Scattered Like Rats Aboard a Sinking Ship

Trading and Markets
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Why is it with all of the information out there that investors still make the same mistake over and over and over? Who are the people that follow C2? I guess a bit of a mix from beginners to pros.

Let’s look at a strategy I recently established on C2. It’s a basic strategy that over the long term should keep pace with the market with a little less volatility in returns compared with most 5 stock portfolios. Fortunately in March it had a bit of a run up making about 10%, gained a bunch of subscribers then hit a 7% drawdown over a period of weeks and just about everyone bailed…

Another strategy is at new equity highs and people are jumping in at quite possibly the worst time to start an investment in that system , being long only and subject to large losses should we see another market pull-back. The system will likely make new equity highs after a pull-back but will anyone still be aboard to take advantage? Not likely based on the behaviour above. (not that I am discouraging you!, just be ready for the drawdown at any time!)

Another look at review after review shows any period of losses whatsoever is met with poor reviews and finger pointing, the behaviour persists over and over. It’s a beginners mistake.

The first strategy above is based around solid long term logic. Pick 5 stocks and express your investment with the use of option selling. The system will pick up premiums every single week but, stock will often be sold at a loss. The hope is the premium income exceeds the capital return over the investment period (from weeks to months or longer). The thing is the raw stock strategy has a 30% drawdown, using options the drawdown will be subsdised by any premium received, but to take advantage of the returns, historically tested to be about the same to the upside on average you have to endure volatility. Without risk (volatility) there can be only low returns.

How can anyone hope to succeed by jumping from one system to another at the first sign of trouble? System can take a long time to assert themselves, some systems fail but they all have one thing in common, if they do make money you have to trade through the drawdown and that means sticking with a system for longer than 5 minutes, understanding the risks, the drawdowns, the returns potential and the underlying premise so when the proverbial does hit the fan, it might be uncomfortable but at least it is within expectations.

If anyone reads this is a subscriber to Halifax Index Trader 2 please check the drawdown in Halifax Index Trader, the dollar loss may not be as high but do expect 40-50% drawdowns on recommended starting capital at some point in time and make sure you have the necessary capital to ride through the rough times, so if there are any good times (which I expect there will be) you’ll be still invested… For those who subscribed to and then quit Halifax 5 Covered Call thank you for the interest, suggest that bailing on the first market fluctuation is short sighted, but then time will tell…

Perhaps I have my wires crossed and the trial ran out or maybe the research process is to do a trial, test a system and see if you like it or not, in which case my mistake :wink: the comments are still valid though.

It comes down to exactly what C2 says, if you do invest into a system such as the ones I’ve put together (or someone else’s), stick with it and you might make some money! and only invest risk capital that could lose much of its value if things don’t go according to plan.

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I think anyone that has a system with subscribers sees a similar thing. People make the same sorts of mistakes over and over, it is in their nature the same as buying stocks high then selling low. It’s the same with trading systems–many people lose money even in profitable systems. Here is an excerpt from some advice I send to new subscribers to my system to try to help them be aware of the mistakes people tend to make:

Drawdowns
A great way to lose money trading (despite subscribing to profitable systems!) is to give up when a system eventually has a drawdown. This is analogous to the “buy high and sell low” mentality that most investors naturally suffer from. The pattern goes like this:

  1. Profitable system has a good period and attracts new subscribers.
  2. System hits an ordinary drawdown period, some subscribers quit.
  3. System recovers to new highs while ex-subscribers do not.
  4. Ex-subscribers find a new system on a hot streak to join and repeat the pattern.

There will be drawdowns. Individual trades usually go negative for a while [referring to my system Drunk Uncle here]. The larger strategy itself will have regular drawdowns with the occasional larger drawdown. You can be sure that any profitable system you follow will have rough patches on its climb higher. If you quit and sell out at the rough patches you can lose money despite the strategy being profitable over the long term. Whatever system you’re following, be ready and able to trade through its typical drawdowns.

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Another aspect that we have stressed on in a previous post here is the importance for subscribers to create a portfolio.

Each Strategy is different and aims to maximize opportunity in a different manner and therefore, will incur drawdowns from time to time.

C2Explorer’s ‘GetCorrelationTable’ function makes it easy to identify candidates for building a portfolio. Here’s some example code for those who are not familiar with this function:

Int64[] systems = new Int64[] {
    46106678, // Bob Dylan
    90325773, // Ascendatnt
    84690231, // Genefish Hong Kong
    92728998, // RSI Opportunistic
    90134941, // SPXTrends Futures
    77119743, // Mean Reversal ES Daily System 
    95943912, // 76West
    98852250, // Halifax Index Trader USA
    92190352, // Drunk Uncle
    97468745  // TickPrime SP500
};

H4 = "Building a Portfolio including the SPY ETF";
TABLE = GetCorrelationTable(systems, "SPY", TimeInterval.Month, "tm");

And here’s a snapshot of the output:

Disclaimer: We run TickPrime SP500.

Regards,
ACA

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I agree with the point above about using a portfolio of strategies, not just for the foreseeable like anti-correlation and drawdown reduction but for protection against unforeseeable events like system failure. Even systems with years of good results can have unexpected drawdowns and even stop working. If you run a portfolio of strategies you are in a much better position to manage a system going off the rails.

Of course in managing multiple strategies you don’t want to bail on typical drawdowns. Of course determining what is a reasonable drawdown and what is an unexpected drawdown can be tricky. I’ll try to post some strategies I have on determining that later when I get a chance.

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It is a very good point being made here. I deal with both Qualified (institutional) and private investors and there is a BIG distinction between the two. Qualified investors are likely to increase their positions with a system / portfolio when certain drawdown targets are hit. The private investor jumps ship and then comes in again on the new equity high. The larger and more serious investors that use C2 out there understand this - and a good vendor has a very good understanding of the drawdown depth and duration of their systems. Scary fact? Most decent systems are in a drawdown however small around 50 % of the time using daily data. Regards and good trading to all.

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