5 Lessons From The Greatest Trader In The Century

Five trading lessons from Jim Simons:

Quantify your edge through backtesting. 

“We search through historical data looking for anomalous patterns that we would not expect to occur at random.” – Jim Simons 

Backtesting past historical price data can give you an edge in trading current price action. Most traders do some thing like this without even realizing it. They have rules and confirmations they follow. The problem is they never use statistical analysis appropriately to back up their “strategy”.

Trade your system with discipline. 

 “We don’t override the models.” – Jim Simons

After you create a trading system with an edge, you have to trade it consistently with discipline. No trading system will work if it is not followed long enough to let it play out and be profitable. All systems have drawdowns and losing streaks even the ones used by the Medallion fund. In simple terms be consistent and discipline. AI Technology can help you do this ;).

Trade a diversified watchlist for more opportunities. 

“We have three criteria: If it’s publicly traded, liquid and amenable to modeling, we trade it.” – Jim Simons 

Be open to looking for trading signals and create what we call the “portfolio effect “, Find multiple solid trading systems and when one is in drawdown or struggling the other ones can pick up the slack.

Trading different types of signals on a diversified watchlist of markets, stocks, and currencies that backtest well can increase your opportunities to make money in different market environments. 

You don’t need a high win rate to make big returns. 

 “We’re right 50.75 percent of the time… but we’re 100 percent right 50.75 percent of the time. You can make billions that way.”  – ‘The Man Who Solved the Market

Jim Simons models tended to focus on risk to reward and shot for 1:2 risk to rewards .

Example of a 1:2 risk/reward with a 50% win rate:

$100+$100+$100+$100+$100-$50-$50-$50-$50-$50=$250 profit

Example of a 1:3 risk/reward with a 50% win rate:

$150+$150+$150+$150+$150-$50-$50-$50-$50-$50=$500 profit

Its simple math at the end of the day. If you risk to reward is good you can lose more.

There are universal principles of profitable trading.

“The things we are doing will not go away. We may have bad years, we may have a terrible year sometimes. But the principles we’ve discovered are valid.” – Jim Simons

Trading systems face drawdown and in every market conditions change. The principles Jim follows will prevail in the long run. Profitability comes down to trade management, position sizing to avoid the risk of ruin and a trading system that has a positive expectancy.