The Reasons We Follow An Algorithmic-Systematic Approach To All
We have been trading and investing in markets for decades since the early 1980s. Experienced and successful traders and market participants tend to remember their losses and mistakes instead of victories. Profits feed the ego; losses are teachers for those who realize that valuable lessons come from adversity instead of triumph.
A batting average of .300 is good enough to get a professional baseball player into the Hall of Fame in Cooperstown, New York. Each time a future hall of Famer steps up to the plate, a success rate of below 30% is good enough for infamy. Trading and investing are similar. No one is correct in their market calls all of the time. When approaching any market, there are always three potential outcomes, a profit, a loss, or a breakeven. The success rate of calling a market correctly takes a back seat to other factors. We have seen market participants who have had the foresight to call the market correctly 75% of the time and still wind up losing money. Conversely, a seasoned trader can be right 20% of the time and still make an overall profit.
I usually write about specific markets on Trading View, but it is essential to look at the methodology, mindset, and path to growing capital over time this week. We follow an algorithmic-systematic approach to trading and investing. Our models come from decades of experience and the knowledge gained from mistakes that led to losses. We all have the same goal; to make money and grow our capital. The route to achieving the goal is what separates the winners from the losers.
Everyone has an opinion- The only objective measure is the current price
I am sure we have all heard an “expert” or pundit tell us that the current price of an asset is wrong. They may provide many compelling and convincing reasons, but they are 100% wrong when challenging a price level.
An asset price at any moment in time is always the correct price for one objective reason. It is the level where buyers and sellers meet in a transparent environment, the market. The “experts” and pundits take a subjective leap of faith when using the terms expensive or cheap. Too many variables establish a price. The only accurate measure of value is the current price itself.
The trend is your only friend- News, experts, and all other information are subjective
Prices are snapshots. Trends are the living and breathing extension of price action. Many market participants become junkies, watching each news event, “expert” forecast, and other exogenous events that could push asset prices higher or lower. They make investment or trading decisions based on what they hear and see. The approach is flawed for three significant reasons:
A market’s trend is purely objective as it reflects the path of least resistance of a price based on market consensus and sentiment. Prices tend to move to levels on the upside and downside that can defy logic, run counter to reason and are not rational. Trend following blocks out logic, reason, and rational thought and favors one of the leading theories of physics. Newton’s first law states that a body at rest will remain at rest unless an outside force acts on it, and a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an external force. Trend following embodies Newton’s first law of physics. Asset prices reflect the market’s sentiment, which is the inertia that drives those prices. If Sir Isaac Newton were a modern-day trader or investor, his mantra would be the trend is your only friend as it is compatible with his first law. The physical sciences are objective.
Trading and investing can be stressful
We have found that decision-making creates stress. When we buy or sell an asset based on anything but the market’s trend, we make a subjective judgment. The attempt to buy at the bottom or sell at the top is a value judgment that runs counter to logic as it implies the sentiment and current prices are incorrect, a fatal flaw. Sometimes some market participants get lucky, but that only reinforces a strategy that leads to future mistakes. Picking tops or bottoms in a market is a strategy that rewards the ego as it gratifies that one called the market correctly. However, ego and vanity lead us down a dangerous path. In the 1997 film, The Devil’s Advocate, Al Pacino, the actor who played Satan, said, “Vanity-definitely my favorite sin.”
Reducing stress comes from following the path of least resistance. We use an algorithmic, systematic approach to trading based on models that remain long during a bullish trend and short during a bearish one. We never miss a significant trend as we are constantly long or short the assets in our portfolio. We do not adjust our risk positions on an intra-day basis. We only reverse risk positions based on closing prices at the end of a session and execute the position at the start of the next session. Our proprietary models come from decades of trading and investing experience in a wide range of markets across all asset classes. We never look to sell tops or buy bottoms. We are long at the top and short at the bottom. However, we tend to capture significant trends, taking the filet mignon out of price trends. We have found that our mechanical approach, with a better than even-money win rate, reduces stress as it takes any decision-making out of the equation. The only job is to follow the rules, always remaining in the markets on the long or short side and reversing positions based on the model’s instructions.
