Mon 31 Jul 2006
I’ve devised a new test for traders to weed out the losers before even seeing an account statement.? It’s kind of a taste test, so to speak.? Show them two equity curves for a couple of trading systems and have them pick the one they want to trade.? One has a steep upward slope and the other a milder, upward slope.? Otherwise they look the same with about equal volatility etc.? It’s a simple choice between more profit and less.? The secret is that the system with more profit is actually the result of a random buy-sell rule that was selected for its pretty chart.? The other, less fruitful?curve?is the result of a planned system that attempts to index to a benchmark and was successful in doing so.? In other words, one curve was most certainly luck and the other was most likely not.
The true?winners will be the ones who refuse to pick and instead say: “Whichever one can prove to me that its results deserve to be trusted into the future.”? I think that could be?the key to winning this game of investing: finding an approach or method that has the capability of leaving you with a sense of understanding why you got the results you did.? You need to be able to trust that your results were more than luck.? Luck will always be a factor to some degree but if you can’t look back at yesterday’s result with any confidence in your own influence over the outcome, why would you dive in again?? Therefore, I think it is imperative?that all players in the markets find a way to verify their ability to meet goals with purpose.? I’ll take the trader who can project a line out into the future and follow it exactly over one?who shows me windfall profits but no reason why.
Is it even possible?? Maybe not perfectly but through the good pillars of trading like risk management, careful testing and realistic expectation, I do think you can benchmark yourself.? Just ask yourself sometime what would have happened if I had just traded randomly they last year.? If the curve looks very similar to your real one, then perhaps you just got lucky.? Think of all the gurus that were born out of the raging ’90s bull.? They were making money right?? If your trading stays within all the parameters you set, if your returns match your expectations consistently rather than just being “up” or “down” any amount, then I think you’ve made it to the level of pro.? Professional athletes know what they are capable of before playing a game or running a race.? A pro would not be satisfied with just winning but must feel he has played the game artfully and know that he can step out into the light again tomorrow and perform as expected.? Otherwise, the pro merely “was” not “is”.