The Edge
Your priority in trading MUST be capital preservation before profit. Every professional trader knows this and acts on this in his or her routine.
The edge we trade is only slight… and as we teach in Lesson 10 – there is a fine line between pleasure and pain… A fine line between consistent profits and consistent account erosion.
Besides the added emotional turmoil of pulling an account out of drawdown (particularly when you’re living off your trading account)… drawdown also imposes a mathematical disadvantage which we characterise in Lesson 3. It’s called the drawdown recovery table, which highlights an extremely important truth about trading:
The more your account dips into drawdown, the harder it is to recover.
You can have the best strategy on earth, but if it’s run through a risk management system that see’s you hit 75% drawdown in a short period of time… Do you have the emotional courage, the patience and the will to stick out a 300% recovery over the course of months, potentially years, just to reach breakeven again? Probably not. And it’s a mammoth waste of time!
On the contrary, someone trading that same strategy, who hits just 7.5% drawdown instead, has an easy, pain free recovery time before they start making new account highs and compounding growth kicks in again.
Your goal as a new trader should not be to seek out the best performing strategy, and drop your existing strategy every time another one with better results pops up… That will never stop happening! For the entirety of your trading career, you will ALWAYS come across another trader who’s doing much better than you in the short term. Dropping your strategy for theirs, IS THE ROOT CAUSE of most traders failing at trading. It is a greed based decision that strips your existing strategy of the potential of being profitable, by violating the very principle that makes us money as traders over time: The Law of Large Numbers.
Your goal then, should be to firstly preserve your capital, and then to master the mind game. When you can protect your account from large drawdowns, and you learn to approach the market calmly and consistently, while avoiding acting on fear and greed… consistent profits and account growth are a side effect of those actions and habits!
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