Traders Should Take the Long View

Asad Dossani
What's the first thing that comes mind when you think of trading? Quick profits? Easy money? Men shouting loudly across a room?

Turns out that none of these are true. Computers have replaced loud men. Profits take time. Money is never easy, unless you are a central bank.

Most new traders have lofty expectations. That nearly all trades should make money. Or that a string of losses means you're doing something wrong.

The truth is that trading performance varies considerably in the short run. Good strategies can lose money. Dumb strategies can make money. The link between short term performance and a profitable trading strategy is weak.

Mostly, this is because even the best trading strategies have only small edges. Suppose a trading strategy has an equal risk-reward ratio. A good strategy would be profitable 60% of the time. On average, six out of ten trades would make money.

But this is an average only. The variation in trading performance cannot be overstated. Sometimes, you'll have nine out of ten profitable trades. Other times, you'll have eight out of ten losing trades.

There are two important ingredients for a successful trading strategy. The first is a strong long-term performance. And the second is a rock solid process. Notice that short-term performance isn't included.

Strong long-term performance is a given. If you're not making money over time, then something is wrong. Here, long term means a year or more.

A solid process is critical, largely because short-term performance is erratic. Even if I picked my trades by flipping a coin, I could still end up profitable due to good luck. This is why it's important to have a good process.

The logic behind your trades must be impeccable. If you're a quantitative trader, your backtest results should be sound. If you're a chartist, the patterns you identify must have a logic behind their existence.

No matter what method of trading you use, your end result is only as good as the process behind it. If I flip a coin to make my trades, I may get lucky in the beginning, but it isn't going to last.

Most importantly, a solid process gives you confidence in your trading strategy during periods of drawdown. It gives you the discipline to make the right decisions.

When I backtest a trading strategy, I'm naturally interested in the potential profits. But equally important is the risk and the drawdowns. With a backtest, I know how much I can expect to lose, or how long losses may last. This way, when it happens in a live market, I'm prepared.

You should treat trading like a business. A business with revenues and costs. A business that some months makes money and other months doesn't. A business where creating long-term wealth is the final goal.

This means that, as a trader, you should take the long view. Even if each trade is short in duration, what matters is the long-run performance. What matters is not each individual trade, but the sum of all your trades put together. Just as you would approach investing with a long-term perspective, you should do the same for trading. Otherwise, you're setting yourself up for disappointment.

Tell us about your trading process. How do you evaluate performance? Club or share your comments here.

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2 Responses to "Traders Should Take the Long View"
C Visweswara
09 Mar, 2016
Sir, In the beginning before collecting money from us, you promised that every week we will be getting 7000, 15000, 21000 etc. In this article you are saying that good traders make profits 60% of the time only. My sincere suggestion to you is to practice sufficiently before you preach to others. Regards, C visweswaraLike (4)
09 Mar, 2016
Dear Mr.Assad, your articles make very interesting reading. This article has given me a fresh perspective.... having done your research and analysis and despite all the efforts, if you win some and lose sum...your advise that we should consider the loss as business a good learning for me.. thanks ..regards.. Like (1)
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