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>> A lot of new traders have a toolkit of half-baked ideas for entering
>> trades, and pretty soon something looks tempting enough to buy. But it's
>> not a plan to trade that entry consistently for 30 trades or 6 months.
>> There may not even be an exit plan on the downside or upside. He has
>> a Reason for being in the trade (it's not throwing darts) but he's
>> not trading with a selection method because the next trade will
>> have a different reason. I therefore think that lack of method is
>> a big cause of actual non-random losses.
>
>Why would this lack of method be worse than throwing darts? How does it
>get him into more losing scenarios than dart throwing? Doesn't changing
>trade selection without reason or regular logical thought sound an awful
>lot like random action? I agree that this trader has no method, but I
>disagree that it is different from throwing darts. I argue that he will,
>if he trades small enough to stay in the game, lose costs, no more.
He doesn't change trade selection without reason. He changes after he's
lost money. This can skew the results of a short series of trades, even
though it would even out in the long run.
Assuming all the methods he switches to produce trades with a 50/50
chance on each and every trade, at first glance it seems not to matter.
But it depends on the length of the series. If you decide to switch
method or guru if, and only if, you become net one loser, then at
the point that you abandon a method anywhere along the way, you are
a net loser by definition. If you're throwing out your 5th system,
you're net 5 losers.
In the Long Run, if he trades small enough to stay in the game, it won't
matter. Eventually, by chance, he will switch into something as it enters
a big winning streak, enough to push the overall results back to 50/50.
The series of trades is seldom long enough for the Long Run tendency
to assert itself with a rare winning streak to cancel out the accumulated
small losses. It doesn't "get him into" more losing scenarios, it stops
the game at a point where he has already been in more losing scenarios.
It stops the game by encouraging small losses now and defering the
offsetting winning streak to the future. He can only win, short term,
if he happens to start trading when a winning streak starts, which
is a statistical longshot.
If he switched after getting ahead by one winner, the effect would be
the opposite: to win now and defer the inevitable losing streak.
There is another factor. Although a system/guru may have overall random
results, they may not be distributed randomly. They may run in short cycles
according to market climate: win, win, win, lose, lose, lose, etc.
If so, switching would have an even worse effect, because the next trades
would be more likely than random to reverse, meaning that you give up
at the worst possible time.
Finally, part of trading a method is having an exit plan. It's deadly to
change this on a whim, because hope, fear and greed take over. This is
much worse on the wallet than changing entry criteria.
For these reasons I think lack of consistent method is one of the causes
of dollars lost, usually in conjunction with other mistakes, especially
trading too large.
Respectfully,
Wayne Moody
wlm95@xxxxxxxxxx
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