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Hi Robert,
I've posted this answer a while back, but I think the trading analogy
compared it to the gaming industry is very apt. The fact that over the last
7 years are so, the proprietary trading desks at many firms have become
populated with experts in game theory mathematics attests to its usefulness.
It's also not uncommon for people who are successful gamblers to be be
successful traders.
As Al mentioned, there are times when the Blackjack deck moves from the
house advantage to your advantage. It's the ONLY casino game where that
happens. But just knowing that the deck favors you is only half the game.
The other half is money management. Knowing when to double up your bet or
reduce it, take insurance, etc. is what makes you a consistent winner. BAD
MONEY MANAGEMENT CAN TURN ANY POSITVE ADVANTAGE INTO A NEGATIVE ONE, WHILE
NO AMOUNT OF GOOD MONEY MANAGEMENT CAN TURN A NEGATIVE ADVANTAGE INTO A
POSITIVE ONE.
Trading is the same way. Like casino games, trading the market in general is
a negative expectation game. At its basic level, the sole purpose of your
trading system is to tell you when you may have a positive mathematical
expectation.
Once your trading system has given you a signal then either your trading or
money management "system" should signal if this positive mathematical
expectation is large enough to trade. A general rule is that the projected
upside/downside is at least 3:1. How you measure this is up to you. True
range, price channels (Jim Green method), etc. are all exceptable methods.
It's up to you.
If you have a system that gives you a tradable positive mathematical
expectation of winning then money management becomes clearly definable as
deciding how much to "bet" and how to control losses either thru setting
stops, hedging with options or other trades, trade add-ons, or using
multiple time frames for example. The complexity and accuracy of your money
management system up to you. The old 2% rule can suffice for many. For
various reasons I require mine to be very accurate and robust and have spent
many years building it.
Betting too much is one of the most common and biggest screwups a trader can
make as it is the fastest way to turn the slim positive advantage negative.
Worse, but perhaps appropriately, the severity of the screwup increases the
smaller your available trading capital. If you want to know exactly how much
you should be trading there are precise mathematical way to determine so.
I'll point you to the works of Ralph Vince and Nauzer Balsara for further
elaboration if you are so inclined.
Unfortunately many would-be traders would not like what the discover. First,
they'll see that unless they have a minimum of $30,000 in DISPOSABLE trading
capital, they are better off "investing" until they acquire it. Further,
it's only when this trading capital increases to around $300,000 (why I can
sympathize with system sellers) should they even consider quitting their day
job to trade fulltime. I suspect that at that level many would rather just
put the money in bank and "retire" !
hope this helps,
rick
Tokyo, Japan
-----Original Message-----
From: Robert C. Richmond <rcrich@xxxxxxxxxxxx>
To: Al Taglavore <altag@xxxxxxxxxxxx>; metastock-list@xxxxxxxxxxxxx
<metastock-list@xxxxxxxxxxxxx>
Date: Thursday, February 12, 1998 3:21 AM
Subject: Re: "Systems" & Money Management
Al Taglavore wrote:
Robert,
Blackjack is the one casino game by which the odds can shift to your favor.
As cards are played from the deck, the composition of the deck changes,
and thus the odds change. As opposed to dice, where the odds remain the
same with each roll because the numbers are always the same on each die.
Yes, we have four riverboat casino's in the Shreveport/Bossier area, and my
office is only 5 minutes from three of them.
Al Taglavore
Hi Al, the highlighted portion of your message is what I am suggesting. As
the odds change, one can calculate based on knowledge of the remaining deck.
But I am still trying to understand how this might apply in context of
"money management" to which Rick referred.
Just for kicks, proximate to the gaming industry that you are, do you think
most securities "traders" would also engage in casino gambling or not? How
about "investors?"
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