Irrefutable Law of Trading Success #2: What to Trade, NOT How to Trade!

What to trade, NOT how to trade.

What to trade, NOT how to trade.

What to trade, NOT how to trade. 

This is rule number two of the 10 Irrefutable Laws of trading success, which is what to trade is much more important than how to trade. Now let's talk about this. Most people spend a great deal of time focusing on how to trade. What entry pattern do I use? What setup do I use? How do I manage the trade? How do I exit? These sorts of things. People spend 1000s and 1000s, if not millions of dollars trying to answer these questions, and they're going out and they're taking class after class after class and they're optimizing parameters sets, they're back testing everything and they're looking for that holy grail indicator. That is going to give them the success that they're looking for in their trading. Now I can identify with this, because I have done this myself and have not only done it once, I've done it over and over again. I've even done it when I knew I should not do it. See, I love patterns. My mind just blossoms with patterns. It finds them soothing and so going through and looking at chart after chart after chart, looking at data, looking at these sorts of things, I find it really, really interesting. But the reality is, is that in the 80/20 principle, it's a waste of time. Understanding what is the right market to trade is so much more important than how you trade it. I've sat down with people and looked at trading systems or trading methods that they've used, and they were stupid. I mean the methods were just stupid. It was like kindergarten shit. But guess what? They made money with them. I'm like, How is this possible? It's because they were in the right what to trade. 

Right now we're in an AI mania, crypto's exploding. There's a handful of sectors out there right now that the money is easy. It's easy to make money in NVIDIA. It's easy to make money in Netflix and Mehta and Microsoft and Advanced Micro Devices. It's easy to make money in Bitcoin and Ethereum and all the other smaller cryptocurrencies, because they're just flying right now. Let's talk about this for a minute. My partner Mark told me a story. He was one of my all time favorite stories. Mark was brought on by a professor at Stanford a doc named Dr. Tom Johnson when Mark came out of school at Berkeley and Dr. Tom Johnson spent a great deal of time securing these data libraries, these databases from different universities around the United States that had all of this past trading data. They set out on a major project that they wanted to go out and they wanted to test all the different types of technical analysis and in doing this with the hope was that they would find the cream of the crop, that they would find the best of the best. They did this with well over 120 years of data. Cross commodities, stocks, different countries, bonds, you name it. They went out and they tested it and during all their testing, they started to see patterns that were the best performing patterns. They started to see the types of technical analysis that held up the best. They identified this and then they decided to set out and go raise money and become money managers and part of doing this to fund themselves is they went out and they started teaching classes, teaching workshops on their research and what they learned. They went to Europe and they were teaching classes around Europe and teaching their classes they ran across a group of French PhDs. The French PhDs had actually engaged in a very similar project to what Mark and Tom had and so they got together and they compare notes and they found that there was a great similarity in the work they were doing as they discussed their experience and actually trading it. One of the things that was very interesting was when they traded it, their systems did well, but they didn't do quite as well as what they had seen in their back tests. Everything was more streaky. There were longer losing streaks than what they expected. The French PhDs said the same thing. They had spent all this time modeling and researching and testing and the patterns are good, but they were not quite as good as what they expected them to be. they are comparing notes on this. 

About the same time, they're teaching a workshop in Europe and one of the most successful money managers in all of Europe, attended their workshop. This is somebody who had been making 25 to 30% for years as a macro investor and so he attended the class and he's like, I love your material. I'd actually like to see if I could hire you to be consultant and look at my stuff and they were excited. They're like, Yeah, sure you're one of the best managers in Europe. We'd love to see how we could help you and maybe we can learn a little bit ourselves. So they agreed to go look at his work. Now when they were doing all their testing, the one type of technical analysis that showed up consistently the worst, consistently the worst was moving average crossovers. Moving Average crossovers did great in trending environments, But they were absolutely brutal, brutally bad and congestions. So they were the worst. So they knew this. They had great confidence in it. So they go sit down with a macro manager and he shows them his system and he trades moving average crossovers and they were just stunned. Mark and Tom were just stunned. This is the method they knew was the worst and yet, not only was he not doing the worst, he was doing the best. He was massively outperforming Mark and Tom with something that they knew was inferior. Now, why is this? How could this possibly be? And so they started looking at it and he had a real knack for knowing what were the best markets and if he ran his Moving Average crossover system in these top trending markets, it worked great and he had a real knack of knowing when it was over and then he didn't trade them when they congested. So it worked and that was a huge eye opener for Mark and for Tom, when they started to realize that what you traded was actually a lot more important than how you traded it.

Now, I have story after story after story after story of this that I can share with you. People that would go trade, let's just say, the Euro every year or the s&p every year and they go trade the s&p every year and they make $500,000 day trading the s&p. They have a nice life and they like it, but then something like a 2020 COVID Shock happens or the 2008, 2009, 2011, where the market gets incredibly volatile and really starts to fly around. Well, all of a sudden the guy's making 500,000 in a typical year. All of a sudden makes 5 million day trading s&ps. He makes 10 times more than he made in a typical year. In fact he makes more in one year then he made in his whole career. Now is he 10 times a better trader? No. The market got incredibly, incredibly volatile and it became a very favorable market for them to trade. That was it. So this is really important. Some of you have heard me say this many times already. But this is one of those 10 Irrefutable Laws, that if you find the right markets to trade, virtually anything you test will work and if you're finding the wrong markets to trade, it's going to be a bitch to get the best stuff to perform well. So, there you have it. It's what to trade, not how to trade. I'll see you next Tuesday when I come to you with another tip, law number three and how to take your performance to the elite level. Have a great week.