Main Source of Long Term Trading Losses

It’s not extremely hard to find things that work on the market. The hardest thing is to make them work properly and make you money in the long run.

The main problem why you not perform may be not that you trade things that do not work. You may have decent setups or strategies or vision, but still, struggle to turn all this into consistent money flow.

The reason is that you over-react on the dynamics of your performance equity. When everything goes well, you scale up, when you hit by a drawdown, you scale down. That may seem perfectly reasonable practice, but in the long run, it may become a serious burden dragging your performance down if you’re too fast scaling up and down.

Your psychology is pressing you to do it fast. When you’re growing, you want this to be as fast as possible. When you’re hit by a drawdown, you want to protect whatever rest of your profits at all cost. All this seem so reasonable!

The problem is that many conditions on the market tend to be clusterized. When you hit the sweet spot of market state, you may locally have a boost in performance. When you’re in a bad spot, it may seem a stroke of bad luck. In other words, trading “luck” tends to be kind of cyclical.

The pro-cyclical pressure of your performance makes you over-invest into your trading right before your good luck is over. And under-invest (or even quit) right before your good luck is about to start.

I believe this is the main source of long-term trading under-performance.

Control your scaling practice.