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-----Original Message-----
From: PIZELLI@xxxxxxx <PIZELLI@xxxxxxx>
To: metastock-list@xxxxxxxxxxxxx <metastock-list@xxxxxxxxxxxxx>
Date: Monday, October 27, 1997 4:35 AM
Subject: MIRAT
>There are soooooooo many theories / services / tools / techniques out
there.
>It seems, the only folks making money are those selling services. Is anyone
>really making money or is investing just a calculated crapshoot! What
really
>is the best system out there for short and long term trading.
Depends on how you view trading, my friend. Do you see it as investing for
life-long wealth building, a short-term price speculation business, or more
like a weekend fling in Vegas?
Since you bought MetaStock you are interested in TA, which attempts to
measure market psychology which affects short-term price fluctuations. With
TA, we are working within short term investment horizons so my advise is to
approach trading as business. To do so otherwise almost always leads to
ruin. Like running any business, this requires adopting modern quantitative
techniques for cost control (read losses!) and to measure performance.
First, If you don't have a system that has a positive mathematical
expectation of winning, then just like in Vegas, the market will eventually
take you to the cleaners. Unless the upside of your trade is 2-3 times
greater than the downside, you always have a trade with a negative
expectation. THERE IS NO WAY TO BE A WINNER OVER TIME WITH A NEGATIVE
EXPECTATION SYSTEM.
Example: Flipping a coin, heads wins $2; tails wins $1. You have positive
mathematical expectation of winning 50 cents on average with each flip.
Reverse the payoffs and you'll be a loser over time. No money management or
betting system will save you from this ultimate doom either.
Creating the system is the fun part and usually the easiest. Good trade
management after entry and minimizing the downside is the bitch, but IMO,
the only way a trader can get an "edge" in the market. This is where I wish
MetaStock would focus its efforts in the future. IT'S MONEY MANAGEMENT TOO,
NOT JUST THE SYSTEM!
You'll eventually have to develop a system that is purely mechanical with
little subjective judgement required. The system has to be this way because
consistency is a proven factor to trading success. When mechanical
objectivity is replaced by subjectivity then your trading rule's take on a
"case-by-case" definition. Without consistency you can't apply the more
important money management "system" that keeps you winning over the long
term.
This requirement eliminates most TA systems, like Elliott Wave, Gann etc.
Cycle analysis holds out the illusion of the holy grail simply because if
you can identify a true cycle for your tradable you stand to get rich. As
far as I know there is no "system" available in the public arena that can do
this reliably, though I've read Ehlers' MESA takes a decent stab at it. BTW,
it is thought that firms such as O'Connor and D.E. Shaw have developed some
reliable proprietary cycle algorithms. Naturally they are carefully guarded
secrets.
Second, just as casino blackjack can be turned into a positive expectation
game by using certain betting rules when the deck turns in your favor, the
same can be done with trading and a good money management system.
Conversely, failing to bet "right" can lower returns, and perhaps worse,
turn your positive expectation system into one with negative expectations.
Money management entails not only measuring the potential upside/downside
but also correct size of the "bet" to make. Most of individual would-be
traders with OK systems crash and burn here because they take poorly sized
positions compared with their trading capital. Instead of improving their
money management, they chuck their "system" for a new one only repeat the
mistake over and over again. Another mistake is to build systems that are
overly complex and optimized. This is generally a waste of time since most
"great" systems win less than 50% of the time anyway. It's just that when
they do win, they win much more than they lose, i.e., a positive
expectation.
I, myself, use a couple of simple systems (depending on a bull or bearish
trend) with only 1 optimizable parameter each, which are easy to explore and
test for. Took only 20 minutes to build! But my money management system is a
series of complex interlinked Excel spreadsheets that gives me a blueprint
for what to expect before and after entering into a trade, including stops,
add-on trades, and potential profits. These took me more than a year to
build and updating them during the course of a trade consumes 50% of my
trading day! Most of my time "tweaking" is spent here too. I never mess with
my systems!
Now instead of flying by the seat of my pants and "hoping" for good trades,
(and for the bad trades to turn around) all this work let's me have an
action plan ready BEFORE things go badly. And since my system has a positive
expectation, as long as I minimize loses (which occur often since it rarely
wins on more than 35% of entered trades) I can be constitently profitable.
Good money management also lets me know when profits & losses are "normal"
and when they're not, signaling that my system may no longer be "working"
and it's time to rotate into another stock or market condition strategy.
For insight into modern professional money and trade management principles,
I recommend you takes some ideas from John Sweeney's "Maximum Adverse
Excursion" and Ralph Vince's "Portfolio Management Formulas" or "Mathematics
of Money Management." MAE is fairly easy reading but the latter 2 are not
for the mathematically challenged.
If you are seriously considering trading as business, these books will open
your eyes into the amount of time, effort, and capital required to do this
at a professional level. Frankly, to try any other way is reckless and
dangerous for you finances and probably no different than going to Vegas.
Vegas can certainly be alot more fun, even when losing!
good luck,
Rick Mortellra
Tokyo, Japan
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