Random Thoughts

Do You Want It Badly?

Lately, I’ve been thinking and writing a lot about how you only need one thing to become (and stay) a successful trader: want it badly. Trading goes completely against human nature. You'll have to embrace and accept that. You'll also need to take steps to protect you from you. And, we’ll get to that in the coming weeks.

Ego To Equity

I wanted to start this discussion with living through good times and bad times, specifically not letting things go to your head when you’re printing money and not shooting yourself in the head when you’re not. While looking for slides on dealing with equity curves, I stumbled upon a presentation that included the following email from over 6 years ago:

“I back tested a few months (June thru Oct 2020) and was disappointed in the results. The months I looked at did not appear to be that difficult in terms of volatility or tradability.”

He’s right not to be impressed. The model account (a hypothetical 100k) lost over 9k/9% during that period. Where he’s wrong is that “The months I looked at did not appear to be that difficult in terms of volatility or tradability.” Yes, the market ended 7% higher. However, it was all over the place in the process. Further, if you measure from the June 7th peak through the end of October (nearly 4 months), the change was nil. As Greg Morris says, in order to follow a trend, you must first have a trend to follow. Picking up on what Greg’s putting down, once you recognize the trend, the trend must follow through and not promptly reverse. Again, the gentleman was right not to be impressed, but wrong in that these were not tough times for the trend follower.

What happened next was fairly amazing. The Service recovered the loss and then some, ending the following June in the black by +$42k /42%.

The market began to trend, and we got aboard. Like the hokey pokey, that's what trend trading is all about. You take perceived opportunities as they come, and when they don’t work out, you become more and more selective. Eventually, you end up mostly biding your time during these less-than-ideal conditions until the good times eventually come along. And, they will, eventually. Eventually is the keyword in that sentence. As long as you are following a conceptually correct methodology, keep following it. Resist the temptation to quit or, worse, change your system. Paraphrasing Morris, the worst time to change a system is during the heat of battle, when things aren’t going well.

Now, let's fast-forward to today. It's the polar opposite of six years ago. We just came off one of those "print money" phases. The Service only had one loss in 6 months (see the archives, warts and all, here). I know, I had to triple-check that myself. Unfortunately, you never feel too good in this business for too long. We're back in a drawdown.

Even trending markets back and fill...a lot! Markets only make new highs 4% of the time (Morris). So, even when it's good, it doesn't always feel that way.

“You’re usually in a drawdown state.”  Robert Frey

So what happened? Well, in March the market took a turn for the worse. We stopped out of our remaining long positions, which was prudent. And then, like good little trend following morons, we began shorting. No-sooner-than they began paying off, the market promptly reversed and went straight up, punishing us for good behavior. Gary Kalbaulm once said, "Give me an uptrend, give me a downtrend, or give me a ticket to Tahiti." Amen, my brother from another mother! So, the market gave us an uptrend. That's good, right? Well, as a pullback player, there were no pullbacks to play in the melt-up. The brief bull market turned into a kangaroo market, the nemesis of the trend trader. Then, right when it looked like the market would roll over again, it went straight back up. And now, the market is back in chop mode.

Where The Sun Hasn't Shined

One last thought. Having the market melt-up and not being on board was tough. Even tougher was that, during that period, my 87-year-old gym buddy told me he had just started day trading and was doing quite well.

In the South, we have a saying: "The sun doesn't shine on the same dog's buttocks every day." And lately, the sun hasn't been shining, at least on us. That's okay. It comes with the territory. Good times follow bad, and unfortunately, bad times follow good. 

Wrapping It Up?

I assumed the ego-to-equity portion of this discussion would be fairly brief. I was wrong. I’m just scratching the surface. In the coming weeks, I’ll be digging deeper here and on what it means to “want it badly.”  For now, in a nutshell, just know the highs are highs and the lows are low. Staying on an even keel in good times and bad is key. Trade a simple system. Study the heck out of it to learn the nuances-both good and bad, and more importantly, how to live with them.

May the trend be with you!

Dave Landry 

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