(I wrote this about goalies but it might as well be about Tiger)

In the world of sports, there is no more paranoid position than being a hockey goalie. You are, for intents and purposes, a human shield used for target practice. Your job is to stop the angry sting of rubber puck flying at you at more than 100 mph as you try to make sense of the constant swirl of motion in front of your goal. You play on a team but are essentially alone. You cannot win games but only lose them.

Little wonder then that hockey goalies tend to be a bit “peculiar”. In my own misspent youth minding the net, I wouldn’t hesitate to throw my mask, glove, stick – anything that I could get my hands on – at my poor defensemen, when I was even slightly displeased with their positioning. I would heap a torrent of verbal abuse on them that I would never unleash on my worst enemy. And yet these big, beefy guys, who under different circumstances could snap my neck in two without breaking a sweat, meekly absorbed all of my rants. Such is the power of a hockey goalie.

A few years ago NY Times ran an article talking about what sociologists call “non-normative” traits of being a hockey goalie. There was Bernie Parent, the famed keeper of the Broad Street Bullies, who took a nap with his German Shepard every day. Another NHL goalie compulsively stripped off his uniform between each period to take a shower as an elaborate superstition ritual. My favorite, however, was Gilles Gratton, who as New York Times writes, “bounced around in the minors in the ’70s before ending his career with the St. Louis Blues and the New York Rangers. Gratton liked to skate in the nude sometimes, wearing just his goalie mask and refused to play if the stars did not line up properly. He believed that in a previous life he was an executioner who stoned people to death and that he was fated to become a goalie — someone on the receiving end of a stoning, so to speak — as punishment.”

Although, goalies rarely if ever score a goal, any hockey player worth his weight will tell you that you can’t win the game without a good one which is what makes the story of Martin Brodeur so interesting. Brodeur was the inimitable netminder of the New Jersey Devils who spent more than 20 years in the league. He is no doubt one of the more talented goalies in NHL history, but what makes Brodeur unique is his ability to recover from losses.

In a profile of him by the New York Times, the paper wrote,

“Hockey people say that Brodeur’s particular strength is his ability to bounce back from a bad goal or a bad game and not let it gnaw at him. Hockey was locked out for the first half of this season, and during the Devils’ truncated training camp last month, you could see that he hates to be scored on even in practice, rapping his stick or ducking his head in disgust after letting one in. But the cloud passes in an instant, and then he’s bouncing on his skates and looking for more pucks to swat away. Lou Lamoriello, the Devils’ general manager, says, ‘Marty’s mental toughness, his ability to overcome a bad game, is just phenomenal.’ “

The older I get, the more I realize that there is simply no greater skill in life than the ability to recover from adversity. This is doubly so when it comes to financial markets, which like a hockey puck traveling at 150 miles per hour will do their best to knock you off balance every single day.

When we are young we think we are invincible and therefore never give much thought to recovery, assuming that our body and our mind will just snap back. But as we get older and hopefully a bit wiser we begin to pay more respect to the process of recovery. When I was young I had the bad luck of catching six cases of pneumonia before I was twenty years old. The net result was that my lungs were shot and whenever I caught a cold it usually turned into a month-long bronchial infection that made New York winters a constant misery.

But I as I got older I began to take my condition more seriously. Instead of trying to “gut it out”, I would drop everything at the first sign of sniffles, get in bed, drink 6 liters of water and try to sleep for 12-14 hours at a time. Doing this, I’ve managed to cut my recovery time from an average of three weeks to just a few days and have had far fewer colds in my 50’s than I did in my 30’s.

When it comes to trading, the ability to recover is far, far, far more important than the ability to win. No matter how hard you try, no matter how good you are, no matter how robust your strategy – you will lose. And it’s at that point that true success will be determined.

Just like with my colds, I’ve learned over time that recovery from your trading losses depends far less on you being “right” and far more on you being “small”. Smaller trades lead to smaller absolute losses which give you time to assess the markets with a much cooler head. You don’t rush into the same trade, you don’t try to win it all back at once and you don’t carry the burden of your losses for days on end. Like Martin Brodeur, you realize that the darkness passes and tomorrow brings another day of opportunity to go toe to toe with the market.

Like time lapse photography of the building of the Eiffel Tower, the one minute chart is a thing of wonder. It allows you compress year’s worth of trading into a mere 24 hours and exposes the real dynamics behind how returns in markets are truly made.

Last week, I was teaching a course on one of my new strategies. The strategy was designed to catch big turning points on the four hour, daily and even weekly charts, but on a lark to I put my trading robot on a one minute chart just to see what would happen. The results were so interesting that I quickly did this with my other strategies in a variety of permutations and here are some of the ideas that I unearthed.

