Two More Ways To Turn Winning Into Losing

July 16, 2022

In our last Newsletter, we saw how fear can turn a winning system into a badly losing system.

But that’s not the only obstacle to our success.

Sabotage #2: Diversification.

Let’s say we didn’t fall victim to fear and kept our GBPJPY system running no matter what like we’re supposed to. Are we out of the woods? Unfortunately not.

Because the trading world at large has browbeaten us into using diversification. It’s the only free lunch, right?

It’s also the way to ruin a winning system.

Here’s the winning chart for the Dragonfly Small Stop from the last Newsletter:

No problems there.

But we can’t just trade that. What would the experts say, after all? No, let’s add another chart that doesn’t produce as much profit, doesn’t win as much, has longer losing streaks, and much worse overall metrics. Hey, at least we’re diversified!

So, in the name of expert trading, we also trade 1 lot on the EURJPY. Here’s how that might have gone from August 2021 to July 2022:

Oh, here’s another good tip. Use systems that trade differently than your “main” system. Different systems produce great “diversification”. Here’s another system on EURUSD that trades a countertrend method. Let’s trade that one, too!

As you can see, trading this portfolio of three is not profitable. It would be in a drawdown.

Trading the best, most profitable, most consistent system would have us sitting pretty. Being diversified turns our hypothetical account into a loser. 

Granted, the EJPY and EUSD will probably be fine in the long run. (Here’s the EJPY curve from ’03-’22: https://www.screencast.com/t/v7ZqTt5KhH3).

But that’s not the point. Why are they needed if we already have everything we need? 

It’s possible that diversification could be helpful in some cases. But as we can see, it’s a great way to turn winning into losing. We’re not done, though.

Sabotage #3: Random trade sizes.

Let’s say we don’t give in to diversification and are back to only trend following on the GBPJPY. But what if we’re greedy and fearful and don’t keep our trade sizes calm.

What if we raise our trade size right after we finally have our winning streak?

We’re supposed to bet bigger when we’re hot, right? Well, doing that could be disastrous. If we increase our trade size at the arrows, we’re at our biggest size during losing streaks and our smallest size during winning streaks. Guess what that does?

It turns winning into losing.

On one hand, if we’re systematically and unemotionally compounding our gains, we’ll still get hit with being in big size during losers, but the regimented compounding program will eventually win out over the long-term.

If we are randomly lowering and raising trade size due to fear and frustration, then a good system can be turned to garbage.

By knowing the evil ways of sabotage, we can be on guard. We can be ready for the emotions and have a plan already in place.

We can let our winning remain winning.

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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.