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Dear Brian, Rich, Group, et al.,
Brian, your note brought up for me an academic study that I read several years
ago about taxi drivers in New York City. There, the economics of being a taxi
driver is that one does not own one's own cab. Instead, one becomes associated,
as an independent contractor and not as an employee (for reasons of minimization
of the risk of legal liability), with one of several taxi companies in NYC.
Then, whenever one wants to drive a taxi (which, because the driver is an indep
contractor, is entirely in his or her discretion), one reports to the taxi
company and leases a cab for what I recall is a 12-hour period, at a fixed rate,
something like $75 for the period, on the understanding that the driver keeps all
the fares he or she collects during the period. So, the deal is: A fixed cost
for the use of the cab during the period + 100% of whatever you collect. These
economics for taxi drivers are similar to those for private traders, such as us.
We put up $$$ for our equipment and real-time data for the day (in fees, rent, or
amortization of expenditure) and keep all the profits (or losses).
What the academics found when they interviewed the drivers was that upon leasing
a cab for the 12-hour day, the drivers largely adopted one or the other of two
strategies:
1. Drive all 12 hours, in the attempt to maximize their total collections for
the day.
2. Drive until they collected an amount that each driver, on his or her own, had
predetermined, after which they would turn the cab back in and call it quits for
the day. Here, for example, if the driver's goal was to collect $200 during the
day, if he did so before the end of the 12-hour period, he would quit early and
take home $125 for the day, after having paid the taxi company $75 for the day's
lease of the taxi.
The academics then analyzed the statistics of who made what and how. What they
found was that the drivers who drove for the entire 12 hours consistently not
only made significantly more money on a daily basis but, as I recall, did so even
on the basis of hours driven. (This possibility arises because the drivers who
drove until they collected their predetermined amount necessarily quit before the
end of their 12-hour period if before then, they had collected their
pre-determined amount). While the academics could not prove it, they speculated
that these results arose because of what they saw as a random fluctuation in the
demand for taxis from day to day --- specifically, they speculated that such
demand is largely a function of the amount of tourism in NYC: when there are lots
of tourists in NYC, the taxis are full and vice versa. This is random, in the
sense of being unpredictable, in that no one really knows when the tourists are
going to descend on NYC. Some days, particularly when there are lots of
conventions or some other big event, like the World Series, they're there; other
times, they're not, leaving the taxis are largely empty. The academics also
speculated that demand turned as well on the weather, which may be even more
unpredictable --- when its cold and rainy, people want taxis; when it isn't, they
don't.
What the academics furthermore found was that but for the periods when the
tourists were in town etc., it really didn't make much difference which strategy
the drivers employed --- they all made about the same money per hour of driving
--- when you drive more, you make more money, as one would expect.. Where the
difference was clear, however, was when the tourists were in town, it was cold
and rainy, and taxis were at a premium, which was largely unpredictable. But
when one or more of these factors did occur, the 12-hour drivers made
significantly more money than did the "drive to a pre-determined amount" drivers,
which seems to make sense --- one makes make money as a supplier when demand
increases.
Now, I am assuming that one's purpose for driving a taxi is to maximize one's net
profit per unit of time expended, and not out of a desire for public service or
meeting people or the sheer pleasure of driving around town, by oneself, with
others, or whatever. Given that purpose, the first basic question facing a taxi
driver is "Am I going to drive today?" If you're not going to "drive" today, it
doesn't make any difference whether the tourists are in town or not, what the
weather is, or whatever --- you ain't gunna make any money because you ain't
drivin'. But as long as a driver has made the decision to "drive" today in the
attempt to maximize one's profits on a time basis, and as long as nobody can
predict when the tourists will hit town, or will it rain and be cold, and if a
driver has already paid the $75 for today and is now driving, then according to
what these academics found, the driver should continue to drive to the end of the
period no matter how much fares have been already collected today. This is
especially true if, during the day, the driver believes that the tourists are in
town, it cold, or its rainy. But it also makes sense to continue simply in the
hopes that the tourists will show up, or it will turn cold or rain during the
remainder of the period. Its makes sense at the margin --- it doesn't cost you
any more to continue driving because you have already paid your fixed cost, so
all the remaining profits are the driver's without any effective set-off for
costs. Regardless of whether the driver continues because he is having an
especially good day or on the hopes that his day will become an especially good
day, it makes sense to continue, because that is when the demand for taxis (which
cannot effectively be predicted) increases and gives the driver the opportunity
to make unusually large profits. This opportunity will be forgone if the driver
call it quits early, after collecting a pre-determined amount, and turn his cab
back in. The nut of this situation seems to me to be that the time it takes to
collect some pre-determined amount of profits doesn't have anything to do with
the demand for taxis today. If anything, those two variables seem to me to be
inversely correlated. If demand for taxis IS high today, then one will likely
collect one's pre-determined amount more quickly, and given that situation, that
is the very time when one's expenditure of his or her own time driving taxis will
be exceptionally repaid in profits. As such, this is just the time when it is
the most economically counter-productive to quit driving --- this is the time
when one should drive no matter what, in order to maximize one's net profits per
unit time, and resist the temptation to quit early, after having made some
predetermined amount especially quickly.
