How Massively Disastrous Losing Streaks Begin

07/18/2013 10:00 am EST

Focus: TRADING

Rob Booker

Author, Man Vs. Market: Lessons from Trading on the Road

Host Rob Booker talks with Bradley Fried, CEO of Rob Booker Japan, about Brad’s wild week (last week), when some of his positions went out of control against him. Brad describes his week and how he came out of it. This conversation leads to a number of important discussion topics, such as: How to know when you’re finished trading during a good week, and if you’re in a hole, do you stop digging (or just get a smaller shovel)? They also discuss the three routes someone can take when they experience a bad week in the market, and how massively disastrous losing streaks begin.

 
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Rob Booker: Brad is here with us, hey Brad. 

Bradley Fried: Hey Rob, how you doing? 

Rob Booker: I’m particularly interested, I’m fine thanks, I appreciate that. I’m particularly interested in the fact, I heard you say something just yesterday to me, you said this was a really crazy week and it still turned out okay for you. Man, I got that all wrong. I’m pulling up your text messages right here because they were fascinating to me. You said something like it was a really wild week and some of your positions went out of control against you, but overall it was a positive week. Can you describe this wild week for you and how you came out of it?

Bradley Fried: Yeah, I would be glad to. You know, I trade the Ichimoku cloud system exclusively and the system does really great, but if there is a big trend move with any reverse setup, they just break down and go even further. 

Rob Booker: Yeah.

Bradley Fried: Then you can get stopped out and you have to then bide your time or wait for the real reversal after that. Now the previous week, the last week, was terrible; I lost 8%, I had 8% drawdown. After that week, as you know, I sat down and I reflected and I went back through all the trades and all the stop outs and I looked at what I was doing and what I thought I could do to improve if that situation continued because I had a period of time a few months ago where I had three weeks like that, where I was getting pounded and I wanted to recover more quickly this time. I was more careful and the big thing I was more careful about was rebasing my equity as I lost money, so I was sizing my new positions I took based on a reduced amount of equity, so my exposure was less than if I just used what I had at the start of the week.

Rob Booker: So if you’re in a hole, stop digging, throw away the shovel. 

Bradley Fried: Yeah, yeah, well at least get a smaller shovel so you’re not digging so fast. You still want to be exposing yourself to risk in the market at appropriate times because that is what we do, but you don’t want to just make the shovel larger and larger so you are digging faster. 

Rob Booker: Well let’s take a moment to talk about that. There are three routes that someone can go when they have experienced a bad week in the market; 1) They can increase their trading size, which is getting the bigger shovel. It gets you out of the hole more quickly as a shovel; I mean it can be a shovel or it can be a ladder, but anyway you can get out of your hole quicker if you increase your trade size. Now Brad, I would say that is probably what I would say 50 to 70% of traders do is they recognize what they did wrong, that the setup is now much better, and they increase their position size. That is not the approach that you took, and I think we both agree that that is a really great way to draw the account down really badly, the one time that doesn’t work. 

NEXT PAGE: Brad’s Review Process After a Losing Week

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Bradley Fried: Yeah, I really feel strongly that doing that is you are trying to do a hail Mary and you are getting emotional about getting back what you lost rather than trying to look at the next trade individually and say how am I going to technically execute my plan on this trade with appropriate risk without regard to what happened to before, or with regard to what is happening out of currency pairs. 

Rob Booker: Yeah, now the second thing that some people do, Brad, is that they walk away completely. They scare themselves from trading and that is not necessarily a bad thing, but you, because you’re an experienced trader that has been around the block, you took some time to quietly reflect on what went wrong and what you might have done differently, and I think that that period of time is necessary whether it lasts a day or it lasts a month, or maybe even longer; that has to occur that you have to get back to the point where you feel like a stable individual that is not trying to claw back something, and that can take a very short period of time that someone is experienced, but you used that time in particular, and I don’t want to gloss that over, you looked at everything that you did during the week where you lost 8%. Could you talk to me, is it your stop/loss you looked at or is it the time of day that you traded or is it economic reports or what kind of things did you identify in those quiet moments, or what were you looking for about those trades that went wrong?   

