- Trading – Excitement vs. Consistency
- Not Big Trades Just Probabilities
- Trading is Like Card Counting
- A Vivid Way to Avoid Blowouts
Trading – Excitement vs. Consistency
Imagine you have a small forex or futures account. How much money do you think you would need to make to double a $1000 stake in one year?
Twenty dollars per week.
Not twenty dollars an hour.
Not twenty dollars a day.
When you break down the numbers trading is far less daunting than it seems. The flip side, however, is that you will probably need to take 1000 trades in that one year to eke out that one thousand dollars with any degree of consistency or skill. Not so thrilling now – is it?
Sure, the manual drudgery of small scalps can be automated. In fact, it’s utterly impractical to run such a system without a robot. But even if you automate successfully – the whole process sounds repetitive, commoditized and boring AF. It has all the excitement of running a donut shop.
Not Big Trades Just Probabilities
And that’s the problem with trading. We want YOLO. We want to break the Bank of England. We want to own Bitcoin at ten bucks or be Ethereum before the world discovers NFTs. We want Vegas baby, when in reality the money is made by running Donut King off the 405.
This is not your fault. All the trading lore ever – from the scammiest fake gurus on YouTube to the “serious” books like Market Wizards is centered around the narrative of the Great Trade. The protagonist is always some schmendrik who keeps losing and losing, and losing until he stumbles across one great idea or one great strategy and POOF in an instant he not only makes all his money back but turns wildly positive and proceeds to become mega rich through a few astute plays in the market. Who doesn’t love that story? Who doesn’t want to BE that story?
Trading is Like Card Counting
But successful trading is just a probability game. It has all the thrill of mindless hours of card counting. In fact, a successful trading plan is simply the card counting strategy applied to the markets. You are looking to play only when the sample set is favorable. (No ten deck shoes in blackjack. No high volatility regimes in the market.) You play only at certain times (When the deck flips to high value cards. Enter only when your setup materializes in the market). You maintain rigid risk control (Bet small unless the deck value changes. Always honor the stops in your trades)
All of this sounds easy paper, but is of course extremely hard in real life. The markets, just like the casinos will do everything in their power to break your concentration and doubt your strategy. No free drinks from skimpily clad waitresses but a probability structure by its very definition means that even in very favorably skewed strategies bad runs will happen all the time. It’s not at all unusual to suddenly hit 5 losers in a row even in a trading strategy that has a long term win rate of 70%. Most of us however can only tolerate 3 losing trades in a row. It’s just a psychological fact that after three losers most of us will go on tilt as the prospect of additional losses just seems too painful.
I don’t have any great advice on how to deal with that dynamic except by sharing my own truly unorthodox methods that shock me into doing the right thing. (Apologies to hemophiliacs in advance).
A Vivid Way to Avoid Blowouts
The plight of many consecutive stop outs is often analogized as the death by a thousand cuts. But if you think about it for a second, five, ten even twenty little cuts are unlikely to truly hurt you. They will heal in the end. An amputation on the other hand is final. You never get the limb back. When you try to avoid the multiple string of small losses you inevitably create a massive loss by refusing to honor the stops. You in effect “amputate” the account.
I know. It’s disgusting and gruesome and perhaps you have a more civilized way of thinking about this process. But for me this is brutally effective. It’s the only thing that helps me stay in the probability game and let me make more donuts … er I mean trades.