THE HARDEST GAME IN THE WORLD
Trading is the hardest game in the world. It’s just you against the market and there’s no referee. Your bankroll is an unerring real-time scorekeeper. It goes up when you win, and down when you lose. It’s that simple.
Far from simple is the fact that you’re up against some of the sharpest minds in the world. There’s always someone who’s better than you, but that’s OK. You don’t have to be the best trader to make money. But you need to be better than the average trader, and YOU MUST SURVIVE and not blow up your account. That’s the most important thing.
If you don’t bet, you can’t win. If you lose all your chips, you can’t bet. (Larry Hite)
Personally, to survive the many ups and downs of the markets I need a good game plan – a plan that’s based on data and rules. And experience. That’s because game plans are unlikely to work without experience.
It’s akin to a cookbook. All the rules are there, so it should work, but somehow the Paella tastes better when it’s prepared by my grandma.
Everything is easy when you know how to do it. Reaching that point and gaining experience along the way is hard, however. You can’t get there by trading in simulation-mode. It only works with real money and it’s an endless journey of learning.
What follows are some experiences of my own. Just a few, not all. Some “evergreen” observations of a quant-driven trader.
MARKETS CHANGE ALL THE TIME, BUT YOUR RULES DON’T HAVE TO
The temptation to change one’s trading rules in the hope of making them better is almost irresistible. We’re our own worst enemies, especially during periods of drawdown. Regression to the mean is a prominent feature of the markets, and it most likely also shows up in your own trading record. Periods of above-average performance are followed by below-average returns, and those bad times then set the stage for good future performance. When do you think are you most likely to change your rules? Yep, when you’re down – and that’s usually really bad timing.
We all live in the here and now. Longer-term perspectives can easily fade into the background when you’re too focused on the most recent performance streak. Zoom out a couple of years. Are things really that bad? Do you really want to change your system?
I think the more experienced you become as a trader, the less antsy you’ll be to change your rules. I’m not saying that embracing new research and ideas is bad; changing good rules because of subpar recent performance is though.
Knowing what not to do is much more important than what to do. A very important aspect of trading is knowing when do absolutely nothing and when not to change your system. This can be very tough, I know.
CHASING HOT THINGS AND LISTENING TO MARKETING MUMBO-JUMBO
When you’re prone to changing your trading rules because of a drawdown, you may also be susceptible to chasing whatever is hot and hip. Calls on AMC? Or maybe futures Dogecoin? Yep, that makes for interesting stories – but does it make you money in the long run?
When placing too much emphasis on the latest hot stuff, which is a form of recency bias, you are at risk of confusing signal and noise, which tends to be an expensive mistake in the long run. The smaller the sample size (recent hot things tend to have a small sample size), the greater the noise.
Also be aware that the media will never ever show boring news. Their business is to report on the hot breaking-news stuff because that is what attracts eyeballs. Most of it is just noise and ad-driven marketing though.
