One of the frustrating things about being a trend
follower is that it takes time to overcome the inertia of a new system,
particularly if that system is based upon slightly longer time periods such as
weekly data. Part of the frustration that traders encounter is based upon the
simple mechanics of how systems work. A system that is correctly designed takes
its losses quickly and allows its profitable trades to simply roll along.
This results in the system instantly going into
drawdown and it is this drawdown that causes traders to develop friction with
their system. This friction often leads to tinkering as they attempt to force
the system to give them something it cannot give. This is exacerbated in times
of a flat market – you cannot force returns from a market. The All Ords of late
has not really been a stand out performer as can be seen from the chart below
the market has been slowly grinding its way up in a broad channel.
With this in mind I thought I would look at the
yearly returns for the various stocks within the All Ords – so I found some
data on their percentage returns and stuck it into a frequency histogram to see
what the performance of individual stocks looked like.
Please visit this link for the charts and images
that come with this article: http://tradinggame.com.au/where-is-the-money/?utm_source=Blog+Subscribers&utm_campaign=2e70d91994-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_eb90516269-2e70d91994-43344013
I have a arranged the data into a serious of blocks
and did a count of the number that fell into that category. I also calculated
the average performance of the group which for this period stood at 17.09%.
However, if I drop out the 200% and above outliers this average value falls to
13.04%. As you might have guessed the majority of values cluster around the
mean with a long right handed tail. This sort of distribution is common with
stocks since we have unlimited upside but limited downside – a stock cannot
decline more than 100%.
Our psychology dictates that we are instantly drawn
to the right hand side of the chart and the extreme outliers that occurred over
the past year. And as traders these are the sort of trades that we hope ours
might evolve into. However, in doing so we ignore that left hand side of the
chart. The majority of stocks (60%) have below average performance.
You may assume as a trend follower that this is not
an issue since you would avoid these large losses and poor performance by the
use of stops but that ignores the reality of the actual trading process. As a
mechanical trader you will not incur these losses but you will burn time wading
through these non performing stocks before you hit the ones that do perform.
You waste time, a little bit of money and a lot of patience dealing with this
mediocre performance.
My anecdotal experience has been that trading
returns are made up of a lot of modest returns and a tiny handful of trades
that do very well but to get to the ones that do very well you have to crank
through a reasonable number of trades and you have to keep going.
This is where the notion of emotional resilience
comes into its own in trading and the ability not to tinker with the system
hoping that it will generate these sorts of trades. Systems don’t actually
generate these sorts of trades – the market does so you cannot actually build a
system with the preconceived notion that it will find you trades that generate
a 500% return. What the system does do is generate a population of trades, most
of which will be duds and hopefully a few large winners. But in the beginning
all trades look the same.
Author: Chris Tate
Article reproduced with kind permission of Tradingggame.com.au
More helpful quotes from professional traders are added below:
“As
always the battle is not with the market but with yourself.” – Chris Tate
“Get
any group of traders together and you will notice that the novices tend to talk
about indicators and charting patterns, whilst the professionals discuss
trading psychology and money management. In the beginning, you’ll underestimate
the importance of these two key areas.” – Louise Bedford
“Most people have an
“interest” in becoming consistently profitable traders. However, few possess
the essential ingredient of “total commitment.” Total commitment is what is
demanded for a high level of success from any endeavor. A trader with commitment
will take the money away from 100 traders who have only an "interest.” – Joe Ross
“In
fact I would say trading without a stop is like walking a tight rope without a
net. You should always place a stop, not because you expect the market to go
against you, but to protect against the unexpected. The worst losses I've seen
have resulted from a trader not having a stop order in place and the ensuing
deer-in-the-headlights paralysis that sets in once losses start to mount.” – Andy Jordan
www.tallinex.com
wants you to become a successful trader
Traders’ Mindset: Super Strategies
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