The SIM Series
The Trades That Don’t Work
(Dan Goldberg, Head of Risk)
Last week, we discussed some differences that take place as someone moves from SIM to LIVE. The whys as to how some people can make money on SIM, and it all goes to pot when they go LIVE.
This week, I want to go through the main types of trades that I feel I see a lot of throughout our Phases that just won’t be able to make the transition between the two.
1) Ultra-Tight Scalps
Trades targeting very small price movements—often one or two ticks—frequently appear profitable in simulation.
In SIM environments:
- Orders are often filled immediately
- Queue positioning is not realistically modeled
- Slippage is minimal or nonexistent
In LIVE markets, those same trades depend heavily on order book priority. If dozens or hundreds of traders are ahead in the queue at the same price level, a fill may never occur beforeprice moves away.
In fairness with TT, this has become less of an issue. That said, I still worry about the high-frequency trader, as psychologically the changes we discussed last week are bound to show up more in the trader that has such a high frequency in their strategy and relies heavily on their own discretion.
2) The Martingale Approach
The Martingale strategy is a position-sizing method where a trader increases position size after a loss in order to recover previous losses when the next winning trade occurs. The basic premise is simple: if you double the size after each loss, a single winning trade should theoretically recover all previous losses plus produce a small profit.
While the logic appears mathematically appealing, the Martingale approach breaks down in real trading environments for several reasons.
Loss Streaks Are Not Rare
The Martingale strategy assumes that losing streaks are short and that a winning trade will occur before position size becomes unmanageable.
In reality, losing streaks are a normal statistical feature of trading systems. Under Martingale sizing, position size grows exponentially during these streaks. What begins as a modest trade quickly escalates into a position that is disproportionately large relative to the account.
Position Size Grows Exponentially
Martingale does not increase risk gradually; it increases it exponentially. Within only a few losses, the required position size becomes impractical for most accounts. The capital requirement grows far faster than most traders anticipate.
Capital Is Always Finite (except on SIM)
The Martingale framework implicitly assumes unlimited capital. This is fine when it may be true on SIM, or you can get a reset or buy a new $99 account, but LIVE, I think it is understood that this isn’t the case. Your limits and your money will run out way before your streak turns.
Psychological Pressure Escalates
As position sizes escalate during a losing streak, psychological stress increases rapidly. The trader is no longer managing a normal trade. They are managing a position whose size is driven by previous losses rather than market opportunity.
This often leads to:
- Early exits
- Hesitation on entries
- Emotional decision-making
The strategy becomes progressively harder to execute precisely when discipline is most required.
Martingale does not solve losing trades. It amplifies exposure to them. The strategy attempts to overcome statistical uncertainty through increasing risk rather than through improving edge or managing downside.
In markets where capital is finite, losing streaks are inevitable, and execution conditions vary, the Martingale framework eventually reaches a point where recovery is impossible.
3) The “no stop” mean reversion
My personal favourite and the one I see most often. The one that, eventually, as I bring in necessary risk parameters, most traders struggle with.
No-stop mean reversion strategies assume that price will ultimately return to an average level, allowing the trader to hold through adverse movement until the market reverts. The trade is not closed at a predefined loss; instead, the position remains open until price returns. In effect, what I see so often is traders willing to run a trade $3k, $4k, $5k offside waiting to close out for a way smaller profit.
This approach can and often does appear effective over short periods, but it carries structural weaknesses that make it unstable over time.
Trends last longer than expected and nowadays go way further than expected. Mean reversion assumes that price deviations are temporary. However, markets regularly enter sustained directional trends. Even over the course of the day, they can last just long enough or go far enough to cause major damage.
In a no-stop system, the typical outcome profile looks like this:
- Many small gains from normal mean reversion
- Occasional very large losses when reversion does not occur quickly
This creates a negatively skewed distribution of returns. The strategy collects small profits repeatedly but remains vulnerable to a single extended move that overwhelms and exceeds those gains.
Drawdowns Become Unmanageable
Without a predefined exit point, losses can expand far beyond what was originally intended.
This creates one major risk:
- Liquidation
But also:
- Psychological breakdown before recovery occurs
No-stop mean reversion systems rely on the belief that markets must eventually revert before losses become critical. This is often false. And when asked to adhere to fair and logical limits within their trading, this is where most suffer a lot. I will often ask a trader to trade within parameters that they agree to, which are likely to be set when and if they go live. These vary, but what they all have in common is that they are not the unlimited version that SIM allows. These boundaries expose this style of trading the most, and what can often be seen is a trader struggling to put any kind of positive run together without the ability to just hold.
Markets will trend farther and longer than an account can tolerate. When that happens, the absence of a risk boundary turns a normal losing trade into a potentially account-ending event. It’s my job to make sure that doesn’t happen.
And remember, adjusting and getting it right at the start is what creates longevity in this game. It’s the professional way to do it and builds a solid foundation for something that will last.
We’ve now gone through:
- The differences between SIM and LIVE.
- The trades you have to eliminate to be successful LIVE
Next week:
How to Fix the Common Problems When Transitioning from SIM to LIVE Trading
Dan’s Weekly Wisdom:
“Pain at the start for free is better than pain at the end that costs.”