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In Trading Strategies Don’t Work – But This Does
Over the years I’ve amused many if you with my never-ending battle of the bulge. I’ve gone through the salad and sardines diets, the paleo diets, the intermittent fasting diets in my many attempts to lose the extra 15lbs.
Nothing ever worked. Or rather it worked for a little bit but never worked for long.
Happy to say that I am near my high school fighting weight, have held steady at that level for more than three months without any effort whatsoever and generally feel good.
What’s my secret?
I went on a European diet. What’s a European diet? That where I eat anything I want anytime I want but at 1/3rd the lardass American portion. Not 2/3rd’s not 1/2 but 1/3rd – because that is actually how Europeans eat.
I stumbled across this idea after my tenth visit to David Aranzabal’s annual forex conference in Madrid. As always, when there I fully enjoyed myself, eating and drinking everything that was put in front of me.
When I came back to New York I was certain that put on at least 10lbs, but was shocked to find out that I gained nothing. This made me rethink my whole approach and the rest is history.
I’ve written about the similarities between trading and dieting before. Both enjoy a 95% rate of failure. Both have millions of gurus trying to sell you their “secret” solution and both are multi-billion dollar industries based on hope rather than results.
This time I realized that there is even a deeper connection between the two. Just as there is no “diet” that will help you lose weight in the long run, there is no trading strategy that will make you money for life. This actually explains why books on some of the world’s greatest traders sound like interviews with idiot-savants. That’s because there is no “secret” strategy there.
First of all, when you read accounts of the greatest traders you always walk away amazed at the variety of their approaches. Some trade trends. Some are pure mean reversion traders and some are momentum riders often on the opposite side of the trade from the other guys. Furthermore, often they will contradict themselves in an interview and will talk about how they’ve switched their approaches mid-stream to adjust to market conditions.
What becomes clear is that all great traders are consistent at only one thing – execution. Just as with “dieting” the only thing that really matters is portion control and natural non-processed ingredients, so too with trading there 2-3 things that will determine long term success.
- Take a stop. – This always the hardest thing to do ALWAYS. You can stop out once, twice even three times, but eventually, you get stubborn or angry or both and fight the move. That’s why the most important execution skill for winning, in the long run, is to lose in the short one.
- Position size – this is actually exactly the same as portion control in dieting. The bigger your size the greater your chance of dying (metaphorically speaking). Position size in levered markets can also be highly deceptive. 5 simultaneous positions at 3:1 lever factor are equivalent to 15:1 gearing for your account.
- Letting the trade come to you – It doesn’t matter if you trade momo or mean reversion, every great trader trades only when the setup manifests itself. Chasing price for the sake of action is perhaps the greatest difference between amateurs and professionals and the less you chase, the better you will become.
That’s it. Just as my “European” diet is very simple so too is most trading success. Strategies change, but tactics are forever.