I understand what you said about the drawdown not being more than 20%, because if you lose 20% to make it back you need to gain 25% or so, and that's going to be harder if that 20% was a part of the margin required to trade the system itself.
Regarding all this, and my possible and usual extreme optimism and recklessness, I'll see how it goes as it goes - if I see that I am starting to lose everything extremely fast, I will stop and reconsider all these rules and contract ratios I have planned.
For sure this time I am being more careful than the first and second time. I will know that I still wasn't careful enough if I'll go broke again (and only lose the initial 4000 dollars investment, after all).
But I suppose that I will indeed start being more careful the more money I have. First let me get to 50,000 and then I will reduce the total amount invested. I think there's also to consider that the broker might go bankrupt, so that will force me to move out 20,000 every once in a while, and that will be one more security feature in my money management that I didn't mention until here. Once I reach 50,000 I will constantly keep 20% of the whole capital out of that brokerage account (by wiring it once a month). So if all goes wrong, I will still have that 20% (and then I would start doing things differently). If everything goes wrong before I reach 50,000, the way I see it is that all i lost is the initial 4000.
Anyway I did a study of the kelly criterion on this, and I think it came out that - too complicated to do it all over again, as I am allergic to formulas - even if your capital decreases by 80%, as long as each loss doesn't wipe you out completely (like in the case you're investing in options, that go to zero when they expire), it will still be convenient to reinvest all your gains. I remember the calculations were like this: say you have a hundred. You then lose 20% and it goes to 80, but then if you lose another 20% you just go to 64. Then if you lose another 20%, you only get down to 51. Because each time you're investing in fewer contracts. Of course this is true only if you can infinitely divide your capital, which is not the case when I am starting with just enough margin for one contract. But I am hoping to get a bit lucky at the start, or rather I am hoping to not get extremely unlucky. If I do, I will just wire more money (probably a couple thousand more). Anyway as time goes by and the capital increases I will underbet and pretend my capital is 20% less than what it is. If I do it now, I will get nowhere, since I am starting with so little money. Besides, I should be reckless now that I have nothing to lose, and less reckless later when I'll have everything to lose. It makes so much sense to me, that I can't worry about what the theories say.
But if anyone cares about what I was saying earlier this is a great wikipedia entry (for us ignorant people):
http://en.wikipedia.org/wiki/Kelly_criterion
------------
Concerning the lack of stoploss as the only condition for allowing a 50% chance of winning, I have doubts. If you use both a stoploss and take profit, all other things equal, your chance should still be 50% (presuming obviously we're not considering the fact that stocks tend to go up more than down in time, and similar things) and this time you do have a stoploss in place. Of course if you only use a stoploss, then obviously your losing trades will increase in %, but then your gains should be compensated for the fewer wins by them being larger in size (as long as you devised a reasonable method for exiting).
------------
On this question:
"3. Could you say what is your holding time when you lose, and your holding time when you win? I am guessing that your holding period when you win is larger than your holding period when you lose, for a system that is winning."
I can answer that my holding time is always the same because I do not use any stoploss or takeprofit and just hold for the exact period the tests have proven is in my favor. Both because it works and because it allows me to keep my system as simple as possible, and without a risk of overoptimization. So, in other words, I go long and short and exit, based merely on a time approach. There's a time to get in, a time to hold and a time to get out, regardless of gains or losses. That's what my tests say.
-----------
Regarding being courageous, I don't know what it means. It sounds like a compliment, so thank you. On the dictionary it says of "courage": "The state or quality of mind or spirit that enables one to face danger, fear, or vicissitudes with self-possession, confidence, and resolution; bravery".
Am I "enabled" to face danger by my state of mind? No, because losing 4000 is not danger to me. Am I enabled to face fear? No, if I feared losing 4000 I wouldn't trade. So I am not courageous so far. Maybe I am facing danger, but I don't see it as danger, and I don't feel any fear. Maybe we could say I am irresponsible, but not even that because it is totally true that losing 4000 dollars will not harm me.
