Thursday, January 07, 2016

Which car mirrors your trading approach?

A few weeks back I came across this quote from David Druz which is thought provoking (Hat tip to @JLTrader1 for posting up this gem):

Most traders seek comfort in high win rates and/or as smooth an equity curve as possible. Yet long-standing trend followers have been able to successfully deal with the up and downs and the general vagaries of the financial markets. How that this been possible?

Simple, by making their strategies as robust as they can. Because they are not tailored towards a particular market state, they are able to control their losses when dealing with the volatility and lack of trending phases thrown at them.

"We have a saying here: "It is incredible how rich you can get by not being perfect." We are not looking for the optimum method; we are looking for the hardiest method. Anyone can sit down and devise a perfect system for the past." - Larry Hite, from his Market Wizards interview.

Think of it this way:

The markets are the terrain you need to travel over. You don't know what you will encounter - from billiard-table smooth roads, to rugged mountain passes, to dust trails, to sand dunes. You need to be able to drive over all these types of surfaces if you are going to navigate your way through to success.

So, to do this, you have the choice of two vehicles - which one would you choose?

Here we have a classic Lamborghini Countach  - the car that appeared on many wall posters in the 1970's and 80's. While it may be fast and exciting, cars like this are:
  • delicate;
  • requiring constant maintenance and fine tuning;
  • hopelessly impractical.
This may not be the best mode of transport negotiating a pot-holed road, or dealing with a stone filled dirt tracks.

Ok, so what about this instead?

Ah yes, that is actually a Toyota Hilux - this particular one is pictured after the Top Gear boys tried killing it (see here). They also drove modified versions to the North Pole and across the English Channel! You couldn't do that in an exotic sports car. These are:
  • mechanically simple;
  • long-lasting;
  • rugged;
  • able to deal with (almost) anything placed in front of it.
In trading terms, trend followers devise their own trading rules to be in a similar manner to that of the Toyota - simple, easy to understand, and most importantly of all, robust. It may not be the most glamorous, or the fastest, and there will be bumps and scrapes along the way (which is where the volatility in the results comes in), but it will keep on running over the long haul.