Everything is lumpy.
The great lie of finance is to convince investors that it can take the wildly chaotic and uneven lumpiness of real life and turn it into a steady and predictable stream of returns. Nothing can be further from the truth. Perfect 45 degree equity curves only exist in the fantasy of backtests. The reality is that equity almost rises and falls with stomach-churning bumpiness of a rollercoaster even on the most risk-controlled strategies. That’s because all strategies are basically thrown against the market regime. Sometimes they are in sync and sometimes they are out of sync and no amount of risk control will prevent a drawdown when styles clash. Just take a look at the two charts below and you quickly get an idea that like all things in life, trading is a streaky business.

2. Pain is easiest in small bites

When you are trading a daily or weekly chart, every trade can seem like a scene from Hamlet. You double and even triple guess yourself and torture yourself with every slow dripping tick of the chart., When you are doing 150 trades per day the stops are mostly a blur, as long as you control risk. My trade size on all these strategies was .5 lever or 10,000 units per every $20,000 equity. That’s right I was even trading at 1:1 leverage. This made it a lot easier to absorb losses even when they came three, four, five in a row. My worst drawdown was only 75 basis points from equity and just 2.5% from peak to trough. This allowed me to have the psychological strength to trade through the losses and made me realize that the only way to survive in the markets is either through time or size. If you are an investor you simply wait out the adverse price movements sometimes for decades at a time. If you are a trader you take tiny losses until the price action turns your way.

3. Robots are the future.

None of this would have been possible if I didn’t have a robot placing my trades. The robot took every signal, managed multiple entries and exits, dynamically adjusted all the stops and take profits and cleared inventory every time. Over the course of 24 hours it made more than 250 trades without an error – a feat that even the best human trader would be hard pressed to accomplish and most of us would fail miserably.

Next week I should have more than a thousand samples each and will return with my thoughts on what this experiment teaches us about the delicate balance between risk and reward.

Ray Dalio built Bridgewater Associates into the world’s largest hedge fund, on one simple idea – safe assets can give big returns if lever them correctly.

Yes, yes, yes. I know that Risk Parity strategy has been a huge beneficiary of secular yield declines, global yield compressions and that greatest gift of all – Quantitative Easing.

But details aside, the fundamental insight that made Dalio billions upon billions of dollars was that you did not have to risk your hard earned money on risky stocks. You could just buy nearly risk-free treasury assets and then lever them up so that a one year t-bill yielding a virtually guaranteed rate of 1% levered 5X would suddenly transform itself into a 5% annual return without any of the heart palpitations of holding stock.

I am of course simplifying greatly, but Dalio’s success holds lessons for us all. We all have a variety of strategies we trade in FX. Some are lottery type payout ideas that bleed money until one big hit pays out for a year’s worth of work. Others are just the opposite. Insurance like products that provide small but steady profits each day but can wipe out half the equity on one badly stopped trade. And then there are strategies that just tread water.

I have one such day strategy myself. It makes about twenty trades per week and on a good week ekes out about 40-50 pips of profit. It has modest stops and even more restrained profit targets and just the tiniest of an edge to give me a small return. All in all, it takes about 100 trades to make 100 pips of profit from this strategy.

That probably horrifies most of you. I still remember the howls of outrage from some of my members when I told them that most good day trading strategies essentially have a positive expectancy of about 1 pip per trade. This is basically equivalent of walking up Broadway from downtown to uptown and bending up at each street intersection to pick up a penny. After about 10 blocks you will quickly grow tired of the task. But imagine if you had an automatic hoover machine that grabbed those pennies for you. Not only that, it sorted them out, put them in rolls, deposited them in your bank account without you doing any work.

That’s the power of a day trading robot. If I had to hunt and peck my way to 100 day-trades a month, I would have stopped a long time ago. But with my EA working 24 hours a day, I never have to worry about missing an entry, managing my exit or watching the market. This very modest strategy runs by itself and slowly adds pips to my account.

This is where Ray Dalio’s strategy comes in. While my day trading is hardly a Treasury bill, it is the lowest volatility strategy in my portfolio. It rarely declines by more than 50 to 100 pips from peak to trough. That means I can margin it at 5X lever and have decent shot at making 500 pips per month or about 5% on my money. That’s huge! If I even come close to that target that means I can aim for 60% returns with maybe 20% max drawdowns. Such payouts just don’t exist in standard market instruments where the absolute best you can hope for is to lose about half what you seek to gain (so if you want to double your account, be willing to lose half of it – and very likely more than that).

That’s the power of automated trading in today’s retail markets. It allows you to mimic the risk profile of the world greatest hedge fund, without having a billion dollars in the bank.