Saturday, January 13, 2018

A trader's development - a case study Part 2

Back in the summer of 2013, I wrote this post about an aspiring trader called Tom (not his real name) who I first met in early 2012, and gave a potted history of how he had developed as a trader over that period of time. Tom was the first trader that I mentored. This post now updates that story...

Over time Tom's trading slowly developed further. He decided to tweak his parameters so that he traded a bit longer-term. This suited his home and work circumstances better, and meant he avoided missing as many entry signals. He also tweaked his trailing stop methodology to be volatility based.

Further to that, he was then able to use his programming skills to automate his trading on a small basket of indices, foreign exchange and commodities, to run alongside his trading of stocks, which he continued to trade using the same parameters but on a 'rules-based discretionary' basis.

I continued mentoring Tom until the summer of 2016. Truth be told, I believed he had already long-obtained the necessary skills, but he wanted to be able to discuss things as and when required. Since then we have continued to keep in touch.

Tom has continued to suffer lots of losing trades, of course, and gone through periods where it was difficult to make much headway, but both individual losses and any drawdowns were contained in accordance with his rules and risk parameters.

All this time, his annualised returns remained good, until he got to 2017, when things really started to take off.

During the year he managed to catch the nice uptrend in the US indices, as well as some additional moves in Japan and some of the major forex pairs, alongside his usual variety of stocks. The returns on those were very good, but the big kicker was that he also traded... yes, you guess it - Bitcoin.

Tom first traded Bitcoin in late 2016, originally going long below the $800 level. Had he simply held, he would have made far more than he actually has, but he has steadfastly remained faithful to his own trading rules.

Each time he was stopped out, he waited for subsequent new entry signals to be given, at which point he re-entered. All told he has traded Bitcoin four times over the last 14 months or so, and as a result he has been able to catch a significant chunk of the uptrend.

Ed Seykota famously said "One good trend pays for them all!", and in Tom's case it is certainly true that this one 'idea' has paid off handsomely. Because of this, the profits generated have propelled his trading into a different sphere, so that 2017 became a game-changer.

We talked about how his psychology during this phase differed from the summer of 2013 when he similarly encountered a sharp rise in equity in percentage terms. While on the face of it, nothing had changed in terms of risk:reward and his core beliefs, due to his compounded returns the positions sizes and subsequent profits being generated were far larger than four years ago. He still felt the same emotions, but he had learned what to expect and how best he could control them.

The biggest thing he has learnt across the years? "That I know I don't know" he said.

What he meant was that he didn't know that the US indices would react in a seemingly continuous one way move post-election, or that he didn't know that Bitcoin would have such a rapid rise. What he did know that there was a positive expectancy in simply cutting losses and letting profits run, with his rules getting him in and out of trades as required. All the while, good risk management and the ability to cut losses meant that the drawdowns were kept as small as possible.

Whenever we talk, he has always been keen to credit me with a lot of his development, but I take the opposite view - I simply gave him a nudge in the right direction, asked questions and made him think about what he was doing in the areas that required improvement.

At the end of the day, Tom has done all the work. He still had to decide internally what path he was going to take, and whether he would commit to implementing the necessary changes. All the while he was doing all the buying and selling, deciding how much to risk, and which markets to trade, based on his rules.

In other words, he accepted responsibility for his own decisions and actions.

In the time I have known Tom, his passion, dedication and commitment to improvement has shone through - and they can come only from within.

Finally, we talked about the future and how his life has developed alongside his trading. He is on the right path. To paraphrase the famous Chinese proverb, he is now in a position to feed himself for the rest of his lifetime.

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