The Rarest of Trading Virtues

Having had the privilege of interacting with many independent traders, prop traders, and traders at funds, I've come to the conclusion that most of them are overleveraged. In the pressure to generate profits, they trade size that is too large relative to the losses they or their firms are willing or able to sustain. One result is undue performance pressure on the trader, but another is the inability to take heat. Raising leverage leads to a shortening of time frame in an effort to contain drawdowns. This, in turn, leads to an inability to ride winning trade ideas.

The rarest of trading virtues is simply the ability to persevere with positions when winning.

If many traders are overleveraged, there is a potential edge to an expansion of holding periods. When others are shaken out, you can ride a longer-term move.

In the latest update to the trader performance page, I illustrate how returns are improved simply by basing trading strategy on the number of stocks making fresh 65-day lows. It's a trading dynamic worth checking out. But the strategy requires the ability to hold the resulting position for many weeks, not days or hours.

Many traders simply can't do that. Maybe they need the action of in-and-out trading. Maybe they're trading so large that the drawdowns associated with longer holding periods shake them out. Or maybe they just can't muster sufficient confidence in their market views.

It's so rare to see traders fully milk their trades.

Perhaps it takes a unique independence of mind to tune out others and stick with your convictions. This evening I was looking at returns after the S&P 500 Index (SPY) makes a 50-day high vs. a 50-day low. Going back to 2004 (N = 824), we've had 31 occasions in which we've had 50-day lows. Twenty days later, SPY was up by an average of 1.98% (24 up, 7 down)--not bad odds.

Conversely, when SPY has made a 50-day high (N = 124), SPY has averaged a 20-day gain of .04% (76 up, 48 down).

There are so many reasons to avoid the market when we've made 50-day lows; so many reasons to jump aboard a trend when we've registered 50-day highs. Even in this persistent bull market, it's taken independence of mind to make a winning trade--and then it takes fortitude to ride it to its potential.

Now that I think about it, those sound like the same rare virtues found among successful entrepreneurs. It makes sense: every trader truly is an entrepreneur, aggressively pursuing niches of opportunity unseen by the established business giants, while keeping a close eye on the bottom line.

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