This is part two of the interview notes where Christian discusses his 433% gain from 2024 with Richard Moglen. Here is a link to part one.
The power of limiting monthly drawdowns
Christian evaluated the impact of capping monthly losses at different percentages, such as 5%, 4%, 3%, 2%, and 1%, and found that capping monthly losses is crucial for preventing significant losses, especially during unfavourable market environments.
By cutting size and preventing losses from getting out of control, he was able to turn a 36% annual loss into a more manageable outcome, (in previous years) highlighting the importance of risk management in trading. Once you have the downside covered, you can think about increasing size.
Christian started as a risk-averse trader and worked diligently to become more aggressive and confident in his ability to take risks and size larger trades.
Mental toughness
Traders with high conviction and confidence have a high chance of blowing up and quitting during bad times, but if they can survive and control risk, they have the best chance at big gains. Risk-averse traders, on the other hand, struggle to grow their account and put on size, requiring the development of mental toughness to overcome this issue.
Building mental toughness is a gradual process, similar to weightlifting, where one must start small and slowly increase the load. Christian started as a risk-averse poker player, but over time, he became numb to monetary and emotional swings, taking years to develop this tolerance.
The transition to trading required him to start over and rebuild his tolerance for risk and emotional swings, which took him time to get under control.
Dealing with stress
Trading is a constantly pressuring environment, unlike poker, where the game can be turned off, and the pressure is relieved. Having large positions in the market can be extremely emotional, causing sleepless nights and anxiety, especially during weekends.
Dealing with the emotional aspect of trading takes time and may require working with a trading coach or psychologist to overcome personal limitations. (visit Brett Steenbarger’s author page on Amazon)
Certainty versus uncertainty is a significant challenge in trading, and exiting trades can sometimes be a relief, especially when the trade is fluctuating. A trader experiences relief when finally exiting a trade, regardless of the outcome, as the uncertainty is over and you can finally relax.
The book “Best Loser Wins” is recommended for its insights on trading psychology.
To succeed, traders must do the opposite of what average traders do, such as not holding onto losers and not selling winners too early.
Most traders are risk-averse, with around 8 or 9 out of 10 traders falling into this category, as boom and bust traders often blow up and don’t survive. Risk-averse traders have a longer learning curve and can survive, whereas boom and bust traders often blow up and quit.
Defining risk in the markets and managing it is crucial, especially for recovering boom and bust traders who have gone through significant changes
Understanding risk & the importance of risk-adjusted sizing
Position sizing should not be thought of in terms of a fixed percentage of the account, but rather in terms of the specific risk percentage assigned to each trade, allowing for flexibility in the amount of the account allocated to each trade.
Let me explain.
A trade with a tight stop can have a larger portion of the account allocated to it, but the trader will only hold it if it moves immediately in their favour due to the risk of gaps against them .
When entering a trade, the trader looks for a cushion or market feedback on day one to determine whether to keep the trade or scratch it, with no firm profit target but rather a dependence on the general market conditions.
The decision to stick with a trade or cut it depends on various factors, including the total risk to the portfolio, the risk on the specific trade, and the market conditions, with the trader trying to let the stop get hit but willing to cut the trade if necessary.
Progressive exposure and cutting trades
Christian moved away from an all-or-nothing approach to cutting trades and now tries to be more incremental, cutting half or a quarter of the position if unsure. Progressive exposure is key in managing trades, and position size should be adjusted based on recent trade performance, such as sizing down after a series of losses.
It’s essential to avoid the mentality of trying to recoup losses quickly by sizing up, as this can lead to deeper drawdowns and significant account losses.
Keeping drawdowns small is crucial, as large losses can lead to a significant need for gains to recover, creating a slippery slope mentality that can negatively impact mental state.
Risk averse mental composure
Risk-averse traders have an advantage in managing their mental state, as they are less likely to put themselves in situations that can lead to significant losses and emotional distress.
Having mental and emotional capital in trading is crucial, as losing confidence and conviction can deplete quickly, although it can also be regained fast, and progressive exposure helps in capping losses and allowing small wins to boost psychology.
Progressive exposure is beneficial as it helps in quickly regaining confidence after a small win, even after taking a small loss, and allows for a faster recovery from losses.
Holding winners, the hardest part of trading
Holding big winners is the hardest part of trading, as it can be emotionally challenging to hold onto a stock when it has already gained a significant amount of value, especially when it involves a huge amount of money.
