Everyone: “Stick to your trading plan and you’ll be a profitable trader!”
I've been trading for over 6 years now, this is a B.S. myth.
Planning matters, but not in the way you think.
If you ever felt cheated by cliché advices, here's the context that they don't give you:
The best course of action to be a profitable trader according to "conventional wisdom":
- Stick to your plan
- Manage your risk
- Trading psychology
These can help. But to be decent at the game, you need way more depth than these abstract, cliché buzzwords.
Ever wondered why most traders can't make money, despite advices like these being well known?
You really think it's as simple as they can't follow it?
No! It's because there's something missing.
Something that ain't covered in simple and abstract advices.
Let's dive in:
1) The Effectiveness of Simple Models
You need to know what you're extracting from the market.
- Is it trend?
- Mean reversion?
- Carry?
- Arbitrage?
Saying that "I make money trading a moving average crossover", is not enough.
What's the underlying source of return?
Rob, in the video above, mentions that he trades simple models to extract returns from trending properties present in the market.
It isn't that signals are magical things that will make him money.
They are mere tools to get exposure to the thing that you want to extract.
A lot of newer traders obsess too much about stuff like technical analysis, without giving weight to the most important thing that will drive their returns:
- The underlying source.
It would be like a lumberjack saying that the axe is what provides him with wood.
No, the axe is a mere tool that helps with the extraction of the wood.
The wood, is the extractable product and the tree provides it.
Don't confuse the axe with the extractable product or its source.
It's just a tool!
2) Diversification Across Types of Models
There's different kinds of diversification:
- Asset Class
- Sector
- Factors
- Geographical
- Thematic
But there's another one that often gets forgotten:
- Diversification across model types
You will do better by trading multiple assets and adding other diversification factors into the overall portfolio, than just being exposed to one thing.
It's hard to do if you were trading without automation, but easier to implement as a systematic trader.
Markets flow in and out of different regimes all the time.
Some regimes are better for trend, others for mean reversion, etc.
Having a few models (not spreading too thin), that have different exposures, is a good way to increase the consistency of returns of your portfolio.
If you believe that markets change, for a multitude of reasons, which they do, you don't want to be a "one-trick pony".
Having a few models, that you TRULY understand, is desirable, to meet a decent level of diversification.
If 1 model stops working, you're not out of the game.
3) Fiddling with Models
A lot of traders, when they go through bad periods of performance, which you will definitely go to, they start changing their models.
This is a really bad thing.
Not only are they inserting randomness into the models, they're also disregarding old data.
By changing a model, they are now making the assumption that current information is better than whatever came in the past.
That is a large assumption to make.
Adding more rules to avoid drawdowns, is a game you don't want to play, if you want to be successful in the long run.
I've written here about the effect that randomness can have in your models.
If you are scared as much as I am about randomness, you understand that adding more rules to achieve a perceived amount of safety, is a very dangerous game to play.
Better face the risks you know.
4) Outlier Returns from Outlier Years
Don't neglect the importance of being exposed to those 1 year type of events that happen once in a decade.
You need to be exposed to the market to be able to take advantage of them.
And in order to be exposed, you need to survive.
That is the name of the game.
Survival.
Make the least amount of assumptions you can, keep your risk very apparent and always remember what you're extracting from the market.
Cliché advices are what they are, mere clichés.
If they were true, everyone would be profitable.
TLDR:
- Focus on the underlying source of returns, not the tools to extract it
- The importance of diversification
- Randomness is a very dangerous factor in your models
- Beware of hidden risks
- Don't downplay the importance of outlier years in the returns of your models
Everyone: “Stick to your trading plan and you’ll be a profitable trader!”
I've been trading for over 6 years now, this is a B.S. myth.
Planning matters, but not in the way you think.
If you ever felt cheated by cliché advices, here's the context that they don't give you: The best course of action to be a profitable trader according to "conventional wisdom":
- Stick to your plan
- Manage your risk
- Trading psychology
These can help. But to be decent at the game, you need way more depth than these abstract, cliché buzzwords. Ever wondered why most traders can't make money, despite advices like these being well known?
You really think it's as simple as they can't follow it?
No! It's because there's something missing.
Something that ain't covered in simple and abstract advices.
Let's dive in:1) The Effectiveness of Simple Models
You need to know what you're extracting from the market.
- Is it trend?
- Mean reversion?
- Carry?
- Arbitrage?
Saying that "I make money trading a moving average crossover", is not enough.
What's the underlying source of return? Rob, in the video above, mentions that he trades simple models to extract returns from trending properties present in the market.
It isn't that signals are magical things that will make him money.
They are mere tools to get exposure to the thing that you want to extract.A lot of newer traders obsess too much about stuff like technical analysis, without giving weight to the most important thing that will drive their returns:
- The underlying source.
It would be like a lumberjack saying that the axe is what provides him with wood. No, the axe is a mere tool that helps with the extraction of the wood.
The wood, is the extractable product and the tree provides it.
Don't confuse the axe with the extractable product or its source.
It's just a tool!2) Diversification Across Types of Models
There's different kinds of diversification:
- Asset Class
- Sector
- Factors
- Geographical
- Thematic
But there's another one that often gets forgotten:
- Diversification across model types You will do better by trading multiple assets and adding other diversification factors into the overall portfolio, than just being exposed to one thing.
It's hard to do if you were trading without automation, but easier to implement as a systematic trader. Markets flow in and out of different regimes all the time.
Some regimes are better for trend, others for mean reversion, etc.
Having a few models (not spreading too thin), that have different exposures, is a good way to increase the consistency of returns of your portfolio. If you believe that markets change, for a multitude of reasons, which they do, you don't want to be a "one-trick pony".
Having a few models, that you TRULY understand, is desirable, to meet a decent level of diversification.
If 1 model stops working, you're not out of the game.3) Fiddling with Models
A lot of traders, when they go through bad periods of performance, which you will definitely go to, they start changing their models.
This is a really bad thing.
Not only are they inserting randomness into the models, they're also disregarding old data. By changing a model, they are now making the assumption that current information is better than whatever came in the past.
That is a large assumption to make.
Adding more rules to avoid drawdowns, is a game you don't want to play, if you want to be successful in the long run.I've written here about the effect that randomness can have in your models.
If you are scared as much as I am about randomness, you understand that adding more rules to achieve a perceived amount of safety, is a very dangerous game to play.
Better face the risks you know.4) Outlier Returns from Outlier Years
Don't neglect the importance of being exposed to those 1 year type of events that happen once in a decade.
You need to be exposed to the market to be able to take advantage of them.
And in order to be exposed, you need to survive. That is the name of the game.
Survival.
Make the least amount of assumptions you can, keep your risk very apparent and always remember what you're extracting from the market.
Cliché advices are what they are, mere clichés.
If they were true, everyone would be profitable.TLDR:
- Focus on the underlying source of returns, not the tools to extract it
- The importance of diversification
- Randomness is a very dangerous factor in your models
- Beware of hidden risks
- Don't downplay the importance of outlier years in the returns of your modelsSources:
1) https://t.co/IrDq4vnPbn
2) https://t.co/EIPcjI1v0o
