Since our goal as traders and investors is to grow our capital over time (more chips in the pile), I'd like to share a great quote with you that really captures the essence of trading.
As star hedge fund manager, Steve Clark said in Hedge Fund Market Wizards:
"Your job as a trader is to make the line of your equity curve go from bottom left to top right. That's it. Don't get hung up on other supposed "mandates". Protect your capital and the direction of that equity line."
Market Wizards author, Jack Schwager wrote that he highlighted Steve Clark for his "remarkable performance consistency". Reading those lines again today, I've come to a deeper understanding of how Clark achieved that level of consistency. He was focused on his one true mandate: protecting his capital so that he could continue growing it over time.
If you allow losses to grow, if you suffer huge drawdowns in individual trades, or add to losing positions in a desperate attempt to prove you are "right" and the market is wrong, you will surely suffer at some point. It is increasingly difficult to get back to your starting point after enduring large losses (simple mathematics), never mind growing your wealth.
This is a subject I've discussed many times with my friend and fellow trader, Olivier Tischendorf, who often speaks to the value of charting his equity curve. Here's what he recently told me:
"When my equity curve is in sync with market action and meets my expectations, I increase my exposure. I press my bets. When my equity curve does not move higher 'as it should', I heed the warning signals and decrease my exposure."
In other words, "when in doubt, stay out." When you are in sync with the market, you have the best opportunity to grow your capital. When you are out of sync with the markets, or conditions are simply too dangerous or unfavorable for your style, it's imperative to cut back your trading and tightly limit your losses. This is how we keep the line of our equity curve moving up and to the right. After all, isn't that the main thing we are trying to achieve?
Related posts:
1. Lessons from Hedge Fund Market Wizards: Steve Clark.
2. How to Pull the Trigger on Your Trading Ideas.
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