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Hi Lawrence,
Thanks for your reply and I think you added value to my original post which
was my goal. I do not think I have the only "mouse trap' that can be used
to trade, and I realize there are many different approaches you can take to
trade successfully. My posts are just intended to get a thread going where
we can toss a few ideas around.
If you like the post then tell us why. If you don't agree with the post
tell us why. And if you think that something should be expanded upon or
that something was missing from the post, then by all means share that with
the List.
Bob
-----Original Message-----
From: Lawrence Chan <stnahc@xxxxxxxxx>
To: Omega List <omega-list@xxxxxxxxxx>
Date: Sunday, February 27, 2000 8:34 AM
Subject: Re: Math of Trading
>
>I have read the complete thread so far, very funny :)
>comments below
>
>----- Original Message -----
>From: Bob Heisler <bheisler@xxxxxxxxxx>
>
>
>> The following are just some thoughts on Trading versus scalping that I
>> thought some on the List might enjoy. While there are many different
ways
>> to approach trading, scalping seems to be a very popular approach - and
>one
>> I employed with less than optimal results. But then again maybe it was
>just
>> me or that I just did it incorrectly...
>
>actually - there is a official definition of scalping, as used by CME
locals
>and NYSE specialists ... CBOT locals are more specifics on the bonds,
>will not touch that.
>
>I assume you are SP future trader so lets concentrate on what scalping
>is in sp. To the locals, if you trade by chasing the flow and only take a
>few
>ticks home (nowadays that is 1 to 2 full pts sp), you are FLOW trading.
>If you take 1 leg of move (from one support/resistance level in an
>intraday time frame to another) you are SCALPING, and that range from
>4 to 6 pts. Your assumption below are wrong, and the definitions are
>wrong, thus the calculation on scalping performance is wrong.
>
>> Let's use a 60% win/loss ratio along with a 2:1 dollar ratio of winning
>> trades:losing trades. Even though I have no idea how you could trade the
>> Spoos with a 1 point stop, we will use $500 on winners and -$250 on
losers
>> just to keep the Math simple.
>>
>> 10 trades @ $500 profit/$250 stop = [6 x $500 = $3,000] - [4 x $250
>> = -$1,000] = +$2,000 - [10 commissions x $20 = -$200] = +$1,800. Now
what
>> about the slippage on your objective - certainly something is going to
>> happen on 1-2 trades out of 10 where a $500 objective only gets $400 OR
>> a -$250 stop ends up at -$350+. Figure that 2 of these cost you ONLY
>> another -$200 = a grand total of +$1,600. (and considering that on 10
>> trades there are at least 20 transactions, that is being quite generous)
>>
>> 10 scalps for quick profits instead of doing what the market says you
>should
>> do. And IF you are good enough to get 60-65%+ wins and ALL good fills
you
>> might end up with $1,600+ of profit. AND then I look at the charts from
>the
>
>You are talking about flow trading, the local stuff.
>Why local stuff? it is to locals' advantage to trade the flow ONLY.
>they are there, in the pit, no slippage, almost none transaction cost, why
>not
>trade the flow?!
>
>> last couple of weeks and see all those huge swings where some simple
setup
>> would get you in a trade and the price action kept you in the trade for
>over
>> 60-100+ ND points or 10-20 SP points per contract - and all the trader
had
>> to do was monitor the progression AND go along for the ride. And we
could
>> have done this numerous times just in the last couple of weeks.
>
>How do you know there is a 10 to 20 pts sp move?
>I assume you do not know, so you have to "take some profit" first,
>then "ride the rest".
>Igorning the entry, it is just a classic method employed by most
>scalpers. In fact, those who do not ride win more :) as they save
>themselves the unnecessary emotional upset.
>
>> <skip>
>>
>> And if we accept as true that you cannot trade the Spoos with 1 point
>Stops,
>> the above 2:1 winning trade:losing trade dollar ratio would have to be
>> changed to $1,000:-$500 at a bare minimum and more like $1,500:-$750 to
>> approach reality. Hmmm...how many scalpers routinely make 4-6 points on
>> their wins? What if we did the above Math on a 1:1 winning trade:losing
>> trade dollar ratio? What if we did the above math with a 50% win:loss
>ratio
>> instead of 60%?
>
>most scalpers who know what they are doing only trade a few times a day.
>they pick the battle - and win 80% plus is common. They suffer way less
>emtionally, and no need to manage trades whole day.
>
>> Regardless of what tools you use to determine entries, you still must
have
>a
>> plan that once in the market allows you to capture the larger swings and
>> keep the math on your side.
>
>statistically, wrong. large moves (by percent) are abnormal. They do
>not happen very often. Those scalpers who exit their trade on target
>of 4 to 8 pts are doing the right thing 90%+ of the time and for that 10%,
>its just a waste of energy and those who keep trying to hit these
>jackpot will most likely making the same as the scalpers :)
>
>e.g. 5 lot in and out
>
>scalper - all in all out
>5 lot x (5 pts win x 80% - 8 pt loss x 20%) = expected to win 12 pts
>transaction cost 5 lot x $20 = less than 1 pt
>this guy is in the market 10% of the time
>
>ride 2 last ones :)
>3 lot x (5 pts win x 80% - 8 pt loss x 20%) = expected to win 7.2 pts
>2 lot x (10 pts win x 10% + 2 pt profit protection x 90%) =
> expected to win 5.6 pts
>total expected profit = 12.8 pts.
>this guy will have the 2 lots in the mkt maybe upto 30 to 40% of the time.
>
>sometime, intuition without appropriate mathematics verifications can
>be wrong.
>
>-Lawrence Chan
>p.s. Bod, if you are a nice guy, then you are suffering the "I am winning
>and I need to let the world know and why others cannot see what I see"
>syndrome ... After you win long enough and in this game long enough,
>you will understand everybody has a different valuation on money thus
>we've got a market to trade - then your itch to speak will go away.
>
>
>
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