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Risk management and odds
- Thread starter NKNY
- Start date
Funny this comparison should come up, because I was just thinking about it this past week and I see a few major differences between trading and horse playing. If you bet on a horse, and it loses, you lose all your money. If you buy a stock with a tight stop and it starts to tank, you sell it and get most of your money back, to "bet" on another stock.
If you bet on several horses to lower your odds, only one can win; the other bets are lost. This dilutes your win if you were lucky enough to have the winner in your group of picks, which is also no guarantee; some 99-to-1 shot could come in and ALL your horses could lose. If you "bet" on several stocks, ALL can go up - "win" - (and if you picked well, they do!). And of those that go down, you can still salvage most of your cash with tight stops.
I used to be a horse player. Haven't been to the track since 1983.
If you bet on several horses to lower your odds, only one can win; the other bets are lost. This dilutes your win if you were lucky enough to have the winner in your group of picks, which is also no guarantee; some 99-to-1 shot could come in and ALL your horses could lose. If you "bet" on several stocks, ALL can go up - "win" - (and if you picked well, they do!). And of those that go down, you can still salvage most of your cash with tight stops.
I used to be a horse player. Haven't been to the track since 1983.
Andrasnm
I am Czech and to me the most important fact is that there are others who can do it so can I. It's true the most people bust out, but show me another business with the same potential and better odds to make it. (Actually it's good most people cannot make it.) It's interesting, I have a friend who says exactly the same what you say. He rose like a Phoenix and came crushing down all the way with CSCO. He is the "buy and holder" and swears by it.
Not that I would be such a successful trader but I am working on it. Now, you might call me an idiot, still I am going to say I consider this business very simple technically. One and the only problem is psychology and emotions. Everything else is BS.
People will argue forever what's better, "buy and hold" or shorter term trading. I do not think there are actually that many buy and holders. What I mean is, how many people are there, who have been able to hold stocks like CSCO or MSFT (for example) for, let's say, 10 or more years? It follows logically that when you start talking about when to get out of the position there is no difference between you and me except the time frame. It might have been advantageous to be long term investor 10 years ago, basically because of high commissions. You cannot seriously complain about commission rates nowadays though(not talking about scalping).
You probably remember all the fuss about daytraders not so long ago. It would be naive to take such a ranting at a face value,because it would imply that all those reporters are well informed and unbiased. In the same way I should believe whatever politicans tell me is true and whatever they do is for my own good. In my opinion reporters are not that well informed in one part, in another part I think it was(is) a deliberate effort to discredit group of people who are cutting into MM's profits.
In conclusion, strictly mathematically speaking, I do not understand how anybody can say that short-term trading is more risky that buy and hold strategy.
I am Czech and to me the most important fact is that there are others who can do it so can I. It's true the most people bust out, but show me another business with the same potential and better odds to make it. (Actually it's good most people cannot make it.) It's interesting, I have a friend who says exactly the same what you say. He rose like a Phoenix and came crushing down all the way with CSCO. He is the "buy and holder" and swears by it.
Not that I would be such a successful trader but I am working on it. Now, you might call me an idiot, still I am going to say I consider this business very simple technically. One and the only problem is psychology and emotions. Everything else is BS.
People will argue forever what's better, "buy and hold" or shorter term trading. I do not think there are actually that many buy and holders. What I mean is, how many people are there, who have been able to hold stocks like CSCO or MSFT (for example) for, let's say, 10 or more years? It follows logically that when you start talking about when to get out of the position there is no difference between you and me except the time frame. It might have been advantageous to be long term investor 10 years ago, basically because of high commissions. You cannot seriously complain about commission rates nowadays though(not talking about scalping).
You probably remember all the fuss about daytraders not so long ago. It would be naive to take such a ranting at a face value,because it would imply that all those reporters are well informed and unbiased. In the same way I should believe whatever politicans tell me is true and whatever they do is for my own good. In my opinion reporters are not that well informed in one part, in another part I think it was(is) a deliberate effort to discredit group of people who are cutting into MM's profits.
In conclusion, strictly mathematically speaking, I do not understand how anybody can say that short-term trading is more risky that buy and hold strategy.
