The Best Way to Become a Stronger Trader

You’re trading a strategy that works. Your trading profits are becoming more and more consistent, drawdowns aren’t too brutal, and you’re proud of what you’ve created. Congratulations! You’ve accomplished what untold numbers of traders could not.

This should be one of the most satisfying feelings you feel as a trader. What you might not realize, though, is that this feeling of satisfaction can turn to despair in an instant. The market can change quickly and it doesn’t care how much work you’ve put in to developing your strategy or how long it’s been profitable.

If you’re trading a single strategy, your trading is vulnerable – no matter how good the strategy is. In order to be successful in the long run you’re going to need to trade multiple strategies.

A couple weeks ago I noticed one of my main trading strategies was performing really poorly. It’s a short strategy and I would have thought it would be killing it in March 2020 but surprisingly it didn’t. After researching for two solid days and trying to figure out a way to adjust it, I ended up abandoning it (at least temporarily).

This was my very first profitable trading strategy that I created all on my own. I’ve traded some form of this strategy for 13 years! This strategy has put my daughters through college and sent us on family vacations over the years. It allowed us to move houses and has given us freedom.

I hate to see it go, but what would have been devastating is if this was still my ONLY strategy. If this would have happened in 2015 or 2016 when it was by far my main strategy and I had not yet gotten other strategies off the ground it would have been soul crushing.

Here’s why.

Don’t Fall in Love with your Strategy

When you create your first profitable trading strategy it is strong source of pride. You’ve literally invented something that creates money! This is fantastic.

The problem is that immense pride in your strategy will eventually make you cling to this strategy longer than you should. There will come a time when your strategy will require major work to continue to be profitable. It might even become completely worthless. It could be happening right now and you don’t even realize it.

When it happens, there won’t be anyone telling you “it’s time! this strategy needs a major overhaul” or “you should scale back your size on this strategy now.” It likely won’t happen quickly and obviously – it will happen slowly and subtly over time. The change will sneak up on you and the warning signs will be small and easy to explain away.

That pride you have in your creation will be a serious vulnerability. It will be difficult to abandon your strategy or admit that it has become flawed because it has become part of your trading identity. To abandon it will mean on some level that you’re giving up on yourself as a trader.

Going from One to Two Strategies is Huge

I think the biggest step a trader can make is to go from one successful trading strategy to two. Because of the psychological issues mentioned above, this step is even harder than creating your very first strategy! As you solidify that first strategy it becomes part of who you are. You start thinking “I’m the kind of trader that trades X.”

Once you do that it becomes harder to create a strategy that trades Y.

But the benefits from having now TWO truly distinct strategies are immense. All at once your trading becomes much more resilient to drawdowns since most of them will be more shallow. See these lines in the chart below. You can see the combined equity curve of both strategies together is a dramatic improvement from either of the two strategies alone.

Two strategies are better than one

The more subtle benefit, though, is that you’ll become less married to your strategies. Instead of having a lot of emotional investment tied up in them, you become a little bit removed.

You become a much more objective observer of your strategies – they need to constantly prove their worth to YOU instead of the other way around. You’ve got options now!

This step took me 7-8 years to truly achieve.

Your Trading Intuition Improves

Once you are able to get a second trading strategy online, your trading intuition will be far better. There are a lot of trading strategies out there – you can’t trade all of them. At this point you’ll be much better at evaluating them and figuring out which ideas to pursue with your finite amount of time.

You’ll recognize some of the subtleties of what happens when you start trading a strategy live versus a backtest or paper trading. You’ll be much more prepared to come up with your third, fourth, or fifth strategy. You’ll waste less time on trading ideas that don’t pan out because you’ll have developed the experience to recognize bad ideas and good ones.

You’ll become more like a general manager of a baseball team, having a broader picture about what’s best for the long term health of your trading team, identifying strengths and weaknesses and addressing them.

Your trading will be far more robust.

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