01 May Making The Leap From Theory To Live Trading
Making The Leap From Theory To Live Trading
May 1, 2019
A goal of this newsletter is to give you trading ideas.
The real goal is for you to use these ideas (or some of your own) and then email me saying you beat the market by a mile.
But it’s one thing to throw out ideas and another thing entirely to start trading that idea with real money.
In between, there’s a whole mess of obstacles.
The biggest obstacle is trust.
Why would I risk money on some random trading idea I got for free?
It’s an important question. The answer is: you probably wouldn’t.
Unless you could trust it.
The first step is to trust the person that sent it. The internet is full of weird, shady characters trying to send you weird, shady newsletters. It’s not easy to know who might be worth listening to.
Longevity might be one way to filter people out. If someone’s been around for a while (since 2013, for instance), then it means that person might be dedicated and also might be around tomorrow (instead of fading off into internet outer space).
Another filter would be to look at the ideas that are sent to you. Are they understandable? Are they transparent? Do they make sense?
And a final filter is how that trading idea is tested. One can never know how diligent the researcher truly was, but one can look at that person’s data. Does it go back longer than a few months or years? Does it have reasonable results? Were those results obtained from reliable data? Are trading costs built in?
If all of those criteria are met, then we have just one more obstacle: fear. If we trust the person and trust the idea, then we need to get over the fear of losing everything on a new system.
To get over that, we need to be comfortable with the drawdown, specifically the maximum drawdown.
The max drawdown is the worst a particular system has done over a period of time. If the max drawdown is $5,000 and you have a $10,000 account, then you need to be ready to see the account drop by $5,000 at some point.
Here’s where I’d like to make two important points about drawdown.
One, if a max drawdown is $5,000 and you have a starting account of $10,000, that doesn’t mean the $5,000 drawdown will happen right away! To be fully armed against losing some trades, it’s reasonable to brace yourself for an immediate 50% drawdown ($5k loss on a $10k account).
But what are the chances that the worst trading period will repeat itself the moment you go live? 10%? 1%? It’s not probable the drawdown will happen at the very beginning. It’s far more likely the drawdown will happen much later.
For example, what happens if you go through a max drawdown of $5,000 after you’ve seen your account rise up to a balance of $50,000? The max drawdown is the same, but now it’s only a 10% drop in equity. You lost $5,000 on a $50,000 account. That’s not the 50% drop that seemed so awful at first glance.
Yes, we should assume the worst, but the worst case (max drawdown immediately) is probably not going to happen. Odds are, the drawdown will occur after you’ve made some money.
The second issue is the idea that “the worst drawdown is always around the corner.” If I had a nickel for every time I’ve heard a speaker say that, I’d have 78 nickels.
I just have one question: Is it, though?
Is the worst drawdown really still to come in the future? Think about the darkest, most depressing time of your life. Will it ever get worse than that? Is the worst depression of your life still to come? No, of course not. If we hit rock bottom, we don’t go back to rock bottom. We have bad times, sure, but nothing is ever as bad as our max depression. This has been the case for me.
And when was the last time the economy did worse than the Great Depression? We’ve had bad times, but there’s a reason that we still hear pundits say, “This could be almost as bad as the Great Depression!” Even 2008 wasn’t as bad as the Depression. It was close in some ways, but it wasn’t as bad. No one was standing in bread lines in 2008. There weren’t any Hoovervilles.
And the Great Depression lasted a decade. Our meltdown in 2008 was over by March 2009. If we somehow survived from September 2008 until 2009, we then could’ve participated in possibly the greatest bull market in history. I’m not saying 2008 was easy. It was horrible. But it was not the Great Depression.
I understand that a young person’s worst day is still to come. They haven’t experienced anything yet. And a backtest over a very short time probably has a bigger drawdown to come.
But, if we look over a long time period, the worst drawdown may not be in front of us at all. It’s not ahead of us in our mature personal lives and it’s likely not ahead of us in our well-researched trading lives.
So please stop telling us a system’s worst drawdown is definitely happening in the future.
In short, if we trust the person and get over the fear, there’s a chance a newsletter system might be a tool to beat the market.
What we need now is some way to track it. We need to track some systems from the newsletter and see if they work in real time.
And that’s what we’re going to do. In the emails to come, we’ll review some systems from the newsletter and see how they’re doing now.
Talk to you soon.
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It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.