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Winning Trades are the by-product of Losing Trades Too many traders have an obsession with Winning Trades. I hate to be the bearer of bad news to some of you, but taking losses is the primary job description of a market speculator. If Losing Trades offend you or upset your emotional chemistry, if you consider “being wrong” to be a character fault or a “problem” with your trading approach, if you even think that the marketplace cares what you think or what you do, then market speculation is probably not for you. Trading is mostly an exercise of throwing mud against the wall to see what sticks – and most lumps of mud fall quickly to the floor. I have known many extremely profitable career traders over the years and very few of them have a win rate in excess of 50%. Almost to a person, these traders view taking losses (many losses) as the process of finding winners. I am not offended by being wrong on a market call – it is absolutely not a big deal to me. It is always an amusement to me when tweeters go out of their way to remind me of bad market calls. To be a successful profit taker, a trader must first become good at taking losses. Sorry – both profits and losses are part of trading. I know of no other service similar to the Factor that provides a frank discussion of losing trades, losing days, losing weeks, losing months and even losing years (I have experienced several net losing years along the way). I am in no way embarrassed to be wrong on my market analysis or on trades. If Losing Trades and being wrong bothers you then trading is not for you. If you become obsessed with Winning Trades and making money back in the same stock, forex pair or futures contract in which you lost capital, then you need to seriously examine if you should be involved in market speculation. Risk Management Money management is job #1 for a trader. Keeping your pile of chips intact is the only thing that really matters at the end of the day. (Risk Management) If you think you know what a given market is going to do, you are only fooling yourself. Trading a market with expanded volatility but reduced liquidity is a demonstration of arrogant insanity. Being flat is a position. An obsession to always be in the market will lead to disaster – it is only a question of when. Being short volatility (short gamma) is akin to picking up pennies in front of a steam roller. Of what value is market analysis and trade selection once a trader has lost his or her trading capital. Patience … Discipline … Discipline … Discipline … Patience I know my sweet spot. Every trader should strive to know his or her sweet spot. We should strive to only take a trade when the market set up is in our sweet spot. We should strive to avoid trades out of our sweet spot. If you, as a trader, do not know your trade set up with great intimacy, then how in the world will you know if you are exercising patience and discipline? Once you know exactly what your sweet spot is and is not, then the real challenges begin. The real challenges for me (and it could be different for you) are different nuances of patience and discipline. Patience to wait for just the right set up Discipline to sit on the sidelines and not getting pulled into a trade that does not fully satisfy my requirements Discipline to pull the trigger when the right trade comes along Discipline to remain detached from open positions and properly manage each trade according to trade management guidelines developed over decades of market speculation Patience to allow a position with a substantial profit potential the room and time to bear full fruit The above challenges are very, very real. The markets can force a trader to let his or her guard down. The markets are all about forcing traders to make mistakes. Markets are constantly luring traders with such deceptive messages as: “Trade now and trade often” “You’re missing out on some good moves” “The only way to make money is to trade” In fact, there are times when NOT trading can be the action with the best outcome. Trading just to trade often leads to drawdowns. Then comes the urge to find trades in order to recover the drawdown. Often this leads to a worse drawdown. Before a trader knows it he or she can be in a 20% to 30% or greater drawdown resulting from trades that never really qualified as trades in the first place. This is when the capital drawdown becomes a significant emotional drawdown. Vicious cycles can easily come upon us as traders. Trading Drawdowns Traders talk a lot about Trading Drawdowns. But what are they exactly? How are they measured? What do they mean? Can they be prevented? If not, how does a trader deal with them. In the world of futures and forex, Trading drawdowns are measured based on month-end to month-end net asset value (or nominal account value). I know a number of traders who will measure drawdowns on a week-ending basis. I really do not know many traders who measure drawdown levels on a day to day basis. I was clipped today by about 170 basis points (1.7%), but that is not a drawdown. Day to day asset volatility does not represent a drawdown. It is especially dangerous (from an emotional perspective) for novice traders to be intraday equity watchers. This is NOT a habit you want to get yourself into. As a chartist, I want to trade the charts, not my equity level. I do not want intraday — or even day to day — volatility in equity balance to affect my judgement. I know traders who have “circuit breakers.” whereby if they reach a certain daily loss level they liquidate all positions. For me, a daily loss of 3% or more would force some examination of my positions. But, the chances are great that a daily loss of 3% of capital or more is an indication of being over leveraged, and that is a separate (but more deadly) issue. Drawdowns are a fact of life for a trader. They happen. There will be bad days and bad weeks and bad months, and periodically even a bad year. A losing day/week/month is not an indictment against a trading plan. In fact, drawdowns are to be expected and a trader must learn to take them in stride without pulling the escape hatch whenever a position turns into a daily loser. A benchmark