Bradley Fried: Now one thing I notice, I don’t like to trade, I start on Monday and I don’t like to trade past Wednesday because I start to get tired, because I’m thinking about these trades, and as you get tired you get more irritable and more emotional about things; it’s just kind of natural. At least for me, my stamina wears by the middle of the week. I looked at what was my mindset also about these trades. I drew down about 4.5 to 5% right at the start of last week and I was right on the line where I said I have hit my 5% drawdown limit that I set for myself for one week, where I have to stop trading. I saw some things starting to set up and I said yeah, but I think these are good opportunities, and that would have been great because you know what, those new opportunities they went to support levels where I had greater than 1 to 1 risk reward, but I wasn’t satisfied. I was looking at support levels that were further one. 

Rob Booker: Okay, so what you are saying is the mindset of a trader, a Bradley, that loses 5% is to extend his profit targets because you want it back, so you are saying that in those quiet moments where you reflected on your trading for that week that you identified one of the problems was that you tried to get it back on trades that could have been good wins, but you weren’t satisfied with just good wins. 

Bradley Fried: I looked back and I threw away profits by trying to get to a further profit target. I could have locked in a perfectly nice profit and probably made back the majority of what I had lost at the end of the week, but because I waited, a lot of those things stop at and break even or they end up taking a loss, and I realized I was just letting my emotion get in the way. I was trying to throw a hail Mary pass to win the whole game for the week when I really needed to be pulling back and saying I just need to take an appropriate profit target for this individual trade as part of my series of trades I’m taking in my trading life. 

NEXT PAGE: Some of Brad’s Trading Rules

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Rob Booker: I’ve even at times reduced my profit target to be less than what I would ordinarily go for at those times, so it’s even one step further and I just gained back some confidence in the system and it reminds me that it works and that one of the problems that I have gone through at times in my life where I’ve had some drawdown is that I start to doubt in my mind the system that I spent years, months, or days developing, I start to doubt it and I’m doubting it for reasons that don’t make sense. Like I’m extending my profit targets and it doesn’t work and I’m like well I’m doubting the system and it’s like no doubt yourself because this is not the way that you ought to be trading. So you are saying that just getting back to the regular old profit targets that you should have had would have been a really great thing to do so you redoubled your dedication to that premise; the idea that stick with the profit targets that are there in the first place. You’re not going to get it all back this week, maybe you could?   

Bradley Fried: Getting it back is going to be a result of taking your next trades and you’re next, next trades the appropriate way considering the appropriate profit target for that trade and not thinking about everything that happened before and trying to correct it. 

Rob Booker: Did you make a rule about not trading when you’re tired? You mentioned that by Wednesday you are really tired; did you make a rule about that? 

Bradley Fried: Yeah, I feel like if I look at my best weeks, my best weeks are less than five trades, I hit my target and I’m done by Wednesday. So one of my rules is if I’m still trading by Wednesday then something is wrong. If I’m having to make nine or ten trades it is shaping up to be a bad week basically. 

Rob Booker: There was a trader once who I talked to until he invited me to go eat out to dinner with them and they were going to a sushi restaurant where they ate sushi off the body of a naked woman? Did you know people do that?

Bradley Fried: I’ve heard of it, but I didn’t know people actually do it. 

Rob Booker: Apparently he is like yeah, check out the website, we are going to go to this restaurant tonight. I didn’t go because that’s disgusting, there are all kinds of dirty things on top of people’s bodies, but anyway, the point is that when they give you like the Sani Wipes at the restaurant, it’s not for your hands, it’s for the, anyway, so he actually used to say that he would be done by Tuesday and I thought well that is extraordinary right Brad, to be done by Tuesday. So in this moment of what I’m calling quiet reflection, you determined that finishing the week by Wednesday is a good thing because you can get tired and I can hear the screams inside of my own head on behalf of the listeners, saying what trader in their right mind wouldn’t just take a sleeping pill, get more rest and come back and get the money that is available to them on Thursday and Friday? Now I’ve got an answer to that, but out of deference to you as our special guest, what do you say to the devil’s advocate?