I believe that I am totally rational instead. If I have so little money as I have, it's pointless for me to invest conservatively, because there is nothing to preserve. If I am in this game it's only because I want to make money and fast. I want to retire and quit my job. So I saw this clearly from the start - it can only happen with derivatives. And only if I invest in derivatives in an aggressive way, otherwise it just won't happen and then why did I bother with it? So in the past ten years, trying to become a millionaire quickly I lost about 30,000 euros. So what? If I had invested it in stocks, I would have lost most of it anyway. On top of it I would have learned nothing.
Because derivatives have a faster way of teaching you things. If you invest in stocks and make a mistake you get a slap. If you invest in futures and make a mistake you get beaten up really badly. So you learn faster. And it only took me ten years so far. With stocks I would have never learned. Just the fact that you decide to invest stocks so you will lose less shows that you didn't understand much to begin with. Because if you are in this game is to win, and if you are in it to win, then you should try to win as much as possible, even if this means losing as much as possible when you lose (in leverage sense), but being understood that you're in it because you expect to figure out how to win more often than lose.
In a sense, we could also say that people with a lot of money can't learn this game because they'll be too afraid of losing their capital. Or also, when they'll start trying to learn this game, they will lose so much money that it will freeze their learning ability. Instead me, I did lose all I had, but not enough to give up, because I only some savings each time. Yeah, I lost all my savings for ten years in a row. That taught me a lot of lessons. But if I had lost say 500,000 dollars inherited by a rich parent, that would have stopped my learning altogether. On the other hand, undercapitalized traders like me, may also be burdened by the drive to make it and get rich as quickly as possible, always too quickly to ever be able to make it happen. We'll see. So far this has been the case. But you see, I am still here trying. Whereas, I think if I had been given 500k by my dad 5 years ago, now I wouldn't be here still trying. So I think I think it is better to be forced to start with very little (but constantly flowing) money. Not zero money, because then you might be tempted to ask for a loan, and I don't think that is a good idea, because you have too much money and it's not yours. If I had taken out loans not this year like I did, but in any of the previous ten years, right now I think I'd be in big trouble and unable to trade for the rest of my life.
Regarding all this, and my possible and usual extreme optimism and recklessness, I'll see how it goes as it goes - if I see that I am starting to lose everything extremely fast, I will stop and reconsider all these rules and contract ratios I have planned.
For sure this time I am being more careful than the first and second time. I will know that I still wasn't careful enough if I'll go broke again (and only lose the initial 4000 dollars investment, after all).
But I suppose that I will indeed start being more careful the more money I have. First let me get to 50,000 and then I will reduce the total amount invested. I think there's also to consider that the broker might go bankrupt, so that will force me to move out 20,000 every once in a while, and that will be one more security feature in my money management that I didn't mention until here. Once I reach 50,000 I will constantly keep 20% of the whole capital out of that brokerage account (by wiring it once a month). So if all goes wrong, I will still have that 20% (and then I would start doing things differently). If everything goes wrong before I reach 50,000, the way I see it is that all i lost is the initial 4000.
Anyway I did a study of the kelly criterion on this, and I think it came out that - too complicated to do it all over again, as I am allergic to formulas - even if your capital decreases by 80%, as long as each loss doesn't wipe you out completely (like in the case you're investing in options, that go to zero when they expire), it will still be convenient to reinvest all your gains. I remember the calculations were like this: say you have a hundred. You then lose 20% and it goes to 80, but then if you lose another 20% you just go to 64. Then if you lose another 20%, you only get down to 51. Because each time you're investing in fewer contracts. Of course this is true only if you can infinitely divide your capital, which is not the case when I am starting with just enough margin for one contract. But I am hoping to get a bit lucky at the start, or rather I am hoping to not get extremely unlucky. If I do, I will just wire more money (probably a couple thousand more). Anyway as time goes by and the capital increases I will underbet and pretend my capital is 20% less than what it is. If I do it now, I will get nowhere, since I am starting with so little money. Besides, I should be reckless now that I have nothing to lose, and less reckless later when I'll have everything to lose. It makes so much sense to me, that I can't worry about what the theories say.
