He studied his losing trades and turned them into a whole new strategy.
Wizard Wednesday #3: an anonymous trader made $500 million, blew up five times, and found his best edge in his own failures.
Chapter three is the first trader Jack let in under a pseudonym, Simon Rousseau. Makes sense. The guy made $500 million in five years. If that were me, I wouldn’t want anyone knowing either. A former music student, no finance degree, which keeps being the pattern in this book.
The idea worth stealing: he studied his losers to build the opposite strategy. He was primarily a short seller. When he wanted to learn the long side, he didn’t start from scratch. He pulled up the shorts that had failed and asked what they had in common. Turned out he was getting smoked shorting low-float names ripping on real news, FDA approvals, big Phase 3 results. So those became his buys. Same setup he’d been shorting, flipped. That’s a systematic gift. Run the backtest on your losers, find the pattern in the failures, and take the other side.
Now the blowups. Most traders blow up small accounts, a couple grand at a time. He blew up $50,000 accounts he’d run to half a million, gone in a single trade, five times. Two causes: boredom trades that didn’t meet his criteria, and giant winners that round-tripped back to losers. A short that got acquired and ripped. Both are things systems already solve. Every trade gets a stop and a position size the second I’m in. No boredom trades, because I only take what triggers. No round-trips, because the exit’s already set.
Read, distill, steal.
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— Michael Nauss, CMT, CAIA, CDMS