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John and Walter,
This extract below I think sums up the "PROVEN CORRECT" approach to
trading. It is quoted from "Phantom's Gift", which is an extended
interview by trader Art Simpson with the mysterious "Phantom Of The
Pits" at "Futures Magazine Traders Forum". The Phantom has some very
good advice on all aspects of trading and in particular the psychology
of trading.
This is the Phantom's first of two major rules:
"The correct way to control positions is to only hold them once they
prove to be correct.
Let the market tell you your position is proven correct, but never let
the market tell you
that your position is wrong. You, as a good trader, must always be in
command of
knowing and telling yourself when your position is bad.
The market will tell you when your position is a good one to hold. Most
traders do the
opposite of what is correct by removing positions only when proven
wrong. Think about
that. Your exposure and risk is much higher if you let the market prove
you wrong instead of your actions removing positions systematically
unless or until the market proves your position correct. When you remove
the position because the market proved you wrong, it is always a higher
loss, and with stops it also is usually with higher slippage.
This is not the same as removing the position because the market proved
you wrong. By making the market prove you correct in order to hold a
position is acknowledging that trading is a losers' game and not a
winners' game. If you only remove your position because the market
proves you wrong, you are acknowledging that trading is a winners' game.
You never want to be in a position that is never proven correct. If you
only get out when
the market proves you wrong, it is possible to have higher risk due to
the longer time
period required to prove your position wrong. In a losing game such as
trading, we shall start against the majority and assume we are wrong
until proven correct! (We do not assume we are correct until proven
wrong.) Positions established must be reduced and removed until or
unless the market proves the position correct! (We allow the market to
verify correct positions.)
It is important to understand that we are saying the one criteria for
removing a position is because it has not been proven correct. We at no
time use as criteria for removing a
position the fact that the market proved the position incorrect.
There is a big difference here as to how we treat all positions from
what most traders use. If the market does not prove the position
correct, it is still possible the market has not proven the position
wrong. If you wait until the market proves the position wrong, you are
wasting time, money and effort in continuing to hope it is correct when
it isn't.
How many traders ever hoped it wouldn't be proved wrong instead of
hoping it was correct? If you are hoping it is correct, it obviously
wasn't ever proven to be correct.
Remove the position early if it doesn't prove correct. By waiting until
a position is proved wrong, you are asking for more slippage as you will
be in the same situation as everyone else getting the same message.
What makes this strategy more comfortable is that you must take action
without exception
if the market does not prove the position correct. Most traders do it
the opposite by doing nothing unless they get stopped out, and then it
isn't their decision to get out at all -- it is the market's decision to
get you out.
Your thinking should be: When your position is right, you have to do
nothing instead of
doing nothing when you are wrong!"
regards
Ian Burgoyne, Melbourne
Walter Lake wrote:
>
> Hi John
>
> I base "proven correct" on MAE, (Maximum Adverse Excursion). John Sweeney's
> book "Campaign Trading" has a complete discussion on how to use MAE in
> trading. MAE is found in Metastock in the System Tester --> Summary
> Report --> System Reports --> "Trade" Tab --> 5th column + highlight
> individual trade --> Inspect.
>
> The MAE column lists all of the MAE's for the trades made. These are put
> into "bins".
>
> Then I look at the trades to see the time factor: i.e., did the trade
> wander, take off, or go south, etc.
>
> "Proven correct" is the resulting time and distance calculation required to
> maintain the trade after entry. For day traders whose entry criteria is
> 11:30 or noon based on opening range then "proven correct" may be 1/2 hour
> before close. For longer term traders, "proven correct" would be calculated
> in days. Each tradable: stocks, funds, commodities, options needs to be
> researched for the specific criteria.
>
> I think of the NASA moon launches, You have lift off, with all of the
> stresses and strains to achieve earth orbit. Mission control asks each
> station for a status report. Only if "proven correct" is the lunar mission a
> "go".
>
> Safety stops are very real and are an integral part of my emergency plan on
> how I am going to trade my way out of a fast market which is going against
> me, whether it be commodities using options, or stocks in the face of a poor
> earnings report. Maintaining a cool head is hard enough, but without an
> emergency plan I'm sunk.
>
> So, each trade demands planning.
>
> Best wishes
>
> Walter
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