Wednesday, May 21, 2008

Can You Really Handle the Way the Market will Pay You Off? IFCN Wk 24 -Wed- Equity: $697.89

With the markets as choppy as they've been currently, I thought I would cover some applicable material.

Tons of people think that the ideal life is to sit on a beach, mountaintop, hotel room in Venice, or wherever and trade the markets. They believe that it's possible to make money almost every day and be able to consider the forex market a virtual ATM. That's obvious by the ads Google chooses to supply up on the righthand side of this site. (You know they now own Blogger too? Pretty soon they will own every search concept and internet delivery idea out there!) The ads change every time you load the page, but the messages are similar.

Some are pretty interesting too. But they center on the idea that there are secrets that no one else has (some truth in that) and you don't have to know very much about the markets and trading to do very well. (No truth at all in that.)

The big reason that trading is so difficult for the average Joe to exploit is because Joe is average. And at the very least, when he starts trading – he acts like the average guy who trades – and loses. He expects the solution to his problem will happen in a certain way, like a paycheck; and when it doesn't work out that way, he bolts and looks for another simple and ultimately costly solution.

The main problem is having solid information to base your decisions on. If you absolutely know some task is difficult to perform, like heart surgery; you would study it for many years before you would attempt going “live” in someone's chest. The same thought process should apply with becoming a trader, but doesn't because the ads say differently.

Even simple-appearing methods like those highlighted in this site such as FirstStrike and OneNightStand are simple only in their execution. The mental aspect that you have to get around which would enable you to trade significant size with them is gigantic.

There is no “something for nothing” in life. No (working) perpetual motion machines. But there are loads of people in this world who are very predictable, some extremely well financed; who have “tells” sticking out a mile and tend to lose because they really don't expect to gain. Some are world bankers.

They are our meat as traders.

But only if you can handle receiving the pay offs the market gives you, in the way it will give it to you.

Sometimes it only takes a change of mind for you to become a profitable trader.

Think about the following:
  1. If the only way you could get paid for your trading was in so many copper pennies per day, you'd probably take them and find an easy way to convert the pennies into dollars.
  2. If the only way you could get paid for your trading was from huge payoffs once every 2 years, and have to pay for small losses out of your pocket until the big payoff, you might  still be in, if the math makes sense.
I am sorry it's the case, but some of the best and ultimately the most profitable methods for independent traders fall much closer to the second example than the first. Some viable methods are in between the two extremes. But not many.

I sent an eight page missive to IFCN subscribers this afternoon entitled, THE HOLY GRAIL- Learning to Handle Variance in Returns. It is about the live trading experience of Ray, a local friend of mine, who recently started trading a daily volatility breakout method in addition to the systems on this site.

He started trading the daily system about 2 months ago and immediately went into drawdown. After 88 trades his new account is down 17% due to his higher leverage. His anticipated return (expectation) at this point would be approximately 15% gain on equity.

Is the system broken? If you would like to get a free copy of THE HOLY GRAIL- Learning to Handle Variance in Returns- just click on this link.

Look at this Monte Carlo representation below of the system's edge. As you can see, the Kelly Criterion number indicates a better than 10% potential edge. And still the volatility in potential returns is amazing. Just because you have a big edge doesn't mean you will win every time. Even Vegas has people take them for millions once in a while, and they have THE edge on every game.

Over the equivalent of 453 trades you can see how many ways your equity curve could end up. It is that variance in return that you have to understand which exists in your system and thereby your tolerance or lack thereof to trade it.

If you and I both start trading a winning system, and then I stop trading because I have an unacceptable (to my perception) string of losses, but you understand that what we've both experienced is typical for the method – you will very likely end up the winner, and me the loser.

That is the very essence of trading, profiting due to information you have that others don't. Maybe those Google ads aren't all bad. At least some of them offer free test accounts, something that can help you see what options are now available. I have tried 5 different test accounts and most of them have features that I would love to see Oanda adopt.

Like automatic OCO orders. Meaning, one-cancels-the-other orders. You can place a buy order and a sell order and whichever gets filled first gets filled and the other order is cancelled immediately.

Maybe soon.

Have a good evening.

Current equity still is at $697.89.

Joel Rensink

PS: To receive the FREE! trading rules for the Infiniteyield Forex Challenge ($499 value) and the semi-monthly newsletter about this challenge, send an email to: and tell me to which address you would like it sent. Please do not use AOL, Hotmail or Yahoo addresses. Nothing personal, but they've been known to filter out more good mail than actual spam. Try a Gmail address. It's free, simple and perfect for traders!

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