In Trading We Sell Greed, but Fear is the True Secret

Boris Schlossberg

This was the first week in five that I lost money on my weekly trades in BK and yet it was the best week I had.

I started out very long loonie, thinking that a relatively hawkish BOC, the high price of oil and decent eco data would give my trades a boost. I was also bearish euro as the pair faced the turmoil of EU parliamentary elections, the slowdown in Germany and the nasty fight between Brussels and Rome.

I was right but it didn’t matter. The loonie was bid up ahead of good news and euro sold down ahead of bad data, so the story impact was minimal and prices went against me almost from the get-go. Yet in the end, I managed to lose very little money which is actually the perfect way to trade.

A few weeks ago I noted that the only way to trade successfully is with a two target process, where you take half the trade off at some short risk target and let the rest float looking to bank 2 times risk or more. That second half of the trade is basically a lottery ticket. The “long profit” trade only happens 20-25% of the time but when does hit target that pip gain is responsible for the bulk of your overall return.

This, of course, is what everyone who provides trading education sells. “Risk one dollar to make ten!” “Double your account in a month!” “Trade one hour a day and make five figures a month!” The trading business is replete with bullshit because of course, that’s what we want to hear. We not only want to make money, but we want to make “easy money” with very little risk and massive payouts on a weekly basis. All trading education appeals to our instinct for greed which of course is why most traders fail miserably.

Greed trips us up in a million different ways. It entices us to chase trades with too much size but more insidiously it makes us hold on to losers way beyond reason and prudence. Most conventional wisdom says that we lift our stops because we are afraid of losing money, but I actually think it’s the opposite. If we were truly afraid we would get out. Instead, I think we hate the idea of not making money so stay in the trade against rhyme and reason desperately trying to claw back to even one pip profit so that we can feel like a winner.

How many times have you been in a trade that was deep against you – maybe even a few pips away from the stop – and then rallied halfway to your entry thus cutting your losses significantly – but you refused to get out, hoping that it would “turn around” only of course to lose it all in the end?

I don’t think there is a retail trader out there who hasn’t done that at least a dozen times. The reality, of course, is that it is really hard to take losses just when things are starting to look up which is why I don’t even try. Our instinct for greed is impossible to tame so I prefer to work on my defensive skills. The beauty of short/long exit structure is that it locks in a small profit and instantly goes to breakeven ensuring that you won’t lose money on the trade. It essentially creates an institutional process for fear. And fear is highly undervalued in my opinion. Fear is the key factor that keeps us alive. Fear is what makes us spit out tainted food so we don’t get poisoned. Fear is what keeps us from crossing a five-lane highway in the middle of rush hour. Fear is what keeps us from rollerblading down a 3000-foot mountain road without a helmet ( Yes my younger stupider self actually did that once )

Unlike the romantic notion of bravery which gets all the accolades fear never gets good press, but as General Patton once said, “The object of war is not to die for your country but to make the other bastard die for his.”

Trading is very much the same way. Returns are made not through big gains but through avoidance of massive losses. Last week I was able to lock down small gains in EURGBP and EURCAD shorts before they blew up against me and that kept my weekly loss very manageable and kept my overall pip tally way in the green.

Hooray for fear. It’s the secret to trading.

The Real Secret to Wealth is Not What You’ve Been Taught

Boris Schlossberg

Today we are faced with two opposite myths both of them wildly dangerous to your long-term financial health.

The “crypto/Lambo” myth is certainly much easier to understand and mock. This is the get-rich-quick myth that permeates all of trading. It comes in every flavor imaginable but the basic premise is the same. All you have to do is learn a few simple strategies and in a matter of months, you’ll be independently wealthy. It doesn’t matter what you trade – stocks, options, forex – the message is always the same. I. CAN. MAKE. YOU. RICH. Crypto is simply the latest incarnation of this age-old con, but equities work just as well. My personal favorite these days is a guy named Jason Bond (what brilliant scam name) whose Youtube ads are ubiquitous even on my five-year-olds Barbie channel (business rule 101 – the faster someone talks, the more they are lying)

Of course, you can’t turn $1000 into $1 Million in a matter of years. Of course, you can’t make $10,000 per day every day in just a few hours of market trading. And no, of course, you can’t trade for a living with just $10,000 worth of capital.

But while the get-rich-day-trading scheme is easy to spot, the flip side can be just as deadly. This is of course is the you-don’t-have-to-do-anything to retire myth of index investing. The financial media constantly tells you all you have to do is drop 10% of your yearly income into an index fund and NOT DO ANYTHING. It will just magically compound to $1 Million! $2 Million! $5 Million! money pot and you will to retire to Boca and play golf with the sunshine boys for the rest of your carefree days.

Like all good myths, this one originated with a kernel of truth. Over the past 30 years the virtuous cycle of easy monetary policy (yes Virginia – this is actually the MAIN reason stocks always go up – check the 30-year bond for the past 30 years), massive technological advances and financial deregulation have created the perfect environment for the index investor. The financial press is full of gleeful stories of Mom and Pop savers eviscerating the Masters of the Universe on a daily, monthly, and multi-year basis. The “F-k me, I am a hedge fund manager” T-shirt, so popular in the early aughts seems as quaint now as the Lambo/crypto dream of 2017.

