Matt Bowen
02-10-2008, 11:04 AM
Today is going to be a lot of fun because we are going to play a trading game !
Hi Everybody,
The subject of this e-mail was: "Why is expectancy Important for trading?" Expectancy is important because it lets the trader know that over the long term that the trader can expect to make profits if the risk level is low.
What is low risk?
Well, for that answer I'm going repeat something Ed Seykota once said at a Van Tharp seminar... here is what Ed said:
You can Risk 1 percent of your capital, you can risk 5 percent, or you can risk 10 percent, but you better realize that the more you risk, the more volatile the results are going to be.
-Ed Seykota
In many cases, most Hedge Funds will limit trading losses to LESS than 1% of capital. If you are an individual trader, then 3% is the maximum you can risk. Why only 3%? Because, the more you risk, the more volatile the results will be AND the drawdowns will be impact you psychologically. If you ever traded a system using 3% position size then you know exactly what I'm talking about...it's like being on a rollercoaster that has some pretty wicked movements, both up and down.
Another reason is that once you start running over 8% position sizing (depending on the system) you start running the risk of margin calls after a series of losses. If you don't know what a margin call is, you don't want to know... it's more like GAME OVER because you have just run the risk of ruin.
I recommend new traders start off risking 1% in their position size until they are comfortable with the risk. Once they have used this for 100 trades and still want to step up their trading, they can then move to 2%. It's all about being comfortable.
It's one thing to be in a 23% drawdown and completely a different matter to be in a 46% drawdown. What people don't realize is that a 46% drawdown takes about 97% return (just to get back to break even).
Take for example a casino. Do you know that every game in the casino has a negative expectancy? Now you know why most people lose. So, how and why do some consistently go back because they can win?
Good Question? But there are three (3) games that you can turn the odds in your favor and do have a positive expectancy if play using certain strategies and they are Blackjack, Baccarat and Poker.
Even if you play basic strategy in Blackjack you still don't have an edge in the game and this is where money management makes all the difference. It makes a difference in whether you walk away a winner or loser... I'll leave this for another e-mail some time.
Sounds pretty obvious, but when it comes to money people act very strange when it comes to risk and the reason they act strange or do strange things is because of two things:
1. The REALLY do not know what is going to happen.
2. They REALLY don't understand risk management.
No one will ever know what's going to happen on a series of trades and traders will always continue to spin their wheels and build better mouse traps to find out. However, once you get off that insanity wagon you will come to realize that you don't need to know what's going to happen on any given trade or series of trades (I'm going to prove this to you in a minute with a simple marble game).
First, I want you to go get some marbles (trust me, this is not a joke). I want you to go to a hobby/craft store or one of those games and toy stores. You can even go to say Target, Wal-Mart or Costco and probably find same simple marbles, you might even have and old board game that has different colored marbles. The point is to go get some marbles And make sure you have 3 different colors.
Hear me out here, when you see how this game works, you are going to be nothing short of blown away.
Why?
Because I'm going to show you how you can NEVER lose again at trading. Yeah, that a BOLD statement and I'm going to back it up, but first you need to go get your marbles (literally).
Trust me on this, the level of your knowledge and ability in the trading business is directly tied to the amount of effort you put into to your trading, so if you just sit on your @$$ and do nothing, you will get nothing. So, let's do this I want to help you learn and earn your success in trading.
See, I save the good stuff for the bottom of my e-mails, so that those people who have ADD (attention deficit disorder) as they need to slow down and take the time to GET the material rather than skimming through it.
Ok, for this game you will need 3 different sets of marbles here is the list you need:
I need you to get:
7 Black Marbles
1 White Marble
2 Yellow Marbles
As you will see below in the chart, this is the breakdown of the R-Multiple distribution once we start playing the game. Yes, I'm going to play the game as well and I expect you to the same... you will learn something very valuable.
http://www.mtptrader.com/MarbleGame.gif
Below is a link to the game rules. I have outlined all of the rules in (Yellow highlighter) for you. So, open up this article and print it out.
http://www.mtptrader.com/Marbles.pdf
Next, your mission is to go to a store and buy some marbles or find the marbles in your house (Your spouse will probably think you lost your marbles, but that’s ok, when you see how powerful this lesson is you are going to be a bullet-proof trader and nothing will stop you from earning profits as a professional trader.
Once you have the marbles, next go find a bag (that you cannot see through) and place the marbles in the bag. You are now ready to begin the game. Remember, click on the link above and read instructions in the yellow highlighted area.
Seriously, play this game. When you see the results I guarantee you that you will not only learn something, but you will be able to profit from it. Who knows, you might just turn into a professional trader. All I ask is that you give me 10% of your profits, ha ha … no just kidding. If this does help you and you enjoyed the exercise/game, please let me know... I always appreciate responses, good or bad.
I’ll be back tomorrow with my results and we will have more than we started with J
All the best,
Matt Bowen
P.S. I plan on using 1% position size when I run 30 trades for the game. So, you might want to do the same and we can compare results tomorrow.
P.P.S. Don't forget to print out the report and GO GET YOUR MARBLES.
P.P.P.S If you want to see my results from the game click on the link picture below. Notice, I didn't start off winning (Most good systems don't start off making money right away... Despite all the BS you have been told), the point of this exercise is to show you that money management CONTROLS the game of trading. In fact, 85% of trading is Money Management.
