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Trading – The mistake of relying on past successes

Trading Room – Fri 9 Nov 2018

Most common traders and investors are always searching for the holy grail in trading. Past success is no guarantee of future performance yet they mistakenly believe that there is some single solution to defining market behavior and are looking for the magical bullet and formula to define all market actions.

However, not only is there no single solution to the markets, but those solutions that do exist are continually changing. The range of the methods used by the top traders in the world, some of which are even polar opposites, is a testament to the diversity of possible approaches.

There is a multitude of ways to be successful in the markets, albeit they are all hard to find and achieve. However, this does not mean that all methods are born equal or are applicable to all market conditions.

These unfortunately, gave rise to many snake oil sellers (traders and educators) peddling their trading methods to naïve investors and calling their products all sorts of nice-sounding names. Most of the time, they are a re-hash of top products in the market used by top investment firms and are a cheap fake copycat (pirated) and are useful for a few trades until the losses start mounting and the capital runs out.

You won’t get support or learning from these mechanical products because they are not backed by a real human being and a real trader in the market. Imagine if the product creator has not even been actually trading (and trading live) in the market every day and yet tells you the “poison” is safe to drink, would you actually believe him? So ask yourself whether the person is still trading today (and trading actual live trades) before you spend your money on his trading product or ideas or otherwise you may get still be living in the past (success or failure) like him.

Elite traders know experience counts and big experience counts even more. If your “experienced” trader adviser has not worked in top fund management firms managing billion dollars worth of money before, would you trust him with managing or trading your son’s future education money? Or giving you trading ideas which you would invest your hard-earned salary money on?

Don’t get us wrong. There are a lot of good and experienced elite traders who came out on their own but you really have your work cut out to separate the gems from the fake if they do not have the “big” experience that really counts.

There are others novice traders who pass of their first few years of trade as being very successful and starts to peddle their trading “products” as well. Well, social media is a great marketing tool and you get to make a lot of friends too either from Facebook, Twitters, Instagram, etc. However, as you well know and soon finds out, there are a lot of “fake” friends and “promises” in the social media world.

Let’s face the real fact. A typical bull/bear cycle lasts every 10 years or so and double that up as your added precaution of accessing “real experience and skills” and it means if somebody has not been trading in the market for 20 years or so, how would that person has claimed to see and manage all types of market conditions?

A trader trapped in the success of a bull market would do equally poorly in the polar opposite of a bear market. And most traders have no idea what to do in a range-bound market, which typically accounts for around 70% of the time in the market. A trader who only knows how to buy stocks and not how to avoid/short stocks would/may also do poorly in different market conditions.

Backtesting and optimizing can do a lot to convince the naïve traders and investors but elite traders know that the results are manipulated most of the time to do curve-fitting. But it’s a sad phenomenon that most naïve traders and investors fall for the trick and spend a lot of their hard-earned money buying products instead of doing “real trading” and making real money.

Trading is hard, and it is a really hard business. Anyone who tells you otherwise and it is advisable you avoid the person with a 10-foot pole. However, common traders are always looking for the easy way out and hence, mechanical products sell well in the market until the market conditions change and what turned out to be routinely profitable trades became routinely losing trades until the capital is decimated.

There are various empirical studies demonstrating that the past performance of traders has no predictive value regarding their future performance. This means that the single factor that overwhelmingly determines how investors choose their investments—that is, past returns—has no efficacy.

When you choose a trading product or adviser or educator, choose their process rather than past returns or their personality. Investors and traders also often make the mistake of equating a manager performance in a given year with the manager skill. Hence, you would have all sort of traders claiming success in a bull market but they do very poorly in a sideways or in a bear market the year after.

 

Always do your homework or due diligence on the trading product or educator/adviser that you prefer. Simple questions like whether has he works in the industry trading or managing the big money before, whether he is still trading live every day, and whether he is keeping abreast of the latest trading and technological processes in his system are some of the due diligence you can do. Skip the personality and past fame of the trader and manager to the last as you are looking for consistency for the future, not past successes.

It is always worth your effort to find the gems from the average and god-forbid, the fake and the copycats. After all, it’s your really hard-earned money that you are entrusting their experience, ideas, skills, and talent in.

We are always looking to network with fellow elite traders and learn from each other. Find out more about us at mPower Algorithm Team and join us at mPower Algorithm, mPower Trading, and Elite Education. We look forward to hear your own personal trading story and success in the market.