The Secret to Long-Term Trading

May 25, 2022

Any coach can get lucky.

Even if he’s a crackpot, if he finds a kid at the right age with the right parents and the right intuitive mindset, he can coach that kid to stardom.

Of course, the kid was the star, not the coach. Of course, the coach’s cockamamie, esoteric techniques actually were an obstacle instead of a catalyst.

Nonetheless, the kid becomes a big-time player while using coaching tips that essentially forced her to play with one hand behind her back.

And the coach wastes no opportunities to brag to anyone in earshot about what a great coach he is.

But here’s the big question: did this coach ever coach anyone else who became a star?

Almost always, the answer is no.

The coach’s odd teachings only worked on one kid in one very specific situation who had an extraordinary ability to overcome bad advice.

Which is a lot like trading.

Many gurus make some money on a very specific market condition using lucky rules that worked extraordinarily well for a short time.

The same big question applies: did this trader ever make big money in different market environments?

If the answer is no, look out.

But we don’t need warnings, we need solutions. How do we know our system is built for the long haul? How do we know we haven’t optimized it so thoroughly that our wonderful backtest won’t show up in the next decade?

The answer lies in timeless principles.

To go back to coaching, if your pro says it’s mandatory that we put our off-hand exactly here and rotate our shoulders precisely there and never hit crosscourt from here and follow-through up by your ear there, you’re in big trouble. Those strokes will break down as soon as you see a ball that doesn’t fit all those requirements.

But if your pro says, “Just hit the ball in. All the time. And here are some ways to do it,” you have a great chance.

When will hit the ball in ever not work? It will always work.

When will put your left hand here and follow-through there and move your feet like this not work? It will almost certainly become a big obstacle (if not a catastrophe).

For trading, buying this pattern with this filter with this proprietary filter on these days could be a big problem. Chances are, if it works, it’s only because the market condition overrode the odd rules and carried the “strategy” to profitability.

But if we just buy breakouts, we have a good chance.

When will following the trend on something that trends ever not work? Trend following research goes back hundreds of years. Is it safe to say that following trends is timeless?

In short, if we want to trade a methodology that will work far into the future, we need that methodology to embrace timeless principles and be as simple as possible.

If you tell your students to hit the ball in with simple-to-create spin, many of your students will go on to do very well.

If you trade a system that follow trends with simple-to-create trading rules, many of your strategies should also do very well.

In our next Newsletters, we’ll talk about a simple strategy that does just that. And we’ll see how our trading journey hypothetically could have gone.

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.