How to Win in 2020

Boris Schlossberg

Ivan Lendl.

Not a name that any millennial will recognize, but if you were a tennis fan during the golden age of the sport in the late 1970’s and early 1980s that name will be very familiar to you.

Lendl was a towering 6 foot 2 Czech with a dour disposition and all the warmth of Count Dracula who dominated the sport holding the #1 ranking for 270 consecutive weeks during the decade. He had one of the best serves and the strongest, most vicious forehand in the history of the game.

One time when an opponent came to the net off a short volley Lendl launched a volley straight the guy’s body that literally blasted the guy with a force of a bullet. When he was asked about the sportsmanship doing such a thing in a post-game presser, Lendl ever the charmer replied, “I did not ask him to come to the net.”

Yet for all this prowess and intimidation Lendl had one glaring flaw. He had no power backhand. He would routinely run around his backhand during rallies and the truly top players at the time used to exploit that weakness mercilessly preventing Lendl from winning the major tournaments.

One day Lendl got sick and tired of coming up short during match play and took a few months off tour to learn how to hit a topspin backhand. Basically, he spent 6 to 8 hours each day on the court and didn’t allow himself to hit anything BUT a backhand while his opponents ran him ragged. During those sessions, he must have hit 2,000 or more backhands per day and after that training period, Lendl was never afraid to hit a backhand again.

In fact, his backhand became so fearsome that it was actually easier to hit to his forehand if you wanted to stay in the rally with him from that point on.

Lendl literally changed the neuroplasticity of his brain. Through endless repetition of a task, he taught himself a new skill.

When we are little kids our brains are very malleable and we teach ourselves everything through endless repetition, from walking to talking to reading to writing. As we get older and our need for new skill acquisitions diminishes our ability to train ourselves declines as well.

But it never goes away.

It simply requires time and patience and Lendl is perhaps the most dramatic example of an adult athlete already in his full prime and maturity teaching himself a new skill to become a champion.

So what does the dour Czech have to do with trading? Actually everything. All of us come to trading as adults, some of us are already well into our middle age. Our ability to learn new skills is deeply diminished but the time we take up the activity.

Furthermore, the skills we need to succeed are not the ones we are taught. Almost everyone who starts in the markets thinks that the key skill to learn is THE SETUP. Find the right formula and you’ll be making bank in no time.

Clearly, good setups require some time and education to develop. But setups are literally a dime a dozen. Talk to enough traders and you soon discover there are a hundred different ways to find an edge in the market.

What’s much harder – and where almost everyone fails – is in the ability to actually execute the setup to plan. Ask yourself these three simple questions:

Did I wait for my setup signal?
Did I take my setup signal?
Did I stick to the risk-reward targets of my set up signal?

Now ask yourself one last question.

Did I do it every time?

My guess, if we are honest about it, is that most of us only do all three 20% of the time. That’s why the single biggest key to winning in trading is the actual execution of the setup, not the setup itself.

So we need to practice the setup endlessly until every step comes as naturally as the topspin backhand came to the towering Czech. Fortunately, in retail trading, we now have access to micros in futures and 1000 unit lots in spot FX that allows us to hit as many “balls” as we need until we can train ourselves to execute properly.

Happy trading everyone!

Let’s make 2020 a championship year!




ECB April Meeting Preview – What to Expect

ECB euro forex blog Kathy Lien

Thursday’s ECB meeting is one of the most important event risk this week.  EURO has been biding its time trading between 1.1235 and 1.1475 pre-ECB. Which end of this range breaks hinges upon Mario Draghi’s tone. If he’s concerned about the strong euro and talks about the possibility of more stimulus, then 1.1235 could give.  If he simply says they need more time to see the effects of stimulus and points to recent data improvements as a sign of their easing measures working, euro could break 1.1400 and aim for recent highs.

The following table shows how the eurozone economy changed since the ECB last met – from a data perspective, the central bank has less to worry about in April vs. March when there was significantly more deterioration than improvement.  So the question is whether the 3 to 6 cent rise (depending where you’re measuring from) in EURO since easing rings alarm bells for the central bank.



