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Wednesday, March 30, 2016

The Torture

Success in trading implies learning to withstand pain. A quick look at something like the Barclay Discretionary Traders Index evidences the fact that, to make money in the markets, you have to be willing to lose and experience frustration. You are bound to experience draw-down periods that, sometimes take months to recover from. This index, reflects the results of audited CTA's. That means, we are talking about professionals here:

The equity curve definitely points in the right direction. But Imagine you experienced it as it developed, without the certainty that it would eventually go up. And now, notice how, for example, it took 4 years, starting in 1998, to achieve new equity highs. From 1998 to 2002 your equity balance would have gone nowhere. That's four years of a very long and tortuous draw-down.

If we look at the S&P500 Index, which with its historical 7% average annual return has beaten the majority of traders over the years, it experienced a 55% draw-down during the 2008-2009 financial crisis. Or the Nasdaq, which lost 78% during the Dot-Com bubble crash in the early 2000's. There is a horrendous amount of pain to swallow by following these instruments, and yet, in the end, they beat most traders.

More recently, from December 1999 to September 2011, the Dow Jones went nowhere, in what many called "The lost decade". Yet, statistics still show that, the index beats the majority of the traders. The price of beating the majority of the traders was to mentally endure an account that really didn't show any progress, not for a month or two, but for years.

And finally, let's look at the Hall of Fame, the Elite of the Elite. How do they achieve the returns that make them famous legends? Are their approaches pain-free? Is it even possible to achieve 20% annual returns without too much torture? What are the kind of draw-downs they are willing to face in order to achieve those results?

Scott Welsh, a Forex trader I follow on Twitter, has brilliantly explained it recently, much better than I possibly could with my words. I will leave you with his video.

The lesson is: To be successful in trading, you must get used to pain. One doesn't come without the other. A successful trader must embrace pain.

Nobody said it was easy, just that it could very well be worth it.


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