Looking Forward not Backward
When you are driving down the road do you only look in the rear-view mirror or do you look at the road in front of you?
When you are making investment decisions do you make them based on what you expect in the future or what has happened in the past?
When you are choosing a trading system/methodology do you look at past results only or base your choice on what is likely to happen in the future?
Based on conversations I have had recently with brokers, clients and potential clients, the tendency seems to be looking at what has happened in the past NOT what is likely to happen in the future.
If you don’t drive by looking backwards, then why make investment choices by looking backwards?
I think I know why. Because it is MUCH easier to look backward (past) than it is to look forward (future). Also, you are never wrong when you look backward but are often wrong when looking forward. So why bother even looking forward if you are probably wrong! I think that mentality has to be overcome for successful investing. I know I have had to deal with this…it is very easy for a system developer to only look backward since that is the data we have to test on. However, I think trading and investment system success only happens when one develops the ability to base decisions on the probable future instead of the certain past. Let me repeat that, I assert that trading system and investment success only happens when one develops the ability to base decisions on the probable future instead of the certain past.
Now, how do we determine the probable future? Well, unless you can see the future (I can’t), the best you can do is look at what is happening right now. To continue with the driving analogy, we can look at our speed, weather conditions, number of cars on the road, lanes of traffic, etc. to determine our probable future (will we get where we want on time, is someone going to pull out in front of us, etc.). For trading, are the strategies performing as expected, what is current volatility and 3 month implied volatility and is that good/bad typically for this system, is there any outside influence on the market (i.e. FED POMO buying/selling), etc.
System trading is not easy. And trading systems after you have had big losses is even tougher. Specifically with my systems, by far the most common thought is that these systems don’t work anymore because of the results the first half of the year. Well, ALL systems have drawdowns and now these systems have come out of one of their biggest ones, and I assert the reason for the big drawdown is because the market behavior changes when the FED is pumping in money like it did during QE1 and QE2 (ref. blog post: http://trendfindertrading.com/blog/?p=1920). Now that the intervention is over, these systems are back to performing as expected. Also, current volatility and 3 month implied volatility are high, which is when these systems typically make their largest profits. Is it certain Trendfinder’s systems will have large profits the next few months? Of course not, but based on current conditions that is the likely future in my opinion.
Take on looking forward not backward.