This situation with the taxis sounds to me similar to the situation with
trading. Who knows when a trend will begin, but for a trader, just like a taxi
driver, the time to be in the market is when it is trending, as it is then and
only then when the market gives a trader the opportunity to make unusually large
profits, which the trader will forego if he or she call it quits early, after
collecting a pre-determined amount, and goes on with the rest of his or her day.
The concern that Rich expresses in his note, in which you sound in harmony, is
the inability to predict whether an incipient market move will peter out after
3-5 points or extend for 10-15. And the concern that you specifically express is
the efficiency of quitting the market after having made some pre-determined
amount of profits. These concerns sound similar to the questions facing NYC taxi
drivers: Are the tourists in town? Will it turn cold? Is it about to rain? Does
it make sense for me to drive today, and especially to continue to drive once I
have already paid my daily lease fee (regardless of how much I have already
collected today)? If these concerns are similar, then the results of this study
of NYC taxi drivers suggest that for taxi drivers as well as traders, higher
profits per unit time expended can be realized by employing a strategy of working
through the day as opposed to quitting after reaching some pre-determined amount
of profits.
I hope the foregoing discussion provides some encouragement for you to reconsider
your decision and see if it best fits your goals.
Sincerely,
Richard
Brian Keith Voiles wrote:
> Rich,
>
> I am in the exact same boat as you. I think it's a personal matter, really.
> My daily goal is to make 4 handles... $1000 less commissions. I break
> my daily goal into two, two-handle trades. Then I turn off the computer.
>
> If I lose 4 points, I call it a day, as well. That's the max I'm willing to
> lose on any given day.
>
> As my account builds, it's my intention to trade 2 lots, 3 lots, and
> eventually 4 lots. (Right now I can't "see" past 4 lots -- maybe when I
> get there...).
>
> I think the reason I've chosen to do it this way is because I don't really
> perceive myself as a "real" trader. Let me put it differently: trading is
> not who I am -- it's what I DO to facilitate the living of my dreams.
>
> In other words, I don't want to eat, sleep, and breath trading 24-7.
> I use the $1000 a day (soon to be $2000, then $3000, and then
> eventually $4,000) to allow me the time freedom and money freedom
> to live my dreams. Which for me is:
>
> 1) being a great "stay at home" dad for my kids
> 2) writing and studying music
> 3) writing inspiring stories and books about life
>
> Having said all this.... it would be really nice to let the profits run
> on occasion. I haven't found a "real" answer to your question. For
> I, too, have had the same experience in the past as you have... that
> of:
>
> "It seems that every time I grab the 3-5 point profit the trade
> goes on to 10-15 points and every time I let profits run, the 3-5 point
> profit disappears. I am not particularly found of trailing stops
> because I have to be willing to give back a fair amount of profit."
>
> This is my experience as well. BUT... that's what led me to the
> decision I've come to: "Make 4 Points Today, Then Go & Play"!
>
> I'd love to hear what other feedback you get. Please keep in
> touch... I'll add you to my list of S&P traders whom I try to keep
> in contact with.
>
> Warmly,
> Brian Keith Voiles
>
> At 08:34 AM 11/17/2001, you wrote:
> >I am an S&P day trader and keep going back and forth in my mind my exit
> >strategy. There are 2 schools of thought 1)let profits run 2)don't try to
> >be a pig on every trade. It seems that every time I grab the 3-5 point
> >profit the trade goes on to 10-15 points and every time I let profits run,
> >the 3-5 point profit disappears. I am not particularly found of trailing
> >stops because you have to be willing to give back a fair amount of profit.
> >Others use a staggered exit strategy such as take 1 contract off at 3 points
> >another at 5 another at 8 etc.
> >
> >I would be interested in hearing only from successful S&P day traders which
> >school of thought they follow.
> >
> >Thanks
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