Trader hype

I operate a free collaboration site on Slack. We have a small community. Although we haven’t been together for very long, I feel like I understand how most of them operate. I believe most are profitable and responsible with risk management. While they do not post their PnL and position statements, as I do, I can say without reservation that these are some of the best (nonprofessional) traders I’ve worked with. Futures, FX, equities, and options on all of them. Good group of generous people.

That said, I’m learning a tough lesson. I gave funds to a member who has a fantastic knowledge of options and volatility. After three weeks, the balance is down 26% largely due to one directional bet on long volatility. While I’m up for the year in my larger account, I am down for the year as a whole due to poor risk management in this smaller account.

The lesson is this: it is foolish to allow someone else to trade my account if I already have a profitable model. It is foolish to think that I can safely add returns by “diversifying” across trading approaches. Diversification in trading as an absolute positive for returns, is a myth. Even in traditional asset allocation discussions, vigorous challenges to diversification are supported with greater evidence than before.

More to the point: anyone can talk a good game, and even produce a positive track record. But beware of cognitive traps when evaluating traders. Not everyone is who he (or she!) seems to be — even if there is no fraud, there is also no real edge most of the time. The perception of success and profitability is easy to cultivate — Twitter Finance is infested with people who make false claims. Some pretty big names in that space are frauds. (This is why I left Twitter.) Fortunately, I’m collaborating with good people. One of them just needs to work on his risk management skills a bit more.

When it comes to seeing the actual trades in my account, the cold, hard truth of my PnL is the only thing that matters. My perception of someone’s skill doesn’t matter. His or her reputation doesn’t matter. The “buzz” doesn’t matter. I don’t have time to mess about any longer. I need to get to work.

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2 thoughts on “Trader hype

  1. “The “buzz” doesn’t matter. I don’t have time to mess about any longer. I need to stop these little “adventures”. I need to get to work.”

    Amen to that mate, mind if I post this link on my site?

    Like

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