Would you continue trading this strategy?

 
 
Do you remember the first time you tried a strategy, and it didn't work out?

I made some trades using a service that would send trades using one of the first text pagers in the 90's.

It barely fit in my pocket.

I promptly lost money of course since the strategy was BS.

There's a lot of strategies that should work in theory — but they don't.

As you have probably found out the hard way.

Unfortunately, this sets you up for the ‘ol strategy merry-go-round.

Because you remember the previous failures, you think “another death spiral for my trading account” and bail out.

Once bitten, twice shy as they say.

Look at the image above again. It's a backtest of a volatile period during the Summer of 2015.

After running an advisory business for nearly 20 years (I do not accept new clients so put your wallet away), I can tell you that clients bought our services at the worst possible times.

Times where the coast is clear, and the CNBC pundits are cheer-leading the market higher.

Then they sell right where you can buy the market for a terrific discount.

The above chart is from the Smart Money strategy.

It's disheartening that we got hate mail, and people cancelled.

But here's what happened next:

Above chart zoomed out

I get it. It's easy to get bucked off the horse when you're thinking about where to land.

You've been trained to hold the reins with a limp wrist.

Previous disasters lead to mistrust just as surely as a failed marriage leads to keeping a foot out the door…

…just in case she turns into a Scarlett O'hara psycho like the last one, and your money is once again Gone With the Wind.

So here's the solution:

Figure out what to expect before you get in.

As a former insider into the advisory biz, the closer your product sounds to magic, the more money you make. Like this:

So when you buy a competitor's service, they never talk about losses.

But losses are inevitable in trading.

You know it. I know it. But for some reason, your wallet doesn't know it.

So before you get into another service, understanding what kind of losses to expect will help you stay on when the going gets tough.

A strategy — and people — are often defined by their worst moments.

If you go to church every Sunday, never cheat on your spouse, pay you taxes, move up the corporate ladder like a good little boy…

…and then go postal one day and shoot your coworkers because they took your stapler, then your past good deeds don't matter one bit.

When you build a trading strategy, you get to see the good, the bad, and the “holy crap, I would never trade this dog in a million years” fugly.

You get to see stats like “worst drawdown.”

For the Smart Money strategy, the worst DD is 18%.

So losing 13% from peak to trough in 2015 is within normal bounds.

But before the 18% drawdown in 2007-2008, the Smart Money's worst was 13% in 2002.

So this begs the question: How can we figure out if a trading strategy no longer works?

When should we bail out?

When we started designing Meta-Strategic trading strategies, I finally got an answer to that question.

We discovered that trading the strongest strategies out of a basket of strategies did very well.

If you don't have access to lots of strategies, then a simple rule of thumb would be to use a moving average on your strategy's equity curve.

So you stop trading when your strategy dips under the moving average.

That way you can hang on until the music stops playing, and enjoy trading, instead of being frustrated by it.

While I don't have anything to offer you right now with a trading service or software, I will make sure to let you know when the next Smart Money sell signal occurs (which is a BUY on stocks at the moment).

Just keep reading these emails. Deal?

In the mean time, we're working on bringing supercomputer trading tools to everyday kitchen counter traders.

Stay tuned.

Trade smart,

Dan “Prince of Proof” Murphy