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-----Original Message-----
From: Walt Downs <knight@xxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Saturday, January 23, 1999 12:01
Subject: Trading GEN: The "Downs Doctrine" 11 part matrix for a Trader's
probability of Success
[snip]
>OBSERVATION # 1
>
>The greatest number of losing traders is found in the short-term and
>intraday ranks.
>This has less to do with the time frame and more to do with the fact
>that many of these traders lack proper preparation and a well
>thought-out game plan. By trading in the time frame most unforgiving of
>even minute error and most vulnerable to floor manipulation and general
>costs of trading, losses due to lack of knowledge and lack of
>preparedness are exponential. These traders are often undercapitalized
>as well. Winning traders often trade in mid-term to long-term time
>frames. Often they carry greater initial levels of equity as well.
>
>CONCLUSION:
>
>Trading in mid-term and long-term time frames offers greater
probability
>of success from a statistical point of view. The same can be said for
>level of capitalization. The greater the initial equity, the greater
the
>probability of survival.
1. The more often you trade, the more you lose in commissions and
slippage. Thus, short-term traders have higher expenses to overcome.
2. Real-time data feeds and computer software are more expensive than
end-of-day data (which is often free) and pencil and paper methods like
point and figure charting. Again, the short-term trader has higher
expenses to overcome.
3. Of course, all other things being equal, a higher capitalization
gives a greater probability of success.
Still, there have been and still are great traders who take a short-term
approach; one current name that leaps to mind is Linda Bradford Raschke.
[snip]
>OBSERVATION # 3
>
>Losing traders often rely heavily on computer-generated systems and
>indicators. They do not take the time to study the mathematical
>construction of such tools nor do they consider variable usage other
>than the most popular interpretation. Winning traders often take
>advantage of the use of computers because of their speed in analyzing
>large amounts of data and many markets. However, they also tend to be
>accomplished chartists who are quite happy to sit down with a paper
>chart, a pencil, protractor and calculator. Very often you will find
>that they have taken the time to learn the actual mathematical
>construction of averages and oscillators and can construct them
manually
>if need be. They have taken the time to understand the mechanics of
>market machinery right down to the last nut and bolt.
>
>CONCLUSION:
>
>If you want to be successful at anything, you need to have a strong
>understanding of the tools involved. Using a hammer to drive a nut in
to
>a threaded hole might work, but it isn't pretty or practical.
To my knowledge, only a small handful of succesful traders are really
mathematically or statistically sophisticated. William Eckhardt
certainly is, Louis Lukac of Wizard Trading is another. Look at it this
way: when you drive a car, you are solving a differential equation. But
you don't need to be a mathematician to drive a car. I think the point
here is that the successful traders choose methods that *can* be
operated by hand and get a *feel* for the markets by such manual
operation.
[snip]
>OBSERVATION # 5
>
>Losing traders focus on winning trades and high percentages of winners.
>Winning traders focus on losing trades, solid returns and good risk to
>reward ratios.
>
>CONCLUSION:
>
>The observation implies that it is much more important to focus on
>overall risk versus overall profit, rather than "wins" or "losses". The
>successful trader focuses on possible money gained versus possible
money
>lost, and cares little about the mental highs and lows associated with
>being "right" or "wrong".
Now I'm going to put on my mathematician/statistician hat for a moment.
What matters about any "trading system" the most is the shape of the
distribution of profits and losses. While there is a great temptation to
try to reduce this information to a single number, whether it is the
average trade, Sharpe ratio, Schwager's Return/Retracement Ratio or some
other risk/reward combination, the distributions I've seen for
successful trading systems are all over the map. Some are bimodal, some
are highly skewed and very few have anything even remotely resembling
the Gaussian bell-shaped curve that most well-known statistical
procedures rely on. You really need to look at a histogram of your
system's trades to get a good idea how it will behave.
[snip]
Good post in general, although I didn't see anything I haven't seen
somewhere else in the literature on trading.
--
M. Edward Borasky znmeb@xxxxxxxxxxxx http://www.teleport.com/~znmeb
If God had meant carrots to be eaten cooked, He would have given rabbits
fire.
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