More Money, Less Useful

Feb. 24, 2021

Pro tennis players are obsessed with money.

In an eat-what-you-kill world, it’s understandable.

If you don’t win, you don’t get paid. If you don’t get paid, it’s over.

So, naturally, pro tennis players can be greedy locusts, gobbling up every tournament opportunity they can find.

And if they play almost every week (and win matches each time), they will definitely get paid. More tournaments means a higher annual salary.

Unless it’s unsustainable.

Unless playing so much leads to burnout and injury.

In that case, making more money can ruin a career.

Traders are obsessed with money.

They desperately search for any system (from any source) that promises a lot of profit.

But they don’t pay attention to how they get that profit.

For example, here’s the Performance of a Bollinger Band™ system (we talked about this last week).

Trading 1 lot each time (no compounding) over about two decades, it hypothetically produces $196,000 of profit with a max drawdown of -$26,855. That’s a profit to drawdown ratio of 7.29.

But if we double to the move to break-even (in other words, if we make the trade be twice as profitable before moving our stop to break-even), we make more money. By waiting longer we hypothetically produce $197,000 with a smaller max drawdown of -$23,502. That’s a profit to drawdown ratio of 8.38.

The longer wait to break-even makes more money and has a better profit to drawdown ratio.

We should choose the one that makes more money, right?

Here’s the problem. The one that makes more money has big losing years:

Granted, it hasn’t had a hypothetical losing year in a decade, but when it loses, it loses pretty substantially.

Here are the annual returns of the same system that makes less money:

It has more losing years, but the losing years are very small.

It would be easy to shrug off a year that was basically break-even. It would not be easy to shrug off 30-60% losing years.

A big losing year (or two) could end a trading career. Amateur traders probably couldn’t come back from that devastation.

Instead of playing more tournaments, a player could play less and focus her energy. Having time to recuperate after losing could lead to going deeper into the tournaments she does decide to play.

Instead of choosing the system that makes more money, a trader could pick the system that is psychologically much easier to trade.

Being able to shrug off a small losing period will lead to the big eventual profits looming in the years to come.

More is not always better.

Many times, it’s a lot worse.

Talk to you soon.

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Disclaimer:
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.