I am posting this e-mail I received from LBR Group for educational purposes. It simply reiterates something that took me almost 9 years to understand. There is no holy grail to trading. No system that the "pros" use . There is no big secret way of trading that is right all the time. Once you truly unerstand and actully believe this .....and actually stop searching for it you are on your way to at least surviving. The true "Holy Grail" is called Risk management, position sizing and consistincy in using a trading technique that you are comfrotable with. Just my thoughts.....Nick TRADING AND BETTING THE HORSES While some people question how easy it is to make a consistent living TRADING, how about making a consistent, comfortable living betting on horse races? Here is a story about Ernest Dahlman - someone who has experienced amazing success at betting on horses for the past 35 years. Some of the principles that have contributed to E.D.'s success are the very same applied by top, professional traders. The following includes excerpts from a June 3, 2001 article titled THE WIZARD OF ODDS, published by the New York Times and written by William Grimes. We recommend that before you read our story you read the original article in its entirety. It is necessary to register first on the NY times website. They will have the article freely available only until June 10. Go to the following link: http://www.nytimes.com/2001/06/03/magazine/03DAHLMAN.html) This Wizard of Odds, "Ernest Dahlman, may be the world's most successful horse bettor. The reason he's so good is that he doesn't gamble." But, according the article, "in a busy year, Dahlman might bet as much as $18 million." Let's look at some of the main principles that contribute to Dahlman's success and see how they are transferable to trading. 1) Dahlman narrows his playing field. He specializes primarily "with races at tracks in New York and California" where he perceives himself to have a larger edge. This way, he can become familiar with the subtle nuances such as local trainers (in whose hands a horse can experience a "religious conversion") and track conditions. A trader will do best to concentrate on a select "stable" of markets and learn their individual personalities, than to jump into markets or individual stocks that have not been thoroughly researched. 2) Dahlman specializes in a very specific type of bet - the exacta, his "bread and butter." A trader will do best if he specializes in just one style or pattern or trading methodology. Know the risk/reward characteristics of your individual technique. Dahlman chooses what would at first glance appear to be a high risk technique, but one which offers good rewards. 3) Dahlman pays more money to minimize his risk. He hedges his bet by creating a box ("twice as expensive as a straight exacta" but which "lets Dahlman have things both ways"). Successful top traders are far more interested in strategies by which to minimize risk than those that go for the big gains. Stops, protective options, or spread strategies are just some of the ways to minimize risk. 4) Be a "plodder," a nickel and dimer. "On average, (Dahlman) says, he earns 3 or 4 percent on his investment." He never bets serious money on long odds. Stick with the high probability setups. Don't try to hit home runs. "The point is, there's no such thing as a sure thing. Favorites win only a third of the time, an immutable racing statistic. Even successful bettors tear up more tickets than they cash. The trick is to cash enough tickets, at the right odds, to offset the losses and turn a profit. That's where addition and subtraction come in." 5) Know the seasonalities of your game. "'Winter is my favorite time of year,' he said cheerfully. 'It's more predictable. The horses tend to be older, and you know what they're going to do. And out in Northern California it rains, and you get a lot of grass races switched to the main track, resulting in complete mismatches.'" If you are a grain trader, there are distinct times of year when volatility increases. If you trade options, there has historically been a strong tendency for volatility to contract going into the summer - good if you are a short premium player, bad if your game favors a momentum style. Do you do best at the beginning of the year or the end of the year? Know the cycles in both your game and yourself. 6) Do your daily homework. "Most horseplayers love a contentious 12-horse race with the promise of three-figure exactas and monster trifectas. Not Dahlman. 'Anyone who knows anything about gambling will tell you I'm not a great gambler,' he says. 'What I'm good at is arithmetic. I can add and subtract.'" "Like many other professional horseplayers, Dahlman relies in part on the work of others. The Daily Racing Form gives him a compressed description of the last dozen races run by each horse entered in a race. That merits a quick glance. The more serious numbers come from 'the sheet'" ... which analyze and quantify... "a variety of factors, ranging from track resiliency to wind direction to the distance actually traveled by each horse." He considers his detailed record keeping to be his biggest edge. What type of detailed record keeping do you maintain with your own trading? 7) Specialize, Specialize, Specialize! Who would have ever thought of specializing in Dahlman's "overriding preoccupation, horseshoes? Years ago, Dahlman began noticing something funny about horses equipped with mud calks, cleats that some trainers use for extra traction when rain turns dirt into mud. Dahlman noted that even when rain failed to materialize, a lot of horses seemed to improve several lengths when wearing mud calks for the first time" It's also another "reason he loves Golden Gate Fields, near San Francisco. It rains a lot there, so plenty of mediocre-seeming horses are switching to mud calks for the first time and then sneaking into exactas at good prices. A second reason for loving Golden Gate is that the track posts very detailed shoe information before each race." Find your niche! 8) Believe in your own game and don't listen to anyone else! Although "Dahlman accepts as highly accurate ... the raw speed numbers," he rejects "other assumptions in the sheets." Others dismiss Dahlman's horseshoe theory. It does not matter who thinks your style is right or wrong ... all that matters is that you believe in it yourself and follow it consistently. 9) Keep your losses at the sleeping level. In the best quote from the article, "If I keep my losses at $7,000, I can sleep easily," Dahlman says. "I can get that back in one race." Your sleeping level may be different from anyone else's. Here is a person who has managed to keep a balanced life and raise 6 children while still maintaining his passion for the horse racing. As the game changed, from trotters to thoroughbreds, he was able to adapt with the times. We have seen many games come and go in the markets, from equity options arbitrage to the disappearance of SOES traders. We have seen markets change from a momentum environment to a trading-range game. A trader must specialize in one thing yet be ready to recognize when it is time to learn a brand new game. Recognize that Dahlman built up a lifetime of racing knowledge. He relies on that experience to interpret the incredible amount of information he gathers. For newer traders just learning to make their way in this business, recognize that, ultimately, experience is the best teacher. Every day that you trade, you gain experience. Keep the discipline, keep the faith. To repeat one last quote: "It's an art with just enough science to make it possible for a very tiny percentage of bettors to take money away from the herd of less disciplined bettors." Trading? or betting the horses? Best Wishes, Linda Raschke LBRGroup, Inc. P.S. You are receiving this message because at one time or another your e-mail address was registered in the LBR guestbook. If you wish to be removed, simply reply to this message with REMOVE in the subject line.
