Worst case scenario

by gbsmith4

Amongst the many sins traders make, perhaps the worst is hubris.   The feeling you’ve finally cracked the secret of the market, where only riches lie ahead.

Believe me, I know the feeling.  I think it was March ’00 and I thought I was going to clear $10M that year.  If only…..

The problem was that I thought my strategy was ready for every eventuality.  Sadly it wasn’t ready for an 80% drop in the market.  I mean, seriously: that stuff happened only in the history books, right??

Anyway, my point is this.  As soon as you think you’ve “got things knocked” run your strategy from March ’00 through October ’02 and see how you would have fared.

Or, if you have more of a bearish tilt, run it from early ’98 through early ’00.

And, by the way, you’re only deluding yourself if you say “Oh, I would have sensed that big move coming.”  Believe me, you do sometimes see a big move coming, but you never see EVERY big move coming.

Anyway, if you can churn your strategy through a worst case scenario — and the two I described are pretty much at the extremes — then maybe, just maybe, you have something.

Of course, then you have to avoid the other 983 ways traders screw things up, but that’s for another column…..