A Loss By Any Other Name

Trader's Mindset

Feb 10

Phil Ivey is one of the great poker players. As cited by Wikipedia, he’s regarded by many as the best all-around poker player in the world. But, some may not know that his story is one of perseverance.  He blew out multiples of times as a teenager trying to make it as a pro. I think I read something like nine times. But, he believed in himself and knew the end result was worth more than any amount of money he could lose. He knew he had to take a shot to make it. He had an ability, he recognized his ability, and also recognized that the ultimate rewards would be worth more than the pain of loss.

It is a great story. But, is it a great story for most traders? There is an alternative and quite compelling perspective. That view is that a loss is a loss. For most of us, capital is not easily replaced. If you lose even 4k per year on poorly tested systems then over 10 years that’s 40k worth of investments you could have had. That 40k over an additional 15 years, with an interest rate of 7%, could have turned into 110k. This view is that it is not enough to have some evidence that you can be successful but you need a preponderance of evidence and it doesn’t matter if it’s trading, investing, or starting a business. This view recognizes that most “risk ventures” do ultimately fail. Above all else, don’t lose money: winning at the investment game is simply the byproduct of not losing.

Personally, I have always cringed when traders compare trading to investing. In my mind, the most important aspect of any investment is that you don’t lose money. Of course, making money is great but everything is secondary to the first rule. Trading on the other hand is a high risk activity, and because of that you need to see the potential to make a significant return. A common citation for a reasonable return for a high risk endeavor is 100% return on capital (Disclaimer: I am not making any claims about whether or not such a return is realistic or attainable, obviously for most it is not).

Both views have merit. Maybe, it is worth it to take a shot but, also, you need to set and define minimum standards for risking money in the markets. So, which view do you think is correct and why?

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.