I’ve spent a lot of my research time studying the track records of the great traders. Those track records are freely available and by studying the track records and the performance records of great traders, and varied traders, you come to appreciate what is going to be required in the journey of trading.
A lot of people come to this game and they think that trading is making money every day, every week, every month and every year. For some people that may well be the case, but for the rest of us who are just common people in the street trying to make a go of it, that’s not the case. You’re going to have losing trades, you’re going to have losing days, you’re going to have losing weeks, losing months and yes, you will have losing years. If Warren Buffett has a losing year, why the hell shouldn’t you? That’s what it comes down to.
First and foremost, you’ve got to have a strategy that has a mathematical edge. You have to understand that. Then you just have to let it play out. Certain types of strategies the edge will play out a lot quicker than other types of strategies. For example, trend following tends to be a little bit more sporadic because it doesn’t do that many trades per year, depending on the kind of strategy you have. To get the edge, your trade frequency is a little bit slower than someone who perhaps day trades or uses a five minute chart. The edge will take a little bit longer to come out, and that can be very frustrating for people. I certainly have clients that find it very frustrating to be a trend follower because sometimes they have to sit there for three months, four months, and sometimes longer, for the trends to start to occur. That’s normal for trend following. That’s why if you go back and you look at all the great trend followers, who’ve got thirty, forty year track records, you can see that, “Hey, it’s happened to these guys!”, and they are managing hundreds of millions of dollars, sometimes billions of dollars, so therefore it should happen to me. If that doesn’t sit well or bode well with your personality, then trend following is not the way to go. You’ve got to look at some kind of a strategy that has a higher trade frequency.
Ideally your edge is a significant part of the trade frequency, so to make that edge move along faster you’ve got to increase your trade frequency somehow. So for those people who struggle with trend following, i.e. they want a lot more consistency, you have to move your strategy down time frames or you have to change your strategy to more short term swing trading types.