Aggressive Trading Strategies: What You Need to Know Before You Get Started // Ep. 52

In This Episode

• Are you throwing away a perfectly good system?
• Why you should understand your internal maximum drawdown first
• Why a 0.75% return is worth more than you think

The Truth About Aggressive Trading Strategies

Most people who come into trading want to make a lot of money quickly.

That leads them to use very aggressive trading strategies. In reality, trading strategies that have a high return per winning trade also have “side-effects” that most people cannot tolerate.

Some of these issues are:

• Large drawdowns
• Very low win rates
• The potential to blow out your entire account

If you don't understand risk management and the parameters of these aggressive trading strategies, then you are probably going to blow out your account.

But these strategies can work, if you can tolerate the drawdowns and if you know what to expect. Learn our tips for approaching these types of trading methods and where to get started with testing.

Read the Transcript:

Walter:     I was talking to a trader the other day or messaging a trader the other day. What he wanted to do was get really aggressive with his trading strategy and use some aggressive-like risk algorithms. So we were working through the numbers and he was trying to figure out, he kept coming back to this point like, “Oh, my system is not good enough. My system is not good enough”.

What I was trying to share with him is that actually, your system is pretty good but what's happening is when we tweak the risk so much and get really hyper aggressive, it is leading to likely draw downs that are going to freak you out.

I think we confuse as traders this idea of the system is no good. When really we put that label on it. When really it is more that the way we are trading this system is making it no good for our appetite for draw downs. Do you know what I mean? Do you know what I'm saying? Does that make sense? Have you ever had that? I've had that happen lots of times.

Hugh:     Yeah, for sure. I mean, I think there's also this idea that if you get a result at a certain risk amount like maybe half a percent risk, the same results are going to scale up if you risk five percent. It just does not work like that. I mean, your draw down is going to be more and like you said obviously, the psychology is going to be different.

Sometimes, systems just blow up when you increase the risk that much.I think that's what people need to understand in addition to you know tailoring the draw down to their personality, right?

Walter:     Yeah, exactly. You reminded me of when you said that, it is exactly like saying, “Well, if I got from here to Las Vegas in ten hours at a hundred miles an hour, I'll just go two hundred miles an hour and I'll get there in five hours”. You are going to die, right?

Hugh:    Yeah.

Walter:    You are going to die on a forty-five mile an hour turn like it's over. So it is the exact same thing. It is exactly what you said, that is totally it. That is trading like thinking that everything is completely scalable.

Actually, I learned that lesson really early in terms of strategies because one of the guys that was sort of getting me into trading, he wanted to work with me and my friend in trading. Sort of like start bringing investors and stuff and he was like, “It is scalable?”. That was his main thing. He worked for a broker. So he understood this idea of: Is it scalable? Is it scalable? He kept pounding on this.

I was like, “Man, what is this guy talking about?” but I realized what it was because some strategies really only work at a certain size. Do you know what I mean? For example, like if you're scalping the Euro or whatever for five pips you're actually going to move the market. I mean, you are going to move the Forex market if you have too much size there.

You actually won't be able to get into all your positions. I know people think about this more in terms of stocks and trading shares and that sort of thing. I saw a really good presentation on this from the guy who founded Oanda. His name was Richard Olsen. I  don't think he has anything to do with Oanda anymore.

He sold out his part of it but he was showing all this data. He had tick data going back to the eighties or something. The biggest takeaway I got from it was, it does not actually take that much to move the Forex market you know.

We think of it as this big massive but he's like, “No. So if you are trading like ten lots or something, ten standard lots or whatever, that's enough to actually really push it you know”. I found that fascinating, that whole idea. So this idea of scalable and it just you know maps on perfectly.

Obviously, that is not the case. We often confuse whether or not it is the system that we do not like or the risk parameters that we've placed on the strategy, on the system and that leads to draw downs that we can no longer withstand. I mean, that's the one thing I try to get across to people.

It is that psychologically your biggest issue is going to be dealing with the draw downs. So you may as well up front go, “All right, what is the draw down I am willing to withstand?” And, what is the draw down I am willing to draw the line and say, “I am okay. I am done”.

So now, you need to do everything possible to avoid that draw down where you say, “Oh, I'm done. I cannot do this. I cannot sit through a thirty percent draw down, that's impossible for me to do. I know that so I am not going to do it”. So you need to know where that is before you ever start trading the strategy. That is the key thing.

Hugh:    Yeah, sure.

Hugh:    Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.

Hugh:     I think one thing that people think of also is, “I need to increase my risk” or, “I need to increase the return because I can't make a living on…” whatever it is. One percent, on ten thousand dollars which is all they have in the account to trade.

The reality is that maybe you just get an investor. You get more money or whatever it is. You can always somewhat scale that up but thinking that you only are limited to what's in your account and the return on your system is kind of like you know, you're kind of throwing away a good system when it could be useful.

Walter:     Yeah, absolutely and you know that idea, that one percent that you said, the first traders that I came across was this group in London. My friend introduced me to them and do you know what their goal was every week? They had a very, very simple goal.

Every week, they just wanted to make a point-seventy-five percent. That's it. That's all. In some weeks, they'd lose a half a percent or one percent but they wanted to average every week point-seventy-five percent. That was it. That was their goal. It's just boom, boom, boom.

You would be amazed at how quickly your account grows if you can do that. Even if you can only do a half-percent-a-week. If you just keep that money in there and if you're able to compound it, you don't have to pull it out, you'd be amazed at how that can grow. It doesn't take that long actually. So it's going to grow faster there than in the bank, that's for sure.

So you know  that's the thing, it is that sometimes you do have to take a step back and go, “Okay, well I am not going to be super aggressive so what can I do?” Maybe that's what you can do. Just take it you know break the goals down into more achievable you know aspects and more achievable steps.

Hugh:     Cool, good advice. All right. Thanks, Walter.

Walter:    Thank you.

Hugh:    All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

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