Remember last week I told you about a strategy that had been making 7% per day?
Well, it was until it grew to a size too ‘unwieldy.’ And the trader’s own orders began moving the market against them costing valuable pips on both entry and exit.
And do you remember me explaining how the strategy makes small profits on almost every trade, with the odd (BIG) loser coming along now and then?
I explained it like this…
“And one or two of those losing trades coming along in quick succession could now gobble-up all their accrued profits, and more!”
Well guess what?
They’ve just taken two HUGE losing trades this week, one straight after the other on the same night.
Their strategy is showing a 90% drawdown.
They’ve pretty much blown ALL profits made since they started trading it last August. And I expect they’ll be having some very interesting telephone conversations with their investors just now.
So here’s a word of warning from the battle-tested voice of experience…
In this strange world in which we live there are certain natural laws at work. Laws that it may seem possible to outwit yet always emerge to restore balance in the end.
One of those laws is thus:
The underlying level of risk undertaken in any venture is commensurate with promised reward.
Or, in other words…
At some point the ‘Piper’ will come looking for payment. And the Piper WILL be paid!
(The trick with very risky schemes, of course, is to be out with your loot before that time comes!)
So the problem with high strike-rate strategies like the 7%-a-day one is that they attempt to smother and hide inherent risk.
The strategy creators think by taking small, regular, profits in the shelter of a WIDE stop loss, the unthinkable disaster scenario will not – cannot -happen.
And they believe potential investing clients will be entranced by the allure of smooth profits now they’ve brushed the idea of losing trades under the carpet.
This misleading behaviour is one of my pet hates of our industry. And the reason many new traders are led astray and filled with unrealistic expectations from day-one.
It is the trading equivalent of holding a beach ball underwater and expecting it to stay there when you let go.
Of course once released the ball never fails to rush to the surface, explode through, and spray anyone within range.
Lebanese clever-clogs Nassim Taleb even wrote an entire book about such devastating and unforeseen events in a trading context. He calls them Black-Swan events.
And the name of his book, funnily enough, is ‘The Black Swan: The Impact of the Highly Improbable.’
It’s well worth a read: The Black Swan
So what’s the alternative approach?
Personally, I ALWAYS prefer to dial-back the strike rate of a strategy and embrace losing trades.
I recognise risk up-front and work alongside it. It makes my strategy so much more robust and able to weather the chaotic nature of the financial markets.
If you don’t try to hide risk, or more accurately hide FROM it, it can’t come and bite you at the worst possible moment.
And risk ALWAYS seems to bite at the worst possible moment (like those 2 BIG losing trades one after the other the 7%-a-day traders are now nursing).
So here’s an example of the superior ‘robust trading’ approach…
One of my beta testers, Peter K, reported in at the weekend. During the previous week, using my new strategy, he completed 12 trades.
6 of them were winners and 6 of them were losers.
That’s ‘only’ a 50% strike rate.
Doesn’t sound too glitzy, does it?
But… we always set out to make at least 150% profit against any risk undertaken.
Strike-rate becomes almost irrelevant in the face of cold hard cash profits.
And that means once Friday rolled around Peter’s 12 trades had notched-up a 4.42% return on his account.
In one week.
Losing as many trades as he won.
And it’s just a typical week for us, placing trades that have a realistic chance of winning or losing.
Not expecting daily miracles. Just grinding out sensible and attainable profits.
It takes away ALL stress, pressure, and performance anxiety.