Hey everybody. Michael Martin, thanks for being here. I wanted to clarify and kind of add new information to an episode I’d done a while back, couple days ago and that is about system hopping and that when you get frustrated and you’re not getting the results, you want to try something differently because you’re desperate to win or you’re feeling strong feelings about putting points on the board. And that’s a tough spot to be, and I didn’t really gloss over it, but I did say that when you’re starting out, you don’t really know what your edge is, so you’re trying to figure it out. The thing is, is that you can jump the gun too quickly and abandon an otherwise good system because when you began trading it, it might have gone in to draw down right away. So this is another benefit of back testing, is that you can montecarlo the simulations and change the start date.
Think about it, and I’ve mentioned this before, suppose you sold a house, came in to say 500 K and escrow settled October 1st, 87. You put the money into the market crashes. Later that month, you’re down 28%, 30% on your money just because of bad luck. Now, that same house got delayed and it said everything cleared. November 1st, 87 market crash happened. You invested the money. Then if you kept it going to today, obviously the results would be very different because in the first instance, you start with a 30, 30% haircut, and in the second instance you didn’t. Now that doesn’t say anything about the rules of the system, it just is a function of bad timing. So when you’re trying to think about who do you want to choose as your role model, how do you want to trade?
You can overthink things and internalize the losses as your fault or your analysis when the reality is is that markets ebb and flow and sometimes your trading style is just not going to work with what the market is showing and vice versa. And so although you’re compatible with your system, it’s not necessarily compatible for that brief moment in time for the market. And so that’s where drawdown comes from because you have false breakouts, you know, have all these different things where you can put risk on, doesn’t work out. You take consistent small losses death by a paper cut, so to speak, and then you wait for the market to turn. That’s the mark of a waiting for that market to turn being in a drawdown that in some cases it could be six, seven months. Now those of you who are doing short term trading are like, that’s never going to happen to me. Well, I hope it doesn’t. But it doesn’t. Just because you’re trading short term doesn’t mean that that can be the case. So excuse me. So just be mindful of that. When you’re looking at the system, you’re looking at your p and l for validation that you’re onto something.
But what I’m saying is that if you’ve back tested the system and it has positive expected value, what you might see in real time from the marketplace isn’t necessarily going to meet your emotional needs because you might just be bad luck or bad timing where you know, get into trades that have small losses and you start off in a drawdown. So what happens is if you start to system hop and jump to another system, you don’t give yourself the opportunity to let that other system kind of kick into gear. And I don’t know too many people who can on a discretionary basis run several different systems. It is possible if you’re running a simulator where you can have, for example, it’s not uncommon for many pure system traders to have a longer term, maybe even a trend following system that could be say long only even.
And then they have a shorter term reversal system counter trend on top of it. So the net effect is that it smooths your equity curve. It takes out some of the bigger whipsaws up and down, for example. So it’s not uncommon in that environment to run a blended system, but that system is grown together, back tested together, run concurrently, and that was deliberate. That’s intentional. What I’m talking about is when you’re a discretionary chart reader and you think you have a trading edge and you’re putting on trades, but you’re in a drawdown and the results that you thought you would see from your hypotheticals or from what the other folks who boasted about the trading rules were telling you, when those results don’t show up for you, it can put you in a tough spot to both overtrade, take flyers, abandon the system, and try something differently.
And that typically doesn’t end up working out because every system, no matter what you do, whether you’re following certain chart patterns or whether you’re trading certain mechanical rules, every system is going to be subject to some type of a drawdown, right? So the question is how do you deal with the drawdown? Maybe we talk about that on another episode because it’s going to happen. And what you don’t want to do is let the results or what happens in your outside world affect your internal world. You want to actually start and ideate what your goals are. And we spend a lot of time doing this on the consulting side because people think they have goals. But when I listen to them, they’re absolutely not goals, they’re tasks. And it’s one of the reasons why people don’t have the success that they want in the marketplaces because they’re not actually clear about, not necessarily what they’re doing, but why? What are you doing it? Because it very rarely comes down to making the money, but you typically don’t want to look at the results
Of your and L in the short run, and I have that come back and say, oh, I have to adjust the system, I have to change this. I have to go the other way, or I have to create some kind of overlay. Those acts of desperation typically might maybe give you a shot of confidence in the short run, but they don’t typically pan out over say two or three days because you’re acting at a desperation. And that’s typically not, obviously not coming from a place of confidence. So if you’re going to run a system, then make up in your mind that you’re going to give the thing three to six months to play out because you just don’t know when you’re starting out anyway, where you are in the market cycle of things for your particular set of rules. Hopefully it’s good timing and you start making money right away, but that’s not always the case and we’re powerless over what the market does.
Just so just try not to internalize what your p and l is because those results might still be in model, even though you’re in a short or a small drawdown, which doesn’t feel good, you want trading profits because then it validates what you’re doing. Maybe it validates who you are as a person and you need that for your self-esteem. I get it. Been there, but just be mindful that the short-term trading results just might be bad luck by timing. Finally, I’d like to say make sure that when you are attempting to do this, trade it super small because in the beginning, you know, have a certain size grub stake, which might be hard to recoup. So I can remember reading stories of certain prop firms when they were starting people out and giving them live accounts. Their daily limit on their capital was literally 10, $10.
So it’d be like buying a hundred shares or something and risking what, 10 cents or something like that. So you know, can deploy that same type of B ideology in the beginning just to get all the moving parts going so that you can get comfortable with it. And if you do come into a drawdown, it’s not going to really hurt you. The key is to get to the point where you can execute that system period after period and do that consistently because consistency is what’s going to reward you, the discipline of that behavior, not necessarily the outcome of any one particular trade, unless of course you don’t put in your stops and you take a big hit. But normally those big hits are coming from trading too big rather than an outlier event occurring. Anyway, that’s all I have for you today. Please like and subscribe to the channel. Appreciate it and you can leave a comment if you want. I see everything and try to reply If you have any questions, if you’d also like to suggest a topic for the show, I’m happy to do that. And thanks very much for being here folks. I’ll see you.
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