Adrian Reid (founder of Enlightened Stock Trading) recounts a personal "oh crap" trading moment: after trading a self-developed, backtested system successfully, market conditions turned volatile and produced 27 consecutive losing trades. Although the monetary drawdown was about 25% due to small position sizing, the streak was psychologically distressing. Using backtesting, Reid diagnosed the issue as an overly tight stop loss (compounded with small position size), and by widening the stop in simulations he improved win rate, smoothed the equity curve, reduced trading frequency and stress, and produced a more robust system. He urges traders to investigate uncomfortable drawdowns with backtesting and to learn backtesting skills.
Questions this video answers
27 consecutive losing trades.
About 25% drawdown.
Adrian Reid, founder of Enlightened Stock Trading.
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Have you ever had one of those moments in your trading where you just thought, whoa, I didn't know that could happen. My name is Adrian Reed. I'm the founder of Enlightened Stock Trading, and I want to share with you a story about when that happened to me. I've been trading systematically for a couple of years, and I was trading a system that I developed myself, and I backtested. I was very confident in this system, and it worked. I had made a lot of money with that system. But eventually, something changed, and the market got what went from a nice, smooth trend to a much more volatile sort of situation. And all of a sudden, I was getting loss after loss after loss, and eventually I ended up with 27 losing trades in a row. That was my moment where I was like, whoa, I didn't know that could happen. Now, I wasn't in a huge drawdown. The drawdown was only about 25% because I was risking a very small amount of money on each trade. But the 27 losers, neuropsychologically was very difficult to take. And. And by the end, I was thinking, okay, what's going on here? Do I need to turn this system off? Is it broken? Do I need to change something? And so at that point, I did a deep dive investigation. This is something you need to do before making any rash decisions about your trading. You've got to really understand exactly what's happening. This is why backtesting is just so powerful, because it gives you the tools to investigate and figure out what's going on. Anyway, when I did this deep dive investigation, what I discovered was that my stop loss was too tight. And because previously the market was very smooth, that tight stop was really working in my favor. But as soon as the market got a little bit volatile, that stop loss kept getting hit time after time after time. And with those tight stop losses, you know, high number of losing trade, high percentage of losing trades, equity curve was very volatile, had a pretty sizable drawdown. And psychologically, I was very uncomfortable. So I asked the what if question. And this is the power of backtesting. When you ask, well, why did that happen? And then, what if I did this instead? So I played. I figured out that the stop loss was the problem because that was what was causing me to exit with a loss. All of the other components of the system were fine. So I widened out the stop loss, and I gradually widened it out, widened it out in the backtesting to see what would happen. And as I widened it, what I realized was I'd Made a critical mistake in my system design. You see, I tried to minimize the risk on each trade by using a tight stop. Instead of minimizing the risk on each trade by keeping very small position size, I was keeping a small position size, but my stop loss was also too tight. So I was getting too many losses in a row. It was death by a thousand cuts. So as I widened the stop loss, what do you think happened? Well, my win rate went up, my equity curve got smoother, there was less frequent trading, so the commission cost was less, the level of stress was less, and overall I was much more comfortable trading the system. So when I got to that point of the 27 losses in a row and I did that investigation, I learned something really, really important. That's the power of investigating mistakes.
Things that you're uncomfortable about, things that make you feel nervous, things that trades that stress you out. The power of using backtesting to investigate all of those things. Because I was uncomfortable with the 27 losing trades in a row. I mean, who wouldn't be, right? That triggered an investigation and I used the back testing to figure out exactly what caused it. And then I found in that backtesting investigation the way to fix it. All of a sudden I had a much better system, much more stable and robust, much lower work effort, and psychologically much easier for me to follow. So when you have a situation you're training really uncomfortable at, or you have a string of losses or a level of drawdown that you're not comfortable with, that's the trigger to get into backtesting. Figure out what caused it and what you can do differently. If you don't know how to backtest, stick around, because inline stock trading is the place to learn it. Once you have that skill, you can answer your own questions. You can do figure out what's going on, what caused it, and you don't need to rely on any other third party to tell you the answer. You can find the answer yourself because you've got the tools in the backtesting skill that you've developed. So 27 losing trades in a row was my oh shit moment. What was yours? Comment below. Let me know what yours was and maybe I can give you some guidance about how to investigate, how to think about it. And if you don't know how to back test, now's the time to learn. Because it is a game changing skill. It's a tool that you need in your trading tool belt that will keep you stable and in the game and confident for the rest of your trading career. My name's Adrian Reid. This is enlightened stock trading. See you in the next video. Bye for now.
