 Welcome back to the Trade Hacker Mindset. In this episode, I want to talk to you about the sequence of returns. Trading the markets can be difficult to master and seemingly just out of reach. Professional traders have a secret. Trading requires total mental and emotional control. It requires the Trade Hacker Mindset. All right, so let's jump into this topic of the sequence of returns in your trading or we're also gonna talk about the sequence of losses in your trading. So this episode is actually gonna have some visuals to it. So if you're watching this on YouTube, you will see the actual video. If you're listening audio only, I'll try to do a good job to explain what we're looking at on the visual aspect as well. But this is a very important topic when it comes to trading and back testing and building out your strategies. And I think it's something that a lot of traders tend to overlook or maybe not quite understand or initially grasp until it's too late, until they've had a sequence of losses and then they go back and figure it out after the fact. So hopefully this helps kind of take that away. So you kind of understand this before you get in the trap of falling into something like this that happens. Okay, so what we're gonna talk about is the sequence of returns, sequence of losses and what I'm looking at here on my screen is a back test. And this is through Option Omega. By the way, the folks over at Option Omega have been generous enough to give our listeners 50% off their back testing tool. If you just go to navigationtrading.com slash omega, you'll get that link to take off 50%. It's literally peanuts, 50 bucks a month or $300 a year with that discount. So well worth it and you'll find it completely changes or potentially enhances your trading. It sure has for me. All right, so what we're looking at here is a couple of different strategies and I've put this together as a portfolio and this is a couple of strategies that I trade every single day, okay? This is a zero DTE option spread type scenario that we trade near the end of the day, every single day. And we stream live. So our community is kind of following along. I'm sharing my screen, talking about exactly what I'm doing. And so this is the strategy that I'm trading for the entire month of May, 2023. So the way that I like to trade strategies is I like to decide at the end of each month exactly how I'm going to trade the following month. And I stick with that for the entire month. So even if there's a drawdown, even if there's some little tweak or change that I think might make it better, I'm going to stick that out for the entire month. And then the next month, I'll make the decision of any tweaks or changes or adjustments that I wanna make to the way that I'm trading or if I wanna stop trading that strategy altogether. So I do that kind of one month at a time. It just, it helps me commit. It helps me with discipline. It helps me from looking at all the headlines and what's going on and making discretionary decisions that typically are the wrong thing to do. So that's what I do. So what I'm looking at here is a portfolio of two strategies that I trade. And here's the metrics of this portfolio. So this would be a back test going back to the first part of May, 2022, because that's when everyday expiration options first became available in SPX. And it's through yesterday, which in this case is May 9th, 2023. So a little over a year's worth of data. So the statistics on this back test for that timeframe, starting with $100,000 in capital, it would have grown to 734,000 in capital. So a total profit of $634,026, a compound annual growth rate of over 603%, with a max drawdown of only minus 4.5%, okay? So if you look at those statistics and you look at this P&L curve, which is exactly what we want, right? It's that bottom left, almost a straight line diagonal to the upper right-hand corner, right? That's what we're looking at. That's what we're looking for in a P&L curve, right? And so you look at this and you might say, I mean, that's a no-brainer. I mean, a 4.5% drawdown, that's a no-brainer. I could certainly handle that. I wouldn't even bat an eye at a 4.5% drawdown. That is completely reasonable and something that from a psychological standpoint shouldn't be an issue, right? It's only a 4.5% drawdown. But what you're not seeing just from the high-level overview of these statistics is the sequence of where the profits came in and where the drawdowns came in. So one thing that I like to do is in the beautiful thing about Option Omega is they have a trade log. So you can click on the trade log and you can see every single trade, exactly what the price the back test entered on, what it closed on, the profit on that specific trade or the loss on that specific trade. And you can dig through that and understand, okay, I took a loss because this was going on or I took a loss because this happened or this was a great winner because this happened. So you can see all that stuff and you can update it on a daily basis to check that out. So that's awesome. On the portfolio feature, there's this daily log and that's what I wanna focus on right now because I want to emphasize this whole sequence of returns. So remember in this back test, we started off when SPX first started offering everyday option expiration. So Monday, May 2nd, 2022 was when that started. And so then you can go through and based on these two strategies put together one portfolio, you can see what the profit or loss was on each given day going back to that day all the way through until yesterday. And so you can look at that and you see that's great, pretty nice. And you can see if you started with a virtual, a theoretical starting capital of 100,000, you can see that how that grows over time. So when it comes to sequence of returns, why does that matter? Well, here's why it matters because if I go through that daily trade log and I go to March of 2023, look what happens, okay? So the dates that I'm looking at now, let me try to zoom in a little bit, are March 7th. So March, excuse me, March 8th through March 14th. Okay, so these days here, March 8th, 9th, 10th, 11, 12, 13, 14, okay? So what happened during that period? Well, we had one, two, three, four, five consecutive days of losing trades, okay? So five consecutive days of losing trades where we lost $780, we lost $5,055, we lost $4,545, we lost $3,000 and we lost $3,705. So if you add those up, I added those up and that comes to a total loss in that five period date of $17,085, $17,085, okay? That was kind of the biggest period of a drawdown during this time period for the strategy. So you look at that and you say, wow, am I comfortable losing $17,085? So am I comfortable with kind of the worst case scenario that happened during this period of time using this strategy, am I comfortable with that? Well, remember the high level statistics overall for that time period, the max drawdown was only 4.5%. But if you take 17,000 from your starting capital of 100,000, what if that five day sequence of losses would have happened right at the start, okay? That would be more like a 17% drawdown on your account, right? The fact that this happened after this strategy had already been traded in the back test for some time, in fact, the current account value at that point when this drawdown started was up in the $650,000 range, okay? So we were no longer using capital of 100,000. We were at a point now where our account had built up to 650,000. So those losses, that sequence of losses while it was $17,000, $17,000 of a loss on a $650,000 account is much less from a percentage basis than $17,000 on a starting capital of 100,000, okay? So that's why sequence of returns matters. If you would have started out of the gate with those losses, your performance would not only look much different overall, but it would also, the statistics would look worse, but also could you handle it psychologically? You know, so if you're starting an account and you have $100,000 and you run this back test and you say, oh, that looks amazing, that doesn't tell the whole story. You have to dive deep into the trade log, into the daily log to figure out does this make sense? And I see this all the time with people in our community in their real life trades where they're comparing their real results to a back test and they're saying, man, my drawdown has been, this has been a bad period of time. My drawdown is way worse than the back test ever showed. Well, was it or was it just the sequence of returns? It was at the sequence of losses of what your account value is when those losses happened or is it a matter of reality that the strategy is no longer working? You know, I see it all the time where people, you know, they jump from strategy to strategy or trading style to trading style or variation to variation because something, you know, doesn't work very well for a week or two weeks or three weeks or even a month. But the reality is if you go back through the trade log of the back test, if you're using the back test as a somewhat of a basis for your trading, then you're probably gonna see that that's not an abnormal situation in that strategy. Maybe it is, but maybe it's not. Maybe it's simply an issue of sequence of returns. So I hope that helps. I just wanted to share that and make sure that when you're doing your testing, when you're building out your trade plan, that you understand how that works and how that can affect your trading. Hope this helps. We'll see you in the next episode. Thank you.