How To Win From Losing

Boris Schlossberg

In the world of sports there is no more paranoid position than being a hockey goalie. You are, for intents and purposes, a human shield used for target practice. Your job is to stop the angry sting of rubber puck flying at you at more than 100 mph as you try to make sense of the constant swirl of motion in front of your goal.You play on a team, but are essentially alone. You cannot win games, but only lose them.

Little wonder then that hockey goalies tend to be a bit “peculiar”. In my own misspent youth minding the net, I wouldn’t hesitate to throw my mask, glove, stick – anything that I could get my hands on – at my poor defensemen, when I was even slightly displeased with their positioning. I would heap a torrent of verbal abuse on them that I would never unleash on my worst enemy. And yet these big, beefy guys, who under different circumstances could snap my neck in two without breaking a sweat, meekly absorbed all of my rants. Such is the power of a hockey goalie.

A few years ago NY Times ran an article talking about what sociologists call “non-normative” traits of being a hockey goalie. There was Bernie Parent, the famed keeper of the Broad Street Bullies, who took a nap with his German Shepard every day. Another NHL goalie compulsively stripped off his uniform between each period to take a shower as an elaborate superstition ritual. My favorite however was Gilles Gratton, who as New York Times writes, “bounced around in the minors in the ’70s before ending his career with the St. Louis Blues and the New York Rangers. Gratton liked to skate in the nude sometimes, wearing just his goalie mask, and refused to play if the stars did not line up properly. He believed that in a previous life he was an executioner who stoned people to death, and that he was fated to become a goalie — someone on the receiving end of a stoning, so to speak — as punishment.”

Although, goalies rarely if ever score a goal, any hockey player worth his weight will tell you that you can’t win the game without a good one which is what makes the story of Martin Brodeur so interesting. Brodeur was the inimitable netminder of the New Jersey Devils who spent more that 20 years in the league. He is no doubt one of the more talented goalies in NHL history, but what makes Brodeur unique is his ability to recover from losses.

In profile of him by New York Times, the paper wrote,

“Hockey people say that Brodeur’s particular strength is his ability to bounce back from a bad goal or a bad game and not let it gnaw at him. Hockey was locked out for the first half of this season, and during the Devils’ truncated training camp last month, you could see that he hates to be scored on even in practice, rapping his stick or ducking his head in disgust after letting one in. But the cloud passes in an instant, and then he’s bouncing on his skates and looking for more pucks to swat away. Lou Lamoriello, the Devils’ general manager, says, ‘Marty’s mental toughness, his ability to overcome a bad game, is just phenomenal.’ “

The older I get, the more I realize that there is simply no greater skill in life than the ability to recover from adversity. This is doubly so when it comes to financial markets, which like a hockey puck traveling at 150 miles per hour will do their best to knock you off balance every single day.

When we are young we think we are invincible and therefore never give much thought to recovery, assuming that our body and our mind will just snap back. But as we get older and hopefully a bit wiser we begin to pay more respect to the process of recovery. When I was young I had the bad luck of catching six pneumonias before I was twenty years old. The net result was that my lungs were shot and whenever I caught a cold it usually turned into a month long bronchial infection that made New York winters a constant misery.

But I as I got older I began to take my condition more seriously. Instead of trying to “gut it out”, I would drop everything at the first sign of sniffles, get in bed, drink 6 liters of water and try to sleep for 12-14 hours at a time. Doing this, I’ve managed to cut my recovery time from an average of three weeks to just a few days and have had far fewer colds in my 50’s than I did in my 30’s.

When it comes to trading, the ability to recover is far, far, far more important than the ability to win. No matter how hard you try, no matter how good you are, no matter how robust your strategy – you will lose. And it’s at that point that true success will be determined.

Just like with my colds, I’ve learned over time that recovery from your trading losses depends far less on you being “right” and far more on you being “small”. Smaller trades lead to smaller absolute losses which give you time to assess the markets with a much cooler head. You don’t rush into the same trade, you don’t try to win it all back at once and you don’t carry the burden of your losses for days on end. Like Martin Brodeur, you realize that the darkness passes and tomorrow brings another day of opportunity to go toe to toe with the market.

CAD/JPY – Which Force Will Win?

