No Luck in Trading

The harder I work, the luckier I get

Samuel Goldwyn

Like almost every action in life where chance plays a role, trading is subject to luck. How many times have we seen a bad bounce along the third base line result in a run in baseball or an unintended flick of the foot score a goal in soccer? Anyone who has ever watched sports long enough can easily remember many instances of luck that turned one game around. Yet in the end it is always the better team that wins the season. In the end luck runs out.

The illusion of luck was particularly evident to me after I read a recent New Yorker article by Malcolm Gladwell called the Creativity Myth. In one of the many arcs of the piece Mr. Gladwell takes on the story of the birth of Apple computer. According to popular lore, Steven Jobs walked into the famed Xerox PARC facility in Palo Alto saw all the great innovations from the graphical user interface to the mouse and simply stole them to create the first Apple operating system.

The reality couldn’t have been farther from the truth. The PARC mouse cost more than $300 dollars, broke very six weeks and had three buttons on it that made it very cumbersome to use. Jobs was able to create a $15 mouse that lasted for years and used only one simple button for navigation. The PARC GUI was essentially an extension of the old command line interface. When you clicked on a PARC icon you got a pop-up menu. Jobs took the interface to a whole new level by emphasizing “direct manipulation”, so that if you tugged on window it would immediately expand, if you grabbed it it would immediately move to a new position.

In short, the saga of Apple is not the popular folklore of “the golden boy” Steve Jobs appropriating and monetizing the hard work of hundreds of Xerox academics. Rather, Apple is the story of Mr. Jobs’ immense creativity and skill in turning technological ideas into a marketable, useful consumer product. Luck had very little to do with Apple’s early success.

As traders we face luck on a near daily basis. A trade goes to within one pip of our profit target and then suddenly plummets to stop us out when some G-10 monetary official coughs the wrong way. Speculative markets are driven by sentiment and such bi-polar swings in price which we quaintly call volatility, are part and parcel of the game. However, we should never let a string of bad luck trades affect our overall strategy. I can’t tell you how many times I have seen traders abandon perfectly sound trading ideas at the first sign of a drawdown in their accounts.

Although this is merely an observation rather than an empirical fact I believe that 90% of novice traders quit following a trading strategy the moment it generates three losing trades in row. Little wonder then that most traders lose in speculative markets. They attribute their losses to bad luck and dismiss the whole enterprise as a futile exercise in randomness when in fact the fault lies with them.

This is not to say that as traders we should blindly follow our strategy into abyss. In fact, I believe success in trading requires evolution and constant adjustment to the changing market conditions. At BK we have tweaked our trading model many times since we started the service, but we have never abandoned the primary principal of trading trend and flow. Over the past three years and more than 300 trades that strategy has proven profitable despite all the “bad bounces” of the market. In short the harder we work, the luckier we get in our trading.

Boris Schlossberg

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