THERE IS NO MAGIC
“Your trading methodology has to
make sense for you even if it’s the opposite of what makes sense for other
people. Choices made in developing your approach to trading should suit you
personally to minimize internal conflict. Only then will you have the
confidence to remain true to its development and its execution during tough
times. The long-term advantage of developing your own system from scratch
(rather than trading someone else’s system) assures you of high compatibility
with your beliefs, personality, edges, and objectives. That compatibility
becomes one of your sustainable edges. As Curtis Faith of Turtle fame noted:
“It’s not about the system, it’s about the trader’s ability to execute the
system.” – (Source: VanTharp.com)
LB and I have just wrapped up the final in our
series on full time trading. For the most part they have been enjoyable except
for one twat who complained that it was unprofessional of LB to not present
when she was suffering from severe laryngitis. Presenting for the first time in
years is an interesting thing as the expectations of those you present to also
change over time.
This particular series could be summarised as all
the mistakes I have made in trading and the solutions I have found such as they
are. One of the things I have learnt over the past few decades is that there is
no magic. Trading is a grinding profession where your central tenet is not to
go broke waiting for the next big move. I think in part some attendees were
waiting for the magic.
That point in the seminar where you do a grand
reveal of your magic strategy that never has a losing trade which means you can
quit your job tomorrow and start trading full time with nothing other than a
credit card because CFD providers will now in their wisdom allow you to fund
your account with credit and earn frequent flyer points.
Regrettably the field of investing has been tainted
by endless shonks who have polluted the thinking of people before they even set
foot in the market. Before writing this piece, I Googled trading bitcoin for a
living and got 35,900,000 returns. Certainly not all of them relate to trading
bitcoin or any other crypto full time but if even 10% do then then that’s a
staggering 3.5 million sites promising
people that they can give up their day job and start trading overnight.
The central theme of these sorts of sites and it is
not limited to cryptos is that you can trade full time with very limited
capital. And you can do this because you will never have a losing trade. Your
equity curve will be a linear trajectory that soars from the bottom left hand
corner of the chart to infinity without ever breaking stride. I can understand
why this sort of thing has permeated the thinking of new traders.
Whilst this sounds seductive it ignores many of the
key realities of trading the foremost of which is that trading does not produce
linear returns. We encounter a feature of equity curves called drawdown. All
trading systems generate drawdowns – in a very general sense if you are a trend
following you expect to have a drawdown of between 15% to 25% once per year. As
an example, consider the equity curve below.
This is the equity curve of Dunn Capital a money
manager that uses trend following as its basic tool. You see decades of
outperformance punctuated by drawdowns. There is an inviolate relationship
between performance and drawdown, if you are swinging fr the fences you need to
expect to be struck out a lot. Irrespective of the trading system drawdown is a
fact of life for traders – it can only be avoided by not trading. If someone
tells you that their equity curve never draws down, then they are a liar. It
really is that simple.
The implication for those seeking to trade full time
is that your first drawdown will coincide with your move to full time trading.
This is a natural feature of systems, they cut their losses and then let their
profits run. There is a timing dislocation between these two events that
results in the account value immediately slipping. The problem is that this
occurs at a time when you are most economically and emotionally vulnerable, it
is also a problem because most new traders are undercapitalised. They simply
don’t have enough money because they have not thought their transitions through
and they may or may not have been infected by the thinking that you can give up
your day job and earn 100k a year on a bank of 50k. It is at this point in a
seminar that I can see how people begin to sag because it begins to dawn on
them that they need much more than think to survive as a trader.
However, I think they are missing the bigger picture
since the move to full time trading does not have to be an all-in proposition.
The move can occur gradually over time as your capital grows and you acquire
more skill. And along the way your life begins to change in small but
incremental amounts. You may even reach a point where you stop believe in magic
and start believing in your own ability to slowly and inexorably change your
own life.
Author: Chris Tate
I end this piece with the quotes below:
“Just coming back from vacation
where we’ve been doing a lot of hiking in the mountains, here’s an analogy.
You’re standing on a peak of a mountain looking at an even higher peak. But to
get there you first have to go down that small valley…no way around it!
It's the same in trading, so as
long as the size of the drawdown is within your expectations, you can and
should relax when you’re in a drawdown. It's just a necessity you have to
endure to get those profits. So understanding and accepting Drawdowns as part
of this business will make your life as a trader much easier!” – Marco Meyer (Source:
Tradingeducators.com)
“Having said that drawdowns are
still making me uncomfortable. I don't like them at all and each time I'm in a
big one I'm having the same doubts and troubles most of you probably have too.
But knowing that actually nothing is wrong helps a lot to make it through these
times. Without that knowledge and understanding, you not only have the doubts
but you allow them to win over, follow them and then probably stop trading at
the worst time possible.” – Marco Meyer (Source:
Tradingeducators.com)
