Why You Should Never Trade The Market

Why You Should Never Trade The Market. Trading Strategy



Note:  I am a winning trader who has beaten the S&P 500 index since 2013, so do not take the advice below as if I am some jaded losing trader, because I am not. There is some really good advice in the article I recommend some of you take it. I currently have a 96% win rate since 2016. More about my trading system can be found here.

The Market is a very difficult place to make money. If you think you are a genius or you know what you are doing, you will be in for a world of hurt. If you don't quit while you are on top, you eventually will be wiped out. If you are trading options, making a ton, and think you will continue in the long term, you are dead wrong. Those who trade options are most at risk.

To compound the issue, there are no accurate risk management models. This is proven by how the Quants could not predict or mitigate the 2007 Market crash, and as well as several hedge funds getting squeezed out of billions due to their arrogant Gamestop ($GME) and $AMC shorts. You are only kidding yourself if you think you are properly risk-managed because you are not. To be truly risk-managed you must have a full understanding of the Market. In reality, no one has such an understanding (or they would be able to make an unlimited amount of money). A lot of these "million to one" events seem to happen every so often i.e. GameStop Squeeze, Coronavirus Pandemic, the 2008 financial collapse. Blackswan events are just too common, the improbable continues to become reality.

 It's worth noting at any point you have all your money in the market, you face "Risk Of Ruin" (chance of losing it all). You never want to be put in that position especially if you have an "edge" in the Market.

I think not all hope is lost, I have a few tips that can help make sure you can trade the market for the next 30 years. However, the catch is, you need to have a real edge. I am not talking about the phony fake advice posted on all of Twitter or what these sub-services try to sell you with using MACD indicators and "break out" setups drawing silly triangles all over their charts. Those don't work. Real edges aren't given away. They aren't sold, they are kept in secret.

First, you need to have a quick accurate edge (don't bother, unlikely any of you have or ever will discover one), one that allows you to be in and out in 24 hours with good profit (not day trading). This edge should have at least a 75%+ accuracy. You have an exponentially higher chance of never getting hit hard in the Market where you trade quickly (within an 18-hour time frame). This is an important concept, the longer you are in the Market the more risk you take. Note, that an 18-hour time frame can span two trading days.

Your edge won't last forever (assuming you have a real one, which I doubt anyone reading this does), often "setups" (use the term loosely) can evolve. You will need to pick up on this fast as possible without ever going broke, or getting hit hard. In order to do this, the only solution that may save you is never having more than 3-5% of your portfolio invested. This way you will have a chance to either adapt your edge if it isn't working or realize you no longer have one and can get out safely. Don't bother with "hedging your position", that is nonsense. Correlation is made to break, it isn't a guarantee. When things go really bad (i.e. when you need a hedge the most), correlations get wiped out (look at the Coronavirus Pandemic: Gold, Oil, Bitcoin, stocks all wiped at once)!

Assuming your edge fits a quick time frame and is accurate you *might* be ok trading via options. As your risk is now capped, and your upside is unlimited. In this case, you will need to always take money off the table quickly, it's okay to leave some profits on the table and hold a fraction of your initial option position to let the stock run (i.e. say you made 60% with options, sell enough that makes you some profit and leave the other options on the table for a potential continuation).

I have often debated what is the best way to trade, not the one that makes the most money, but the one that has the highest chance of making money over 30+ years. That is to trade very quickly and to invest very little of your portfolio.  The catch is this type of trading requires a huge account, were trimming and 3-5% gains actually matter in terms of profitability. In other words the more money you have the more money you will make.

The strategy I listed above is unlikely to help many of you because finding a truly profitable edge is unlikely. If it does exist you won't find it on Twitter or in books. Everyone needs to realize they are not a genius, the Market is nearly impossible to beat in the long term. It is just better not to play it. You will go broke in the long term. You are unlikely the exception. Just put your money in an index fund.

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