Date: Sat, 14 Dec 96 11:24:06 PST
From: ramon@world.net
Subject: Re: Tuition and Education
To: dgl@vnet.net
================================================================================
On Fri, 13 Dec 1996 04:04:17 -0500 (EST) Carl wrote:
> I WANT and NEED 'HELP' in my trading decisions!!!
>
>I've "BEEN THERE and DONE THAT" but always,my
way-NO DISCIPLINE!!! , seat
>of the pants kind of stuff-------what a rush,a 30,000 +
day,and then watch
>the 'screen' in >a sort of trance for a 90,000 ---(minus)
day! .....
(of course,day >trade,NO stops, >until my order taker asked
for it)
===================================================================================
Hi Carl,
Here are some suggestions and hope they can at least point you in
the right direction.
I believe the transition from "mug trader" to
"consistent profitability" needs the
learning of three lessons.
1 thinking in terms of probabilities. Ultimately, this needs the
development
of a trading plan (including a money management plan).
2 executing that plan as flawlessly as possible and
3 accepting the profits the markets gives a trader as a reward
for his
efforts.
The first lesson is firstly technical ie acquisition of the
relevant knowledge
and secondly psychological ie application of the knowledge. The
other two lessons
are mainly psychological.
Generally I have found that most novice traders fail to have a
plan; in other words
they fail at the first gate. To have discipline means to
"execute your plan flawlessly";
if you don't have a plan, then how can you expect to have
discipline?
So what must a trading plan contain?
* Identification of the timeframe you are trading:
This means you have some means of measuring moves of a like
magnitude and identifying
the trend of that timeframe:
up, down or sideways.
It also means you have some means of identifying changes in
trend.
Once you have identified the trend and answered the question
"continuation or
change", you have established your strategy.
in uptrends: buy
in down: sell
in congestion: buy the bottom end of congestion and sell the top
end or
just stand aside until a trend resumes.
Once you have your strategy, then you need to establish
* low risk entry
++ To do this, you need to have some means of establishing
support or resistance areas
where the market is likely to stall eg
- you're in an uptrend, a correction is in place, you need to
establish an area where there is a high probability the
correction
will end
- you're in an uptrend and given the structure of the market,
you are looking for a change in trend. You need to
establish an area where there is a high probability the trend
will
will end.
DGL's are great for this.
++ You then need to define a series of high probability setups. I
define
this idea as indications that the support/resistance area are
likely to be effective.
There are three groups of setups. These (with examples) are:
time: Delta, Gann dates, Fibo dates, cycles, etc
volume/price: Wyckoff, Arms etc
price: Candelsticks, 5VBT etc
You can of course mix setups from each group.
++ Finally you need to establish an entry technique and initial
stop.
eg the ATR posted here recently.
The principle here is you need some means of identifying
rejection away
from the zone.
* trade management
Once you are in a trade, you need to manage it.
++ at its most basic, this involves a trailing stop.
++ however, I have found that the "rule of three"
allows you to take
some profits early while retaining the possibility of taking part
in large trending moves - the best of both worlds. I posted
this idea before. If you missed it, e-mail me and I'll resend it.
When the trading plan is in place, you need to establish a money
management approach. This has two purposes:
a how much capital is needed to fund each contract,
b the stop loss for each position
Both questions are determined by four factors:
a financial capacity to lose
ie your capital base
b psychological capacity for loss
c the profitability profile of your methodology
d the volatility of the markets you are trading
I won't go into this here - this post is getting too long as it
is.
However I did write an article on this topic on the Realtraders
Website, http://www.realtraders.com/.
Go to "trading secrets" and to my "shelf".
regards
ray
-------------------------------------
Name: ray barros
Tel : 61 2 9267 3470
Fax : 61 2 9267 3478
101/25 Market Street
Sydney NSW 2000
Australia
E-mail: ramon@world.net
Date: 12/14/96
Time: 11:24:06
-------------------------------------
In any given market, the sum total of all traders's perceptions
is one
collective perception which, at any given moment, creates the
price and
hence the reality of the marketplace. Every trader's account is
credited
or debited based on this.