Bradley Fried: I’d say there’s a fine line and a balance that I’m always having to struggle with, which is between if there is trading opportunities I want to take advantage of those, I want to receive the money that I deserve from the market, but I don’t want to over trade, I don’t want to give back what I’ve made to the market, I don’t want to dig a deeper hole for a loss when things are going wrong because those things may continue to go wrong until the end of the week. Those things that are going wrong have to do not just with the price action of market, but also my emotional state and how I’m dealing with managing and entering trades. So it’s appropriate to step away. It’s also once you have won to take a few days and not think about trading and do something completely different; it makes me more effective when I come back to the market the following week. 

NEXT PAGE: How to Recover from a Loss?

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Rob Booker: All right, you’re really getting on it here, this is awesome. I talked to a trader this week after the Thursday Federal Reserve decision where Ben Bernanke said, what a toodle doo, I don’t know what he said actually.

Bradley Fried: He’s a jack ass. 

Rob Booker: Actually I wasn’t even aware that he was talking; I don’t even care. I talked to them, they made some unbelievable amount of money. It is no one that has been a guest on the podcast; it is nobody that we know, it is just a trader that had written me by email to say I finally broke through and I had a good week. I wrote back and I should have said it a little bit differently, but the gist of my response was so you’re done for the week, right? I think that’s a leading question. If we were in a court of law there would be an objection and the jury would be that my heinous comment would be stricken from the record, so I should have said something like how do you know when you’re done in a good week, and for most of us the answer is in a good week I’m never done. I think what you are suggesting is, and this isn’t the first time you and I have talked about this, what you are suggesting is good or bad you gotta know when you are done. 

Bradley Fried: Yeah, you have to. 

Rob Booker: This is really complicated and the devil’s advocate in my head, the devil’s podcast listener in my head, says you guys are insane, my trading is systematic; why not just follow my rules. You guys don’t make any sense. This is amateurish, this is being afraid of the market. You’re just being a wuss or a term that is even worse than that, and I’m not even going to listen to the rest of this podcast, so goodbye. I will give my answer, Brad, it’s that listen if someone out there is mentally stable enough on a regular basis to be able to cope with the winds and continue to trade and you never had to know when you’re done, God bless you, we salute you and we would like to have you as a guest on the podcast because what you are able to experience, this emotional calm during a time when you have done really well is a very rare occurrence, and I’m not saying this tongue in cheek, I’m saying seriously if this describes you and you keep going then we want to know how you do it and we want to talk to you about the kinds of things that you feel because it is not normal for traders to continue to trade in exactly the same way when they have made a lot of money. In fact, we changed the way that we trade and we become homicidal maniacs I mean we just go on a killing spree and we think that we can do no wrong, or Brad we just take one loss and one loss after a really great week of training.

One loss throws this thought into your mind; I want to get back to the money that I’d made before I took this one loss and that is the genesis, that is where all massively unsuccessful losing streaks, all the big losing streaks that I have had in my life that they all started when I kept trading after a win, I lost one time, and I wanted it back. Then I lost another one and I said now I gotta get it back. I have a bunch of money to spend here, so I’m going to increase my trade size. So I increased my trade size and that wins, but not quite all the way and it’s a series of events that go from bad to worse to horrifying, sometimes ending in break even for the week and sometimes ending in much worse than that, but rarely if I continue to trade do I end up with some giant additional spectacular result, and here’s why, the conditions that created the huge Thursday for traders who benefited from Ben Bernanke, those conditions did not exist past 2:00 in the afternoon on Thursday, they didn’t extend into Friday, they didn’t move past that point. 

