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>From Linda's book "Street Smarts"
excerpt from CHAPTER 25
THE SECRETS OF SUCCESSFUL TRADING
by Fernando Diz
{Ass't Prof of Finance
a study of CTA success and failure}
The Secrets of Successful Trading page 201
An important lesson to be drawn from this finding that is particularly
suited to traders who have been in business for a very short time is: Avoid
large drawdowns and recover from them quickly if you want to stay in
business (but do not increase risk to do it!). More interestingly, when you
include the maximum number of months that it takes a trader to recover from
its worst drawdown in the analysis, these two variables alone explained 88
percent of the predictive power of a model with all the edge and money
management variables put together!
This clearly demonstrates that although unsuccessful traders have a smaller
edge over successful ones, their smaller edge is not the cause of their
failure; their money management is! In fact, their smaller edge may very
well be a result of poor money management.
This is quite revealing. What it basically tells us is that most CTAs or
programs that have gone out of business had enough of an edge to stay in
business! The cause of their failure can be traced to poor money management.
Two of the most important components of successful trading are the edge of a
system and sound money management. This study confirms this notion.
Successful traders have a larger edge and better money management than
unsuccessful traders.
Unlike popular belief however, this study shows that the smaller edge of
unsuccessful traders is not the cause of their failure. Traders failure can
be explained almost exclusively by their poor money management practices.
The techniques taught in this book will give you the trading edge you need.
If you want to increase this edge, the importance of money management cannot
be stressed enough.
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