OK, along those lines, I read a story of a guy who was on an airplane with someone he knew to be a successful trader. He asked the guy what it was that made him so successful. The trader responded "what is the ratio of the most contracts you use per trade vs the least." The guy responded "I don't know, maybe 4 to 1". The trader responded, " Make it 20 to 1". Seems to be a function of confidence. Not necessarily expectancy or probabilities. Hmm...
I did not say that all books are stupid - but the few that are of any real value are very hard to find :eek: The Gamblers Fallacy "There are beliefs held by some traders that are likely wrong. Some say that after a string of losing trades success on the next trade is more likely, so position size on the next trade should be increased. According to Larry Williams: âAfter you have had 3 or 4 losing trades in a row, the probability of the next trade being not only a winner but a substantial winner is way in your favor.â This may or may not be true in trading, but for most random events like flipping coins, it is definitely not true."
Here are Phantom's Two Rules of Trading for Trade/Risk/Money management. Rule 1 - In a losing game such as trading, we shall start against the majority and assume we are wrong until proven correct! (We do not assume we are correct until proven wrong.) Positions established must be reduced and removed until or unless the market proves the position correct! (We allow the market to verify correct positions.) Quote: Trading is not a favorable game in most circumstances, and that is what we must use as our assumption in trading. The big mistake made by traders is thinking and expecting trading to be a favorable game. You have execution costs or slippage when getting in and out of a position as well as commissions as a cost factor to be subtracted from your winnings or added to your losses. The market spends much time in an unpredictable mode. Trends both short- and long-term do exist but not 100% of the time. The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad. The market will tell you when your position is a good one to hold. Most traders do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct. When you remove the position because the market proved you wrong, it is always a higher loss, and with stops it also is usually with higher slippage. This is not the same as removing the position because the market proved you wrong. By making the market prove you correct in order to hold a position is acknowledging that trading is a losers' game and not a winners' game. If you only remove your position because the market proves you wrong, you are acknowledging that trading is a winners' game. You never want to be in a position that is never proven correct. If you only get out when the market proves you wrong, it is possible to have higher risk due to the longer time period required to prove your position wrong. We will further clarify these thoughts for you in the book. Rule 2 - Press your winners correctly without exception. Quote: Sounds pretty elementary but correctly is the key. What you hear quoted most of the time is "cut your losses." Cutting you losses is only one side of the coin. Without Rule 2, you will find that trading still isn't even a 50/50 game. Without a correct method to press your correct positions, you will never recover much beyond your losses. You need rule two to ensure you have a larger position when you are correct. You always want a larger position when you get a great move or trending market than when your position isn't correct. There certainly will be debate on how you know when to add to a correct position and on how a market can turn a correct position into a wrong position. We will cover those debates later. First, let us get the rules and reasons established. By knowing what is expected in Rules 1 and 2, we can prove the theorem based on good assumptions and experience. Rule 2 does not mean just because you have a position in your favor that you must now add to that position. "Correctly" in Rule 2 means you must have a qualified plan of adding to your position once a trend has established itself. The proper criteria for adding positions depends on your time frame of expectations in your trade plan. You might be a day-trader just trading back and forth, a short-term trader, weekly trader, monthly trader or trend trader only . The add criteria will be different for each trade plan. The important point of Rule 2 is to point out the rule is established so you can make the most gain with the least drawdown expectations. You must also use Rule 1 properly. Rule 2 is important for it keeps you in a good position as well as impresses upon your own thinking about having a correct position initially. Most traders are conditioned to want to take a profit to prove to themselves that they are right. Being right does not, in itself, make the most amount of profit. Most traders also want to get out before the market turns and takes away any profit they may have. Ordinarily, they will let losses get larger but only let gain get started before getting out. This is just simple human nature when having a market position. Human nature in trading is not often proper trading technique. Always a good reason for adding to a winner is because traders usually tend to doubt the position unless they reinforce the correctness of that position. Adding to the position correctly best does this. The other good reason is that you must be larger when correct on a position than when your position is wrong. Correctly adding to a proven position must be done so that a pyramid isn't established that will hurt the trader in a minor reversal. Each add onto an original position should be done in smaller and smaller steps. As an example, if you put six contracts on as your initial position, you should use four contracts for your first add and two contracts for your next add. This gives you twice the original position when all three positions are in place. This is a 3:2:1 ratio in establishing three levels of positioning. At all times during the trade it is important that Rule 1 be in your plan. This includes when you are adding to your positions to protect your trade from any major reversals, which often happen. Your plan for adding positions could be as simple as using each buy signal for longs and each sell signals for shorts. It could be on 45-degree retracements or support lines. Without exception the rule indicates it is not an arbitrary decision on the trader's part whether to add. Keep in mind this does not exclude the correct method of adding in respect to variables of different trading plans. What is a correct way of adding in one trade plan may not be in another. Reviewing Rule 2, it states only that you must add to correct (proven) positions and that it must be done correctly. The rule does not tell you how to add, as this is your requirement in the trade plan you develop. The rule makes no exception on adding to correct positions. The intent of Rule 2 is twofold: Reinforce your correct position both mentally in your thinking and your execution and increasing the size of your position. Find your "edge" and use these two rules, you will be on your way to take millions from other traders!
Well, in context of that example, it would have to be a setup I rarely see, which I am willing to bet big money on, because I've seen it work so many times before. But that goes against our unstated agreement that stated probabilities are not always applicable. Or does it? I have to admit, you have me thinking in ways I'm not used to. This is fun.
Oops - I was afraid of that Ok, here we go again! I have read POP, and if you want my honest opinion, it has some basic truths but a lot of it is just a story! There are no real specifics given to help anyone understand what it is they need to know in order to take money from other traders! I threw it in the rubbish bin after printing it off and underling the good points! BTW, I only posted the details as they are relative and factual - not stories!
Always remember what Morpheus said, "There is a big difference between knowing the Path, and walking the Path" What you think you see is not what you see! If a new trader wants to learn how to make money trading, he/she must realize that no one in their right mind is going to publish any information that will make money! Why are new traders so blind! If you knew how to make good money each and every day, would you tell someone else if you knew that by doing so, you will run the risk of not been able to make any more money! If I substituted sweets for money, and asked a child a similar question, I know the answer that child would give!
You state the word "proof" quite often in your post. Proof is in the eye of the beholder, and therefore your method depends entirely on the user. I agree with everything you say, but I get the feeling that the hard rules kind of thinking goes against the grain of this thread. Correct me if I'm wrong, NYSE.
The story helps you to understand the rules and make your âBehavior Modificationâ to be successful. and as POP says, "Behavior Modification" is the key! No need to deny it, these rules are golden and they are all you need for trade management if you can change your LOSERâs behaviorâ under live bullets.