The biggest lie in trading

This weekend @Michigandolf - whose feed I love dearly - put out a pic Tweet of one very pretty lady force feeding another lady a very long bottle of water.  He marked one lady with the name of a famous FitTwit “guru” and titled the name of the bottle “Trading Platitudes”. I cracked up the moment I saw it because it encapsulated perfectly the maddening drivel that often passes for trading advice on the internet.

One such platitude is that you MUST trade with a 2 reward to 1 risk ratio. After all, what can be easier than that?  You just need to win 40% of the time!

Go ahead and try it. You’ll bleed out faster than a kosher slaughtered cow. It’s the ultimate three card monte trick of the markets. Especially if you are trading on an intraday basis - making at least ten trades per day. 

Let me back up. There is nothing wrong with 2:1 trades IF you are trading a few times a month on long target/long stop ideas. I have several strategies that follow that method - and  yes - if they are properly configured, they can eke out a slight edge.   

The bullshit comes when “gurus” try to sell you the same idea on an intraday basis. I’ve written many times before that the fastest way to tell someone is lying about their trading is if they claim that they day trade with 70% or better win rate and a 1.5 to 1 R/R. Turn off the podcast right then and there. The person is lying his a- off. (The fakers have learned to temper down their claims from 1:2 because they realize that even someone with grade school math will quickly figure out that you can’t make 100+ trades per month with a positive win rate and a positive risk reward ratio because within a year you will own every market you trade.)

Do you know what the win rate of HFTs - the most profitable actors in the market - is? It’s barely  50.5% - pretty much the win rate of the casino in which I am staying now. That’s because as Warren Buffet - who famously made a bunch of college kids pay upfront before sitting down for a Q&A meal with him - once said, ” I wanted them to learn that there is no such thing as free lunch in the markets”.  If you want reward you must assume risk, and if you want reward on a daily basis that risk will need to be sharply negative to give you even a fighting chance.

Do this. Open a demo account and trade something volatile like Nasdaq, US30 or even Gold. Make ten or more trades each day with 2:1 R/R and see where equity is at the end of the week.

Now flip the script. Make the same entries with the same frequency in the week following but risk 3 dollars to make 1. You will most likely lose money, but I am very confident that you will lose LESS than with the 2:1 approach. That is because intraday markets are designed to take away money from suckers like you. Especially in the let’s sell-the-bottom-only-to-see-it-reverse type of choppy price action we have now.

Don’t fall for the false promises of easy riches. To have a chance, you need a Trading Plan, you need a Strategy and you need Execution Tools. But importantly you need to stop sopping up trading platitudes and think for yourself.

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