If that perception is not in harmony with the collective
perception of the
market, that trader will be punished by losing money.
These are not my personal beliefs anymore than the law of gravity
belongs to Newton. This is the way of the market. But, perhaps
this is
all wrong given that it is coming from someone who you claim has
a 70
IQ. On that last point, I think you may be on to something. Every
since
graduating from my third rate alma matar college, I have been
working
hard at dumbing down so I could become a better trader. Since
arriving
on the CBOE trading floor in 1975, I came to the conclusion that
trading
genius lies in the brain of a 4 or 5 year old child. More
recently, I had
the opportunity to test this hypothesis and was pleasantly
surprised when
my then 4 1/2 year old son produced some extrordinary trading
results, i.e.
62% winning trades with a 2.41 to 1 win/loss ratio, and more than
$7,000
in profit in about ten trading days. Please keep in mind that for
the
purpose of this experiment I provided little or no instruction to
him on
the markets. I merely ask him to look at some charts and indicate
up, down,
sideways, or that he didn't know. I then took the markets for
which he had
an up or down opinion and did a paper trade based on the close
price of that
day, i.e. bought if he said up or sold if he said down.
So if IQ measures one's intelligence in relation to one's age, I
can see how
it would be helpful for me to perhaps reduce my IQ to about 25 in
order to
become a more succesful trader. I thank you for your assessment
of me being
at an 70 IQ, as this shows that I have been making steady
progress in reducing
my IQ.
Norman nwinski@naples.infi.net
What makes you think that determining
market direction and chosing indicators
are relevant in making money trading? If you look for these, you
become an
analyst, not a trader.
Joe Ross: "TRADE WHAT I SEE, NOT WHAT I THINK!"
You can fool all of the people some of the time and some of the
people all of the time.
The best time to buy is when blood is running in the streets,
even if it is
your own.
Neal T. Weintraub in "Tricks of the Floor Trader" said:
You will run out of
money before a guru runs out of indicators...
Subject: Re: Poll: Pick your favourite three
indicators
In order of priority:
1. Price
2. Price
3. Price
The problem is, the tighter the stop, the
more likely noise will stop
you out with a loss even if your entry was good and the trade
will show
a profit if you stay in. Therefore the best stops are not stops
in the
traditional sense but rather short and long exit signals based on
careful
system design and with due respect to the reasons why the system
got you into the trade. Do the justifications for entry still
exist?
Bottom line is that exiting a position requires as much thought
in
system development as entries do. The better the system, the less
often
you will wish you had a stop loss that was not already part of
the system
itself. These days, many system writers are looking to volatility
as part
of the criteria for entry and exit, but other factors involve
partial vs.
complete profit taking, looking at multiple time frames. etc.
James Charles money4u@erols.com
Try looking at a 3/9/15 Exponential
Moving Averages and trade multiple
contracts (2 or more). When the 3 crosses the 9 sell one. If the
3 crosses
the fifteen sell the rest. If the 3 doesn't cross the fifteen you
will
still have a contract or two on. This can reduce the number of
whipssaws.
It will also increase the dollars of profit per trade and
decrease the
dollars of loss per trade. POINT IN THOUGHT: has anyone
considered in
which time frame you use your moving average? If you trade 5 min
charts,
what about putting the MA on the next longer time frame( 20 min)?
Comments
or ideas welcomed.
Richard Chehovin GalacticFXInternational@worldnet.att.net
Should you desire to increase this stop
loss (1% of cap.), you should reduce
accordingly the size of the position or exposure you have in that
market and
at that method at that particular time.
=> adjust stop loss and profit-taking levels
as the profit in a position increases, you should reduce the
position size to
maintain a maximum portfolio exposure and, ideally, in effect you
will be
investing only the profits generated in the trade (!).
