Back to Zero

When traded system hits some bad times many traders start to think about abandoning system; they will look for new “holy grail”; or they will stop trading or drop size until system recovers. Over last two to three months I read many worried e-mails in which traders were talking about systems that are not performing anymore and required number of points just to break even.

Getting back to break even level or “Back to Zero” is exactly what I would like to write about today.

Trading and sports (and any other performance discipline) are very closely correlated in terms of skill development. Many hours of learning, back testing, paper trading, keeping journals and statistics - all of that boils down to one trade in a day, month or a year. Same is with professional sportsmen’s training: training day after day and even more training and preparation and hard work, just to run 100 meters race in approximately 10 seconds.

Many years back, country that I’m coming from (Yugoslavia - as of now there are six independent countries, as a result of dissolution of Yugoslavia) had the best female tennis player, who dominated for period of few years. Her name is Monica Seles and she played at the time of Steffi Graf. Her success in tennis arena was recognized because she was number 1 player for many months and because she won Grand Slam tournaments.

What some tennis player from some ex communist country has to do with trading?

It is very simple: Monica Seles, from the beginning of her tennis career was taught not to count points in any of games/sets played. On the contrary, she was taught to play every point like it is the last point in the game, match or her life. This approach might cause some disagreement, but her results proved that those coaching ideas were viable options.

Yes, but what about trading?

If you ask me - “Back to Zero” is something that will hurt anybody’s trading skill. You should execute trades like this is the last trade which will be thousand point winner. (All of this, adhering to your system health analysis, money management, trade management and risk management rules.) You should not look back to locate where we stand on the equity curve and how many points we should make to break even. Bigger picture is what has to be there in front of your eyes.

Equity curves and drawdown have their own space in statistical measurement of system and systems comparison and these statistical measurements are, among other tools, very important. My point is: If you trade thinking about “Back to Zero”, that is probably going to put tremendous pressure on you.

Of course, if one is undercapitalized and must pay his bread and milk from monthly profits, “Back to Zero” becomes massive problem. However, that is the story for next time.

Trade with trend!