On relationships and strategies

Written by on March 29, 2017 in psychology of trading

Today I’m going to write about relationships and how they can help you in your investing life. We’ve all had relationship, right? (If you didn’t, stop reading this, get off your ass and get out there!) One of the factors that determine relationship success is good communication. Not convinced? Let’s look at two examples together.

Example #1

Husband: Whoa you look fat.

Wife: <screaming> F*** you!!

Example #2

Husband: You gained weight recently.

Wife: Well that’s not a very nice thing to say!

Husband: No I didn’t mean it like that, it actually looks good on you!

 

At this point you might ask yourself “So tell me Francis, how the heck is that supposed to help me pick a winning strategy?”

The answer depends on your objective: if your goal is to enjoy a good fight go with #1.  If your goal is to have a reasonable chance to get sex then go for #2. See, without a clear goal and a realistic understanding of the price to pay to reach that goal, you’re more than likely to just randomly say or do things based on how you happen to feel at that moment.

When you look at an investment strategy, what is your goal? You want to make money of course, so that part is easy. But what about the price to pay? Let’s look at what that means for a second.

 

Strategy #1

Source: https://www.collective2.com/details/75800796

 

Strategy #2

Source: https://www.collective2.com/details/84372841

 

Strategy #1 has double the return, but the drawdown is also much higher so you take on more risk. It’s also uncomfortable to live with as over 60% of all trades were losers.

Strategy #2 has a lower return and a low historical drawdown (i.e. the biggest losing streak the strategy had since it started trading). Nearly ¾ of all trades are winners which makes it comfortable to just sit back and let it trade.

Most people will only look at the higher return in #1 and tell themselves they can live with more risk. Be honest for a minute and ask yourself:

Can you live with a possible 24% drawdown? (It did happen in Strategy #1)

Can you live with a daily grind where 60%+ of all trades lose money? Don’t minimize it: that’s a big emotional toll for anyone.

Now let’s go further and do an experiment: imagine replacing Strategy #1 with our earlier Example #1 above. How do you feel about it now? Experience has shown me that few relationships survive Example #1 very long. Some can, but few people have the emotional makeup to deal with that day after day.

Can your relationship with your strategy survive the risk you are taking on to reach your profit goal? Remember the Godfather’s famous last words: “This is the price you pay for the life you have chosen”.

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