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I guess I better preface this with a few comments. First I
am not selling anything, and I am not looking for investors
and am basically just documenting one of the problems I
have found through personal experience. Now for my
comments...
You forget about one other factor in money management.
Greed! We have a great system developed over the last 50
years. My dad has traded commodities for over 60 years and
my brother and I for over 40 years. Our system works in
all markets except long term, trending markets (our worst
year was 1995 with 70% profitable trades and an annual net
return of almost 34%) and we still manage to wipe ourselves
out periodically (I'm not bragging here).
Our problem is the aforementioned GREED. After several
months of 30% returns, we start to double up. For example,
from June, 1995 to June 1996, we were running along at the
following profitability levels (actual trades, the system
really worked better than this:) averaging 11.2% a month
return (for the 13 months net after commissions). We
decided to 'increase the bet' in January, 1996. Big
mistake. Got too greedy and managed to wipe out 90% of our
capital in a few trades.
% ROI Profitable
Trades
38.7% 50.0%
33.2% 33.3%
25.6% 66.7%
-28.6% 33.3%
44.0% 100.0%
-5.5% 66.7%
64.8% 100.0%
-88.5% 33.3%
-10.5% 0.0%
47.5% 50.0%
83.5% 100.0%
-12.8% 75.0%
14.9% 75.0%
The above chart begins in June, 1995 and continues to June,
1996 (13 months). You would think with these numbers, we
would be minting money. You would also think that we would
be able to refrain from getting greedy. Just investing in
a single contract (no doubling up) of S&Ps in 1996 we had
80% profitable trades with a profit of $118,000 on a margin
of $22,000. 1997 had profitable trades of 79% with a
profit of $161,000. We really don't need to keep doubling
up, but, unfortunately, we want to make a ton of money in a
hurry. Always bites you in the rear every time.
Didn't do much trading in 1997 due to open heart surgery
and the subsequent recovery, but we're in process of
starting up again, albeit with a lot less capital.
Actually, I'm back to doing some consulting to generate
additional capital. Setting this one up as a partnership
with my brother instead of a corporation.
One of our decisions is whether to do it on our own again,
or take in some investors. Have had $200,000 pledged for 2
years, but due to my illness, we've held off on starting a
pool. It seems to me that we would do a better job
managing other people's money through a small, private
fund. Then I talked to John Bollinger (a friend who lives
a couple of blocks away and our kids went to preschool
together). He recommends doing it on our own rather than
take on investors and the required reporting, etc.
Then we have the next question. Should we do this off
shore, restrict ourselves to this small domestic fund with
a total capitalization of $200k, or do it all ourselves? I
guess we'll have to research this a little more and look
into the restrictions, etc. I have a complete abhorrence
of the Federal Government and their paperwork and
documentation demands. I like the off shore idea but my
brother doesn't want the hassle. I still think doing
everything off shore with no citizens involved makes a lot
of sense and would take care of any taxation problems.
Oh well, back to the planning stages while I complete the
Visual Basic code in my spreadsheet. Also got to complete
the design of our spreadsheet to see if we can figure out
how to make a buck via the Net.
Enough rambling. Like you thoughts regarding money
management and gaming theory. Our trading system is
strictly probabilities. All home grown indicators, so we
don't really talk about what we do. Have tens of thousands
of hours invested and thousands of computer hours
developing these trading rules.
Regards
-----Original Message-----
From: Rick Mortellra [SMTP:rmjapan@xxxxxxxxxxxxx]
Sent: Wednesday, February 11, 1998 3:57 PM
To: MetaStock List
Subject: Re: "Systems" & Money Management
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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