This blog is designed to help new traders and those who have yet to become profitable understand what it takes to become consistently profitable. It’s a good idea to read the Introduction to Preston’s Mentoring Blog and to watch the 01/29/20 video “Consistently Profitable Trading: It Does Exist” prior to reading this entry.
Becoming a consistently profitable trader is NOT easy, but it IS worth it. And it DOES exist.
In my last blog post I talked about the search for the Golden Goose, or Holy Grail as it’s more commonly called. This is the search many of us go through, and it’s the search for what doesn’t exist.
It’s the hardest part of the learning curve in my opinion because it can last for a long time and at times be utterly demoralizing. It can be a make-or-break time for a trader.
To break out of this difficult psychological morass you have to focus on strategies that show success and match your personality while at the same time eliminate those strategies that are costing you money.
It’s much easier said than done, and your journey doesn’t stop there.
In addition to actually identifying and honing in on these strategies, you have to realize that whatever strategies you choose to focus on – while they could very well be robust enough to work in many different market environments – will not work in every environment because MARKETS CHANGE.
Remember, there is no Golden Goose strategy.
It’s an arduous journey to arrive at this realization. Many of us lose money getting there. Some of us lose LOTS of money getting there. It takes time, hard work and serious resolve to stay in the game.
But once you get there you finally have a real reason to never go back: you’ve earned the right to be there. You’re at the next level and it’s a VERY big deal for your trading.
I was mired in this stage for longer than I like to admit, searching for something, anything, that would work for me.
I beat myself up verbally time and time again, told myself I’d never be able to do it. I would quit over and over again, hoping to just put myself out of my misery. But, again, I always found myself back at my desk, losing money and hopping from strategy to strategy.
And then finally, almost unexpectedly, a strategy clicked for me. I didn’t initially see it as being the first strategy that would take hold and be the one that would propel me to the next level. But it turned out to be exactly that.
A few years into my trading journey I was taught automated trading and it was my automated system in VXX that became that first successful strategy for me.
Once I started to get a taste of success and a deeper understanding of the vehicle I was trading, as well as why it was working, I began to see a difference in my trading.
And it was because I had begun to actually move forward instead of sideways.
For the first time what I was doing made sense to me. I had a very clear plan that I had developed myself and to which I adhered. And it was showing success. So I kept running it and studying it.
As I kept running and studying the strategy it began to become highly personalized; I started to understand it on an even deeper level. And even when I’d experience the inevitable drawdown I’d stay in it because my understanding of the strategy gave me enough faith that it would keep working in spite of the drawdown.
I also committed to the game plan that if something out of the ordinary happened to the system, like it took a larger loss than was expected from the trade results, I would force myself to analyze it objectively instead of react emotionally to it. And this helped immensely.
I stopped spending most of my time looking around for the next Golden Goose strategy and started spending more time and effort on my automated strategy.
And the fact that I was now focused on a successful system which I understood inside and out helped me believe that I could also be successful with the other systems that had stuck around, like swing trading and market-neutral options.
On top of this, I started objectively analyzing other factors that had an effect on my strategies, like the market environment. I began to see the real impact of this effect.
And it forced me to put more weight in its importance.
When my automated short VXX strategy would underperform in spite of a constantly rallying market, like in 2013, I was able to step back and understand why. I realized it was because the lack of pullbacks during that year hadn’t allowed for profiting from falling volatility after volatility spikes.
Sure, VXX has a “negative drift” due to the time decay in VIX futures contracts, which is the way VXX tracks the VIX (Barclays, the issuer of VXX, must rotate its inventory of futures in order to track the VIX and when the futures are in contango it means Barclays is buying futures at a more expensive price and selling them after they’ve decayed in value), and this is one of the reasons it can be profitable to short VXX. But it’s much more profitable to have both falling volatility and the negative drift occurring together over time. In 2013 there just wasn’t an adequate amount of falling volatility to pair with that contango loss. So it underperformed relative to other years.
I know, it’s like crying over spilled milk because the system was profitable nonetheless. The important thing was really that I understood WHY it underperformed. I realized how much market environments affect strategies so it helped me plan for future environments that might show similar characteristics.
During the February 2018 event known as the “volpocalypse” the market sold off quickly and ferociously and volatility spiked bigtime. While other volatility instruments were under severe pressure and some were even taken off the market, like XIV, VXX survived and my particular trading plan helped me avoid disaster.
Was I worried at the time? Yes. But I forced myself to maintain perspective and stick to my plan. I knew the system was robust so I had the requisite faith that the exit plan would work, and it did. I was out before the real craziness ensued.
My deeper understanding of the strategy and vehicle allowed for a clear plan that took into account changing environments. I had learned that strategies don’t win or lose in a vacuum. They are affected by the overall environment. And this led to a much higher level of faith in my strategy.
Understanding the concepts and fundamentals of your strategies on a deeper level, as well as the vehicles they use, helps you maintain the required faith needed to navigate successfully through unfavorable conditions. It gives you the confidence to stick with your strategies, even if you might decide to allocate less risk to them for a while or stop trading some of them temporarily.
The point is that now that you have a strategy that shows success and matches your personality it’s important that you don’t go back to that strategy-hopping stage. Focus on it and use it to give you the confidence to not only strengthen that particular strategy but also to develop other strategies that have stuck around and show promise, and to eliminate the ones that are difficult for you and costing you money.
Use it to give yourself a deeper understanding of what YOU should be doing to make money in the markets and to give you confidence to stay in the game and to get better at it.
That first successful strategy can be more than just a trade. It can be how you overcome your own learning curve as well as the beginning of a profitable trading career.