What’s Wrong With The Right Way To Trade

July 3, 2019

My trading education began at the School of Warren Buffett.

At this school, there’s a right way to do things, and the wrong way is for idiots (who are poor).

The right way means you read financial reports from dusk till dawn, you hold positions forever, and buy good investments at great prices.

And one more thing.

You don’t diversify. Diversification is for the birds. Or to put it more eloquently:

“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.” -Warren Buffett

This way of thinking dominated the early part of my trading and still affects it today.

Perhaps too much.

Looking back, I’ve realized I’ve stuck very close to this Buffett method. I don’t read financial reports till my eyes bleed but I do test systems until my computer breaks.

And when I’m done researching that one thing, I then trade that one thing, either by watching it for months or forward-testing it for months/years with live money.

I’ve always traded one thing at a time, no matter what, because it makes “little sense” to do more than that.

And it’s worked to some degree.

In 2014, trading just one thing netted me a 100% return in a year. In 2018, trading my robots in isolation–one at a time–all of my systems beat the market.

It’s the way I was raised and it’s in my DNA.

One thing at a time.

But here’s the problem.

Trading one thing at a time has legitimate disadvantages, especially if you use large trade sizes with just one thing.

For one, if anything goes wrong, everything goes wrong. If, all of a sudden, the execution of the trades starts suffering, the whole account is not being hurt. If a 20-pip target starts turning into a 14-pip win, that’s a big deal.

For another, trading just one thing leaves a trader open to long dry spells. What if a system is robust but only works in certain market environments? Then performance will suffer when the market goes through an unfriendly phase.

And, of course, focusing on one thing makes drawdown much more severe. If all the eggs are in one basket and that basket has a large trade size, then drawdowns will be substantial. Without other things to take the heat off, every loss can hit hard. And hard-hitting losses can make trading not fun.

If trading isn’t fun, then the future can start looking bleak.

So is the answer to simply suck it up and keep trading? That’s what the School of Buffett might say.

Or is the answer to (gasp) diversify?

What if we took systems we already have and combined them? What if there aren’t any bonus points for trying to suffer through drawdowns and dry spells?

What if we could make more money with less stress simply by combining systems into one income stream?

In our next emails, we’ll take a look at what would happen if we did just that.

Even if it gets me thrown out of School.

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.