A plan and discipline are the building blocks for success
Emotions lead to impulsive behavior. Acting on impulse leaves little or no time for planning and throws discipline out of the window. Albert Einstein said that the definition of insanity is doing the same thing repeatedly and expecting a different result. Impulsive decision-making is the root of Einstein’s insanity definition.
Any risk position in any market must have a plan, which is simply balancing the financial risk versus the potential reward. Before pressing the buy or sell button, we must establish risk parameters for trades or investments when not following an algorithmic approach.
The discipline is following the plan. Many market participants run into problems when a risk position goes against them, and they have no plan for risk and reward, or they modify it to allow them to stick with a wrong decision. Turning a short-term trade into a long-term investment is a common mistake. The mistake comes from a subjective call that the market price is incorrect.
A way to prevent this is to remind yourself that the market price is always the correct price. We are often wrong; the market is never wrong.
You have to be in to win- Drawdowns are a part of any trading or investing system
We are constantly long or short the highly liquid assets in our investment portfolio because we never know when a significant trend will begin. Being in a risk position that follows trends is the only way to catch the bulk of a bullish or bearish trend.
Drawdowns or losses are a part of life and any trading or investment approach. A choppy market near the high or low end of a trend will result in short-term losses. However, that is the price for capturing the long-term trend. There is no free lunch in life, and the same goes for trading and investing. The goal is always the same for every market participant, to make money over time and build wealth and our nest eggs. The strategy is what separates winners from losers. We take a long-term systematic approach and do not veer from the path. We know that drawdowns are a part of any investment or trading approach. We are in it to win it on a long-term basis.
Join us for the Monday Night Call each week - all you have to do is use the link below. There's also a link to sign up for early access to these articles as well.
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
- Everyone has an opinion- The only objective measure is the current price
- The trend is your only friend- News, experts, and all other information are subjective
- Trading and investing can be stressful
- A plan and discipline are the building blocks for success
- You have to be in to win- Drawdowns are a part of any trading or investing system
A batting average of .300 is good enough to get a professional baseball player into the Hall of Fame in Cooperstown, New York. Each time a future hall of Famer steps up to the plate, a success rate of below 30% is good enough for infamy. Trading and investing are similar. No one is correct in their market calls all of the time. When approaching any market, there are always three potential outcomes, a profit, a loss, or a breakeven. The success rate of calling a market correctly takes a back seat to other factors. We have seen market participants who have had the foresight to call the market correctly 75% of the time and still wind up losing money. Conversely, a seasoned trader can be right 20% of the time and still make an overall profit.
I usually write about specific markets on Trading View, but it is essential to look at the methodology, mindset, and path to growing capital over time this week. We follow an algorithmic-systematic approach to trading and investing. Our models come from decades of experience and the knowledge gained from mistakes that led to losses. We all have the same goal; to make money and grow our capital. The route to achieving the goal is what separates the winners from the losers.
Everyone has an opinion- The only objective measure is the current price
I am sure we have all heard an “expert” or pundit tell us that the current price of an asset is wrong. They may provide many compelling and convincing reasons, but they are 100% wrong when challenging a price level.
An asset price at any moment in time is always the correct price for one objective reason. It is the level where buyers and sellers meet in a transparent environment, the market. The “experts” and pundits take a subjective leap of faith when using the terms expensive or cheap. Too many variables establish a price. The only accurate measure of value is the current price itself.
The trend is your only friend- News, experts, and all other information are subjective
Prices are snapshots. Trends are the living and breathing extension of price action. Many market participants become junkies, watching each news event, “expert” forecast, and other exogenous events that could push asset prices higher or lower. They make investment or trading decisions based on what they hear and see. The approach is flawed for three significant reasons:
- Trading off what one sees and hears is stale before it reaches our ears and eyes. Others have seen the news or forecast before us, and some had seen it before it appeared on a medium for all to see.
- The translation of an event, forecast, or news item is purely subjective as it assumes, we will make a correct analysis. The expression “buy the rumor and sell the news” or the converse runs counter to even the most complete analytical decision-making approach.
