Time Is Your Ally

The market giveth, and the market taketh away. You should recognize that in all markets, there will be time periods when money is easily made and other periods when most models will show losses. Your goal, as a system trader, is to survive the unprofitable periods so you can enjoy the good times when they roll around. In essence, your risk-control strategy, money-management practices, and overall system design will all play major roles in determining your ability to survive difficult market condi­tions. Hence, it is advantageous to take the long view and remember that the current trade is just one of many to come. Therefore, you need not get emotionally involved in the outcome of each trade.

Suppose you are trading many markets and more than one system in a diversified trading account. Let us assume that your average prob­ability of winning is 35 percent. Since we can show that successive trades are independent, the probability of having ten successive losing trades is (0.65)¹⁰, or 0.0135, or 13 in 1,000. Thus, if you opened 1,000 new ac­counts, only 13 of them would show ten successive losing trades. Now, suppose you put on the trades all at the same time. If you risked 2 per­cent per trade, you will experience a 20-percent drawdown at the very beginning about 13 times in 1,000 attempts. If you risked 1 percent per trade, your chance of reaching a 20-percent drawdown is approximately 18 in 10,000.

A 20-percent loss of capital, although not pleasant, is not irre­versible. You should also recognize that unlikely events can and do

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occur. Thus, do not get emotionally involved in each gyration of every trade. You should take the long view: enforce rigid risk control, follow money-management guidelines, and focus on implementing your system.