NEXT PAGE: Position Sizing After a Loss

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So whatever movement occurred that caused all that wonderful stuff on Wednesday or whatever day it was, it didn’t exist the next day and the moves didn’t go as far, and so Brad you can’t expect the same awesomeness and the setups aren’t there anymore if you are a systematic trader, it’s rare that you are going to get the same kind of setup after those huge moves. So these moments of quiet reflection really serve us well to stop and think about what we are doing and to know when it is that you stop. So you stop at this 5% loss level. 

Bradley Fried: Yeah, that’s my cutoff. 

Rob Booker: To remind the listeners who might not know this already, where do you stop yourself on the positive side?

Bradley Fried: I’m generally going for 150 ticks, I’m generally exceeding that every week, but that’s what I’m going for, and I’m risking between 1 and 2% of my equity on any one trade. 

Rob Booker: So as a currency trader, you’re looking for 150 ticks and that would be the equivalent of in the futures market because of the value of a tick, that could be the equivalent of between 50 and 100 ticks for a futures trader, and did you say that that represents a certain percentage gain in your account? 

Bradley Fried: Typically, if I look back on my trading record, I’ve been doing about 2% a week, but as my equity increases, that is increasing too. 

Rob Booker: Okay, do you spend these moments of quiet reflection, take a day, a morning, an afternoon, a week, a month or whatever it is, you come up with some ideas for what could have gone better and you redouble your mental efforts to stay on track to keep your profit targets the same and your trade size maybe a little bit smaller and you get back on the horse. Let’s talk about then the third perspective, when someone goes through a week that is not so great, they sometimes increase their trade size, which we said occurs between 50, 65, 70% of the time. Some traders take a moment and stop; that is very rare, that is 1% of traders, that is very rare that anybody stops. It is rare for me to stop and think about it. I have had to build that into my day purposefully. The third perspective is to reduce the size of the trades going forward to reflect the reduced amount of equity. Does that change anything? Is it aggravating for you to have a win after you reduce your trade size? 

Bradley Fried: You know it is something I struggle with because I want to get back to break even, I want to get back to where I was before I took a big loss, but on the other hand, I know that I’m being responsible. I know that because I’m doing that, I’m staying under my 5% limit and I’m winning and so I’m still in the game; I can still continue, and that gives me an opportunity to not dig a deeper hole, but to start filling in that hole. 

Rob Booker: Right. Well I think it’s worth considering. I go through periods of time where I vacillate between reducing my trade size or keeping it the same and I guess we didn’t mention that one, so there is a fourth perspective, which is leaving your trade size exactly the same, which I throw in category number one of wanting to get it back pretty quickly; that is what most people do. I go between keeping the trade size the same until I’ve lost a certain percentage of the account. It is like a fixed fractional trade size system where I don’t increase the size of the trades on every trade, and I don’t reduce the trade size on every loss, but rather I wait for the account size to decrease by a certain percentage or gain a certain percentage and then increase the trade size. 

NEXT PAGE: Trade Management Rules

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What this does for me as a discretionary trader is it forces me to experience a number of losses in a row before I panic and reduce my trade size, or it forces me to gain a certain amount of money and reach a point before I increase my trade size. Statistically and performance wise, this actually reduces the overall profitability of every single system I have ever traded. It reduces the profitability of it because I’m not compounding my gains as quickly when I do well. However, it is a really good way to go about the business when you feel things are spinning out of control Brad, and have you felt like that ever? I mean it doesn’t seem like you panic with respect to losses. Has there been a time in your trading career where a set of losses caused any kind of strong anxiety that really messed up the rest of your life? I mean you didn’t seem like even a different person when you went through the 8% loss. 

Bradley Fried: Well, that’s because I manage it, because I do have these rules in place and because I have confidence that as long as I slow down or stop things when they are going wrong that when the storm is over and I come back again that I’m going to have new opportunities and I’m going to be able to make money again. 

Rob Booker: All right, so you’re on an unavoidable path towards success and it doesn’t have to be this week that everything turns out great for you? 

Bradley Fried: Right, because I’m not letting it destroy me. When things are going bad, I’m not getting emotional and just redoubling my efforts and digging a hole deeper and faster, I’m stopping. 

