I have seen several hundred hedge funds, many traders using disretionary judgement, many using mechnical models. Almost each and everyone experienced at least once an unusal and challenging event against him/herself - including myself. How did you cope with such an event? How did you overcome it and what did you learn? What would you do if it happened again? peace
Being in the middle of such a challenge, I cannot tell you exactly how it will turn out. But, I can share some interim observations. One lesson, for me, is that systems can go weird in ways that do not involve a drawdown. In my case, my system stopped generating the profits that it was supposed to create and stopped tracking the indices that it usually followed. (It was as if the system became disconnected from the markets that it traded.) Being attuned to how a system is supposed to act helps catch anomalous behavior before a serious or prolonged drawdown occurs. As far as coping, I feel like its a back-to-the-drawing board situation. I'm trying to understand exactly what happened to the old system while working on new alternative systems. I suspect (and hope) that I will end up where traders like rtharp and WDGann are: having a set of different trading systems/tactics that they deploy dynamically for different trading conditions. The real challenge will come in learning how to recognize the market's mode of behavior so I can choose the right system to trade. In future I will be more attuned to the behavior of my systems (not just tracking profitability). Thus I will be more likely to cut-off a system that is behaving incorrectly on the basis that I am exposing myself to excessive risk by trading a malfunctioning system. At some level, learning to cope with a system that has gone bad is like learning to cope with a trade that has gone bad. Bad systems and bad trades should be cut short. With system one can also scale back on trading too. The emotion challenge with systems, however, is that the psychological energy invested in a system is very high so the failure of the system is felt very deeply. Best wishes on overcoming your challenge, Traden4Alpha
I've been through that. At times you feel like you are losing your mind. Then there's the whole world is out to get me phase. Then you go through the market is just random and it's all luck phase. It's just you are backed up against the ropes right now. It's hard to fight your way out. Wait for the bell to ring and save you, go back to your corner and have the cut man fix you up a little, and you'll be ready for the next round. It aint any better in the real world. All the problems are just the same. Better to work it out in trading where you can at least make money. When loss causes pain, we sometimes try to stop the pain, and if you close the door where pain gets in, none of the good stuff can get in either. And the good stuff is what makes you money.
I said "never again" And now I am only focused on risk not on gain. Trying not to lose is better than trying to win, and by moving to this approach you should better climb the hill of success.
very interesting idea...it's all about risk, isn't it? too much risk is like trying to beat a casino at roulette... i agree with you 100%
When one finds oneself in that position one has knowingly or unknowingly stepped over the boundry of acceptable risk. However it may be defined within the terms of the untoward event that is what happened. The style or system has to be re engineered to avoid it in the future. It sure can twist your head though. " The most important rule of trading is to play great defense not great offense"- Paul Tudor Jones
In my experience, you just need to stop or downsize. When you get back, you will have a little sense on what was going wrong and just need a little porfit to get back to your (adjusted) system.
I completely agree with focusing on risk. In Art of War, it suggest you fight a war that you can't lose. If you try to win you are causing your strategy to be frigid and in war you want to be flexible. In any board games, Othello which is my specialty, you try to put stones where you are safe and place stones so that they can't take advantage. You wait till the opponent makes a mistake then you take advantage of the other's mistake and lead him into his defeat. Even if the person doesn't make a mistake for a long time, it is still in a favorable spot because you are not losing. Still, there are skills involved identifying the smallest mistake they make. In fights, you have to fight to protect yourself. You have to protect your life. When you are in a fight, you have to make sure to have a way to run away just in case the other person is stronger. If you fight in a house, you have to keep an exit ready, like an open window or a door behind you. In a fight outside, you make sure you have you're not surrounded 360 degree. In Aikido, you position yourself into the other's blind spot while controlling the other through controlling joints, it's the same in grappling like Gracie Ju-jitsu. You control others through positioning yourself to a less risky position while controlling and limiting the other movements. It will cause you to be limited but soon the other person will attempt to change his position which causes him to open an weak spot during the transition. This is where you take advantage of. As with boardgames, you also need skills to identify and take advantage of the oppurtunity.
From my own experience, I tend to make the best trades after I've decided to hunker down, bet small, and take it a little at a time. It's once the successes start getting to your head, and you start thinking you can trade much bigger, or without stops in place, etc -- that's where trouble lurks. Large profits can be just as debilitating to trading as losses.