Hi Everybody,
The subject of this e-mail was: "Why is expectancy Important for trading?" Expectancy is important because it lets the trader know that over the long term that the trader can expect to make profits if the risk level is low.
What is low risk?
Well, for that answer I'm going repeat something Ed Seykota once said at a Van Tharp seminar... here is what Ed said:
You can Risk 1 percent of your capital, you can risk 5 percent, or you can risk 10 percent, but you better realize that the more you risk, the more volatile the results are going to be.
-Ed Seykota
In many cases, most Hedge Funds will limit trading losses to LESS than 1% of capital. If you are an individual trader, then 3% is the maximum you can risk. Why only 3%? Because, the more you risk, the more volatile the results will be AND the drawdowns will be impact you psychologically. If you ever traded a system using 3% position size then you know exactly what I'm talking about...it's like being on a rollercoaster that has some pretty wicked movements, both up and down.
Another reason is that once you start running over 8% position sizing (depending on the system) you start running the risk of margin calls after a series of losses. If you don't know what a margin call is, you don't want to know... it's more like GAME OVER because you have just run the risk of ruin.
I recommend new traders start off risking 1% in their position size until they are comfortable with the risk. Once they have used this for 100 trades and still want to step up their trading, they can then move to 2%. It's all about being comfortable.
It's one thing to be in a 23% drawdown and completely a different matter to be in a 46% drawdown. What people don't realize is that a 46% drawdown takes about 97% return (just to get back to break even).
Take for example a casino. Do you know that every game in the casino has a negative expectancy? Now you know why most people lose. So, how and why do some consistently go back because they can win?
Good Question? But there are three (3) games that you can turn the odds in your favor and do have a positive expectancy if play using certain strategies and they are Blackjack, Baccarat and Poker.
Even if you play basic strategy in Blackjack you still don't have an edge in the game and this is where money management makes all the difference. It makes a difference in whether you walk away a winner or loser... I'll leave this for another e-mail some time.
Sounds pretty obvious, but when it comes to money people act very strange when it comes to risk and the reason they act strange or do strange things is because of two things:
1. The REALLY do not know what is going to happen.
2. They REALLY don't understand risk management.
No one will ever know what's going to happen on a series of trades and traders will always continue to spin their wheels and build better mouse traps to find out. However, once you get off that insanity wagon you will come to realize that you don't need to know what's going to happen on any given trade or series of trades (I'm going to prove this to you in a minute with a simple marble game).
First, I want you to go get some marbles (trust me, this is not a joke). I want you to go to a hobby/craft store or one of those games and toy stores. You can even go to say Target, Wal-Mart or Costco and probably find same simple marbles, you might even have and old board game that has different colored marbles. The point is to go get some marbles And make sure you have 3 different colors.
Hear me out here, when you see how this game works, you are going to be nothing short of blown away.
Why?
Because I'm going to show you how you can NEVER lose again at trading. Yeah, that a BOLD statement and I'm going to back it up, but first you need to go get your marbles (literally).
Trust me on this, the level of your knowledge and ability in the trading business is directly tied to the amount of effort you put into to your trading, so if you just sit on your @$$ and do nothing, you will get nothing. So, let's do this I want to help you learn and earn your success in trading.
See, I save the good stuff for the bottom of my e-mails, so that those people who have ADD (attention deficit disorder) as they need to slow down and take the time to GET the material rather than skimming through it.
Ok, for this game you will need 3 different sets of marbles here is the list you need:
I need you to get:
7 Black Marbles
1 White Marble
2 Yellow Marbles
As you will see below in the chart, this is the breakdown of the R-Multiple distribution once we start playing the game. Yes, I'm going to play the game as well and I expect you to the same... you will learn something very valuable.
http://www.mtptrader.com/MarbleGame.gif
Below is a link to the game rules. I have outlined all of the rules in (Yellow highlighter) for you. So, open up this article and print it out.
http://www.mtptrader.com/Marbles.pdf
Next, your mission is to go to a store and buy some marbles or find the marbles in your house (Your spouse will probably think you lost your marbles, but that’s ok, when you see how powerful this lesson is you are going to be a bullet-proof trader and nothing will stop you from earning profits as a professional trader.
Once you have the marbles, next go find a bag (that you cannot see through) and place the marbles in the bag. You are now ready to begin the game. Remember, click on the link above and read instructions in the yellow highlighted area.
Seriously, play this game. When you see the results I guarantee you that you will not only learn something, but you will be able to profit from it. Who knows, you might just turn into a professional trader. All I ask is that you give me 10% of your profits, ha ha … no just kidding. If this does help you and you enjoyed the exercise/game, please let me know... I always appreciate responses, good or bad.
I’ll be back tomorrow with my results and we will have more than we started with J
All the best,
Matt Bowen
P.S. I plan on using 1% position size when I run 30 trades for the game. So, you might want to do the same and we can compare results tomorrow.
P.P.S. Don't forget to print out the report and GO GET YOUR MARBLES.
P.P.P.S If you want to see my results from the game click on the link picture below. Notice, I didn't start off winning (Most good systems don't start off making money right away... Despite all the BS you have been told), the point of this exercise is to show you that money management CONTROLS the game of trading. In fact, 85% of trading is Money Management.