All Trading Strategies Are Worthless Without This One Thing

Long, long time ago when Michael Milken was still king of Wall Street I used to know an old crusty, broker at Bear Stearns. Whenever a customer would call him with a question on the direction of the market, Bob would pause and then in his most earnest TV-announcer voice utter, “The market will be up or down unless it stays the same.” That line never failed to crack me up as it perfectly encapsulated all there is to know about trading.

Trading despite all of the complex strategies that we employ is actually extremely simple and only boils down to three bets. You can bet on continuity. You can bet on mean reversion. You can bet on volatility. That’s it. Everything else we do is just decoration. That’s why traders obsession with strategies is laughably absurd. 90% of the success of your strategy will have nothing to do with its rules and everything to do with the market environment.

That’s why in a strongly trending market the simplest moving average crossover system will reap outlandish profits while in choppy environments you can just sell and buy Bollinger band tops and bottoms with remarkable success.

Don’t get me wrong, I don’t mean to imply that strategies do not matter at all. Of course they do and a well thought strategy is still better than a random one, but in truth they matter far less than we think. The key to good trading is good process, rather than good strategies. In short it is much better to learn how to bet rather than what to bet.

A few weeks ago I wrote a column about how my results improved dramatically this year (from -4% loss and -8% drawdown to 5.5% gain with -0.20% drawdown) when I started to make much smaller, more frequent trades -- that’s an example of triumph of process over strategy. As mentioned then many of my trades were completely impulsive yet I was able to succeed despite the randomness.

The difference between strategy and process is that the former focuses on how much can I win, whereas the latter is primarily interested in how little can I lose. When it comes to trading process trumps strategy every time.

Boris Schlossberg

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