1. I trade a basket of commodities having certain margin
requirements.
2. I fund my account at least 2 times margin. I can thus
withstand a
drawdown of up to 40% emotionally...
3. I increase my units of trading when I have enough money to
cover taxes
and another 2 times margin.
It is simplistic but it works for me. Rumery and Lehman also
offer a system.
If you know the approximate drawdown (who
really knows???)...you must then
fund your account according to your temperament..., i.e. it
sounds as if you
are uncomfortable with the % drawdown....deleverage by having a
larger account
size...thus a lower % drawdown... If that is not possible, try to
deleverage
by switching to the DJH8 or ESH8...thus accomplishing the same
effect.
Tom Stein comfut@msn.com
I use threshold levels to increase my
trading size. My formula is:
2x max historical drawdown + margin = equity needed to trade 1
S&P contract.
So a 50% drawdown to me means a real 25% drop in equity.
By drawdown I'm talking about my total net running drawdown. I
always
use stops on my individual trades which keeps my max. daily net
loss around
3% to 5% depending how many systems trade that day (I use 3
systems). The
recent volatility in the S&P's has forced me to almost double
my stops over
the last 6 months which has made the drawdowns deeper.
Bob RRedman144@aol.com
Maximizing use of Margin:
Margin for British Pound is $1552 while Swiss Franc is $1721,
both had almost
the same amount of margin requirement to trade one contract. But
BP offers
the most bang for the buck in which its average EOD close is at
around 100+
points compared to SF which is 50+ points.
BP tick size is $6.25, SF point value is $12.50.
=> Both point values are NOT 12.50. The Pound is 6.25 per
point. Both are 12.50
per TICK, but the minimum tick in the Pound is 2 points. So the
margin in this
case does accurately represent the "bang for your buck"
since the average daily
move in both is $625 per contract.
The tick in the BP is $6.25 per contract but the minimum tick is
two
so you are back to $12.50 per contract.
trading plan has three rules:
1) When to get into the market
2) When to get out with a profit
3) When to get out with a loss
If I flip a coin N times, then the odds
that I will never flip a head
are 1/(2^N). This is true no matter how high a value I give for
N. So it
seems plausible that, if I flip a coin a countably infinite
number of times,
then the odds that I will never flip a head are 1/(2^countable
infinity)--in
other words, one over an uncountable infinity. This result seems
reasonable,
since the problem can also be looked at as "If I somehow
picked a random
infinite string of coin flips from the set of all possible
infinite strings of
coin flips, what would be the odds that I would pick the set with
all tails?"
There are an uncountably infinite number of infinite strings of
coin flips, and
I'm looking for exactly one; so, assuming that I'm really picking
randomly (so
I'm no more or less likely to pick one string than another), the
odds of
picking the all-tails string should be 1 over that uncountable
infinity.
Now, _if_ I'm restricting myself to the real numbers, I then
proceed to
say "Well, any finite number over any infinity must be
zero"--so I say that
the probability is zero. If I'm allowing myself to use
infinitesimals, then
finite numbers _don't_ get zeroed out by infinities in this way,
so I simply
leave the result as it is--1 over an uncountable infinity. That's
not a valid
real number, but it's a valid infinitesimal.
Yes, this is counterintuitive; but then, so is infinity itself.
And
think about this: If we exclude infinitesimals, then the odds
that an infinite
string of coin flips will contain at least one head are
"1-but-just-maybe-it-
won't-happen." The odds that an infinite string of coin
flips will contain
at least ten coin flips are
"1-and-I-really-really-mean-it-this-time." We're
using the exact same probability figure--1--to describe one event
that's
certain to happen, and another event that's not. Doesn't that
defeat the whole
purpose of probability figures? Doesn't that suggest that, in
problems like
this, we're making an error by restricting probability figures to
real numbers?
Risk Trailing Stop:
maximum profit is calculated from the
point of entry using the highest high
if long, or the lowest low if short.