Entries can be more scientific, such as using breakouts, opening range highs, and stop-losses, but selling is more of an art that traders need to improve on, and it changes depending on the market environment.
The decision to hold or sell depends on the market context, with trending bull markets favouring holding winners longer and choppy volatile markets favouring selling into strength.
After a trending bull market, the next year often brings a more choppy and volatile market, making it essential for traders to adjust their strategies. Traders need to adapt to the market and adjust their strategies, such as using trailing stops, to maximize their gains.
Progressive exposure and adapting to the market can be key to success, and recognizing patterns and themes, such as the tendency for strong trending bull markets to occur every four years, can help traders make better decisions.
Following experienced traders, such as Mark Minervini, can provide valuable insights and help traders navigate challenging market conditions.
Create your own modelbooks
To take trading to the next level, it’s essential to review and learn from past trades, including those that were successful and those that were not. Studying past trades, including those of well-known companies like Facebook, SE, and Blackberry, can help improve trading skills and build confidence in sizing positions.
Building a model book can be a valuable learning experience, and it’s essential for putting up big numbers in trading. A homework exercise for readers is to go through a list of names and review their trades to learn from their experiences
Using the USIC as an example, out of 400 or 500 entrants, only the top 20% of people who are really into trading are likely to be successful. So make sure you start building model books and play books of your favourite setups.
The challenge of consistent long-term performance
To achieve a 433% return in one year, you must outwork everybody else, as it is not possible to put up such numbers without doing so, and it is also important to be a consistent winning trader.
Only about 20-25% of traders are profitable every year, even in a bull market, and out of those, only 15-20 are up triple digits.
It is better to control the drawdown and be profitable every year, rather than having one big year and then having a significant loss. A 35% return per year is a fantastic number, and if you could put up such numbers forever, you would go down as one of the greatest traders ever.
Long-term consistency is more important than one big year, and it is better to have steady returns rather than a boom-and-bust cycle. It’s crucial to control drawdowns and avoid giving back big profits, aiming for small losses instead of big double-digit losing years.
Trading for a living
Trading for a living is a challenging goal, and it’s essential to differentiate between trading full-time, where a separate income source is available, and trading for a living, where the trading account is the primary source of income.
To achieve trading for a living, it’s crucial to have multiple years of living expenses saved and a large trading account, as well as a plan for managing expenses, such as housing and education costs.
The cost of living can significantly impact trading for a living, and factors like rent increases, family size, and education expenses should be considered when planning for this goal.
Trading for a living is very difficult, especially when there are high and rising living expenses, and it’s recommended to have years of consistency and multiple years of living expenses saved before attempting it. It’s also essential to assume the worst-case scenario, including a significant drawdown, and be prepared for it before contemplating trading for a living.
Many traders have had to leave the profession due to blowing up their accounts, sometimes in just one or a few trades, highlighting the difficulties of trading. Trading is often portrayed as easy and successful on social media, but in reality, it’s a challenging profession that requires managing money, accounts, and living expenses.
If given the chance, the advice would be to stay in a secure job and trade full-time without relying on trading as the primary source of income, as this would alleviate pressure and allow for more relaxed trading. Trading under pressure to make money can lead to mistakes, and it’s essential to avoid trading in a position where money is needed, as this can result in trying to force trades and making errors.
Closing thoughts: The key to success is full commitment
To outperform and achieve success in trading, one must go all in and devote themselves fully to it, as it is a challenging and frustrating endeavour that requires a lot of hard work and dedication. The journey to becoming a successful trader can be emotionally and mentally demanding, but if you persevere and make it, it is worth the effort.
Following humble and focused traders on Twitter can be beneficial, as they often share valuable insights and advice on how to navigate the challenges of trading. Meeting and learning from other traders, either in person or through online communities, can be incredibly helpful in improving one’s trading skills and gaining new perspectives.
If trading is not for someone, it is perfectly fine to acknowledge that and consider alternative investment options, such as buying the S&P or NASDAQ, which can provide a more straightforward and less demanding way to invest.
To succeed in trading, one must be willing to put in the effort to outwork others and continuously learn and improve their skills. Reaching out to experienced traders, such as through Twitter, can provide valuable opportunities for learning and growth.
Studying the strategies and approaches of successful traders, including those who trade differently, can be a great way to gain new insights and improve one’s own trading skills.
When learning from others, it is essential to be open-minded, take notes, and be willing to listen and learn from their experiences.
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