- Picture Courtesy of Seabamirum
One of the biggest mistakes new traders make is to focus on the rare ‘Black Swan’ event happening instead of simply trading a methodical system. Too many traders continually bet on a big crash happening by buying put options or selling futures short in the middle of a bull market than simply going with the trend of the market. Too many new traders want to be the next Paul Tudor Jones by being right about a crash. Paul Tudor Jones did double his account selling short on Black Monday but the rest of his career was based on steady trades taken in the direction of a trend or betting against extended market tops and bottoms.
Black Swans are rare events and do not produce steady market returns due to there randomness and rarity. For me the warning from Nicholas Nassim Taleb about the dangers of Black Swans in the markets applies more to risk management than creating a system around their occurrence. Taleb had both great success while trading the possibilities of Black Swans on a few occasion and severe drawdowns when none appeared over prolonged periods of time.
I believe that profitability lies in trading signals inside a winning system not betting on a Black Swan event to make you rich. The governments of the world all focus on preventing bad events from occurring which bring down the probabilities of events outside the Bell Curve. The path to trying to capture a Black Swan event usually causes a drawdown and could lead to ruin . While a trader has to manage their position size so they are not ruined by an outsized move caused by a Black Swan event, in the long term your profits will be made by normal price action of White Swan market action. The path to long term profits is buying the deep dips caused by fear or trading with the trend. Trend followers will capture a lot of Black Swan profits because they will be on the right side of a trend when the Black Swans do take flight.