I've suffered a huge reversal in my trading over the last two years, and it has (almost) completely broken me. I know I'm not the only guy in this business to find himself in this position, and since I've been an off-and-on lurker on these boards for years now, this seems like as good a place as any to begin looking for a way back. Here's the story: I spent seven years as a consistently profitable equity pairs trader, after paying some first-year dues learning the game. I'm not a trader who can boast no down months for seven years, but I had fewer than 10 in that time, and my up months were always much larger, and losing months were scattered events -- usually due to simply building an inventory of positions. As market volatility compressed, so did my rate of return and income. It reached the point where I was unable to support my standard of living (which had risen somewhat, though not crazily) on trading profits alone and I began to dip into savings to supplement. I was reluctant to bail on a profitable strategy that was just in a slump, or so I thought, so I soldiered on trading, waiting out the lows for the upswing I was sure would come. After a time my returns were near zero, and I was borrowing to survive. Depression began to set in, and my trading was affected accordingly. Then I took a fairly substantial loser, and was taken out of the game. My trading partner and I decided to call it quits, and our financial backers, though remarkably patient and encouraging throughout, concurred. We closed up shop, I liquidated assets -- including my home -- paid off creditors, and sought treatment for the depression. Fortunately I was a carpenter in my previous life, so I could go back to work earning a living almost immediately. That helped me get a sense of forward motion again, and the release of pressure was terrific as well. Now, eight months or so after the bomb, I feel ready to get back to work, yet at the same time wondering how to proceed. I feel good about my background and discipline as a trader. I'm not prone to wild trades, taking gambles, or behaving irresponsibly. I'm clear-headed again and can still make decisions under pressure. I want to be back. And yet the strategy that served both me and my partner for so long is still nothing like it when when we first developed it, and I'm mindful of the fact that, despite long, long nights and many hours of brainpower, when I understood that my system was falling down I was unable to adapt it to the current market. Couldn't adapt? That's a negative on me -- a big one. So where do I go from here, guys? How did you do it? (assuming you have) I have a wife, kids, a job, and very little capital. I also have a good reputation among the people I've traded and done business with, and an absolute need to have not been beaten. Any ideas?
I do trading on the side. I started back in 99 and slowly grew over the years. I use margin at times and spread the risk through different sectors. If you fell on hard times from 2000 - 2002, you are not a lone. It was a big correction. Last year I had a pretty nice profit.. This year I am up, but it still has been rocky. With Oil, Iran, Iraq, N. Korea, etc. There is a lot of turmoil in the market. Start off small.. If you are afraid of the market, utilize Yahoo Finance, IBD, and Morning Star for tips. I'd stay away from options.. I was never good at that. I am more of a stock player. Starting to short has been pretty good on some stocks also. When I am trying something new, I usually only buy a hundred shares to get my feet wet. That is the best advice I can lend to you. Do not rush into this market. It will eat you alive. NEVER, and I mean NEVER play with money you need to survive. I started with a few thousand dollars and slowly increased it over the months with margin and profits. Always use risk capital.. If you use money you need to survive, you've already lost. Like it or not, the market is a legal form of gambling. While I am not the casino type, I do hedge a good amount of money in the US and UK markets. Stay with solid companies, and not hot shot wonders... Even IBD can get it wrong sometimes (anyone remember IFO). Do your homework, check the ranks and opinions. Check the coverage and charts. Stay away from stocks under 5.00. Stay away from OTCBB as well. Slow and steady growth.. That is the ticket.
Well I haven't been in your situation but there is no one else responding so what the heck... My advice would be to take it slow ... start developing a few new strategies. I noticed you didn't mention any other strategies you were trading besides equity pairs. This time around you should develop a few and trade the systems that are woking at the moment (Trending or Non-Trending). That could cut down on risk. I'm curious about statistical arbitrage, do you think it's not worth trading in the current market? Anyway, good luck to you!
My advice, you need to focus your attention on learning how to interpret price activity Yisterwald, nothing is above price & there no better indicator than price. Ask yourself, why do markets move up or down? The buyers aim is to drive the market higher & the sellers aim is the opposite. The buyers use support zones to move the market up & the sellers use resistance zones to push the market down. Trading mastery is achieved when one is able to interpret price. In my humble opinion, a trader that cannot interpret price will never fully understand why markets move, true insight on why markets move will remain elusive. Examine the charts I've posted. One chart contains the battle lines noted a day before(6/22/06) the market opened on the 23rd of June, 2006. Notice how the bulls & bears moved the market from those support & resistance zones.
You had a winning strategy that with time turned into a zero-return strategy. You have to look for a new edge, but dont come back to trading just because you have "an absolute need to have not been beaten".. What do u think this absolute need will do to you when you dont have an edge? It'll destroy you. Thats sounds like an emotional statement. Think logically. Come back to trading only when you've found a new edge that u absolutely believe in ... otherwise look for something else, the world is yours, u dont HAVE TO come back to trading, really u dont. Don't be another lemming..
Whatever you were doing (an inventory of positions doesn't sound like wisdom) was not robust. You ate your seed corn .. that is the profits you did make. You are not cut out for the trading game. You long for and just like spending the profits (if any). Completely forget about going back into trading.