That's a very interesting article indeed! It just shows that sometimes, NOT following conventional wisdom can prove very profitable. And it also proves that the most important element in any trading strategy is risk management.
I live across the street from the beach and Horse Race track in Del Mar. I personally don't like the odds in horse racing. The track takes over 30% out on the bets. The's a considerable spread. rtharp
thx for sharing that highly interesting article with us. just goes to show that if you manage to identify what the truely relevant factors in achieving success in a chosen field are vs all the irrelevant noise and combine that with strict discipline you can make it in pretty much any endeavour. identifying the 20% input that lead to 80% of results is probably the first initial hurdle that most will never manage to overcome. for those that got that far, the second hurdle is probably learning to keep ones emotions in check. but for the very few that achieve both, lot's becomes possible. cheers
Add to this should be mentioned "frequency of bets" most pro horse players may bet once a months or a week. Being very few pros who are actually money making pros no-one knows the best pros number of bets in a year. I could vary of course. In Vegas I saw an interview with the top sports bettor, and he may take 2-3 large bets a year. Of couse he may "gamble" small in-between. When they bet they swing a big stick but they chose the time very carefully. This also can apply to futures and stock trading. The vig will eat you alive !!!!!
i agree that less is more. at least if your objective is maximising capital growth then trades with longer term holding periods, accordingly meaning less no. of trades/year, is the only way to go. cheers
Andras, I think you are getting carried away with the vig. Sure in illiquid markets it will kill you, but take the e-mini S&P for example. I trade this product a lot and rarely get any slippage. I will buy the bid and sell the offer, sometimes go to market (and hardly ever pay more than 0.25 pts over or under last). With $6 round turn brokerage, the vig is not even a consideration for me. There are many other products just as good.
zentrader, Maybe so but I have read "Niederhoffer's" book and it reads like a doctoral thesis. True he has blown out of the market but I value his analytical skills and stat knowlege as much as the next guy's.I suggest you take a peek. His analisys is - the vig is very high on the list of reasons for failure. (read overtrading) I have seen this everywhere besides him. I am sure your broker will disagree
Andrasnm These are the words of Linda B. Raschke (as you know she is not a broker):"I think nowadays the media uses the word day trader to refer specifically to those people who never carry trades home overnight, or intra-day traders. Most recently the term seems to be used a lot with upstairs bucket shops, if you will, those little electronic day-trading shops. IN REALITY THOUGH, ALL PROFESIONAL TRADERS THAT I KNOW, INCL. LARGE CPA's THAT MANAGE BILLIONS OF DOLLARS, DAY TRADE. I don't think people recognize the fact that average holding period per trade for 90% ofthe pros out there is extremely short.. An overwhelming majority of pros tend to do majority of their trades on an intra-day basis. If you are successful pro trader, the odds are that you will be trading on a very short-term time trade. SWING TRADING IS THE LEAST RISKY TYPE OF TRADING YOU CAN DO BECAUSE YOU ARE NOT TRYING TO MAKE LONG TERM FORECASTS OR PREDICTION. In my words, as number of trials increases (in any game) factor of luck gradually diminishes. Large # of trials works in your favor. Second, you have more control(day-trading). The only actor working against are ,of course, commisions. Psychologically day trading is more intensive endeavor than investing. Mainly because of cutting losses. The reason anybody who loses a fortune in day-trading is not because of the odds, but because he is clueless. Andrasnm this is not supposed to be anything personal but following your comments at this message board you are easily the most negative person around here. I wonder whether you are aware of it.
well... the large majority of successful buy side players do not daytrade... i'm not talking about a smalltime exchange member, but the big hedge funds and CTA's... 75% of CTA's are long term trend followers... Robertson and Soros very rarely traded intraday. of course on the sell side, dealers (specialist and market makers) only trade intraday. cheers