Forget Right or Wrong – Here is the Only Thing That Matters in Trading

by Boris Schlossberg Boris Schlossberg

Wudda Cudda Shudda. A retail trader’s favorite pastime. If only I “wudda” taken that trade, I “cudda” made massive pips. I “shudda” just traded. What an idiot I am.

If you haven’t had that internal dialogue with yourself you clearly haven’t traded for long enough. Of all the things that frustrate me about trading the “wudda, cudda, shudda” game is the worst. You never, ever learn anything from it. You wind up feeling miserable and helpless and most importantly annoy everyone around you, who no doubt find your endless whining to be worse than whatever trade setup up missed.

The other day, however, it suddenly hit me as to why we continue to play this useless game. It all has to do with how we view our trading. Without even realizing it we view each trade we take in moral terms. The trade is either right or wrong. If we win the trade is right. If we lose the trade is wrong. It doesn’t matter if the trade made sense or not, all we care about is that the trade is a winner.

And that is exactly how we turn trading into gambling and lose all of our money in a month. Allow me to explain.

Last week, I was chatting with Rob Booker and we talked about how new traders just want the price action. They don’t care to learn about market structure, trade management, risk control or market news. They just want to trade, trade, trade. As a result, they become “liquidity fodder” (my new favorite term). Their stops or margin calls become the smart money’s take profits. It is essentially socially sanctioned theft – just like Las Vegas.

But here is the thing. If you judge your trades on a right and wrong spectrum you’ve just become “liquidity fodder” because you have turned a probabilistic enterprise into a binary game. We all know intellectually that strategies are simply probability paths across time and price. But if you judge each trade as an isolated right or wrong incident you have basically stopped trading and started playing FX roulette.

Black or red.

I can’t tell you how many times I have seen traders quit a set up after they lost 2 or 3 trades in a row because of this right or wrong paradigm.

So how about this. How about, instead of using a false moral dichotomy we start treating trades as true or false. This is a lot harder than it sounds. In order for the trade to be judged true, it must follow every single condition of your set up. The outcome doesn’t matter at all. The only thing that matters is that the trade is true to your setup principles.

As I said this is a lot harder than it sounds. Once you start classifying trades as true or false you’ll notice how many times you cheat, rush and generally ignore your set up. Staying true to your rules means sitting on your hands above all else until every single variable lines up. But the benefit of this approach is tremendous. One, you’ll start to be much more selective in your trades. Two, you’ll stop crying like a five-year-old girl every time the trade does not work because you’ll have the confidence that it was a true setup. Three, and this is by far the best part of the process – you will see success. Even when you pass up on “true” setups you will be pleasantly surprised that most of them work out exactly as you thought.

So take a deep breath. Stop acting like “liquidity fodder” to the market. Take control of your trading and change your mindset.

No more right or wrong.

Only true or false.

How To Make Money Trading When You Are 100% Wrong

by Boris Schlossberg Boris Schlossberg

The past week has been a rollercoaster ride for us all. I am too exhausted for bon-mots of trading wisdom this week but I did want to show you how traders always need to trade what they see rather than what they want to see.

I walked into the US election armed with exit polling data that assured me Clinton was going to win. The markets had already rallied ahead of the result and frankly, I expected a boring night of little action. But about half and hour into the session real results started to deviate from the models and I made one fateful little move that saved the night for us and ballooned our P&L even as it deflated our spirits.

Watch.

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Always Be Wrong

by Boris Schlossberg Boris Schlossberg

What is the single biggest reason for failure in trading?

Is it strategy?

No.

Is it bad analysis?

No.

Is it costs and execution?

No and no.

Those are all just excuses that every trader uses to justify their losses. I’ve modified my strategies a dozen times. I’ve mis-analyzed markets almost on a daily basis. My costs are often as much as 50% of my gross profits. And yet I have been consistently profitable this whole year and haven’t had a losing trade since Brexit.

Why? Because I always assume I am wrong.

When you go back and study all the great blow up trades in history from Nick Leeson to Long Term Capital to the Whale Trade of JP Morgan there is only one factor that unites them all.

Ego.

They all thought they were right and they kept fighting the market until it broke them.

In fact I bet if you were to do your own “greatest hits” of blow up trades the dynamic that ties them altogether would be the same. You just couldn’t imagine an outcome opposite your expectations and as result you were margined called. I certainly was. I can’t even begin to count how many times I blew up my FX accounts when I first started trading. And in fact that behavior didn’t just go away. It took years of hitting my head against the wall, before I finally tried another way.

Now I look at the market differently. I only have two impulses whenever I put on a trade – win right away, or get the f- out with minimal loss. As a result of this approach I often miss successful setups and even more often leave lots of pips on the table.

Any trading “guru” would shake his head in disgust at my three-yards-and-a-cloud-of-dust style of trading. And I am the first to admit that I leave too much pips on the table. But I also know that I wouldn’t change my approach for a million bucks because I know that all trading books and other fables set up a false dichotomy. “Sell your losers and let your winners” run they say. But in real life 9 out 10 of your winners will turn into losers if you hold them long enough, especially in a two way market like FX. So all you will end up doing is cutting losses, until such time when you will get tired and annoyed and will make the biggest mistake of all which is letting losses run uncapped.

