The Road to Professional Trading: Dealing with Losses and Living with Drawdowns
When you trade in this matter, looking for short term overbought and oversold conditions, buying into the pullback and selling into strength, you will see in the historical test results accuracy rates in the 80% range – which is a real high number.
In the Daily Battle Plan, we’re seeing approximately the same numbers, around 82% for the past two and a half years. So the test results that we saw years ago – and we continue to update the test results – continue to show the same numbers. You can see it play out in the Daily Battle Plan Model Portfolio.
Again, these are high probability trades.
That being said, when losses occur in this type of trading, they can potentially be large. They will be large during those times when the market is transitioning to a bull market from a bear market, or from a bear market to a bull market. Or when a market is going to test its 200-day moving average.
So if you think back to January 2010, it did a heck of a job getting everybody into the market. Everybody ran into that market in the first couple of weeks. There was a big rally, and a number of fund managers didn’t want to be left behind.
And then the market plunged in the second half of January, and raced back to the 200-day. A number of ETFs broke under the 200-day.
That’s when drawdowns occur. That’s when losses will occur.
The other times they will occur is when there is a transition in which the market not only races to the 200-day, but goes to the other side of the 200-day. Potentiallyl losses will occur here.
The hard part of trading like this, buying the pullback and selling into strength, if you are going to be successful trading in this style, you have to accept that a certain percentage of the trades are going to be pretty healthy losses.
As one of my early mentors mentioned to me years ago:
“You need to learn to live with it. We all want every trade to be a winning trade. But it doesn’t work that way. You need to learn to live with it. And if you do learn to live with it, it will pay off in the long run.”
And he was right. He was very correct in saying that.
So I’ve learned to live with it. And ultimately many of our customers over time have learned to live with it. And many of our customers have done extremely well doing this.
It’s no fun along the way when things are drawing down. It never is when losing trades occur. But that’s part of the game. It’s all included in there.
Again, this is why we provide so much statistical data. We show the backtest results. You can see every seetup along the way in the Battle Plan. You can see a high percentage of the trades are profitable, a handful of trades are losing trades, with a couple of the losing trades tending to be larger.
ETF Model Portfolio Performance History
As a whole, though, you want to be net positive. That’s the name of the game. This is how it works.
To access Part 1 of Larry Connors’ series on ETF trading, click here. For Part 2, click here. The fourth and final part of the series is available here.
Larry Connors is founder and CEO of TradingMarkets.com and The Connors Group