But if anyone cares about what I was saying earlier this is a great wikipedia entry (for us ignorant people):
http://en.wikipedia.org/wiki/Kelly_criterion
------------
Concerning the lack of stoploss as the only condition for allowing a 50% chance of winning, I have doubts. If you use both a stoploss and take profit, all other things equal, your chance should still be 50% (presuming obviously we're not considering the fact that stocks tend to go up more than down in time, and similar things) and this time you do have a stoploss in place. Of course if you only use a stoploss, then obviously your losing trades will increase in %, but then your gains should be compensated for the fewer wins by them being larger in size (as long as you devised a reasonable method for exiting).
------------
On this question:
"3. Could you say what is your holding time when you lose, and your holding time when you win? I am guessing that your holding period when you win is larger than your holding period when you lose, for a system that is winning."
I can answer that my holding time is always the same because I do not use any stoploss or takeprofit and just hold for the exact period the tests have proven is in my favor. Both because it works and because it allows me to keep my system as simple as possible, and without a risk of overoptimization. So, in other words, I go long and short and exit, based merely on a time approach. There's a time to get in, a time to hold and a time to get out, regardless of gains or losses. That's what my tests say.
-----------
Regarding being courageous, I don't know what it means. It sounds like a compliment, so thank you. On the dictionary it says of "courage": "The state or quality of mind or spirit that enables one to face danger, fear, or vicissitudes with self-possession, confidence, and resolution; bravery".
Am I "enabled" to face danger by my state of mind? No, because losing 4000 is not danger to me. Am I enabled to face fear? No, if I feared losing 4000 I wouldn't trade. So I am not courageous so far. Maybe I am facing danger, but I don't see it as danger, and I don't feel any fear. Maybe we could say I am irresponsible, but not even that because it is totally true that losing 4000 dollars will not harm me.
I believe that I am totally rational instead. If I have so little money as I have, it's pointless for me to invest conservatively, because there is nothing to preserve. If I am in this game it's only because I want to make money and fast. I want to retire and quit my job. So I saw this clearly from the start - it can only happen with derivatives. And only if I invest in derivatives in an aggressive way, otherwise it just won't happen and then why did I bother with it? So in the past ten years, trying to become a millionaire quickly I lost about 30,000 euros. So what? If I had invested it in stocks, I would have lost most of it anyway. On top of it I would have learned nothing.
Because derivatives have a faster way of teaching you things. If you invest in stocks and make a mistake you get a slap. If you invest in futures and make a mistake you get beaten up really badly. So you learn faster. And it only took me ten years so far. With stocks I would have never learned. Just the fact that you decide to invest stocks so you will lose less shows that you didn't understand much to begin with. Because if you are in this game is to win, and if you are in it to win, then you should try to win as much as possible, even if this means losing as much as possible when you lose (in leverage sense), but being understood that you're in it because you expect to figure out how to win more often than lose.
In a sense, we could also say that people with a lot of money can't learn this game because they'll be too afraid of losing their capital. Or also, when they'll start trying to learn this game, they will lose so much money that it will freeze their learning ability. Instead me, I did lose all I had, but not enough to give up, because I only some savings each time. Yeah, I lost all my savings for ten years in a row. That taught me a lot of lessons. But if I had lost say 500,000 dollars inherited by a rich parent, that would have stopped my learning altogether. On the other hand, undercapitalized traders like me, may also be burdened by the drive to make it and get rich as quickly as possible, always too quickly to ever be able to make it happen. We'll see. So far this has been the case. But you see, I am still here trying. Whereas, I think if I had been given 500k by my dad 5 years ago, now I wouldn't be here still trying. So I think I think it is better to be forced to start with very little (but constantly flowing) money. Not zero money, because then you might be tempted to ask for a loan, and I don't think that is a good idea, because you have too much money and it's not yours. If I had taken out loans not this year like I did, but in any of the previous ten years, right now I think I'd be in big trouble and unable to trade for the rest of my life.