That pretty much is the story of every blow up in FX. It starts with bad advice and then proceeds with bad behaviour and ends up with stubborn refusal to admit you are wrong.

How much easier would it be, if being wrong was your default assumption? If you stopped trying to make trades and just started to make probabilistic bets, keeping every loss to less than 2% of your capital?

In trading being wrong is being strong, but for most of us it takes years to realize that idea.

How Do You Know When the Trade is Wrong?

by Boris Schlossberg Boris Schlossberg

There is no business more binary than trading. Each trade is effectively a twofold choice – continuation or reversal? All your trades depend on how well you answer that question. Everything is commentary.

Similarly when it comes to trade management the choice is binary as well. You are either right or wrong. Being right is easy. There is only one way you can be right. The price is moving your way. In all other scenarios you are wrong.

No woudda, coudda, shoudda talk. No “market is just insane” excuses. As they say on Wall Street, “If my aunt had b-lls, she’d be my uncle.”

You. Are. Wrong.

The first step to professional, trading is being able to say those words to yourself at least ten times each day.

The next step is even more difficult. You have to decide exactly what you are going to do about it. If you were foolish enough to have bet large on your first entry – the choice is simple. Get out. Any loss of more than 1% on your capital on any single day trade is mark of a rank amatuer and will inevitably cause you to lose 10%, 20% maybe even 50% of your whole account on this one position as you will add madly in size refusing to accept that you are wrong.

If your bet was relatively small and you are sitting on a 10-20 basis point loss then your choices a more nuanced. You can stop out regroup and re-enter the trade with larger size or you can pick a point farther away add to the position with size ( 2X or 3X the small initial trade) and make sure that your average cost is now close to the market price.

Here is the key point however. You. Are. Still. Wrong. Being early does not make you right. It just makes you early. So you should not be seeking profits. You are simply looking to minimize losses. You are practicing triage. So instead of that fat profit target that you had on your trade initially you are looking to basically just get out at scratch.

This is perhaps the hardest skill to learn as a trader. Not only are we all moral cowards who never want to accept personal responsibility, but we are also all greedy bastards – who when given a chance to escape unscathed by the market – instead view it as a divine validation of on our analytical skills and try to press a bad trade into a big profit.

It doesn’t matter if we sometimes succeed. In fact it is orders of magnitude worse when we do because it only sets us up for a massive loss down the road. There is nothing I hate more than some trader telling me he had 50, 80, 100 winning trades in a row. I always look at such guys, smile politely congratulate them and know that a year from now they won’t have any money.

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Trading is an amazing intellectual challenge that allows you to engage with the world at large every single day. But its is also the only activity that will instantly expose and lay bare your worst habits, biggest personal weaknesses and greatest moral failings. The sooner you realize that, the more successful you will be.

Trading Right By (NOT) Being Wrong

by Boris Schlossberg Boris Schlossberg

The longer I trade in the forex markets the more I am convinced that long term success has almost nothing to do with choosing winners and everything to do with avoiding losers. In short, trading is basically the art of saying NO.

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Before I proceed – let me qualify my comments by emphasizing that I am only talking about day trading where in the course of a year I am presented with as many as 1000 trading opportunities. So even if I eliminate the vast majority of those ideas I am still making many trades. If I were a long term trader my decision making process might well be different.

Alas as I have noted many times in the past, I am just not smart enough to know where currencies will trade 72 hours from now much less 50 week forward. So I operate on the shorter time frames – much like a meteorologist that only tries to forecast the weather two hours ahead.

When you are in the forecasting business the key to making good decisions is not to focus on whether you are right, but to relentlessly question yourself as to whether you are wrong. After all as traders we operate in a probabilistic universe where the kind of revenue certainty that say a McDonald’s franchise owner enjoys is laughably out of reach. No decision we ever make can be unqualifiedly termed as “right”. On any given day, at any given moment a piece of news could instantly wreak havoc with our position. That’s why focusing on being right is a futile proposition.

On the other hand, looking at all the ways that you can be wrong can be very productive. My best strategy refuses to make directional, takes only a few select trades during the week and holds hard time expiration rules that often result in no trade at all. Like some algorithmic Grinch it surveys the market and constantly say – NO, NO, NO – which so far (and of course past performance is no guarantee of future results) has translated in YES YES YES on my bottom line.

The key I think is that professionals in any field try to remove as much waste and profligacy from the actions as possible. Ted Williams never swung at a pitch that wasn’t a strike. Warren Buffett’s number one rule is DON’T LOSE MONEY ( Note it’s NOT – make as much money as you can). ZARA runs a very tight inventory system in its stores and only makes more of what’s working. The examples are endless and I think they all center on one key point – To Trade Right, Focus on Not Being Wrong.