The situation you experienced, I have also, with some notable exceptions and I recently started posting here to get a sense of balance and to glean some wisdom myself. Some years ago, after 2 years of borrowing to survive during trading, the inevitable happened, so liquidation of assets resulted. That's very tough when you have a family to support. But did I learn my lesson? No. So I took a few months break, started my own one man business outside of trading, and then got back into trading again with smaller amounts. Only to get wiped out yet again after I took a huge gamble. This time I had the sense to set a limit of how far I could get wiped out as I never wanted to be in the situation to liquidate assets again. I think you have a better chance than most of making it again, but your big handicap is lack of adequate capitalization. So you would have to either wait longer, or go for small and consistent gains. Under no circumstances let your job go. That's going to be your safety net. The problem is that if you get back into this game your job will suffer so you need to work out a balance. Also, ask yourself. What is it you want to achieve? Is it 2mil in the bank for instance. Would the money and time invested in making that in trading be better spent on investing in your profession to make it more profitable. I think you have to ask yourself some fundamental questions first. What is the outcome you want? Sounds to me you want your good reputaion back. That's an ego thing. As far as your strategy, it sound like you knew the conditions under which it would not work but you were in denial. So put denial on your list of things to cover as part of your loss management plan. You also stated that volatility dried up and this is a reason that your strategy failed. I don't know what markets you traded, but have you thought about expanding to other markets? Sorry it's a bit long my reply.
Remember the time when you develop your system, back then you had nothing, no gain and no loss. You worked your ass off (I assume) and you came up with a winning system, and was profitable for a few years. OK, the market changed, you got bum out. So why not go back and develop your system again?
First off, many thanks to posters who have taken the time to reply so far. It is much appreciated. Now for some particulars: Actually, that was a great time for me. My rate of return started to contract in mid to late 2003. 2004 was a lean, though profitable, year, and 2005 was the killer -- especially the 3rd and 4th quarters. And no, I don't remember IFO. What happened there? New strategies would be welcome, and at this point so would the work of developing them. I've been completely away from trading for all of 2006, trying to clear my head. For what it's worth, my partner and I did put a lot of work into new system development, but never arrived at something we believed strongly in the edge for. Our charting platform was CQG, and we used its backtester to look at trend-following trades in the currencies, swing trades in equities, and modifications of our pairs trades. Some ideas made it to live trading tests, but none of them bore real fruit, and all were shut down. I do think there are guys out there making money in stat arb right now -- my old trading partner has been in contact with a couple, and is trying to learn from them -- but they're clearly doing things differently than we were. The low-hanging fruit has been picked in it, that's for sure. The best trader I've ever known personally would certainly agree with you. While I was a clerk on the CBOT floor, I met big S&P trader who hired me to work with him over at the CME. I clerked for him for just under two years in an office off the floor, during which time he brought in a remarkably steady 50k a day. His trade was all about price activity, and though I understand what he was doing I've had no real success trying to emulate his style. I do know that his ideas became less profitable also, and he had retired by 2000. That having been said, I see his trades in every chart I look at -- including the ones you posted. Perhaps, for a number of reasons, some of which I'll touch on below, you are right about a new direction. Heh -- I agree that it sounds like an emotional statement, but losing as much as I have is a pretty emotional experience! I don't recommend it. But thanks for the reminder to keep emotions in check. I've read some of your posts over the years, Cheese, so I wasn't surprised to see you name attached to this one. I'm not even sure I wouldn't have been giving the same advice four or five years ago. I did eat my seed corn, no question. But I don't long for profits excessively, nor did I spend them recklessly. What I did do is continue to live as though trading was fine even when it was far from it. I stuck my head in the sand and ignored my negative cash flow in the name of perseverance. I'll tell you what I do long for, though: the sense of competence and confidence I had when I was on top of my game. It wasn't the money so much (Although that was nice, and I don't think there's a trader alive who doesn't think so. This isn't the Peace Corps), but it was also the satisfaction of doing something difficult well. Construction, though it put food on my table for many years, never gave me that feeling in the old days, and still doesn't now. thanks for the vote of confidence. Nope, I agree that keeping the job will be essential. A fine local on the CBOT floor years ago, Steve Lawrence, kept his job in a grocery store chain's produce section for a long time after he had turned profitable. Smart. Good questions to ponder as I plan, but my reputation isn't something I'm worried about, except insofar as I don't want to be defined by these events for the next 40 or 50 years. I don't think any of us would. And thanks for the long reply. I appreciate your time. I'm not sure I'll ever really believe in the edge from that system again. This touches on one of Cheese's comments, that building an inventory of positions didn't seem wise. Actually, that's common practice among pairs traders -- establish positions at statistically anomalous price points, add to those positions in a measured way, and let mean reversion provide you with your profits. Unfortunately, it's like picking up dimes in front of a steamroller. Your profit profile is like a guy who sells teeny options (another type of trader who can, and often accepts as a normal part of the strategy, accumulating inventory) -- many, many small winners on the way to a huge loser. I don't think I could trade that way ever again, not with any real confidence. Any new system would have to fundamentally shift the risk/reward. Thanks again, guys, and I hope we get some more discussion on this. Looks like, as I suspected, I'm not alone. There has to be a comeback success story on this board. Let's hear it.