One Up on the Romans

Sometimes, words are hard to come by.

Like now.

It’s a dry spell.

Happens.

At other times, well, they burst forth as if a geyser’s exploded.

Then, I’m not able to stop their flow.

That also happens.

Welcome to the dual-natured environment of Earth.

While we’re steeped in this duality, there’s no option but to get used to it.

One can always go on to then master it.

Oh, I forgot, that’s optional.

I’ll tell you what I’ve done to master such fluctuating fortunes, as far as word-flow is concerned.

Two simple steps, that’s all.

When we’re dry,…, we’re dry. No PhDing over the fact that we’re dry. We’re just dry. Period. Accepted. Digested. We just go on to do other stuff. There are millions of other things that grab our interest on this dual planet.

When we’re up and running – that’s just it – we’re up and running. No PhDing over why we’re up and running. We let the flow happen. We can decide to make it happen even more. That’s optional…, but we don’t stop the flow… till the tap dries itself out.

Similarly, you can experience a string of losses in the markets. Losses make you hit your cut-off. A cut-off is a cut-off. You don’t keep on trading. Nature’s telling you to lay off till your mind and body align themselves with the flow of the markets again. Just do other stuff till you’re mentally and physically back.

On the other hand, when profits run, they can really run. PLEASE LET THEM RUN. Don’t PhD about the run. Let them run till they dry out.

When in dualism, the idea here is to first live through dualism, in order to understand its nature.

We’re one up on the Romans, though.

We’re trying to be masters over our fluctuating dualistic environment.

Yeah, in the markets, we’re getting through losing spells with minimal damage.

Simultaneously, we’re maximizing the potential of profit-runs.

That’s what we’re doing.

If not, then that’s exactly what we are going to do.

Cheers

🙂

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How Does One Position-Size?

What is the singular most lucrative aspect of trading?

Any ideas?

Want a hint?

Ok, here’s the hint. It is also the safest aspect of trading.

Give up?

Here’s the answer. It’s called position-sizing. (The pioneer of position-sizing is Dr. Van K. Tharp, @ www.iitm.com, and I have learnt this concept through him).

Surprised? I would be surprised if you weren’t surprised.

Yeah, trade selection is important too, but other things are more important while trading.

For example, trade management is more important than trade selection. So is exit. Entry might be paramount to an investor, but to the trader, entry is run of the mill. It happens day in, day out. The trader … just enters a selected trade. There’s no deep thinking involved. The trader knows this. Crux issues are to follow. The trader is saving his or her energies for the crux issues.

So far, we’ve spoken about the chronology of a trade, i.e. entry – management – exit.

Before entry, you decide how much you want to trade with, and how much you want to risk. That’s the size of your position, or your position-size. Remember, for the concept of position-sizing to make any sense, your stop-loss percentage must remain constant from trade to trade. Only your traded value goes up or down.

What does the level of your traded value depend upon?

It depends upon HOW WELL YOU ARE DOING.

If you’re on a roll, your traded value for the next trade goes up. The increment is proportional to the profits you are sitting on. Since the stop is a constant percentage, the amount risked is also higher. Return is proportional to the amount at risk, and the long-term net return of such a trade will also be higher. All this means, that the more you make, the more you set yourself up to make even more…!

Take a coin. Flip it millions of times. There will be a stretch, where you’ll flip tails 5 times in a row, or six times in a row, or maybe even ten times in a row. The 50:50 trade called “coin flip” can well result in a series of back to back losses. You are an experienced trader. Your trade selection ratio could be 60 winning trades to 40 losing trades, or perhaps a little better, let’s say 65:35. Even a trade selection ratio of 65:35 will result in back to back losses. As a trader, you need to take large drawdowns in your stride, as long as you are confident, that in the long run,  your system is working. What’s working in your favour during the large drawdown?

Your position-size is.

You see, as trade after trade goes against you, and your losses pile up, your position-size KEEPS GOING DOWN. Your stop percentage remains constant. This means, that the more you lose, the more you set yourself up to lose lesser and lesser, trade after trade. Yeah, position-sizing gives you the safety of losing less. Nevertheless, because of this safety assurance from your position-sizing strategy, you keep yourself in the market by just taking the next trade without too much deep thinking (and with no melancholy whatsoever), because your next trade could be the one decent trade that you are looking for. Yeah, your very next trade could cover all losses and then some. TAKE IT.

Now, two things can happen.

Firstly, if you keep losing, and hit your loss cut-off level for the month, well, then, you just stop trading for the rest of your month. You then spend the rest of the month reviewing your losses and your system. You tweak at whatever needs tweaking, and come back fresh and rested the following month. Position-sizing kept you in the market, ready to take the next opportunity to earn big. The auto-cut takes you out of the market for a while. That’s why, in my opinion, while position-size is still activated, it provides more safety, because it keeps you in the market to recover everything and then some, starting with your VERY NEXT trade. Having said that, auto-cut is auto-cut. It overrides position-sizing.

The second thing that can happen is that your losing streak ends before your month’s cut-off is reached. Yayyy, position-sizing is still activated! You’ve lost lesser and lesser on each losing trade as long as you were in the losing streak, and now that you are winning again, each win sets you up to win more in the trade that follows.

After many, many trades, just cast a glance at your trading corpus. It will boggle your mind!

Your position-sizing strategy has kept raising your corpus, because your system is 60:40+, and you win more than you lose. Ultimately, your corpus has become substantial. Its size exceeds your expectations BY FAR.

All thanks to position-sizing.