Unknown Market Wizards
Pavel Krejčí: The Bellhop Who Beat The Pros
In this interview, the most important message is that it can be done. Given the enormous growth in the quantification of trading in the past two decades, many individual traders and investors wonder whether it is still possible for them to succeed. Undoubtedly, it is practical to ask how a sole trader can compete against a plethora of management firms with scores of PhDs & MBAs. It is true that neither the majority of individuals nor the professional managers will succeed, in the sense of outperforming the relevant benchmark.
However, Krejčí demonstrates that success and superior performance are still possible for the individual trader. Krejčí had no education after high school, no coaches and minimal funds. Yet, he developed a methodology that has achieved performance characteristics that far surpass those of well over 99% of long-only equity managers and hedge funds. He supported himself for 14 years with his trading profits. Krejčí chose trading as a career path because he sought an endeavour in which he would be responsible for his success or failure. The operative word here is responsibility. Winning traders understand their responsibility for their outcomes. If they lose money, they will give a few explanations. Either they followed their methodology, and the losing trade was within the percentage of losing trades that is inevitable, or they made a mistake—a fault they will completely own. On the other hand, losing traders will always have some excuse for their loss- they followed someone’s bad advice; the market was wrong, and so on.
Krejčí cites an example of a trader who succeeded because he found a method that fits his personality. He was uncomfortable holding overnight positions. By trading stocks only, the day after earnings reports, Krejčí was able to develop a strategy that could generate significant returns, at acceptable risk. This means that to succeed in the markets, one has to find a methodology that he is comfortable trading. If there is anything in the approach that is uncomfortable, he needs to figure it out and change the same.
One characteristic that has been common in so many traders is that they are strongly committed to their work. To develop his method, Krejčí had to put in 16-hours daily apart from his day job and market research. Even though his method resulted in no trading opportunities in five months of the year, he would still devote full-time to the markets in those months, using that time to continue his market research.
Krejčí attributes his long-term success to how he reacts to losing moments. Whenever he loses, he focuses extremely on research for improving his methodology.
One significant factor that has enabled Krejčí to achieve his remarkable return/risk performance is his trade restrictions. Krejčí only takes what he understands to be high-percentage trades.
Many traders can improve their performance by passing on the marginal trades and waiting for high-probability opportunities. Krejčí’s edge comes from his trade selection and the entry-exit timing, but his risk management is the reason for his continuous profits.
There are two ingredients in Krejčí’s risk management. First, he avoids the risk of holding positions overnight. Second, he places a stop loss on every trade to limit losses.
Krejčí explains that without stop loss, his percentage of winning trades would be higher, and his returns would be almost the same, but his drawdowns would be deeper. Since larger declines could easily have forced Krejčí to discontinue trading, risk management has been instrumental to his long-term success.