Newbes, mechanical systems, expectancy, etc.

["Erich Kohlhofer" <KohlhoEG@xxxxxxxxxxxx>]

Hello fellow traders

I don't post very often to the list, but some times I like to throw a
few ideas around. I have been trading actively for about ten years, and
for the last three I have also included mechanical trading. Let me
assure you, it does work. As they say, 95% of traders loose all their
money within 6 to 9 months, or have to add extra money to their trading
account. I have been able to live and purchase my house out of my
trading account, so that should account for something.

I have done extensive work to crack all the MS experts. None of them
can be used without discretion. i.e. they will lose money in the long
run if you just trade them.

For example, someone asked about expectancy.  Let us take a rather poor
system like the MACD crossover. Over say a sample of 2000 charts, the
system may give you say 8 correct signals out of every 10. Looks like a
good system doesn't it, I mean 80% right, you cant loose.
WWWRRRROOONNNGGGG.

This is the point that most newbe traders miss. The system may be 80%
correct, but have a look at what your commissions do to the system. Many
of these profitable trades are not actually profitable. Now in reality
the system only becomes about 25% correct. BTW a system can only make 1
good trade out of every 10 an still be profitable if your losses a very
small on the poor trades and your profit enormous on your one profitable
trade. This is what is called expectancy. Although, I have never seen a
system like this. All my systems that work are about 55% to 75% right.

Carrying on with MACD, if you use it without discretion on the entire
US market, it works out to be about 23% negative. i.e. you will loose
23% of your money in 1 year if you use 2% commission charges.

This same argument goes for most of the MS experts and systems, some
are far worse, i.e. 225% negative. As I always say, it takes 5 years of
study to become a doctor plus 2 years internship. Or 4 years to become
an engineer plus 3 years practical. The same goes for trading. Don't
even think that you will be any good after 6 months, this is not going
to happen, never mind what the advertising bumpf says. Remember 95% of
traders (not newbes only) loose their money.

As you can see, I have said far to much already. The trading game is a
zero sum game compared to an index. If you are doing better, you are
taking money from someone else. And this is the point exactly, the
market needs a constant supply of newbes to take money from. This may be
in the form of books, courses, software, etc. MetaStock is a great
package, you must just learn to use it correctly to your advantage.
Study a few good trading books (van Tharp, Elder, Gary Smith, Kaufman,
Bollinger), learn something about statistics (this is more important
than you may think), but best of all; if you can pick a good traders
brain, even if you have to pay for it, it will vastly improve your
trading.

Erich