Key Ingredients Needed for Trading

The Key Ingredient

The key ingredient you’ve got to have to start with is you’ve got to find a strategy that suits you. It doesn’t matter how profitable a strategy is, if you can’t trade it, it’s no good to you. A lot of people look at the return side of things rather than the risk side of things to start with. For example, let’s say I produced a strategy that has an annualized return of 25% as an argument. Most people would jump all over that, but if the strategy has a draw down of 30%, I can guarantee that 95% of the population that take on that strategy will not see it through.

The simple reason is, because the drawdown is too big for the vast majority of people. When you’re looking at the strategy, you’ve got to be able to trade it, which means you’ve got to be able to go through periods of drawdown. You’ve got to go through periods of spinning your wheels, and a great thing I like to do is go and have a look at the track records of great traders; David Druz, Salem Abraham, these guys thave got track records for thirty years. Go back and study their monthly returns and see what they have to go through. Someone like DUNN Capital, they had a 60% drawdown. They still outperform the market. The psychological fortitude those guys must have had.

Strategies

I can have some of my strategies hit a 20% drawdown and I’m just sitting here thinking, “Oh, I’ve got to turn this around, I’ve got to do something!”, and that’s just with my own money, let alone having four or five million dollars under management of other people’s money. The pressure those guys must have been under.

Now, I’m not saying that everybody does that but even if you go and have a look at someone like David Drews who has a third year track record of 70% annual, after he’s taken his performance fee, is quite phenomenal. He has losing months, he has strings of losing months, and he has losing years. Sometimes his year can be down 29%. Interestingly enough with that is, a lot of people say that’s just not good enough, which is quite interesting.

Everyone idolizes Warren Buffett. Warren Buffett’s worst calendar year is down 35%. The last fifteen or sixteen years, he’s had two draw downs of 50%. Now, for some unknown reason a lot of people think that’s okay because it’s Warren Buffett, but when it happens to their own strategy or another investment manager that doesn’t do what Warren Buffett does it becomes a major issue.

Find a Strategy that Suits you!

So you’ve got to find a strategy that suits you. It doesn’t have to suit me. It’s got to suit you. I think too many people jump on to strategies that they don’t understand or they don’t feel comfortable with and regardless of how good it is they can’t follow up with it. For me that’s they key, and once you find a strategy that’s suitable for you, then I think you’ve just got to research it, test it, and do everything to validate it and then go from there. I don’t think there’s any point doing that kind of stuff on a strategy that at the end of the day, you’re not going to trade anyway.