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Tuesday, December 29, 2015

Trading Competition: Looking for The Chosen One

The Chosen One

The idea of a trading competition started to invade my restless brain sometime in January or February of 2015. It all started unintentionally, as a joke in the comments section of an article two or three months earlier, and then on Twitter, where Jonathan, Bellini and I would friendly compete to see who obtained the better results in 2015. Loser would pay dinner to the other traders. It was an informal thing where we relied on each other for reporting of entries and exits. In other words, you were not allowed to come up today with "Hey, I am closing this winner!" without evidence existing first of an entry into that position through a correspondingly time-stamped tweet or blog post from the past.

We never agreed upon what the parameters would be to determine the winner, so by default, this implied that the trader with the greater return at the end of the year would be the winner. Being the winner was not as important as NOT Being the Loser, given that the only penalty was for the loser to pay dinner for the other two guys.

In the meantime, we had started observing a new disciple, who was independently posting his trade entries, transparently and freely on his site. He was also kicking our asses with his results, which would have been reason enough to NOT ADD him to our contest as he was making us look bad. But, being the carefree guys we are, and risking a larger dinner bill payment, one good day we informally added Aram, after having followed the guy closely for a couple of months.

Finally, the other day when I reviewed the Core Income Butterfly course, I briefly mentioned that the author, Dan, would have kicked our asses too with his returns, had he been part of our little trading contest. Totally insulted, Dan reacted in the comments section demanding an explanation for his not knowing about this contest and not having been invited.

So, it's now 5 traders in total, who freely and openly share their trades with the world and have shown commitment enough, not to do it for a week or two, but for months and years. So, it's time to formalize this. Why the hell not?!?

Why typical trading competitions suck
Trading contests out there are basically promoted by brokerage firms so that hundreds if not thousands of people can learn about a random guy who made 9328498329% return in a month. Trading contests exist to keep selling the "rich overnight" dream and attract new people with their capital to the world of trading.

Because trading competitions only rank participants by returns, the only way to win is by shooting for the moon. Be reckless, huge bets, insane leverage, stupid position sizing. That's how you win a one-month trading contest where the trader with the greatest return takes the prize.

At the same time, trading contests usually last only a month. What a joke! When it is normal for the best traders in history and elite traders nowadays to have, not only a negative month, but a negative quarter or even a year, the illusion that a one month trading competition is long enough is absolutely bonkers. Small sample size that says nothing. It says nothing about the sustainability of your methods. It says nothing about you as a trader facing different market conditions.

Contest Promoter's shady objectives
Greater Return wins. Other metrics are irrelevant.
One-Month-Only competition

We are doing something different
- We don't want to attract capital to our brokerage firms. Lucifer hasn't wanted to put us in charge of one of those yet.

- We are not giving away a monetary price. This is for us. For entertainment. Because human life is based upon being social, sharing and helping each other since the Homo-Erectus and the Neanderthal. Also, we all need and want to have more fun in life. Not just the five of us, but everybody. This competition is also to engage our readers with something that is truly unique. That no other site out there does.

- We won't do it for a month, because that is a waste of time. We intend to do it for a year: to show how our different styles perform during a more significant sample size; how we react under pressure in different circumstances; how we avoid blowing our accounts in the most challenging environments.

- Finally, we won't determine the winner by just "the best return", because that only promotes reckless and irresponsible trading. Instead, we want to promote sustainable approaches, responsible techniques, top notch risk management. For this reason, we have agreed on a formula that considers several factors:

. Returns (40% weight)
. Max-Drawdown (30% weight). Obviously the smaller, the better
. Return to Drawdown ratio (20% weight)
. Average Portfolio capital exposure or capital at risk (10% weight). The smaller the exposure, the better.

With this mechanism to calculate our own "competition points", we hope to deliver our message: "Trade responsibly. Manage your risk. Be consistent".

For exact details on how points are calculated per aspect, feel free to consult the Points Calculation guide.

There is now a Trading Competition page on this site where results we'll be tracked throughout the year. At the same time, we don't want this to become a burden or a big distraction, so initially the idea is to update the page at the end of each quarter (March, June, September, December). We'll see if this is good enough. If it is not too much work and people want more frequent updates we will consider updating the results on a monthly basis.

So, that's it. Five traders/bloggers, all of us sticking our necks out, as we've always done. Walking the talk. Guru BS not welcome. Those who are not willing to show results, to back up their constant bla bla bla, can go to hell.

Aram, Bellini, Jonathan, Dan: Thanks for making this possible my friends.

At a personal level, I can say that I don't care too much whether I finish first. Of course, I would like to win and I will do my absolute best effort. However, I know I'm competing against solid proven traders. Therefore, I will be satisfied as long as I trade my plan with discipline and achieve a smooth and growing equity curve, with a smaller than 10% maximum draw-down. Personal objectives and goals folks, risk management and consistency. That's what matters most.

Let the games begin,

PS1: In our "less formal" trading competition of 2015, Aram obtained the best final return for the year (+24.99%) and because no other rule had been defined, he is the legit 2015 winner. A special mention must be made about Jonathan, who was pretty close in terms of Annual Returns (+22.96%) but with a much smaller and manageable max draw-down of only 9.94%.

PS2: I also wanted to mention that Kevin from requested to be included in this Trading Competition but unfortunately it was a bit late, as we all had been reporting 2016 options trading activity for a while. It is worth mentioning that Kevin's attitude shows confidence in his trading skills, honesty and his willingness to share. Another solid trader to follow and from whom everyone can learn a lot.

Follow ups:
Trading Competition Update (June 30)

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