Happy New Year! We are back with a new edition of the Rookie Blog and I want to start of the new year talking about systems. We have talked about systems in this blog before but I feel like a deeper dive is warranted because of the large amount of misinformation that can be found on the almighty internet.
Let’s see if I can organize this diatribe in a way that conveys my concern but also gives some quality solutions to an issue that you may be aware of or perhaps it has not yet crossed your mind but that might rear its ugly head as time passes in your trading career. There are two separate thoughts that I want to tackle in this subject. The first is the concept of high probability trading systems and the way that they can sometimes be spun to look better than they really are. This can be a really big issue for some folks who are newer to the trading game as a lot of folks who wade into this pool are looking for a holy grail system that will bring them untold riches! When I think about this concept I harken back to the snake oil salesman in the old western movies.
I will surely explain what I mean later in this piece. The second part of this that I want to go through is the way we must treat high probability systems so that they actually, in fact, have a high probability of winning and yet still make money over time. So let’s dive into these two concepts and see if we can prevent some future problems or maybe even solve one that you may be experiencing right now and not fully aware that it is a problem.
So let’s examine part one, have you ever seen an ad for a high probability trading system, it probably goes a little something like this….97% win rate, you could triple your money if you had just gotten in on the past 30 trades!! I’m sure you have seen things like this on the internet if you haven’t already I’m sure you will see it soon enough. These things are designed to get folks excited about making easy money in the markets and it works just like the snake oil that was sold back in the olden days! These things take advantage of the human emotions of fear and greed. Everyone wants to make easy money, the problem is there is no such thing as easy money especially in the markets. Even if something looks like easy money, one can find out soon that indeed easy money comes and goes and usually goes quicker than it comes. Take a look at the chart below and this is a fine example of easy money that goes bad. If you had bought Enron in 1999 you would have thought it was very easy money, just buy the stock and watch it skyrocket and then comes the fraud and the easy money disappears. This is fear and greed at its finest and it becomes easy to see how someone can get hooked in by these types of advertisements.
There are two types of problems with these types of systems:
1️⃣ Can you duplicate the success that these folks claim to have?
2️⃣ Are they really telling you the whole story?
For example, what if I told you you could be right 99 times out of a 100 but on the 100th time you went broke, is that a good system? I would say that’s hard no! Are there systems out there that are similar to what I described, absolutely!
➡️ The other question that begs to be asked is: “Is this a bad system or just a bad system for you?”
What if you knew what to do on that 100th time to prevent financial Armageddon? Would that change that system from bad to good? Well, it could if you had all the skills and details required to prevent the aforementioned disaster but with some of the snake oil salesman, unfortunately, all the details may not be there at all or may not be shared and taught well enough to be of use.
I am hopeful that from the above description you can see two things:
1️⃣ One is that there are pitfalls that await those who don’t get informed before venturing out, hopefully, this isn’t anyone that has come to our community but even if this has happened to you, you are in the right place to ensure it doesn’t happen again.
2️⃣ The second thing I hope you can take from the above psuedo-rant is that any system can be good or bad and that it depends more on who you are as a trader and how well you know the system you are using as to whether it is good or bad. As far as I am concerned there are not good or bad systems there are just those who know and those who are about to pay some more tuition to the market.
The second thing I spoke about at the start of this blog is how we need to treat the systems we use to ensure that they are not only profitable systems overall but profitable for us. I have used many systems throughout my trading career that were very profitable for other traders and not so much for me. I attribute this to a couple of things:
1️⃣ One is not being able to duplicate the skills of the person trading the system. If you do not understand the skill that is required to make that system work and have practiced those skills sufficiently then it is unlikely that you will have the same success. An example of this would be a novice trader trying to trade like Carl Ichan, the skill sets and experience are so very different that success is highly unlikely.
2️⃣ The second thing that comes into play here is personality if the system you are trying to trade is very aggressive and you are by nature a very conservative trader or a timid person in general, again this system is unlikely to be successful for you. Does this mean you can’t trade all systems? That’s not what I’m saying, but what we need to do is look at systems that best fit us and then gain the skills and experience to branch out on other systems when your skills and trading experience catch up.
This is just the start of the discussion I want to have on systems. I think we need a deep dive into this concept so that when you discover your trading personality you can marry that with a system that will bring you success and it doesn’t matter if you are using a high probability system or a low win rate system as long as you are controlling the risk and keeping it in check and that is the topic that we will pick up with in the next blog!!!
BE AWESOME EVERYONE !!!