The message of the index myth is – you don’t need to know anything, you don’t need to do anything, just buy the f-ing dip and money will grow like a magic tree.

I am not going to bore you with all the empirical data that I’ve already shared before how there are many, many periods in American history where that wasn’t true. I will, however, share just one interesting tidbit that I came across this week. Did you know that since 1962 (that’s 56 years) the return on Japanese equities is 2.72% per annum, for German equities it’s 3.46% and for Italian equities its … wait for it -0.38% per year! Now you can believe in American exceptionalism all you like but you would be beyond irresponsible to risk your financial wealth on that assumption.

In any case, there is something incredibly primitive about the index myth. What after all, is the difference between the indigenous people of the Amazon who perform the rain dance without understanding a thing about meteorological patterns and the index investors who perform the “saving dance” without understanding a thing about financial markets? Eventually, the drought comes. Eventually, there will be a time when 30 years worth of savings will evaporate in 30 days of the market meltdown and … the money will never come back. Don’t believe me? Just ask Mr. and Mrs. Watanabe who’ve never seen the Nikkei at its 1988 highs in their life.

So instead of falling for the get rich quick myth or the do-nothing-and-money-will-come-to-you myth, the reality is that we all need to become trader/investors. We all need to learn how to manage risk both in terms of size and stops. We all need to learn about algo trading. We all need to learn how to trade both sides of the market (not that there is anything with that). We. All. Need. To. Become. Active. Not. Passive.

It’s not glamorous to make 10 pips per day. It’s not easy either, but therein lies the true secret to long-term wealth. Because 10 pips per day will accrue to millions of dollars over years of trading. 10 pips per day is 25% per year – which is huge if you understand the compound tables and even half that – 5 pips per day – is a pathway to financial security.

More importantly, it’s eminently doable. It’s doable not only from an absolute return point of view but from a volatility point of view. I can assure you that if you learn how to make 5 pips per day you will never put yourself in a position of losing 90% of your retirement savings in a matter of weeks. If you learn to trade actively, you will obtain the ultimate wealth building skill – control.

Is EURJPY the True  FOMC Play?

Is EURJPY the True FOMC Play?

Chart Of The Day

For the past few weeks, EURJPY has been contained to a 132.00-133.00 zone as the push/pull tug of war between bulls and bears provided no clear winner. The market essentially remains in a “show me” mode as traders await the FOMC rate decision and more importantly its guidance about the growth and inflation in 2018.

While the chance of a rate hike tomorrow is 100%, the much more important question is whether the Fed has now moved unambiguously into a tightening mode as it tries to normalize policy. If the statement tomorrow looks past the weak inflation numbers and instead upgrades the growth forecast the dollar is likely to rally hard against the yen, but may not necessarily gain much ground against the euro as markets will assume that Fed’s upbeat outlook will spill over into global demand and will, therefore, force the ECB to become more hawkish as well. That’s why EURJPY may be the best yen cross for a bullish FOMC day especially if it breaks above the 135.00 resistance level clearing the way for a strong rally into the year-end.

The True Risks of Trading

Boris Schlossberg
  1. You had an argument with your spouse.
  2. You woke up with a vicious headache or a head cold.
  3. Someone you know belittled your judgment about a trade.

Tell me, after each and every incident above did you trade worse or better?

How about.

  1. You missed a target by 0.1 pip and the got stopped on the trade
  2. You hit three stop outs in a row
  3. You were in a trade when a news bomb hit and you suffered -100 pip slippage off your intended stop

Did you trade better or worse then?

Or.

  1. You watched the currency rise all night long and were convinced that it was a long bias and then it reversed all of its gains and more so./li>
  2. You been trading a set up you were sure would work, but when you did a quick backtest it turned out to be a massive loser./li>
  3. You missed a trade that was a winner and so decided to do another trade in hopes of replicating the experience./li>

Did you trade better or worse?

I think we all know the answer to that question. The funny thing is that none of the issues I raised above have anything even remotely to do with a particular strategy you are trading. Yet they can all sabotage your long-term results far more than any specific setup you choose.

Every trading guru likes to pretend that trading is logical. Just do A when B occurs and voila you will be rewarded with endless and consistent pips. It just like making widgets. Stamp them out and collect the revenue.

Of course, nothing can be further from the truth. Trading is not at all logical. Its psychological both in the market structure and in the way that the whole process works, and while we obsess endlessly about this indicator or that one, this exit level or that one – the true risk in all of our trading lies in the day to day issues above.

Each one of those pressure points is about losing control. Indeed, the whole purpose of the market is to FORCE YOU TO LOSE CONTROL SO IT CAN TAKE AWAY YOUR MONEY.

That’s why it’s important to be aware of the real risks in trading. If you just had an argument, don’t trade. If you feel sick don’t trade. If you got stopped on a bad market break, don’t trade. But frankly, we all know that is advice that we will ignore. Nobody in life ever obeys’s DON’Ts. Not consistently anyway. That’s why the only way to combat those risks is to follow the only DO that can help you stay in control – trade small. Angry at the world and want to punch your computer screen? Trade the 0.01 lot. You will be very glad you did. It will hurt a lot less than the 100K lot you waste on the market in revenge.