This is one of THE biggest problems that active investors struggle with. It goes to the heart of the discussion on this thread. Performance. The answer is essentially about trust. At three levels…
Before explaining the three levels, the direct answer to your question is: we don’t know whether an “Edge” will maintain its edge and advantage over the market over time. If we did, that would be certainty.
Dave & I cover in the The 4-Week PROCESS + MINDSET Training Intensive James Clear’s Atomic Habits, where he explains how our minds are hardwired to seek to be right and predict getting positive rewards in the future. And how human beings struggle to build habits in environments where we get lots of negative feedback. Sound like trading the market?
Market indices spend over 90% of their life in drawdown! Around 50% of trading days over the long term are negative! We cover more detailed stats in the Training Intensive in Session 2.
Active investors admit that “there is no crystal ball” yet seek certainty (there are no degrees of certainty, it’s either certain and a probability of 1, or less than 1, and uncertain) by wanting confirmation that “the Edge maintains its edge over time”.
James Clear tells us where this thinking comes from. But it’s more than thinking, it’s human beings default mental setting. It’s hardwired in our automatically operating subconscious minds, as beliefs. Until we unwire our subconscious by instilling new beliefs wrt trading. How do we do that?
The answers are in Mark Douglas’s Trading in the Zone.
More specifically, in the The Uncertainty Principle from Chapter 6, which we unpack in Session 6.
Back to TRUST.
Sooner or later, we have to confront, and then completely accept, the reality that the market can do anything at any time over any timeframe. More than half the time it will NOT do what we are hardwired to expect, or predict, it will do. We will never know the timing of the ‘half’ or over what period the ‘half’ will occur. It’s open to too many ever-changing variables, making its movements random.
Meaning, our task as a successful and skilled trader is to have NO expectation, projected into the future, of what the market will do. It doesn’t mean that because the market, or your trading account value, has risen strongly over the last month, quarter, half-year, year, 3 years, 5 years or 10 years that it will continue to rise in the same or similar way. Regardless of what method we use.
Conversely, it doesn’t mean that because the market, or your trading account value, has fallen, or not risen to a new high, over the last month, quarter, half-year, year, 3 years, 5 years or 10 years (the NASDAQ100 TR index took 16 years & 3 months to rise and remain above its previous high - 2000 to 2016) that it will continue to fall or track sideways in the same or similar way. Regardless of what method we use.
Our job as a skillful trader is to trust: the market, ourselves and our edge(s).
The opposite of trust is fear. You can’t trust and fear at the same time, one will get the upper hand.
Trust can lead to success, peace and joy. Fear will never lead to these but rather to indecision, failure, discomfort and despair. The three ‘trusts’:
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Trust that the market provides an endless stream of opportunities in all its everchanging timeframes. And that it moves in price trends in all these timeframes.
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Self-trust in ourselves that we can flawlessly execute an edge without any trading errors. Meaning, to execute consistently, objectively and peacefully without hesitation, internal conflict, doubt or fear.
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Trust that each “edge” we use has a statistical and probabilistic advantage in the future horizon, trading timeframe and lifestyle we have chosen.
To expect or predict what will happen in a future timeframe, based on what has happened over a certain passed timeframe, merely self-sabotages us to be able to execute our “edge”.
Our human minds are hardwired to want to know. Defaulting to our human hardwiring does NOT work if our objective is to be a skilled, competent, peaceful, successful active investor.
If we desire this objective, then we have to “step into a process” (one of Mark Douglas’s favourite phrases) to redefine, reframe and retrain how your mind works with respect to trading financial markets. This is the Skills Acquisition Plan provided in The 4-Week PROCESS + MINDSET Training Intensive (or The Exercise on page 185 in Trading in the Zone).
So where does this leave us with trusting an (our) “edge”? An “edge” is, by definition, probabilistic in nature, i.e. it is not certain.
Sooner or later, we HAVE to trust an “edge”, some “edge”. Otherwise, we’ll never achieve consistency and have the ability to “flawlessly execute” our “Edge”.
What do YOU have to do to trust any “edge”?
Simply read a paragraph on a website about the performance of 3 of an edge’s metrics? Or 6 or 7 metrics. And which ones?
Were the results achieved in backtesting? Or live trading with money at stake? If live trading, with how much discretion? (Discretion and subjectivity have a very low probability of being repeated or replicated into the future by somebody else.)
Over what period was the backtesting? And the live trading with money at stake?
Covering what market conditions? For backtesting and live trading?
In conclusion…
By default, we are discussing mechanical trading systems here.
The great majority of traders don’t use mechanical systems. They use subjective and discretionary decision making. Understand that 70% - 90% of traders lose money (mentioned in the Training Intensive). Nearly all of them do not use mechanical systems. Their benchmark is not a Total Return index, it’s the $0 horizontal line along the bottom on an equity curve chart. They just want to be profitable…
What we are discussing here is attaining mindset skills that can ONLY be achieved by trading with a mechanical system. Not my words, Mark Douglas’s.
So, which comes first? Trust in a mechanical system or self-trust.
You can post your answers to Dave’s post from today here: Thought of the Week