Hear me out here
It’s almost impossible to visit a trading forum without a thread dedicated to it – thousands upon thousands of pages littered with varying views on the elusive ‘Holy Grail’ of trading which, alas, I fear I’ve probably read about half of with interest at some point, just like an idiot.
But anyway, it’s only natural. When you came to trading initially, it’s likely you first heard a story about someone making a killing trading some particular security, leaving you salivating with admiration (or envy) and wanting a piece of the action. Then, after a quick Google search along the lines of “how to make money spread betting” to get acquainted, you’re soon onto a search for “how to make 50 pips a day”, before inevitably flocking with the rest of the sheep to the Holy Grail pages as a last resort to find comfort in the masses, all the while watching your trading pot bleed in the process.
Or perhaps that was just me?
Probably not.
The danger with forums is that, in my view, more often than not they are packed with traders who aren’t (perhaps yet) consistently profitable and so, by looking for comfort in the masses, you’re finding comfort with the majority who lose money in this game. I don’t mean to bash the forums – I spend a bit of time on them and they can offer a wealth of observation and insight that can help you on your way to find your trading method but, ultimately, these Holy Grail pages generally offer two outcomes:
1. An abundance of poorly tested trading systems, which generally fail in the end.
2. A self-proclaimed authority coming along to say that the Holy Grail is that there is no Holy Grail.
In my eyes, the Holy Grail of trading holds the vital ingredients that enable you to become a consistently profitable trader over the long term, regardless of style of trading or quantity of revenue.
This is where backtesting and patience come into play.
For the time being, I can personally really see only three ways how you can become a consistently profitable trader:
i. The Superhero Way
You are a coding superhero who can write algorithms able to slay arbitrage or any other market weakness, probably with one hand whilst threading a needle with the other.
ii. The Fortune Teller Way
You have a crystal ball or time machine or you are just a one-off who is able to tell where a market will be at a specified time in the future.
iii. The Average Joe Way
You can spot a repeating pattern in a chart and are able to formulate a system to trade this pattern before fully backtesting this system for consistent profitability. You then apply an appropriate risk structure to the system before accurately executing the system in the market and then you sit patiently until it pays off.
Certainly, the superhero method is beyond my grey matter. I’m also no George Soros so that swiftly eliminates option ii. If however, like myself, you do fancy yourself as a bit of an Average Joe, then the third way could be for you.
Backtesting
I can’t stress enough how important good, full backtesting is. It is easy to spot a repeating pattern in a chart but fully backtesting it provides your confidence in trading. In my early days surfing the forums, I’d often look for a magic number to determine the correct number of trades to test back until I was able to validate a particular system. I think the average number that seemed accepted was around 200 trades.
Oh dear.
I’ll say that since I learned that you have to backtest far enough until you’re confident that your own trading method is profitable, it took me results from 10 years of manually testing IRP trading, which included results during a market crisis, before I became confident in my own trading style. It was a process that, needless to say, lost its excitement after a while as 10 years of backtesting in this instance equated to testing around 15,000 trades, but I’m happy I gritted it out nonetheless and I continued to test back even further.
Patience
The absolute worst thing that can happen when trading a system, and the number one thing that can rattle your confidence once you’ve backtested to your heart’s content, is that you get off to a bad start. A typical predicament might see your backtesting results making you a 200% return per year on average over the previous few years and this is supported by doubling your money demo trading over a couple months before taking the live plunge, but then it happens – a significant change in market volatility gets the better of you and a few months down the line live trading you find yourself 30% down on your starting capital. Ouch.
Then all the self-doubt and self-entitlement issues creep in:
Did I backtest correctly? Has the market changed forever? Am I good enough? Who am I kidding that I thought I could be in that tiny winners’ circle? Did I do something wrong in a former life?
And then the killer:
Maybe I should stop trading this way and start trading another way?
Don’t panic, it happens, you just have to be patient and ride it out. As long as you’re executing your trades accurately and there hasn’t been some major catastrophe or policy that has altered the future of the market, then the market will continue to behave as it always has done and you should come good sooner or later. Even if you start well and then proceed to lose a large portion of your profit, you’ll likely only have peace of mind once you’ve made enough to withdraw your original trading capital, before carrying on to trade with the remaining profit. Thereafter, you really have nothing to lose!
