A few words about trading!
Successful trading is hard, very hard. Not so much because it is complicated and difficult to design, quite the opposite actually. That is the easiest part, although conventional wisdom dictates otherwise. The hardest part is implementing it and sticking to it, especially during loss-making periods. It is psychologically extremely difficult and stressful for any human being to carry on with a trading strategy when it’s (temporarily) losing money. Our instinct as humans is to change it, recalibrate, adjust, amend, incorporate new ideas or eliminate existing approaches. However, avoiding all this, is exactly what is needed to trade successfully. This is what makes trading hard and why successful long-lasting investment managers are extremely difficult to trace.
There is no single trading strategy out there that always makes money. Even the most successful trading approaches have periods of losses. The market distributes the profits among different strategies in a pattern that resembles randomness. One year its long/short strategies, next year it’s the CTAs, then its long equities, then bonds, arbitrage, event-driven, relative value to name just a few and then all over again in a different order.
So how is one meant to trade successfully with so much randomness. During trading, the aim is not to ascertain and chase the strategy that (will) make profits in the following period based on what made money in the last period. Nobody can predict the future so nobody will know that consistently, making this approach a recipe for disaster. The aim should be to stick to one strategy, one that suits the style of the trader and achieve two things: (a) make the most of it during profitable periods (i.e. profit capturing) and (b) lose as little as possible during loss making periods (i.e. risk management). This is the essence of trading and this is what makes a successful trader stand out among peers.
The architecture of our trading strategies is based around these very fundamental concepts. Our Programs trade a number of strategies and do not switch constantly in and out of them. Equally important, the design of our Programs is such to achieve maximum profitability during profit-making periods for trend-following and systematic value strategies and lose as little as possible when the market shifts its profits to other approaches.
During loss making periods, we do not change the slightest thing about our trading approach. Our trading strategy during profitable and loss-making periods is identical. The Program of course does recognize when opportunities are gradually becoming limited and reduces trading volume, reduces traded capital, reduces trade size and takes a defensive approach. This is by design in order to lose as little as possible during that difficult period whilst remaining vigilant for when the market revisits our strategies with profits again.
Where would we be if when the market reignites profits in trend following and systematic value, we had started a few weeks earlier to do long/short investing or arbitrage!?
We do one thing and that’s why we do it well. As always, time will be our best judge.