Diminishing returns and productivity

Discussion in 'Trading' started by Joe Ross, Jul 23, 2010.

  1. Do you have a problem with not taking money out of the market when it is there for the taking? Do you seem to think that somehow it is not yours -- that it doesn't really belong to you? What should you do if you have that problem?

    Losers think the open equity they take home on overnight trades belongs to the market, or to someone else. The winner views open equity as his money, temporarily loaned to the markets for a greater return. The initial trade Closing price is not the only reference point for open equity. The trader is also theoretically long from entry to the highest open equity tick since the trade began. Think about this.

    What you have really made in an upward move is from where you entered to the highest point prices have moved. But how much of that did you actually get? And what have you really made in a downward move from where you entered to the lowest point prices have moved?

    If you could catch the entire move it would be great, but to the extent that you did not get it all, you have come up against the Law of Diminishing Returns. There are two laws at work in the market:

    1. the law of diminishing returns, and
    2. the law of diminishing productivity.

    There are a number of ways you can experience diminishing returns other than not getting every tick of a move. Bad fills yield diminishing returns. Commissions result in diminishing returns. Every trader should realize that it is a lot easier to double a $5,000 account than it is to double a $100,000 account.

    Diminishing productivity is seen when you are given split fills. Split fills yield a management problem causing you to be less productive. Similarly, too many positions can result in diminishing productivity. Too large of a size can bring diminishing productivity. The more you have to scramble to manage your trades, the less productive you will be.
     
  2. loik

    loik

    Well it`s fiat money, so it`s obviously not yours!