August Numbers

• Tweets posted on our Private Member Twitter: 87
• Updates and Special Reports posted on the Member site: 6

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Snippets from Thoughts on a Weekend Afternoon

Peter’s thoughts on the finished week and the week ahead | Issued most weekends

A short clip from a member webinar –

Why do drawdowns occur?

Following I discuss two types of Drawdowns:

• Drawdown ending in destruction or disappointment
• Drawdowns within long-term profitability

Drawdown ending in destruction or disappointment
Here is an important point: Technically the concept of “Drawdowns” applies to long-term profitable trading programs because eventual new NAV highs are implied. A trader whose account zig-zags in a downward slope over time or never really gains traction technically does not experience Drawdown per se.

Over the years brokerage houses, regulatory agencies (such as NFA and CFTC) and academic researchers have consistently reported that fewer than 20% of futures and forex traders are profitable after three years. After five years the proportion increases because of survivors’ bias. My guess is that the data for crypto and equity traders are very different. Crypto traders who began prior to 2021 would have much higher success profiles – crypto traders who began since 2021 would be similar to futures and FX traders. Stock traders who are longterm holders have also done well. Short-term stock traders would fall into line with futures/FX traders.  There are many reasons why a trader might never gain traction. I will highlight several.

Absence of a trading plan.

As insane is it sounds, many people who engage in market speculation do so without a conceived organized plan or goal. This applies to the process of identifying a candidate trade, the sizing of
trades, overall risk management and managing individual trades.
Note: There are a very small proportion of traders who do quite well, even from the start, based on instinct and feel rather than rules, but these individuals are a huge exception. How does a person know if he or she is in this group?

Answer: Profitability comes naturally and continually. I am NOT in this category.

Non-commitment to a trading program (lack of conviction). A trader may have most or all the pieces for a successful trading program, including:

• Insightful market analysis
• Trade identification
• Entry process
• Risk and trade management guidelines/rules
• Organized procedures
• Performance reviews
• Process for adopting modifications to plan
• Safeguards to protect plan from emotional swings

But still, traders may have lacked the conviction to go “all-in” following the plan. Self-doubt and second guessing are huge enemies of trading success. A trader who does not follow his or her trading plan does not really have a trading plan.

There is no magic formula to discretionary trading. When I see something with a measured risk and a potential for gain, I step to the line and place a bet. My default assumption is that the next trade I enter will be a loser. In reality at least 80% of the trades I enter will either be losers or NOT produce a large enough profit to contribute to my net profitability. Only 15% to 20% of my trades end up being the outcomes I seek. Hey, that’s a reality for me and there is a great chance it’s reality for you.

Let others in financial Twitter brag about how they are always right and how they were able to figure out in advance every waggle and weave by every market. That’s not reality for me. In fact, I think the pursuit of “BEING RIGHT” in trading is far over-rated. Long-term consistent profitability in trading comes from the ability to manage losing trades. But if you are intent on chasing the illusionary “BEING RIGHT” trading goal, then I completely understand that the Factor Service is not for you. If I did not know that the Emerald City was just a myth I would probably be searching for it too.

The obsession with “BEING RIGHT” by retail traders is something my peers at the CBOT in the 1970s/1980s would
have found mystifying.