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Kevin
We have been trading for too many years. Between my dad, my brother and
myself we have over 125 years experience. All that without much money
management to speak of. Thanks to this group and their help, we have
started to add money management rules to our trading and have successfully
weathered two bad trades (not sequential losers). With our current trading
system, we can go back 18 years for back testing, but have specifically
stayed with the last 5 years.
Our money management rules are based upon our actual trading results. We
then take all of the factors into consideration, apply them to a table in
one of our books and trade at a risk of ruin level of 0. We feel fairly
confident with our system, so feel that our money management rules suit our
trading style and our system.
I don't look at our trading as gambling. If I felt it was gambling, I
wouldn't do it. I feel that we definitely have an edge.
Now my brother and I just added stock trading to our portfolio. He started
the end of last June and is doing quite well. I started trading a week or
two ago when we had the largest NASDAQ drop in history. I chickened out and
closed half of my stuff out at a substantial loss. Should have waited as it
all came back. My second foray into stocks was last Friday, but I got smart
and didn't buy anything on margin. Held on through the big drop on Friday
and have enjoyed a couple of big days up. I don't select 1 stock and put
everything in it. I have 18 positions and they are up almost 30% in 3 days.
I am within $5k of being even, no thanks to my closing out those stocks.
Now I'm waiting for the sell.
Guy
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]On
Behalf Of Kevin243@xxxxxxx
Sent: Monday, April 17, 2000 9:18 PM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Money Management Stops
Mickey was the one that was refering to the roulette wheel. If I remember
the rules right, for picking the right number, you have a 36 to 1 payout,
with a 1 in 38 chance to win. The house has the advantage. If the gambler
plays long enough, he will lose everything (negative expectancy), If the
House plays long enough, the house will take all (positive espectancy). The
House is taking a risk, while the gambler is just gambling. To me, the
difference between gambling and risk is whether there is positive
expectancy.
It is entirely possible for a bunch of gamblers to enter the house and have
a winning streak that breaks the house and I'm sure that has happened to
some
gambling establishment, somewhere or sometime. Capitalization (money
management) is important here. Diversification is also important. A Casino
having many different games is essentially diversifying. If they only had
one game, and played against a high roller, the house may be at great risk
of
losing everything even though they have a positive expectation. The casino
industry has used many math wizards to develop games and house rules,
especially the electronic slots, to extract the most money from people and
keep them coming back. I'm sure they test market their slots, to see how
people react.
The trading analogy here is to use trading systems with positive expectancy,
diversify and use reasonable money management. You also might want to have
a
rule that, if you lose a certain amount of capital, due to a losing streak,
you might stop trading. We are trying to trade with an edge, just like the
casino, with both diversification and money management.
Sure trading is different, but the hazards are different and the rules are
frequently broken. Luck (random events) plays a role in trading, ie. taking
a risk, even for system with a positive expectation. Let's say you have a
great system and you put all your money into one great stock, like MSTR, and
then they announce the have an problem with their accounting. You get
creamed, despite the great trading system.
Bad luck, Fraud, the result is the same.
Or consider a beginner starting out with a good system that only takes long
trades and the jumps into the market right at the peak. They get clobbered,
even though they have a good system. Just bad timing or bad luck, they know
what a losing streak is.
Guy, I don't know what your longest losing streak was, but lets say its is
four losing trades. With very poor money management, a person could manage
to lose most of his capital in four bad trades. And four bad trades could
be
topped by five bad trades down the road. There is nothing in nature that
says
the losing streak must end. I think most experienced traders, develop a
sense of how the market is and take trades accordingly. For example, J.
Livermore, would test the waters with small positions, before committing the
bulk of his capital. He did go broke a few times though (losing streaks?).
You and I have both met people who have had hard luck all their lives. ( A
life long losing streak and there are other people that are incredibly lucky
all their life)
I'm currently a stock trader, and I'm mostly trading high growth stocks,
like
the ones that just got clobbered. I'm continually testing my main trading
system on different stocks to see how the work on different stocks. I have
seen quite a variation in results. (fat tails?) Diversification and
careful money management keeps me from getting hurt too bad by those fat
tails.
Recently, I watched a person start trading, for the first time, this year
with a pretty good trading system. He aggressively took one loss after
another until his capital was reduced by 25%. This was a combination of bad
luck and lack of experience.
I guess it never occurred to him that a long system wouldn't perform well in
bear market. Had his money management skills been worse, he could have
essentially lost all of it.
Guy, I don't know if you have ever watched a new trader start out trading,
but you quickly realize that you have a lot more knowledge that is coming
into play that is interacting with the system. The beginner doesn't know
what he doesn't know.
This really is a tough complex game. (or as you say, a hard way to make
easy
money)
I hope that Mickey realizes, that just because you have observed four losing
trades, that the fifth may not be a sure winner. Betting the farm on the
fifth trade may work for a while, but eventually that fifth loser will bite
you. As Ralph Vince has said many times, "you are only as good as your
worst
trade".
Kevin Campbell
In a message dated 4/17/00 8:48:53 PM Central Daylight Time,
grt@xxxxxxxxxxxx
writes:
> Kevin
>
> I'm not sure whether I agree with any of the gambling analogies when used
> for comparison to trading the markets. My primary reason for this is
that
> in gambling (roulette and craps are examples) your analogies are 100%
> correct, IMHO. When compared to blackjack, there are some variances
based
> upon the play of players before and after you that impact the deck and
the
> play.
>
> When compared to trading the market, I don't think these analogies are
> applicable at all. Again, that's just my opinion.
>
> I'll agree that it's possible to have 1,000 events go against you in a
row
> and then have 1,000 go for you in a row. However, if in testing this
> system, you ever decided to trade it, you would be broke in no time at
all.
>
> If on the other hand, you develop a system that is capable of 80%
profitable
> trades, proper testing would give you some idea as to the distribution of
> these losing events.
>
> In our case, even when we develop a new weighting schema, we back test
the
> system for 6 months, 5 years and 18 years. While we're primarily
interested
> in the last 3 years, we also need to see how the system would have done
in
> the real world over a longer period of time. Rather than manufacturer a
> random list of numbers going back many years, we just use the actual
> market's performance over that longer period. In our case, again, large
> losses are exceedingly rare, thank goodness. Repetitive losses are also
> very rare. On average, for the past 15 years, we average no more than 6
or
> 7 losses a year while still maintaining our minimum profitability ratio
of
> over 70%.
>
> If in back testing, we ever encounter repetitive losses of the type you
> describe, even while still maintaining good profitability, we would
never,
> ever trade it. In all of our back testing, we take repetitive losses
into
> consideration as well as the system's profitability. A system that wipes
> you out without giving you the opportunity to make a "come back" is
hardly
a
> system.
>
> Regards,
>
> Guy
> Fax (630) 604-1589
>
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