Your Equity Curve Is the Best Coach You’ll Ever Have
Happy Friday. I was going to talk about adding to winners, but I made a bold-faced lie to you — I don’t want to talk about that today. I want to talk about something more important. We can get to adding to winners another time. That’s a style, a personality type as much as anything else.
If you trade long enough, you realize your trading is a reflection of your personality. Just don’t be a jerk about it.
Scaling Up
I get a lot of questions about when to scale up. It’s especially a guy thing: “I’m going to trade bigger.”
I think this pattern day trading rule — taking out the $25,000 threshold — is a mistake. It’s timed perfectly for a market top. There are trillions of dollars in margin balances. I don’t know who’s trading on margin today, but I’m not.
Here’s the thing: nothing is certain. We’re always dealing with probabilistic outcomes and uncertainty. That’s what makes trading fun. That’s what gives you the unlimited upside.
If you went and took a job for $180,000, that’s good money. You could survive a long time on that. But every day would look the same. You’re not going to wake up and have it be $500,000. Your bonus is going to be a fraction — some percentage — of your salary. Nothing wrong with it, but most companies say, “You’re a payroll E6. Here’s your salary and here’s your bonus range.”
That would never work for me. As you can imagine, I’m a tough dog to keep on the porch.
Self-Knowledge Beats Trading Knowledge
The thing that gives you insight into yourself is your equity curve.
Self-knowledge, to me, is more important than what you actually know about trading.
What kind of drawdowns and pullbacks have you seen, percentage-wise? Can you visualize them over time? Do it as a line chart and think: would I buy myself here? Am I breaking out or breaking down? Use that chart to say, “Here’s where I need to start cutting my positions. Here’s where I need to cut my frequency. Or, my equity is going geometric — now I need to press.”
That’s the best way to tell. Look at your results.
I’m a visual learner. I need the chart. I can hear things — I’ve been to a million lectures and I read books constantly. But at the end of the day, the most objective way is to chart your progress.
There’s nothing bad about an equity chart with a negative slope. It just tells you that what you’ve been doing isn’t working. Good. Now you can eliminate it. That’s what Chaco says. Good. Might come down 50%. Good. Now you know what not to do.
It isn’t fun. We’ve all been there.
You Can Learn This Yourself
If I have any genuine response to the “should I scale up” question, it’s this: you can learn a lot on your own. That’s the thrust of the videos and content I create — I’m trying to help you teach yourself.
If you’re stuck, we can think about working together. But a lot of this is self-explanatory. First: if you need a psychologist, you’re in the wrong business. Get out of trading.
Second: it’s not that sophisticated. Here’s what I intended to do. Here’s what happened. Here’s my assessment. Was it me? Did I follow my rules? Did I renegotiate my stops because I was within 50 cents of getting knocked out, and I was blinded by the ideology of the story? Did I stay in because I didn’t want to miss out? Because I didn’t want to sell at the bottom and have it rally in my face — especially since I already opened my mouth about how much I love Bitcoin, or whatever it was?
That has nothing to do with trading. That’s ego. Keep your mouth shut.
First: no one cares how smart you are. Certainly the market doesn’t. I found that out a long time ago. I was very well educated, and I thought that would be an asset. But at the end of the day, if you’re not a good person, who cares how smart you are? And what are you using all that brightness for?
Ranges, Plateaus, and Diversification
Your equity curve is the best governor. Think in ranges. My equity ran up and now I’ve plateaued. Why is that? Am I doing something different? Am I not being quick enough to change the asset class I’m trading?
Some of you might have an A setup, a B setup, a C setup, a D setup. No way I could do that. It’s like dating four people at the same time — I can barely handle one.
If I can’t see five to one, that’s my A setup, and if I don’t see it, why am I putting on the trade? What is it that I want? What’s the outcome I want? Do I want to be right?
I’ve been right enough times where I’ve exorcised that demon. I don’t care about being right. I want to know that, for the money I’m putting up, the odds are skewed in my favor. Even if I become an idiot — which I certainly can — if I win only one in five times, I’m still going to make money. It won’t be a sharp slope, but the slope of my equity curve should still be up.
That’s how my mind works when I start thinking about whether to scale up or scale down.
Small Accounts, Big Egos
A lot of times when people ask about scaling up, it’s because they have small account sizes and they feel emasculated. Don’t bring that into your trading. Fix that outside of the markets. You don’t have to worry about that.
Everyone started small. Let me be humble: I started with $5,000, which was about $13,000 in today’s dollars. Some of you watching are leagues beyond that. That’s just where I was at. But I didn’t have a lot of debt, and I didn’t buy things I didn’t need. That kept me in a financially sound space overall.
So here’s the Johnny McGorry: use your equity curve to be your own coach. If you looked at this equity curve as though it belonged to another trader, would you allocate to that person? What advice would you give them?
If the curve is pointing down, that’s not the time to scale up. You only press when things are good — and these are hard markets.
Thanks for all your comments. Please keep the emails and comments coming. I’ll try to get to everything as fast as possible. Get your free copy of The Inner Voice of Trading audiobook at TraderMindset.com. See you Monday.
