There are many differences between theory and reality in trading. The accumulation of a lot of practical experience will be the most useful help on the road to progress.
Risks are the most important thing in portfolio construction:
The purpose of portfolio construction is not to eliminate risk but to diversify it. Market risks will not be eliminated, but can be diversified away and reduced through strategic allocation. The starting point of any investment portfolios should be based on the amount of risk you are willing to take.
The profits you earn comes from the risks you take:
Regardless of the nature of excess returns, it comes from taking on additional risks. Typically, the greater the expected returns, the greater the risks taken. Even arbitrage trading strategies that take advantage of special situations or behavioral biases in market microstructures can still have risks that arise when market participants start to learn your strategies and chip your profits away. So, excess returns will gradually be diluted to zero. In short, there are no profitable, long-lasting, and risk-free trading strategies.
Don’t ignore Beta for Alpha:
Finding alphas may be the goal for many traders. But, in asset management, consistently earning profits is the most important, whether it comes from Alpha or Beta. There are always risks in the market. In addition to pursuing alphas, we must also carefully examine the possible use of beta in our portfolio.
Don’t make meaningless bets for any reason:
The consequences of actions out of greed are always more serious than you think. Any short-term successes from betting cannot take you very far in the long term.
Be sure to understand your risks as much as possible and be prepared for them. Don’t accidentally turn trading into gambling.
The psychological impact from live trading is much bigger:
Managing real money is very different from backtesting and researching strategies. The drawdown period of strategies is often underestimated when you develop strategies. Several months of drawdown period may only take a few seconds in your mind during backtesting. However, in live trading, the psychological impact from long drawdown periods is often ignored, resulting in unexpected trading results you may not have expected during strategy development.
There are many things in the past that will never happen again in the future:
Many strategies will perform very differently from backtesting after they go live. One reason can be that their performance was overly dependent on a few unusually large market movements during backtesting. If you simply look at backtesting reports to calibrate your strategy logics or configurations, you can easily fall into such a trap.
If you don’t have a good understanding of how the strategy made profits in the backtesting period and whether it is likely to happen again in the future, you may be waiting for trading opportunities that will never come.
The market is never wrong, and neither is your strategy:
There is no right or wrong in market behaviors, and nothing is supposed to happen. The same things apply to the behaviors of your strategies. Strategies will not achieve expected results in the future just because of how well it performed during backtesting. You also should not think of the outcome of a strategy as a success or a failure. Faced with current and future markets, the only real question is whether the strategy is suitable or not. Overly blaming unsatisfactory results on strategies being right or wrong is just a delusional way to escape from failures, missing out a lot of opportunities to make your strategies more suitable for the current market. Many strategies are gradually modified into a more comprehensive model only after being hit by the market again and again.