metric maintained by many professional traders is their Calmar ratio. The Calmar ratio is calculated by dividing the worst drawdown (month-ending basis) into the average annual rate of return for some measure of time. A rolling three-year period is the most frequent time measure for determining Calmar. A Calmar ratio of 2.0 is considered outstanding — 3.0 is world class. Some short gamma traders (naked options sellers) can generate Calmar ratios of 5.0 or even higher — that is, until they go broke, which they eventually will. The practical implication of a Calmar ratio of 2.0 is that to achieve an average annual ROR of 30% you will likely experience a worst-drawdown of 15% or greater (month-ending). Keep in mind that a month-ending worst drawdown of 15% probably equates to a week-ending worst drawdown of 20% or greater. Now, if your trading approach frequently experiences daily equity swings of 3% or more, then you have some issues that need to be dealt with. But, equity swings less than 2% daily (or 5% monthly) must be expected. If you cannot handle Trading Drawdowns, then my advice to you is simple — quit trading and take up gardening or knitting. Related articles:Can you double your account every six months?Why Retail Investors Lose Money In The Stock MarketAre You Ready For The Learning Curve?Are You EMOTIONALLY Ready To Lose? Trading Insights From Steve Burns Want to learn how to trade successfully while reducing the risk? Start Your Free Trial
Trading Drawdowns Peter Brandt explains: "There is a statistical concept known as the “underwater curve.” The underwater curve plots the time periods when new all-time high NAV levels are being registered (represented by “0” on an underwater curve) and the time periods in which drawdowns are either underway or in recovery back toward new all-time NAV levels. Most successful long-term traders are underwater the majority of time. Welcome to trading!" You are in a drawdown state 80% of the time and of that, you are in a severe drawdown state (greater than -20%) 67% of the time Did you know that Warren Buffett has had multiple 30-50% drawdowns in his career? Yet he is considered one of the greatest investors of all times. False claims by wolves in sheep’s clothing Peter continues: "Successful market speculation is one of the most challenging endeavors one can pursue. Yet, promoters of get-rich- quick-and-easy schemes run rampant in the email and internet worlds. If they are not registered with the SEC, FINRA or the CFTC/NFA or are not personally managing assets of investors they are free to make exaggerated claims. Their advertising is extremely appealing and enticing. Many of these training and trade signaling services claim to have REAL trading track records. But, as far as I am able to determine, none are willing to provide an attestation or audit letter from a national or regional auditing firm that has reconciled their IRS tax payments for trading profits, brokerage statements and bank deposits with their public claims." This is so true. Here are some of the claims I have seen from those promoters: I turned $12,415 Into $4,155,000 trading penny stocks. 2,062% Weekly Option Gain. Turn $3,000 Into $100,000 in 4 months. I made 29,233% in 12 months trading high flying Internet stocks. We averaged 127.16% Per Month trading credit spreads. We guarantee that our options trading strategies will make you profitable every month. 99% of my recent 326 stock picks have been winners. Trading $150,000 into $650,000 in 8 months. How Jack turned $250 into $16,000 in Just One Month. +9,651.04% day trading return since Jan. 4 2016. Of course none of them has ever provided any proof of those returns. As Bloomberg article correctly concluded, their self-promotional strategies have made them richer than trading ever did. Some of those guys claim they live in mansions worth tens of millions, trade tens of millions in their personal account, but at the same time sell trading advisories for $50-100/month. Does it make sense to you? Many times they specifically mention (in fine print) that their performance based on "HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS". Does it mean anything when they don't actually trade? Red flags to Watch in Alert Services Moneyshow listed 10 Red Flags to Watch in an Options Alert Service. Here are some of them: The service doesn’t have any losing trades. The service won’t show you their closed trades. The trades have huge risk. The service inflates their ROI numbers. No detailed track record is posted. The performance is not based on real trades. Here is another HUGE red flag: If the promoter keeps bragging that he lives in a multi million mansion, drives a Lamborghini and has a private jet, run away. Really successful traders are modest and humble. They don't need all this BS. There are also a lot of ways to inflate your track record numbers, as I described in my article Performance Reporting: The Myths And The Reality. Some of them include: Basing performance on "Maximum profit potential". Calculating gains based on cash and not on margin Presenting "Cumulative return". Holding losing positions indefinitely. Resetting past returns after a large drawdown. And more. Those who want to find out more details about some of those scammers, I highly recommend reading real and objective reviews by Emmett Moore from tradingschools.org. Emmett also describes how some of them game the system and make their profits look real. Fascinating read, highly recommended. SteadyOptions lists all its trades on our performance page, winners and losers. The details of all trades are available on the forum with screenshots of our fills and can be verified with historical prices. Van Tharp says successful trading/investing is 60% psychology...only 60%? Humans desperately want to believe there is a way to make money with no or little risk. That’s why Bernie Madoff existed, and it will never change. Best luck with your investments. Related articles: Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Are You EMOTIONALLY Ready To Lose? Trading Drawdowns by Peter Brandt Winning Trades and Losing Trades by Peter Brandt Want to learn how to trade successfully while reducing the risk? Start Your Free Trial