CAD/JPY – Which Force Will Win?

Chart Of The Day

The two biggest stories going into the final trading day of the week is CAD and JPY. Both have seen brutal moves with JPY in particular seeing some of the biggest volatility in years. Tonight the BOJ comes back from holiday and everyone want to know if they will intervene. If the market doesn’t see any action it may try to push USD/JPY towards the 110 level.

Meanwhile just as the afternoon was coming to a close in NY, news leaked out that OPEC may be entertaining an oil cut. The move may be too little too late, but crude so grossly oversold, the chance of pop is strong especially if the Saudi’s confirm the move.

This leaves CAD/JPY prone to some very strong swings, If the BOJ intervenes and OPEC cuts are confirmed, the pair could have one of the biggest rallies tomorrow with 83.00 and possible 85.00 level in view. Meanwhile 80.00 remain the near term support.

How Yogi Berra Taught Me to Win 95% of the Time

Boris Schlossberg

In my day trading room we try to hit 95% of our trades. We do this because I am firm believer in the insurance model of day trading (lots of small wins with a few large losses) rather than the lottery model of day trading (a few large wins and many small losses). Lotteries are for suckers while insurance companies are some of the best businesses in the world. I have discussed this subject many times in prior columns, but today I can across another reason why my model is working our chat room.

I was reading a summary of Brett Steenbarger book on Trading Psychology on Ivanhoff’s Capital webpage when I came across this tidbit

“A small win is a small mirror. It reflects a winning image to us. Accumulate enough small wins and that winning image starts to become familiar. We internalize that which we experience repeatedly. That’s one of the reasons positive emotional experience is important….People I’ve known who are particularly adaptive have made small wins a habit pattern. They undertake many new challenges and regularly define meaningful, doable goals. They set themselves up for success. Positivity becomes a habit, a lifestyle, making the whole issue of discipline moot.”

Without really appreciating its power, I hadn’t realized just how valuable the idea of frequent wins is to overall success of the trader. I have seen with my own eyes as more and more traders in my room start to put together profitable runs of days, weeks and even months. In the world of retail trading this an exceedingly rare occurrence and I don’t think it’s due only to efficacy of my strategy but rather to the fact that positive experience creates good habits that leads to better performance.

Which brings me to Yogi Berra. He died this week and it is true testament to the kind of man he was that his death managed to stand toe to toe in headlines with Pope Francis’s visit President Xi’s White House arrival. Berra was not just a great athlete but a great philosopher. His sometimes unintended witticisms are far more quotable than anything uttered by Jean Paul Sartre (and I would argue more insightful as well).

Berra is famous for saying, “You can observe a lot just by watching.” Which is a lesson that I live by every day. Whenever people ask me why I don’t back test my strategies I always think about that Yogi Berra quote and laugh. Markets like any man made social constructs are fluid and ever changing. Back testing data is like trying to figure out social habits of Millennials by studying the Victorians. It’s why every perfectly backtested system, whether it be done on your MT4 package or by Andrew Lo of MIT, always fails. Its why if want to succeed in day trading you watch what is happening now. As Mr. Berra used to say, “In theory there is no difference between theory and practice. In practice there is.”

Upon his death many analysts have re-examined Berra astounding athletic achievements. And as fivethirtyeight has pointed out what’s absolutely remarkable about Berra is that no one with his slugging percentage has struck out less. Berra only struck out 5% of the time and he was notorious for being a bad ball hitter. That means that instead of waiting for a perfect pitch he took what the pitchers threw and tried to make contact. And any time you make contact in baseball you have a chance to score.

This is perhaps Berra greatest legacy and his most valuable lesson to us as traders. Instead of looking for the perfect set up or the absolute best execution, we should try to figure out how to turn every trade into whatever win, scratch or small loss that we can. Berra collected 10 World Series titles by never trying to be perfect but by winning by any means necessary.

To Win at Trading Follow Baseball, Forget Football

Boris Schlossberg

(My apologies to my international readers for boring you with American sport arcana this week, but stick with me I promise you I have a point)

Here are a few winning strategies in American football that almost no one uses to the full potential. One – it’s almost always better to go for it on fourth down rather than punt. Two, a two point conversion is a much better play than field goal. Three an onside kick is superior to trying to float it into endzone every time.

