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Richard,
>I came out ahead on the day. Analyzing my trades, I once again realized
how
>hard it is to follow a trend. Much easier to hit and get out, hit and get
>out. Had I just taken $100 on each trade, I would have made more money
with
>less risk. It is far easier to trade a system that gives you 80% winners
>than 80% losers - gambler's ruin is less likely also.
You have missed the most important side of the equation - the rewards you
get. Trading is just Risk and Reward numbers.
Answer the following questions:
1. If you were to make $5 when you won 20% of the time and lose $1 when you
lose 80% of the time would you be profitable?
YOU BET YOUR ASS IF YOU MAKE ENOUGH TRADES!!!
2. If you were to make 60 cents every time you won and you win 80% of the
time and yet you lose $3 every time you lose and you lose 20% of the time
would you be losing??
YOU BET YOUR ASS IF YOU MAKE ENOUGH TRADES!!!
Why?
The Expected Return =
Win Ratio * Expected Average Profit per winning trade - Loss ratio *
Expected Average Loss per losing trade
In Case 1 You are ahead of the game in theiry every time you trade by 20
cents. If you make enough trades the system comes into line with the
Expected Returns (in theory and I have seen it in practice). This is what
Russell Sands and the Turtles refer to as getting into the long run - making
enough trades to give you the returns. The Turtles system is the classic
and most proven example of this. The Turtles only make profits 1/ of the
time and lose money 2/3 of the time. But their Win/Loss ratio is $3 to $1
accross the system. MOST PEOPLES EGOS WILL NOT HANDLE WINNING ONLY 33% of
the TIME AND LOSING MOST OF THE TIME. That is why the Turtles make so much
money for themselves as money managers and their clients as traders in that
they do what most people can't handle. Hence the Turtles are amongst the
most established and longest running CTAs. THEY MAKE THEIR MONEY BY
FOLLOWING TRENDS. The System last year had its worst year on record - It
made only 51% return. Now most Turtles do not trade at full size as the
system does so their returns are lower than that - by a factor of their
lower leverage.
In Case 2 You are losing 12 cents every time you trade. This is satisfying
to the ego but extremely damaging to the ego. I have a very good friend who
trades his own money this way ONLY HE TELLS ME HE IS RIGHT 95% of the TIME!!
Wow great statistics. He sounds like a great trader!! But would you want to
put money with him after I told you that he also lost $1million in total
last year. Yes he got killed in that 5% trades. He cut his losses short
and lets his profits run.
I have another friend who has been trading for 20 years. He can't follow
trends - he Has to pick tops and bottoms to satisfy his ego- he has LOST 19
out of 20 years.
Following trends is about going with the line of least resistance. The
opposite of that is about satisfying your ego and putting your wallett at
risk. Stick to the Trends and test to see if your method is actually a
method that is profitable in the long run. If it is gioing through a short
term draawdown then recognise it for that. I have watched Russell Sands
trade over the last few years and know that while he may be grumpy over
losing days 2 out of 3 the 1 outof 3 winning days more than make up for the
bad mood.!!
David Hunt
http://www.adest.com.au
-----Original Message-----
From: Richard Stokes <stone@xxxxxxxxxxxx>
To: realtraders@xxxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxx>
Date: Friday, March 26, 1999 8:29 PM
Subject: Re: MM & Psychology
>Today I took a couple of hours off the floor and decided to day-trade some
>stock, and ran into exactly the same issue:
>
>About 11:20 or so, I purchased 100 shares of MINE at 64 1/8 based on the
>trend.
>
>A few minutes later, the stock hit $66 and I thought about selling for a
>quick $178 profit. Instead, I watched the stock move back down to $62. It
>began making lower bottoms, so I sold 200 shares at $62. I hoped to take
>the small loss and make it back on the second trade.
>
>The stock moved down over the next half-hour or so to $60. It sat there
for
>an uncomfortably long time, so I put a limit order to buy 100 shares at
$60.
>It hit, and the stock moved down to $58 within a minute or so. I bought at
>$60 because that's where the lower Bollinger Band was, and I was going to
>try and place the bounce. Unfortunately, there wasn't one.
>
>I attempted to follow the trend downwards. After a few minutes I sold
>another 100 shares at 59 1/8. I sat with this for at least an hour - much
>longer than I intended. I placed a buy limit at 56 1/4. This time, I
>intentionally didn't look at the trend or any of my indicators because I
>didn't want to be influenced like I was on the previous trade.
>
>The stock quickly moved down to $56 and hit my limit. I purchased stock
and
>it moved back up soon after to $58 1/2.
>
>Again, I tried to sell the next leg of the trend downwards, but it never
>happened. The price moved up to $60. It moved up so quickly though that I
>decided I would wait for it to come back down. I placed a buy order at 56
>3/8, which wasn't hit. About 2:30 I moved it to $58 because I wanted to be
>flat by the close. The stock ended up around $61, so it was a smart move.
>
>I came out ahead on the day. Analyzing my trades, I once again realized
how
>hard it is to follow a trend. Much easier to hit and get out, hit and get
>out. Had I just taken $100 on each trade, I would have made more money
with
>less risk. It is far easier to trade a system that gives you 80% winners
>than 80% losers - gambler's ruin is less likely also.
>
>rich
>
>
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