- Finally, reacting to any stimulus involves a primary human response, emotion. Emotions are a trader or investor’s worst enemy. They trigger responses and decisions based on fear and greed, a deadly duo that increases the chances of mistakes, miscalculations, and irrational behavior.
A market’s trend is purely objective as it reflects the path of least resistance of a price based on market consensus and sentiment. Prices tend to move to levels on the upside and downside that can defy logic, run counter to reason and are not rational. Trend following blocks out logic, reason, and rational thought and favors one of the leading theories of physics. Newton’s first law states that a body at rest will remain at rest unless an outside force acts on it, and a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an external force. Trend following embodies Newton’s first law of physics. Asset prices reflect the market’s sentiment, which is the inertia that drives those prices. If Sir Isaac Newton were a modern-day trader or investor, his mantra would be the trend is your only friend as it is compatible with his first law. The physical sciences are objective.
Trading and investing can be stressful
We have found that decision-making creates stress. When we buy or sell an asset based on anything but the market’s trend, we make a subjective judgment. The attempt to buy at the bottom or sell at the top is a value judgment that runs counter to logic as it implies the sentiment and current prices are incorrect, a fatal flaw. Sometimes some market participants get lucky, but that only reinforces a strategy that leads to future mistakes. Picking tops or bottoms in a market is a strategy that rewards the ego as it gratifies that one called the market correctly. However, ego and vanity lead us down a dangerous path. In the 1997 film, The Devil’s Advocate, Al Pacino, the actor who played Satan, said, “Vanity-definitely my favorite sin.”
Reducing stress comes from following the path of least resistance. We use an algorithmic, systematic approach to trading based on models that remain long during a bullish trend and short during a bearish one. We never miss a significant trend as we are constantly long or short the assets in our portfolio. We do not adjust our risk positions on an intra-day basis. We only reverse risk positions based on closing prices at the end of a session and execute the position at the start of the next session. Our proprietary models come from decades of trading and investing experience in a wide range of markets across all asset classes. We never look to sell tops or buy bottoms. We are long at the top and short at the bottom. However, we tend to capture significant trends, taking the filet mignon out of price trends. We have found that our mechanical approach, with a better than even-money win rate, reduces stress as it takes any decision-making out of the equation. The only job is to follow the rules, always remaining in the markets on the long or short side and reversing positions based on the model’s instructions.
A plan and discipline are the building blocks for success
Emotions lead to impulsive behavior. Acting on impulse leaves little or no time for planning and throws discipline out of the window. Albert Einstein said that the definition of insanity is doing the same thing repeatedly and expecting a different result. Impulsive decision-making is the root of Einstein’s insanity definition.
Any risk position in any market must have a plan, which is simply balancing the financial risk versus the potential reward. Before pressing the buy or sell button, we must establish risk parameters for trades or investments when not following an algorithmic approach.
The discipline is following the plan. Many market participants run into problems when a risk position goes against them, and they have no plan for risk and reward, or they modify it to allow them to stick with a wrong decision. Turning a short-term trade into a long-term investment is a common mistake. The mistake comes from a subjective call that the market price is incorrect.
A way to prevent this is to remind yourself that the market price is always the correct price. We are often wrong; the market is never wrong.
You have to be in to win- Drawdowns are a part of any trading or investing system
We are constantly long or short the highly liquid assets in our investment portfolio because we never know when a significant trend will begin. Being in a risk position that follows trends is the only way to catch the bulk of a bullish or bearish trend.
Drawdowns or losses are a part of life and any trading or investment approach. A choppy market near the high or low end of a trend will result in short-term losses. However, that is the price for capturing the long-term trend. There is no free lunch in life, and the same goes for trading and investing. The goal is always the same for every market participant, to make money over time and build wealth and our nest eggs. The strategy is what separates winners from losers. We take a long-term systematic approach and do not veer from the path. We know that drawdowns are a part of any investment or trading approach. We are in it to win it on a long-term basis.
Join us for the Monday Night Call each week - all you have to do is use the link below. There's also a link to sign up for early access to these articles as well.
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
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