This is not my opinion. These are facts borne out by data that almost football coach ignores.

That’s not the case in baseball where the science of sabermetrics has been raised to an art form. Sabermetrics is the study of baseball statistics to improve performance. The field was popularized by both the book and the movie called Moneyball which chronicled the improbable ascent of the hapless Oakland A’s from one of the worst to one of the best teams in baseball.

Now, everyone in baseball uses sabermetrics to improve their game.

So what about football? Why do coaches rely on outdated inferior methods in sport so competitive, that the best team is compelled to cheat? (Yes Patriot Nation you definitely cheated)

The answer I think comes down to sample size. Football has only 16 regular season games while baseball has ten times as many. Any single mistake in football can literally mean a season lost. Imagine a coach who goes on fourth down only to fail and have the opposing team score. The idiot fans would be screaming for his resignation on every talk radio program in the state.

In baseball things are much more lax. You have an average of 4 at bats per game, a hundred and sixty games each season so you have more than 500 attempts to try things differently. All statistics only work under the law of large numbers which by definition means that you have try the strategy many, many, many times before you can really see its success in action.

But of course most people never think probabilistically. When it comes to retail trading all is takes is three consecutive losses for 90% of most traders to abandon a strategy. That is laughably poor judgement because most traders are acting very much like dumb football coaches rather than smart baseball managers.

The only way to combat this most common and most deadly trading flaw is to trade small and trade often – in other words do everything that conventional wisdom tell you not to do.

The Best of Boris’s Day Trades and Kathy’s Swing Trades – $145 All in

Here is a rule of thumb you should use – if you haven’t done 500 trades in a given system you really can’t judge its effectiveness. Just as in baseball, in trading you need a lot of at-bats to ascertain if you are truly a pro.

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.

Quitters Always Win

Boris Schlossberg

I used to have a football coach who would always drawl in his Southern accent, ‘Son, winnahs nevah quit and quitahs nevah win.” He would drum this into our head constantly to motivate us and while the value of that advice may have been dubious at best, I’ve been thinking about coach Fish (yes that really was his name) a lot lately.

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The subject of quitting is near and dear to anyone who has ever traded for more than a month. Markets are unbelievably fickle, execution can me maddenly poor, resulting in massive losses and puny wins and the depressing nature of watching your account balance dwindle by the day has led many a wannabe trader to pack his toys and leave the playground.

That is exactly as it should be. Speculative markets are unbelievably competitive and they spend most of their time redistributing money from the suckers to the pros. Yet within that ruthless dynamic lies a possible exploitation of these same markets since it is at the point of “maximum quitting” that one often finds the best trading opportunities.

Think Warren Buffet in 2009 and you get the idea of what I am talking about. But as retail traders we cannot hope to emulate the sage of Omaha because we have neither the resources nor the intellect to pull the trigger at the right time. However, as day traders we are presented with myriad opportunities throughout the year to take advantage of these points of failure. And for that I have thank another great thinker – George Costanza.

I often joke that if I ever meet Jason Alexander on the street (alas I believe he lives on the west coast now, so little of chance of that) I will kiss him on both cheeks as a sign of my gratitude. In one of the iconic Seinfeld episodes George Costanza, as played by Jason Alexander, decides that he will do the exact opposite of his natural impulse with the predictable outcome that everything in his life suddenly improves markedly.

While the Seinfeld premise is utterly hilarious, it has nevertheless provided me with an incredible insight into market behavior. I realized that some of the best opportunities to trade arise from failed setups. Think about it for a minute. If logic and reason worked in the markets then most of us would be rich beyond our imagination. But markets are never that obvious. In fact they often operate on a warped sense of logic that seeks to inflict maximum damage to maximum participants. And they only operate “reasonably” after most players “quit”.

This realization has allowed to design a very interesting short term set up that we trade in BK almost every day and now is yielding a possible longer term strategy that shows some very real promise for swing trading. So thanks coach Fish – even though you were kinda wrong in your premise – in the Alice in Woderland world of trading quitters often win.