevail in the markets. Even as evidence in the form of price and news turned against you, you stubbornly held your losing trade until all hope and money was gone.

And just like Scott Adams you also created a litany of reasons as to why you were still absolutely right. Of course in the cold harsh light of the margin call, those reasons looked like pathetic excuses, but at the time you believed them fervently, because they were all that you had.

Scott Adams may even turn out to be right. In politics as in markets you never know what could happen from one moment to the next. But if he is, it will be due to luck rather than skill, because if we were to run the US election in one hundred alternative universes today, it completely improbable that Mr. Trump would win in 98 out of 100 cases.

Scott Adams is making a classic trading mistake. He is basing his decision on ideological, rather evidentiary principles. This is how very smart people lose all their money. We’ve all been there. The key for us as traders is to not repeat those mistakes going forward.

In short, don’t ever be a Dilbert trader.

The Spock Within Each Trader

by Boris Schlossberg Boris Schlossberg

Leonard Nimoy died today. A son of poor orthodox Jews from Boston he managed against all odds to succeed in Hollywood and create one of the most iconic characters of the twentieth century. He also turned an obscure Jewish priestly gesture into the Vulcan salute, forever delighting those of us who have had to sit through the interminable theater of High Holiday services.

Spock personified the fundamental struggle between reason and passion, between logic and emotion and his conflict is very familiar to all of us who trade. How many of us preach the gospel of “discipline” only to fail over and over on one seemingly minor trade that turns into a massive disaster that nearly bankrupts our account?

In my day trading room we have a perfectly serviceable trading strategy that made money every single day last month. You’d think all of us would be ecstatic, just counting our “Benjamins” as take profits rolled in.

Wrong.

The strategy is slow. It trades only once or twice a day. It trades obscure crosses that don’t really move that much. In a word- its boring.

So we seek action elsewhere and trade the same strategy on the majors, often taking suicidal risks on highly volatile pairs like GBP/USD or USD/CAD. Because the strategy is very robust and because I try to be as careful as possible we’ve been able to escape most of the of the damage, but we have certainly taken on more heat than necessary.

Why do we do this? Because we want to trade. Of course we want to make money, but don’t ever fool yourself into thinking that making money is the number one priority of any trader. If it was we would all the have the cool dispassion of Spock and only trade that which produced the highest probability of profit.

But that’s ok. I think its much better and much more honest to admit to ourselves that trading lures us not just for the money but because we love the game and want to engage with the market every day. Forex trading is one the few pursuits in life where you can instantly match wits with the rest of the world and the act of a trade taking profit is as pleasant as the actual money it drops in your account.

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Nimoy was great at making Spock a multi-dimensional character rather than just another robot and we should appreciate that just as Spock fought the battle between logic and feeling we do the same in the market every day. There is a Spock within each trader and we should recognize that fact.

What Separates an 8M Trader from a 40K one

by Boris Schlossberg Boris Schlossberg

I am not a big Shark Tank fan (and Mark Cuban while a very nice guy, is the luckiest SOB that ever lived having sold essentially a worthless website to Yahoo in the go-go 90’s and then had the presence of mind to have Goldman do wrapper on his stock thus preserving his billions when the whole party crashed).

But I digress.

Last night I saw Barbara Corcoran on the show who I admire very much for her hustle and no bs attitude and it reminded me of a recent interview she gave to Business Insider (Video here) in which she describes what separates the 40K a year salesperson from the 8M one.

Its not hard work.

Its not intelligence.

Its not personality.

Its the ability to take rejection and move on and try again.

What I love about Corcoran is that she does not sugarcoat the process. She does not get all “new age” and start spewing nonsense about overcoming pain of failure. She freely admits that it hurts to lose. In fact she states that the best salespeople feel the most pain, because they care the most about the deal. But once they let their frustration out they REFOCUS on the task at hand and try again.

A while back I wrote about the great NJ Devils goalie Martin Brodeur who minded the nets for 20 years. What made him a unique athlete wasn’t that he was quicker, stronger or bigger than other goalies, but that he was able to come back from a loss. Usually goalies are very rattled by bad games and one bad game can turn into many. Brodeur was unusual in that he could shake off a bad performance and become an impenetrable wall the next day.

What is interesting about winning performance in these fields is that is highly contingent on psychology rather than technique and that is why the lessons of Barbara Corcoran and Martin Brodeur are so applicable to trading. More than any other human activity trading is the essence of psychology. Let’s be honest. Technique while important, will never, ever be the sole determinant of your success. The market is just too volatile and too random for anything to work well all the time.

Yet as traders we spend all our time working on technique and almost no time considering our own psychology. But when we look back at all our losses – what caused them? Bad technique? Rarely. It was mostly bad psychology as one or two losing trades spiraled into a flurry of self destructive behavior that ended up with an empty account. That’s why if you want to be a successful trader care much less about your technique and consider carefully your psychology on EVERY SINGLE TRADE. Your trading will improve markedly.