I’d spent 20 years preparing for the day…
It was February 1, 2005. My first day as an Air Force retiree.
I woke up that morning and didn’t have anything to do. The first such morning in half my life.
It was exactly what I’d planned for.
My plan was to trade for a living. I had my pension and health insurance backing me up, along with some income from writing about the markets.
But if I was going to build the life I wanted, the bulk of it would have to come from trading.
I succeeded… but not right away.
Just as I started, I faced a devastating losing streak. It felt like the market was testing my resolve and ambition.
I passed that test. I was amply rewarded for sticking to my guns. And the experience solidified my trading process for the decades to come.
A Simple Strategy and Two Targets
When I started out, I had a simple strategy in mind. I wanted to use just one technical indicator, modified for my purposes. And I aimed to use the futures markets to maximize my potential gains.
I talked about why I focused on futures earlier this week. For an investor with a good sense of risk management, they were the best leveraged trading vehicle at the time. (Options weren’t nearly as prevalent or easy to access then as they are now. If they were, I would’ve traded those.)
I was trading futures on the U.S. dollar and Treasury notes. Long-term systems work well in these markets, because trends tend to last for months.
My strategy used the popular indicator Bollinger Bands. I would buy when prices closed above the upper Band, and sell short on a close below the lower Band. When the price crossed the midpoint of the Bands, I would exit either position respectively.
This was a long-term strategy. So, I changed the Bands a little to suit my needs.
Instead of the 20-day default setting, I used about four months’ worth of data. This made it so I had about two or three signals a month, on average. This would let longer-term trades persist within my system’s rules.
I started trading the strategy about five years before I retired. It worked well, earning me about $110,000.
It also had a great back tested record. Going back to 1985, the strategy would’ve taken an account from zero to over $200,000 by the time I began trading it.
The red line shows the profits or losses trading one contract at a time.
(Click here to view larger image.)
In 2005, this strategy had a great 20-year track record. The strategy made money in 18 years. Losses in 1985 and 1996 were small. Trading a few contracts at a time would generate the income I needed.
You might notice something unusual in that chart. There’s a big dip in the otherwise steady line, starting on February 1, 2005, and lasting all the way through early 2006.
If you’re reading closely, you may recall that was the day I retired.
The system didn’t make any money in 2005. The losses continued for 20 months from when I started trading.
The strategy suffered its worst performance in more than 20 years, right when I started using it to make a living. All told, it lost me about $91,000 — a huge chunk of what I’d earned the previous five years.
Traders like me are prone to suffering during losing streaks. I questioned everything. I thought I might have to exit retirement and get a job – the last thing I wanted to do.
But I knew that I’d be okay. This strategy worked for decades. It was just a losing streak. The worst thing I could do was panic.
I stuck with my strategy. In time, I was rewarded. In the five years after the downturn ended, the strategy handed me about $300,000.
Looking back, it all seems inevitable. I had a strategy that worked. The only difference was that I wanted it to continue doing exactly what it’d done for the previous 20 years.
Markets don’t work that way. There was nothing especially different about 2005 that would cause the strategy to break. It’s just that sometimes, strategies don’t sync with the current environment. Over time, good strategies always snap back.
It’s almost as if the market saw I was retiring and wanted to test me. I like to think I passed its test.
Michael Carr, CMT, CFTe
Editor, True Options Masters