Let’s take a look at why traders lose their focus and figure out where this focus goes. It is simple, usually it is because their focus gets fixated only on making a profit.
They invest only to increase their capital. It’s as simple and obvious as that.
Less immediately obvious is the importance of the way to obtain a profit with trading. There isn’t a trading system where you always win, but there are systems which deal with negative and positive phases. The aim is to have the positive phases outweigh the negative phases.
This is the reality of the facts of trading. Sooner or later all traders end up having to deal with this concept, which in technical terms is called the drawdown.
How many times have you read or heard about people who have earned unusually high profits? Maybe even 100% in a month or sometimes even more.
Inexperienced traders might focus on this data without even thinking of anything else. The experienced trader, however, does not just focus on how high the profit is but always asks the two following questions in order to have sufficient data to evaluate whether the strategy is valid or not: “What risk profile did you use to do the trade?” And – then – “What was the maximum drawdown?”
In 2011 I participated in a trading championship organized by an English broker. I finished fourth place (with an excellent 45% profit in 2 months). The person who won got an amazing 164% profit in less than 2 months !
Was it a trading phenomenon? I would say no, especially if we look at the performance of the winner’s account.
If the equity looks respectable to you, let me explain how you evaluate an equity line.
Let’s start from the beginning: equity is the performance of an investment account or of a prospectus of the investment.
In the equity line you can see that the starting point is: 2,000 euro and the point of arrival, more than 5,000 euro. Usually traders and inexperienced investors stop there. For me it is the starting point. The next step is this:
What was the maximum drawdown? I’m only interested about the final gain up to a certain point, I am much more interested to know what amount has almost been lost.
Try answering this question:
WHAT IS THE VALUE OF AN INVESTMENT THAT IF ALL GOES WELL, DOUBLES AN ACCOUNT IN A MONTH BUT WITH EVERY TRANSACTION YOU MAKE YOU COULD LOSE EVERYTHING?
I will give you a clue: It’s not worth anything! ZERO!
A good investment is not evaluated so much on what you could make but the way in which your assets make you a profit. If any operation involves risking losing everything, this is not a good investment strategy but rather a ticking time bomb about to explode!
You might just as well go to down to a local casino and try your luck there if you want to take those sort of risks. If you are only interested in profit and do not worry about losing everything, then gambling is perfect for you.
Instead, in my classes, I teach other strategies: I want my class participants to leave my courses with sound methods enabling them to invest their capital while maintaining total control. My aim is to give them a method that in good times make high profits for them and in bad times minimalizes their risks.
Let’s go back to the previous scenario, chasing the elusive ‘good investment‘, and answering my question: “What was the risk involved?”
Look carefully: the starting point is 2,000 euros but after only 10 transactions the amount has dropped to just over 400 euro. I’m talking about a loss (drawdown in technical jargon) of nearly 80%!
So here we can see the story behind the final profit of 164% from a different angle: it was obtained with the risk of losing almost everything. And when an investment method makes you vulnerable in bad times to the risk of losing almost everything, it is not a good investment method.
Learn to evaluate a trading strategy and investment prospectus that do not limit you in terms of profit, but allow you to evaluate what kind of control you may have on your capital and what risks you might incur.
Trading in Options is the first and only course in Italy that truly teaches you how to invest in option trading and earn even when the market is down.
To your financial freedom!