The dollar amount of profit per contract or per position you are
willing to risk is then subtracted and
the trailing
stop is placed at that point.
Multiple Entries:
Average all entry prices (factoring in
any profit for any entry) and divide
by the number of contracts.
This average, minus a market move that
represents an additional $500 loss, is the stop price, a level where once the
position is exited you would lose
$500.
Let's look over the shoulder of an experienced gambler (you
will learn much more on Money Management on Gamblers' websites
than on Trading websites!!!):
Here is what a lifelong gambler told me.
You buy in for $100 at blackjack.
Maximum bet is $2 until you start winning.Then you increase your
bet size.
Increase your bet 50% on a win. Go back to $2 on a loss.
If you lose the $100 you walk!
If you get to $175, YOU PUT $150 in your pocket,never to see
daylight again!
Now you play the $25 left. You lose it, you walk.
You are now betting $2 again. Increase your bet 50% as you are
winning.
When you lose back to $2.
If your chips total on the table $50, you put $25 again in your
pocket
never to see daylight again !!!
This goes on until you lose the $25 stake once and then you
walk!!!
No drinking and you must be disciplined.
You must follow basic strategy perfectly or use the card.
Sit at third base. Only shoe games. Never take insurance.
Once in a while put out $1 for them, especially when you have a
big bet out there. You have to be comfortable. If there are
obnoxious players, cigarets or cigars or dealers that bother you,
change tables. If you are tired and up money, do not play
anymore.
Never play at a casino that does not let you double down after
splitting.
Never play at a casino that does not let you double down on any
two first cards.
If you want to bet $5 minimum, you must start with $250; 50 times
minimum bet!
billhere@att.net
==> You minimize the casino advantage by knowing when to split
and when to double.
What I mean here is that using ONLY WINNINGS or "house
money" I follow a classic
Martingale betting progression in an attempt to win MORE money,
i.e. even when
I am only winning LESS than 50% of the hands I am playing. If the
table is
"choppy" (win-lose-win-lose) or even if it becomes
slightly dealer-biased so
that I'm only winning, say, one out of three hands, this STILL
allows me to
slowly win more money than I'm losing.
IF it happens (as it does quite often) that my chasing the losses
all fail and
I end up back at my starting basic buy-in money (20 units), I
will then give up
on the progression and basically start over, flat betting my own
money and
basically pretending that I just arrived in the casino once
again.
Negative progressions tend to increase the frequency of winning
small amounts
but expose you to occasional large losses. Positive progressions
tend to
increase the frequency of losing small amounts but give you a
shot at
occasional big wins.
First, gambling is not a continual game resting purely on chance.
Individuals
can materially affect their odds by knowing what those odds are
and making
choices to maximize their odds.
Second, no one gambles with unlimited funds thus stop losses and
strategies
for money management are important to the game. Third, if you
increase your
bets when you win but always hold a little back (never betting
the entire
winnings) you will be better able to take advantage of winning
streaks.
Probability operates in the long term over many trials. Most
individuals bet for short periods of time. The imbalances that
occur in the
short term correspond to what people call "luck" and
can be very good or
very bad without necessarily evening out for the periods people
generally
play (hours or days vs. months). It is entirely possible to win
in the short
term and many people do.
I plotted histograms of the actual results. There was the
familiar "bell-shaped"
normal curve. For regressive betting, it had a long relatively
flat tail on
the negative side (the small number of big losses) but the bulk
of the curve
was on the winning side. For progressive betting, the curve was
centered on
the losing side but had a long flat tail on the positive side
(the small
number of big wins).
(A distribution with a significant positive skewness [the more
extreme values
are greater then the mean] has a long right tail. Investors
prefer returns
and positive skewness and dislike risk and negative skewness)
A measure of the (a-)symmetry of a (return) distribution.
Positive skewness
would indicate a greater probability of large high returns
relative to low
returns.