Tuesday, October 04, 2011

Be consistent in your approach

I posted the following on a bulletin board earlier this week which may strike a chord for some less successful traders, or those who hop from one system to another:
"Trend following can be a bit like panning for gold or drilling for oil - lots of dead ends (losses) before you strike a big winner. However, when the markets do find a decent trend which is not too volatile, then my win rate can go up to 90% with winners comfortably bigger than losers. Most trend following systems are profitable with a 40% win rate - most traders can't cope with that - they like the comfort of a (consistent) 90% win rate. 

The problem with those types of systems (which you normally find auto trade FX markets) is that when a losing trade does come along, the losses are way bigger than the winners - approaching trading in this manner can easily end up with one or two trades leading to a blow out.

Experience of knowing what your system is capable of (both on the winning and losing streaks) is important as it gives you confidence to ride out the poor performing periods. I've seen others who move from system to system, experience a period of losing (which EVERY system has), switch system and go through the same process again. If they had the nerve and/or confidence to stay with their original system they would have been able to profit from the system during those winning periods. People who are continuing to look for the holy grail type system do this all the time."

The moral of the story - if you find a system that is historically profitable, with controllable drawdowns, and generates consistent profit both in up and down markets, then trade it, and stick to it. Don't drop the system if you experience a drawdown, stay with it and wait for the tide to turn.

Don't believe me? Go ask someone like Ed Seykota, Larry Hite, John W Henry, Bill Dunn, David Harding or any other trend follower.

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