Rob Booker: Well then do you have bad days anymore? That’s a pretty stable way of living your life Brad.

Bradley Fried: Well, I’ll tell you what the hardest part is, let’s say I hit that 5% limit, and I stop trading and I know I’ve done the right thing, but then I have to wait let’s say three or four days before Monday when I can start looking at the market again. How do you know when you’re okay again? I just try again next week. I know that I’ve stopped and basically what is happening is the market is resetting. There is something going on there that was screwing with me. I’m more rested. I’ve done something completely unrelated to trading for a few days to get my mind off it, so when I come back I’m fresh and I can see new opportunities and be more unemotional and focused about what I’m doing. 

Rob Booker: What do you do in your spare time? We don’t know enough about you. I know enough about you.   

Bradley Fried: I work at a volunteer bike shop one day a week and we basically rebuild bikes that are abandoned and then sell them cheaply to the community and then other things I do is I like to swim and I like to ride bikes too. I also play guitar and I have a variety of interests that I like to pursue. 

Rob Booker: So you have other things, this is obvious, this is such a leading question, I would have been the worst attorney in the world because I would have gotten to the point too quickly, and the point of being an attorney is to stretch out someone’s budget as long as you can. So what you’re saying is when you quit for the week, whether good or bad, there are other things in your life that you can fill your life with? There is not some void in your life when trading is gone? 

Bradley Fried: Yeah, the last thing I would do is have a period of mourning where I’m diving into trading books and back testing and just struggling with diving into trading more deeply. I want to get as far away from it as possible and do something completely different. 

Rob Booker: Well, because trading isn’t thinking about trading, right? So just spending a lot of time thinking about it doesn’t do any good; it is like breaking up with your girlfriend and then looking at a bunch of pictures of her, like what’s that going to do and like that’s going to ruin your life for as long as you want to look at the pictures. 

NEXT PAGE: Do You Retire from Trading?

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Bradley Fried: Right, you’re going to stay in that place where you are unhappy and you are going to keep yourself there serving some kind of penance thinking that is going to get you out of it. When really what you need is to get away from it and reset and then you can come back to it fresh and start again. 

Rob Booker: Is trading the most important thing in your life? 

Bradley Fried: No, it’s not. 

Rob Booker: Trading is a means to an end and you’d prefer that it was the way that you made your income? 

Bradley Fried: Yeah, I would definitely prefer that it’s the way to make an income and it’s something I enjoy especially when it is going well, and I like teaching about it to people. 

Rob Booker: Can you envision yourself retiring one day from trading?

Bradley Fried: You know I don’t think I’d have to unless I had some handicap that prevented me from making good decisions, but one thing I like about it is if you learn how to do it well, it is something you can continue doing for a long, long time.

Rob Booker: If you learn how to do it in sort of the effortless way that you describe it, which is you have a systematic approach and you wake up every day and you take that systematic approach and then you are done, it doesn’t exhaust you, so this is something that you could sustain doing, but when there were days that you were looking at it for 16 hours a day, that is something you retire from? 

Bradley Fried: Right, I think people when they come to trading they come with a set of preconceived images about what trading is, about having 30 screens on their desk and about trading a bunch of different asset classes and being up 24 hours a day, and they almost imagine themselves being on a Wall Street trading desk and that’s really not what it is. 

Rob Booker: Yeah, trading is something on Wall Street that you retire from and trading on Main Street is something that you retire to. It is a totally different perspectives on doing it and the folks that are on Wall Street that do it until the day they day, the Warren Buffets or the Charlie Mungers, or the Barton Biggs, those kinds of individuals have never really approached this business as anything other than a game that they like to play and it is something they wake up to as an enjoyable experience as opposed to trying to make enough FU money to retire and go do something else. The thought has never crossed my mind that I’m anything except for retired already and that you wake up in the morning with a systematic approach to doing something that you enjoy doing; there is nothing wrong with that. I have a couple other questions for you.

Bradley Fried: Sure. 

Rob Booker: I’m looking at the dogs walking. Can you hear that? 

