How To Make Money in Trading Without Any Strategy at All
It is a quiet Easter/Passover week in Anglo-Saxon part of the currency market with most traders either off on the slopes or suntanning on the beaches. The lull has given me an opportunity to take a detailed look at my proprietary (also known as “do whatever I like” ) account. In contrast to my other accounts which trade algorithmically, this account is purely discretionary.
So here is what I discovered in looking at all my trade runs over the past six months.
From about mid-November to mid-January I lost approximately -4% of the account and my peak to valley drawdown (from highest point to the lowest point over that time frame) was a whopping -8%. Those are pretty ugly numbers.
From mid-January to the present (mid-April) I made about +5.5% on the account with my peak to valley drawdown shrinking to about 10 basis points. That’s right not 10% not even 1%, 10 f-ing basis points.If you use Paul Tudor Jones’s formula of dividing total return by total peak drawdown I look like a trading genius. (PTJ considers 2:1 ratio to be a sign of good trader)
Here is the absolute kicker to the story.
Throughout the past three months I have not used any consistent strategy on that account. I’ve faded tops. I’ve bought breakouts. I’ve speculated on the news. I’ve done a series of stupid average down trades. I’ve done trades out of boredom, frustration, curiosity -- you name it -- I’ve done it all with very little discipline or thought. The only logical, rational trading I’ve done was develop the AJAX strategy in that account but those trades have only started to kick in over the past few weeks.
So what’s the secret to my success?
I went from trading 400% of my account on each trade (400K notional on 100K of equity) to trading 50% of my account on each trade (50K notional on 100K equity). Often I would trade as little as 25% of my account on each trade -- just because I wasn’t confident in the position.
Now in the leverage fueled world of forex making 10K trades on a 25K account (my real size in this account) is laughably small. But look at the difference it makes! My losses were miniscule and ironically enough because they were so small they were much easier to close out. Even in my idiotic hey-let’s-add-to-this-loser-because-I-KNOW-the-market-will-turn trades I never got very deep in the hole because my basis was so small.
What is really shocking is how all those nickels and dimes add up on the plus side. On any given week I averaged only 50 basis points of gains -- but over a year that produces a very respectable 25% return.
Is this way of trading going to turn 10,000 dollars into a million in a year? Of course not. But it may turn 10,000 into 12-15,000. And the one thing it will definitely NOT do is turn 1M into 10K.
Next week I’ll discuss the one other factor that has been the the key to my success -- how I managed my winners.