Trading In The Zone and The Holy Grail

[autofx]

The "money management" school preaches no stops and adding
lots as the action goes against a position!

Who exactly is selling snake oil?

Not only have the clowns revealed themselves, they now have
taken center ring. with their size 22 clown shoes on, honking
their 130-decibel diesel-powered clown horns!

[Smurf]

Dear KPcurrency

That's a very valid argument. However, I suspect that if you cannot absorb the maximum losses of a system then certainly you cannot withstand your system performing even worse than it should be. My bickering with autofx has nothing to do with this, because I would really like to know the answer to this question. Could this be one of the reasons that amateurs fare worse than pros? Pros can absorb the losses and hence reap the full rewards of a system whereas amateurs need to put in stop losses and consequently get a much poorer overall performance?

Cheers,

Smurf

[Smurf]

Great post, autofx. Full of answers and sharp observations (hint: you're the only one selling anything).

[comenow]

Originally posted by Smurf
Dear KPcurrency

That's a very valid argument. However, I suspect that if you cannot absorb the maximum losses of a system then certainly you cannot withstand your system performing even worse than it should be. My bickering with autofx has nothing to do with this, because I would really like to know the answer to this question. Could this be one of the reasons that amateurs fare worse than pros? Pros can absorb the losses and hence reap the full rewards of a system whereas amateurs need to put in stop losses and consequently get a much poorer overall performance?

Cheers,

Smurf

I think u r right in a way. When u think about it, if u have a huge amount of money, then, given that no currency pair goes in one direction forever, with a good system that is right even less than 1/2 the time, u will make a lot of money. However, the fact is that most of us have to limit our losses in order to remain at the table the next day.

[Smurf]

Dear comenow

Yes, I thought as much. I always had a hard time trying to come to terms with the fact that such a high percentage of amateurs go broke and disappear and all the old sayings. Two things could explain this: 1) The old sayings are correct but nobody follows them. 2) The old sayings are wrong.

I would suspect point 2 to be correct. I mean, it's right there! If a system suffers from stop losses then stop losses are wrong. However, there's a way out of this. Trade smaller volume. I know this is not sexy and it doesn't correspond to new traders' ideas of buying a Jag after three months. I think it works, though. I do it myself anyway and with huge success, but nobody wants to hear about trading much smaller volume (and consequently delaying the purchase of the Jag).

I'll leave you with a thought. A Business Week story on the bonds trader John Merriweather (the guy from the book "Liars' Poker" about Salomon Brothers) pretty much stated that one thing he learned as professional trader was, above anything else, ride your losses until they become winners. This sounds as insane advice. Even more so considering the trouble of LTCM. However, how does that correspond with things that rookies are taught?

Comments appreciated.

Cheers,

Smurf

[comenow]

Originally posted by Smurf
Dear comenow

Yes, I thought as much. I always had a hard time trying to come to terms with the fact that such a high percentage of amateurs go broke and disappear and all the old sayings. Two things could explain this: 1) The old sayings are correct but nobody follows them. 2) The old sayings are wrong.

I would suspect point 2 to be correct. I mean, it's right there! If a system suffers from stop losses then stop losses are wrong. However, there's a way out of this. Trade smaller volume. I know this is not sexy and it doesn't correspond to new traders' ideas of buying a Jag after three months. I think it works, though. I do it myself anyway and with huge success, but nobody wants to hear about trading much smaller volume (and consequently delaying the purchase of the Jag).

I'll leave you with a thought. A Business Week story on the bonds trader John Merriweather (the guy from the book "Liars' Poker" about Salomon Brothers) pretty much stated that one thing he learned as professional trader was, above anything else, ride your losses until they become winners. This sounds as insane advice. Even more so considering the trouble of LTCM. However, how does that correspond with things that rookies are taught?

Comments appreciated.

Cheers,

Smurf

Dear Smurf,

Let me tell u my situation. I started spread betting on currencies about 18 monts ago. B4 that I had no experience of trading at all. I spent a lot of time reading and studying b4 taking the plunge. I use a simple lagging trend following system and I win consistently. I never wanted to buy a jag because I don't really care for nice cars and the like. I trade to have financial freedom so I don't work for someone else.

Any way, the 1st thing I noticed when I backtested different systems was how much worse they do when you factor in stop losses. However, I was starting out with only £2,000. I was betting the smallest amount I could (£1 per pip). A lot of times a pair would take out my relatively tight stop and go in my favour if i were not stopped out. However, it happened enough times that I would have been wrong by 100-200 pips. Without a stop, that would have meant a few losses would have taken me out of the business.

I am now in a position to bet £10 a pip, but I am not in a position to risk large sums of money. In the end, it is really a matter of what u can afford to lose. Would I have longed Euro/USD b4 xmas without a stop if I had a lot of money. Of course, I would. Trading would be very easy if u can afford to lose large sums of money on paper and wait it out. But if u have 2000 in ur account and the margin call comes, u are effectively done and dusted.

However, I would like to know at what point u would throw in the towel if u r wrong without a stop loss.

[Croesus]

Hi fellows!
This thread was born good, so here is my thought.

The old adage let the profit run is sacrosant,
probabilistic trading is right, we can't predict anything
is right too, but that's not all. Friend Smurf told he doesn't like
stop losses very much, they seems like traps, why?

Because we can't predict where the market is going
but we must place good entries.
If entry-point is wrong, Mr. S/L is there!
One thing is to predict, another thing is to have a good timing.

Carpe diem and go go go profits!

[KPcurrency]

Didn't they go out of business?

In Well Wilder's Adam theory of markets , he quotes a floor trader as saying the first thing he learned to do was get out of a losing position 100 out of 100 times. Not the secret to being less wrong than the retail trader. And I think this would be true of all locals (yes they still exist). Therefore, the locals, who make a living trading from their own account, understand the importance of cutting losses. And the trader trading somebody else’s' money (the firm) could care less. But even the firm didn't have unlimited resources.