How wrong are you prepared to be?

Volatility rules in the markets right now.

But rather than measure the volatility of the markets … instead, I’m going to hold my stethoscope to your personal trading to check on your profit volatility … how rampant is it?

How much of a roller-coaster ride are you taking … and what effect is it having on your profitability, and your health?

Trading is all about winning and losing … we know that both will happen to us, and we hope that we’ll win more than we lose.

But what about the ups and the downs? How much of a roller coaster ride can we stomach?

And, more importantly, how much of a roller coaster ride can our finances take?

Too often when we’re judging trading performance, we add up the winners and the losers, and use that to gauge our success.

What we ignore is volatility.

One way to measure this volatility is to look at drawdowns – we see these as the troughs on our equity charts …

Just as things are going along nicely … the drawdown strikes.

And they can have a devastating effect on your trading, as you start to lose money and lose faith in your system. Drawdowns will often cause traders to give up completely. The table here shows just how dangerous drawdowns are for our trading health. Every percentage point we lose sets us further and further away from achieving our goals …

But long-term profitability isn’t just a sum of our winners and losers … volatility plays a crucial role.

Profitability is very vulnerable to volatility, as you can see from these examples …

Let’s say that we have £100 to invest, and we expect to make 20% profits on a good year, and 18% losses on a bad year. And we get 50% good years, 50% bad years.

It’s not a big margin, but if you’re making more than you’re losing, you should expect to come out on top … right?

Here’s how the first ten years might go …

£120
£98.40
£118.08
£96.83
£116.19
£95.28
£114.33
£93.75
£112.50
£92.25

Your average annual return is +2%, but because of the 20% upswings and 18% downswings, this is being eaten away by volatility.

Compare this to how you’d fare with a 2% steady return over the same 10-year period …

£102
£104.04
£106.12
£108.24
£110.41
£112.62
£114.87
£117.17
£119.51
£121.90

This is why traders to look for big winners (which inevitably come hand-in-hand with big losers) will almost always do worse in the long-term than traders who look for lower, but steadier returns.

If you want an exciting roller-coaster ride from your trading – accept that you’ll be paying out for the thrills. But if you want to make the best return long-term, you’ll need to look for slow-and-steady profits.

The good news is that my top-recommendation for a steady long-term return has just become more accessible. If you’ve not been able to use this method before, I hope it will open it up to a wider audience. Please watch out for my email next week with all the details.

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