- Speed in trading = leverage and frequency
- Frequency can be just as dangerous as leverage
- Insurance model requires particular care
- Let the algo take you real trades, your mind the impulse ones
I feel the need. The need for speed. Maverick
Speed in trading = leverage and frequency
If you are a young man or even a middle aged one and someone hands you keys to a sleek sports car your biological impulse is to go fast. I don’t know if it’s the testosterone or the Y chromosome but we are compelled to go fast and break things.
While this impulse may be fun and occasionally amusing it is the ruin of almost every trading account in the history of mankind. Speed in trading is a function of two things – leverage and frequency. Having a 100:1 leverage is exactly like driving 100 miles per hour down the West Side highway in New York City. Fun while it lasts but hit one pothole and NYPD is pulling your lifeless body out of the Husdon river.
Frequency can be just as dangerous as leverage
Although leverage is the most common speed trap in trading (just ask Bill Hwang of Archegos), the one that can really get you into trouble is frequency. If you are day trading equities or forex there is almost an unbearable temptation to always do one more trade. Our mind loves to seduce us into seeing a setup that isn’t there and very soon you find yourself jumping from one trade to another looking for that one more dopamine hit that only speed can give you. Your targets get smaller and smaller going from 10 points to 5 to 3 to losing all pretense of control as you trade for just one point of profit like the true market junkie that you are.
I tweeted out this week that it is better to have a controlled loss than an uncontrolled win – observation borne from my own painful experience. I know the seduction of speed. Many a day I have traded 30 , 50, even occasionally 100 times in an eight hour session and at the end of the day only my broker enjoyed the profits . Speed is not just a waste of effort, speed in trading just as in life often kills.
Insurance model requires particular care
If you trade the lottery model of trading then making 10 or 20 trades a day until you stumble into a winner could actually work. But if you trade the insurance model like I do, then speed through frequency is just about the worst thing you can do. Insurance companies make their money by selling policies to those who are least likely to collect. Their whole business structure is based on the idea of avoiding the delivery of the very service they provide. If you trade the insurance model then the whole purpose of your strategy to avoid stops as much as possible. Sure you will always have to take some stops, just like insurance companies always have to pay out some portion of their premiums, but the less you do the more you make in both markets and insurance.
That’s why frequency is such a dangerous variable in trading strategies that employ insurance like structures. The more you select the greater the chance that you will select badly and like an insurance company that inadvertently writes a bunch of policies to a gang of overweight, chain smoking motorcycle riders caught in a meth deal gone bad, you will lose and you will lose a lot.
When I took my strategy from 30 trades per day to 3 I not only saved a massive amount in commissions but I improved my performance tremendously.
Let the algo take you real trades, your mind the impulse ones
Is it fun to drive like a Boca Raton Grandpa in the farthest lane of I-95? No. The siren call of the market tempts me all the time. But like Odysseus I’ve tied my hands, by letting only my algo take the trades.
As for me, I amuse myself now by doing trades in my head. If I see some price action that grabs my attention I pretend to make a trade at that point in time on the chart. Sometimes I win, sometimes I lose, but one thing is certain. It’s a lot more profitable and far less dangerous to race in my head rather than on the actual highway.
As Ed Seykota once said, ““There are old traders and there are bold traders, but there are very few old, bold traders.” So drive slowly. It’s good for your health and good for your wealth.