Cesco,
Since we were "neighbours" I can tell you this, I wish you
will have a long successful career in daytrading or trading
however long of a timeframe you chose. I just hope folks
on this BB don't think I wish anyone failure or bust.
There is no use to argue wichever method is safer, surer or
better for a long haul. I just hope there would be
a more intersting and not so one dimensional discussion on
the boards sometime. I sure as hell can't fix that and it's
crazy to even to try. As for holding stuff for long I suggest you read "The Millionair Next Door". Those are the
folks who buy on dips and just hold. It may not agree with everyone's temperament here but it's a fact. I have my
ex neighbour who trades for this guy in SF. And he is a real
trader, he will trade with a Swiss banker so they minimize
the tax implications. Even he will trade short term of course, why not ? Mostly he shorts for a day or two. Long
side I am sure it's measured in months maybe years. The Boss
owns a law firm, a winery in Napa, and has his own
group of traders. My budy is the head of the Finance div.
of his. Last time I talked with him he said he shorted
3com before the 1st Qtr announcements, using his words he
"sold it to Daytraders and bought it back from the MM's"
Since we were "neighbours" I can tell you this, I wish you
will have a long successful career in daytrading or trading
however long of a timeframe you chose. I just hope folks
on this BB don't think I wish anyone failure or bust.
There is no use to argue wichever method is safer, surer or
better for a long haul. I just hope there would be
a more intersting and not so one dimensional discussion on
the boards sometime. I sure as hell can't fix that and it's
crazy to even to try. As for holding stuff for long I suggest you read "The Millionair Next Door". Those are the
folks who buy on dips and just hold. It may not agree with everyone's temperament here but it's a fact. I have my
ex neighbour who trades for this guy in SF. And he is a real
trader, he will trade with a Swiss banker so they minimize
the tax implications. Even he will trade short term of course, why not ? Mostly he shorts for a day or two. Long
side I am sure it's measured in months maybe years. The Boss
owns a law firm, a winery in Napa, and has his own
group of traders. My budy is the head of the Finance div.
of his. Last time I talked with him he said he shorted
3com before the 1st Qtr announcements, using his words he
"sold it to Daytraders and bought it back from the MM's"
Andrasm,
I like that motto of yours "Don't confuse brains with Bull Market". That by itself may be the answer to this discussion. Day trading as a mass occupation coincides with Bull market of the past several years. I don't think that day trading would have become so popular if it had started in the market of the past several months.
On the other hand trading is definitiely more favorable to the trader than any casino game is to the gambler. And even with the odds greatly stacked against them people continue
to gamble. In trading if you were to trade randomly, with very low commisions and low spread you have almost 50/50 to break even. So I guess by using all the TA tools you want,
together with the access to real time news and by limiting your losses by using tight stops, and maximizing your profits by using trailing stops you should be ahead.
However most people can not strictly follow any strategy and that is the main reason for lack of success of most traders.
I like that motto of yours "Don't confuse brains with Bull Market". That by itself may be the answer to this discussion. Day trading as a mass occupation coincides with Bull market of the past several years. I don't think that day trading would have become so popular if it had started in the market of the past several months.
On the other hand trading is definitiely more favorable to the trader than any casino game is to the gambler. And even with the odds greatly stacked against them people continue
to gamble. In trading if you were to trade randomly, with very low commisions and low spread you have almost 50/50 to break even. So I guess by using all the TA tools you want,
together with the access to real time news and by limiting your losses by using tight stops, and maximizing your profits by using trailing stops you should be ahead.
However most people can not strictly follow any strategy and that is the main reason for lack of success of most traders.
andrasnm,
Despite what you've just said, how does that make day trading terrible. The reason being that no matter what they do, the charts don't lie about what goes on in a trading session and the potential to be profitable. Again, the key to profitability is no more than a few rules in day trading, which are 1) determine the trend, 2) find a stock with decent volume and point moves 3) use indtraday stochastics to enter and exit positions.
