How to Better Manage Your Trading Expectations
There’s more To Trading than Just Having a Strategy. In trading magazines as well as web sites there are lists of trading system results they all seem to highlight “the trading strategy of the month”. If it were so simple to buy one of these systems you would have retirement in a box. The reality is that strategies “Do NOT make a good trader”. This article is not another trading technique or about any magical methodology or indicator that claims win rates of 80% or more (by the way the vast majority only lose money chasing these type of concepts).Hopefully this article will hopefully give you an “AHA” experience what successful investing is really all about. True successful investing is never taught in school or even graduate school. More so in my career spanning more than 19 years I never came across a book or article that really taught what successful investing is. There is no Holy Grail systems or “Perfect” trading indicators.
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Many beginning traders underestimate how hard trading really is. Too many traders go to a weekend course, read a trading book or buy a trading robot. The inevitable occurs that they have a couple of wins and a couple of losses. After experiencing a loss or a bad week, too many traders give up and start looking for, or start trading a different strategy. While the trading strategy they just abandoned is recovering from the drawdown, the new trading strategy may result in yet more losses, so again, they start looking for another. It becomes a vicious cycle. There are always a series of losing periods and the trader says” GET ME OUT OF HERE” or this methodology is junk. They go to another course from some “Guru” or read another trading book. They trade the strategy for a while and again the inevitable happens. Some trades work and some do not and then experience a series of losses. The cycle repeats again and again. Successful trading is to understand what to expect and how to temper those expectations. This is the goal of this article – to give you a realistic approach that has worked in the real world for me.
I learned under a man who started trading in 1979. He started with $200,000 trading commodities. He ran it up to approximately $18,000,000. Today is 80 years old. He did not have any magic system. It was a basic and robust concept based on Richard Donchian and later the Turtles of Richard Dennis fame.
He did not have the magic indicator or a super computer. Actually in 1979 computers were not available. He always had numerous losses and long periods of time in which he did not make money. He succeeded while so many others failed because of the way he thought & how he approached the markets mentally. His goal from the onset was to compound money. He tempered his expectations. He learned what successful trading really was. He realized that “NOTHING” is perfect. He realized he would always have losses. He learned that he must “Try” to keep these loses small.
He did not give up or jump system to system.
He had a complete trading plan and accepted the results!
He kept his losses small as possible (there were limit moves against him as well as gaps which caused larger losses than he planned). His mental fortitude was unique and a strong key in his success. He traded a simple robust methodology based on trend following. This simple trading concept was called a Breakout Strategy. He would buy the 20 day high and sell the 10 day low. It works on all time frames and all markets. What separated him from the vast the majority that fail is also how he approached the inherent risks while trading. He risked a small percentage of his account size on any trade. For example if he had $200,000 account size he might only risk 1% on a trade or $2,000. He watched his correlations between markets as well as his total portfolio risk. Everything was planned. There were no surprises except gaps and limit moves which were out of his control.
His trading plan told him specifically the following:
- What to buy or sell
- How much to buy or sell
- When to exit with a profit or a loss
Compare this approach in which he accepted that trades do not have to work to those that try to avoid losses. Losses cannot be avoided. There are those traders who jump from system to system…guru to guru…or indicator to indicator. Keep it simple and robust.
You will easily realize if this is you if your bookshelves filled with numerous trading books? Do you have more than 20 different trading books suggesting different strategies? How many expensive seminars have you attended? Did the trading books and seminars help you succeed? If they did, why did you buy more books or attend more courses? The fact is in order to succeed one must realize there is nothing perfect. There are no win rates of 80%. The key is to “try” to keep losses small.
There are only four possibilities when we trade:
Big Losses
Small Losses
Small Profits
Large Profits
Accept this reality. Even the best of the best traders have rates of returns between 15-20% after fees. Even the best traders have gone through ugly drawdowns and long periods in which do not make money. Do not think you will make 50% per year. It is just not realistic. More so do not think you will not have ugly periods and long periods of elusive profits.
The Next 1,000 Trades
Yes that is really how I think. I look at any one trade as insignificant. I think in a series of trades. There is no reason to get bent out of shape when a trade did not work. Any one trade is just one out of 1,000 or 10,000 trades that I will have over the years. I mostly trade commodities and in the following charts you will notice some very interesting things. I have had and will always have long series of trades that do not work. I “try” to keep my losses small. The trades that work are much greater than the trades that do not work. I just keep on going. The goal is consistency once you have your trading plan.
Past Performance is not indicative of future performance
In the above in the yellow highlight you see the series of losing trades. In between there were two very small profitable trades. How many of you would quit at this point and look for the next system? It does not matter if you are trading forex, commodities or stocks. You will always have series of losing trades.
Past Performance is not indicative of future performance.
In the above chart you will see mixed in the group of trades some nice winning trades. If one had given up during the series of losing trades 4 to 7 in a row; they would not have stumbled onto some of the “rare” big winning trades.
Past Performance is not indicative of future performance.
No one ever rings a bell when there are profitable trades. You just make yourself available. You “try” to keep your loses small and let the probabilities unfold. You need to be consistent, follow your trading plan with patience and discipline.
Once you internalize the fact that trading is just a probability game in which you cannot avoid losses you are on track to being a consistent & possibly profitable trader.