BarroMetrics Views: Emotional Blind Spots II
Today, I’ll look at the first question:
“if I have a system that makes money, why won’t that guarantee I become wealthy?”.
My answer is having a robust system is necessary but insufficient to deliver a promise of success.
Trading success is comes from:
Mind x Money x Method
The mind delivers the mindset that delivers the discipline to execute the ‘rules’ of our plan, and to constantly achieve improvement; money balances risk of ruin with optimization of profitability; and method provides the process by which we determine whether the probabilities favour the entry and continuation of a trade.
Notice the multiplication sign – it means that our trading returns are determined by the weakest link in the chain. Normally this will be ‘mind’.
The reason is most traders focus on the the left brain when making trading decisions. And, if you understand the educational context, it’s little wonder. How often in trading have you heard: “To succeed, don’t trade emotionally!”.
The problem is no decision can be made with emotion. This is true even if you are trading a computerised mechanical system. You don’t believe me?
See what happens the next time you computerised computer system hits a deep and prolonged drawdown. I guarantee you that your emotions will be part of the decision-making process. Are you saying that ‘no matter what’, I have the discipline to stick with the system through thick and thin?!
Problem is there are times when you do have to pull the plug (if only temporarily) because the conditions supporting the system have changed. If LTCM proved anything, it proved that risk management sometimes requires we stop trading.
Finally your email indicated you were in a hurry to acquire wealth. You are looking at returns for 50% pa. A word to the wise. Trading can make you wealthy, but only if you employ the power of compounding i.e. wealth will come in time.
The best traders in the world focus on keeping their drawdowns small relative to their annual return. In trading, a consistent 12% per annum with a maximum drawdown of 4% is preferable to a 100% return per annum with a 50% drawdown. The latter sails to close to the brink of ruin.