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Interview with LEAPS Trader

Justin Vandergrift trades LEAPS as a trend follower. A recent interview:

Q. How did you become interested in trend following?
A. Ten years ago I bought a copy of Omega Research’s Super Charts assuming that the software would pave the way to riches. I dreamed up ideas and tested them. All the systems I came up with were tested against my benchmark: A simple price action indicator. After many months of testing nothing surpassed that simple benchmark.

Q. But you knew your entry mechanism was only the start?
A. I began studying money management, but there was not much written on the topic.

Q. What is more important money management or trend following?
A. That’s a loaded question. But money management is the key to any trading system. Money management will make a good system better. Trend following, however, opens up a bigger Pandora’s box. Trend following makes trading (and life) easier.

Q. Why?
A. Yeah, following a trend makes trading easier. Most traders look at the wrong things when evaluating a system. Being right is not what makes money.

Q. What do you mean?
A. To be a successful trader you are going to be wrong more than you are right. Most can’t handle this reality. Most think that if you are not right 51% of the time then you will not make a profit. That is absolutely incorrect; you can be right 40% of the time or less and still make significant amounts of money.

Q. How do you back this up?
A. Look at these two example systems:

System #1

  • Percent Accurate: 73%
  • Average Win: $750
  • Average Loss: $1,000

System #2

  • Percent Accurate: 40%
  • Average Win: $3,000
  • Average Loss: $1,000

At first glance most would favor system one. It looks robust enough. With a little calculation you can determine the expectation per trade for each system.

System #1

  • Expectation per trade: $277.50

System #2

  • Expectation per trade: $600

After 100 trades (assuming the next 100 will produce the same results as the previous 100), system one will generate a profit of $27,750 while system two will generate a profit of $60,000. You can go further and determine what I think is the most valuable piece of information about a trading system: the breakeven percent.

System #1

  • Breakeven percent: 57.14%


  • Breakeven percent: 25%

This is significant. System one needs to be right 57% of the time just to breakeven. System two needs to be right only 25% of the time. When you start trading a system you are not guaranteed that the next group of trades will produce the same percentages as the track record. If you place 10 trades and 7 are losers, system two will still show a profit, system one will show a loss of $475 per trade. You need to create a trading environment where it?s easier to succeed. It is easier to succeed when you only need to be right 25% of the time in order to generate a profit.

Q. Provocative. Elaborate?
A. Some trend followers have drawdowns that can last for months. Then performance can often turn higher and roar straight up. The only way to do this is to have a method that favors system two over one (from above example).

Q. Talk about your trading?
A. I trade stocks. My research has centered on how to use a retirement account to follow trends.

Q. Any success?
A. LEAPS provide an answer. The LEAPS offering was a pleasant surprise. I was not as revolutionary as I first thought.

Q. Your insights on LEAPS?
A. LEAPS lower your breakeven percent. When comparing a LEAPS trade to an equity trade I found that my average loss dropped 50% or more, but my profit profile stayed roughly in check. Remember system two from above. Let’s say this was an equity trade and your breakeven percent was 25% and your expectation per trade was $600. If you lower your average loss by 50% your breakeven drops to 14.29% and your expectation per trade increases 50% to $900 per trade. The results over time can be substantial.

Q. Keep us posted on your LEAPS work?
A. Absolutely.

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