CHASING THE HOT HAND

I was on a conference call today with some top traders, some of the best in the business and one topic came up that I found interesting. Every single one of them with no exceptions has had or currently has one of more trading services. I asked them at one point how they handle the ups and downs and surprisingly they all said that one thing they know will happen is the minute they get on a hot streak new clients will pile in the door. They also said the minute they get on a cold streak everyone leaves. This type of herd mentality is why most people do not get ahead in trading.

There are many counter intuitive things you have to do and believe me it is not easy to do some of them. One of the traders, probably the most well known to me of all of them, mentioned a trading program he had that went through a good sized draw down last year. He told me the very last client left the day of the low in the draw down and by the end of the year it had far exceeded the prior equity peak. The problem of course is that not one single person of his original group was around to see the turn around and new equity high.

If you look at the chart above would you want to be the guy who bought at the high? That is the equivalent of chasing the hot hand with trading programs. I am not picking on that market in the chart, it could be any market, it could be the stock market. The point is that getting in after a rise of that amount is not a high percentage play.

If you plan on following a trading program from me or anyone else, I think it is a good idea to outline your plan. If the plan is to go do something define how you will do it. Set it aside for one week and do not think about it. After a week come back to it and see if it still makes sense. I would be willing to bet that if the plan was originally at one point to find the hottest trader you could find and just follow him blindly once he gets hot, you would think a week later that might not be such a great plan. It would be a great plan to follow a great trader, but it would not be a good plan to wait for him to get on a hot streak. It would be a better idea to wait for him or her to have a down period. I will give you a real life example in my life. Last month we had a bad stretch in our bond system and Ryan at Robbins put a new client of his into my Bond System atfer the losing streak. The logic was that he believes in me and my system and told his client if he wants to follow me now is the time to do it. The client thus far has 3 trades all wins, the last 3 trades we have done.

Whether it is me or anyone else, the time to start following someone if you believe in them or their programs, is after a draw down not after a big run up in equity. This does not assure anyone of anything, but it is a better probability play. It is how I manage my money with my Bond System. When it goes through bad periods I trade it more aggressively at some point looking for the reversion to the mean. There is any guarantee that a draw down won't get bigger or just keep going. However, we know there are always going to be draw downs, so if it is in your own trading and you believe in what you are doing stick with your plan. You establish and uncle point and if you reach it stop trading and re-evaluate. The uncle point needs to be realistic, it can't be 2 ES point on a 75 tick chart, and it should not be $5000 on a 75 tick chart either. Something more moderate in them middle would be best.

The moral of the story is don't follow the herd they always wind up going off the cliff.

Have a great Friday and weekend next week is bound to bring some action since this week was quiet.