How I Trade As If Price Is Random – Part 2

(continued from part 1)

Let’s talk account size for a bit. This is not to brag, but just to paint a realistic picture of where I’m at. This style of trading is not going to be feasible if you have a $5,000 account.

Ever since college I have been very frugal and tried to live below my means. This isn’t meant to be a financial lesson, but just because your salary increases doesn’t mean your expenses have to increase. I’m sure you’ve all read “The Millionaire Next Door” and that type of books (if not, read it. Cliffs notes: rich people are frugal, poor people are flashy).

This is especially true in trading. If you have a normal salaried job, you know that every week you will get paid $500 or $1,000 or however much you make. Although your salary may be limited, it still allows you to plan for future expenses. If you own your own business (trading is included in this) then this is all uncertain. You may make $10,000 one week but that doesn’t mean you won’t make $0 the next week. Or -$10,000.

Being frugal helps ensure your survival.

Lesson over, back to trading.

Let me back up even further and say that the reason my account is where it is today is because during the “recession” of 2008, I averaged down heavily into weighted index funds (QLD, SSO). This is already breaking two “rules” that traders love to quote: 1. don’t average down, 2. don’t use weighted ETFs long term.

Everyone else was freaking out and selling. “Oh noes, the economy is collapsing!”

No it’s not.

It hit me that this could be a great buying opportunity. My first thought was to buy as much SPY as I could afford, but then I learned about the weighted ETFs which were not only cheaper per share, but also double weighted, so for example, if the S&P 500 goes up 1%, SSO goes up 2%.

I picked the indexes because I had no idea what would happen to individual stocks but I was pretty confident that the indexes would not go to zero, and if they did, I had bigger problems than blowing my account.

While I watched everyone on the forums talk about the collapse and how they were selling, I just continued buying more every time it dropped a certain %.

“Be greedy when others are fearful.”

I can’t predict price direction, but I was pretty sure those funds would go back up.

So, remember when I said I regularly break commonly-accepted trading rules?

What is it, 95% of traders lose? And they all probably follow those rules.

– Never add to a losing position
– Never let a winner turn into a loser
– Never risk more than 2% of your account
– The trend is your friend

Let’s talk about those:

– I regularly add to losing positions. I do it within certain boundaries, never with margin, and never with risk of blowing my account.

– My winners often turn into losers. I have no idea if price is going up or down. Sometimes they go against me.

– My drawdown sometimes goes well past 2% of my account.

– Every trade I make is counter-trend.

“The trend” is a bunch of nonsense and is a great topic for another post. Let me summarize it like this:

– price can reverse at any point and the “trend” only exists in hindsight. Just because whatever trend identification method you use (MA slope, higher highs/higher lows, whatever) happens to say “hey, we are now in a trend whereas one tick prior to this we were not in a trend” doesn’t mean price is going to keep going in that same direction.

(continue reading in part 3)

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