Im sure there are other ways, but regardless, this should work most of the time. I would like to hear your thoughts as you might know something that we in the US perhaps do not. If this simple rule is no good, and is not the basic foundation of what happens intraday, then please voice your knowledge for all of us to learn.
Despite what you've just said, how does that make day trading terrible. The reason being that no matter what they do, the charts don't lie about what goes on in a trading session and the potential to be profitable. Again, the key to profitability is no more than a few rules in day trading, which are 1) determine the trend, 2) find a stock with decent volume and point moves 3) use indtraday stochastics to enter and exit positions.
Im sure there are other ways, but regardless, this should work most of the time. I would like to hear your thoughts as you might know something that we in the US perhaps do not. If this simple rule is no good, and is not the basic foundation of what happens intraday, then please voice your knowledge for all of us to learn.
What do you mean by âThe charts donât lie about what goes on in a trading sessionâ? If a given chart contains enough information to accurately formulate probabilities about future direction that is far from evaluating such information correctly.
How does that relate to the potential for profit? Observing that point A to B could have produced profit if correctly anticipated does not address the potential for anticipating such a swing.
Your argument seems to rest on the idea that determining trend is a simple matter. While this may be true for you I donât believe it is true for the vast majority of traders. Certainly there are times when the trend appears to be more obvious than at other times but entering an existing trend with appropriate risk control, however you define it, can be difficult on a number of levels.
If you have the ability to accurately determine a trend in a given time frame or above please explain the use of an oscillator to enter pullbacks. Why not just enter your position upon trend confirmation and hold your position until a contra-trend indication is given. Are you only using stochastics in the beginning to improve you risk/reward? Please explain as I am probably misunderstanding you.
While I personally feel that most oscillators are poor tools without additional filters that can tell you more about the supply and demand landscape, I would have no problem with the idea that you have developed a sound methodology incorporating them. Without giving away your edge would you elaborate as to how you use the stochastic to enter the trends and how you go about determining trend.
Finally you say:âThis should work most of the timeâ. Is this something you have a long trading history with or an outside observation?
While I agree with the spirit of the idea of simplicity in trading, you position sounds extreme. I can see why Andarsnm would object to what seems to be a white washing of a more intensive process and might lead newer more vulnerable traders to not take the necessary precautions in a dangerous environment.
Bye the way, It seems like a lot of people in hear express a lot of fear and disrespect for other peopleâs points of view. Could someone explain why it is necessary to write to other traders in a ridiculing manner? While few people are outright rude, the implicit tone in a lot of posts is just short of it. Seems to me that would only serve to weaken your position.
How does that relate to the potential for profit? Observing that point A to B could have produced profit if correctly anticipated does not address the potential for anticipating such a swing.
Your argument seems to rest on the idea that determining trend is a simple matter. While this may be true for you I donât believe it is true for the vast majority of traders. Certainly there are times when the trend appears to be more obvious than at other times but entering an existing trend with appropriate risk control, however you define it, can be difficult on a number of levels.
If you have the ability to accurately determine a trend in a given time frame or above please explain the use of an oscillator to enter pullbacks. Why not just enter your position upon trend confirmation and hold your position until a contra-trend indication is given. Are you only using stochastics in the beginning to improve you risk/reward? Please explain as I am probably misunderstanding you.
While I personally feel that most oscillators are poor tools without additional filters that can tell you more about the supply and demand landscape, I would have no problem with the idea that you have developed a sound methodology incorporating them. Without giving away your edge would you elaborate as to how you use the stochastic to enter the trends and how you go about determining trend.
Finally you say:âThis should work most of the timeâ. Is this something you have a long trading history with or an outside observation?
While I agree with the spirit of the idea of simplicity in trading, you position sounds extreme. I can see why Andarsnm would object to what seems to be a white washing of a more intensive process and might lead newer more vulnerable traders to not take the necessary precautions in a dangerous environment.
Bye the way, It seems like a lot of people in hear express a lot of fear and disrespect for other peopleâs points of view. Could someone explain why it is necessary to write to other traders in a ridiculing manner? While few people are outright rude, the implicit tone in a lot of posts is just short of it. Seems to me that would only serve to weaken your position.