Setting Expectations With Trading Systems

Have you ever started using a trading system only to lose money and quit following it?

Here are two common challenges that systems traders have.

1. Not being confident enough in a strategy to get started with it

2. Not being patient enough with a strategy to let it do what it was designed to do

John Wooden said “Be quick but don’t hurry”

Let’s quickly clarify and solve these challenges together. Ready?

Problem #1 – The Confidence Problem

The confidence problem is diagnosed by having data and statistics that shows an edge but not doing anything with it.

Do you know of a strategy that has an edge? Is it trend following, mean reversion, market neutral spreads, indexing, target volatility, or something else?

Most strategies should be understood and ready to execute within days or weeks of being introduced to them. If you have known about a strategy for several months and keep analyzing, comparing, researching, etc., then you are taking too long.

As a general rule, you should be able to take a trade at the smallest possible size within 4 weeks of learning about it.

It continues to amaze me that traders will make a decision to buy a new mattress, TV, car, or even book a big vacation quicker than they will commit a few hundred or few thousand dollars into a trading strategy.

Solution To The Confidence Problem

Select a strategy and commit to making a “Go, or No Go” decision within four weeks.

Put aside everything else and get the information you need to make that decision. At the end of the four weeks, select the amount of capital that you can fully commit to the realization of the results of that strategy. This is explained in Problem/Solution #2

Problem #2 – The Patience Problem

Symptoms of having the patience problem are frequently changing the size of trades, frequently delaying entries and exits, skipping trades, and frequently quitting a strategy within a few weeks or a couple months of starting.

Here is a question that often asked which indicates a trader is not prepared for systems trading: “What returns do you expect each month?”

That question can only come from someone who does not understand what the world of profitable trading really looks like.

This video shows an example of this.

Check out the returns of this strategy. Looks pretty smooth right?

Multiple years or returns that appear to move in a continuous, upward direction. One could look at this strategy and decide to add it to their portfolio.

But what if it loses money the first month you trade it? What would you do? What if three months later you are still down? What would you do? What if 8 months later, you are still down? What then?

If you think you would quit at that time, then you should not start. Because it’s part of the history of the strategy to have up to 2 or more years without new gains. That is the path to success with a strategy like this one.

Solution To The Patience Problem

Know your strategy’s past performance in terms of returns, drawdowns AND drawdown duration to know if you are truly ready to begin.

Prepare yourself mentally and financially to commit to the length of time that respects the pattern or returns and drawdowns that occur with all trading systems.

If you enjoy this style of trader psychology and strategy, then join our community or apply to work 1-on-1 with me.