Bradley Fried: Yeah, I can hear the dogs. 

Rob Booker: So, I was going to ask you what the one thing in your life that you want right now is, but as soon as I thought that question in my mind, this beautiful Golden Retriever, his name is Achilles, who walks in the neighborhood is walking past here and I just love that dog; I want that dog; I want a Golden Retriever, but I don’t want to take care of it. I don’t want to take care of it everyday, I just want to play with it. What are some things in your life that you are working towards that your trading account is meant to give you? What are some things that you are building up to? 

Bradley Fried: I’m building up to I want to be where we were on the road together for about a month and that is something I want to build into my own lifestyle, so I want to be traveling be at international locations doing different stuff and trading and be supporting that along the way. 

Rob Booker: Are there any gadgets or electronic devices that you just have your eye on right now as a trader? Most of the traders that listen to the podcast share our love of electronic gadgets; you are listening to this on your iPad or your iPhone or in your blue tooth connection in your car, hey Brian, or whatever else. What are you building up to next?

NEXT PAGE: The Importance of Interests Other Than Trading

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Bradley Fried: I’d like a new bicycle actually. 

Rob Booker: What do you want? Let’s talk about it. 

Bradley Fried: Well, I’ve been looking at carbon bikes and I’ve been looking at custom built steel frames and I talk about how doing something completely unrelated to trading is really good for my trading, so I consider the time I spend biking and the things I do on the bike to be part of my trading process. Have you found that that is your other thing, like they’re connected but they are very separate?  It is definitely becoming my other thing. It is part of the mix that makes this possible, that makes it possible for me to do this well. I’m also looking at a new guitar. I have a guitar, a pretty cheap one right now, but my playing is getting better, so I want to move up to a better one. 

Rob Booker: I was going to ask you about that, how long have you been doing lessons. 

Bradley Fried: I just started lessons this year, but I’m working with a guy at University of Texas, Austin, who is really, really good and he is teaching me and making pretty good progress. 

Rob Booker: Do you practice everyday?   

Bradley Fried: yeah, I practice everyday; that’s what I do. I mean you don’t have to sit at the screen all the time. I spend most of my days doing stuff like playing guitar and working on bikes or riding bikes, or working, you know, teaching people about trading in Japan. 

Rob Booker: Jason, does this not sound like the lifestyle of a retired individual who just is enjoying every day of his life?

Jason Pyles: I love it; I want to be Bradley Fried when I grow up. 

Rob Booker: I think our listeners are getting some insight into the fact that successful trading looks more like retirement then it looks like a job, although we talk often about making it into a job and making it systematic. When you wait until you make a certain amount of money to live the kind of life you were hoping to live, it is very difficult because trading doesn’t reward someone for showing up in the same way that it rewards someone for having a systematic approach, and a systematic approach can only work when the system allows it to work; I mean it is based on a system. When you overlay your template or your system on top of the market, it either does or it doesn’t produce a trade today, and in those moments, there needs to be other retirement like things that you do because watching it or reading about it is once again, it is like your loved one is on vacation and what you are doing is you are looking at pictures of your loved one instead of having a life of your own, and it really sounds like Brad that you have built a life that you enjoy living and trading is there to support it. I applaud that and I think that we could all take some mental notes about what you have said today and apply those to our own trading lives. 

Bradley Fried: I mean I’m definitely in the process of doing that and I think it’s important. You don't just flip a switch one day and you go from one life to the other. You have to start shifting to it and getting used to it and building these things in your life at whatever level you can do them and then it’s a gradual transformation and you already gained the skill set you need to live and enjoy that as you also get your trading to where it needs to be. 

Rob Booker: My guest today has been Bradley Fried, he’s an independent trader, and the CEO of Rob Booker Japan and the author of many articles on the subject of currency trading and most importantly, a good friend. Brad, thanks for being here. 

Bradley Fried: Hey Rob, thanks so much for talking to me today. 

For more podcasts from Rob Booker, visit Traderspodcast.com. You can also follow him on Twitter @traderspodcast.

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