"I know you are talking about 5 sigma events. I thought that sept 11 was one. If I don't risk more than about 20% of my account on any one intraday trade and about 15% of my account overnight, I think i'm pretty safe. It's rare for a stock down 50% to loose half it's value again." Just to be clear, though, when we're speaking here about risk, we mean the expected maximum loss - stopped out, plus slippage - rather than the total amount of capital traded. I have to believe that, when you say you don't risk more than 20% of your account on any one trade, you mean that you don't allocate more than 20% of your total available capital to any particular position. You can't mean that on any one trade you're willing to lose 20% of your account before admitting defeat (and getting out) - can you? Anyway, I'm not talking just about the extremely unlikely event, though, if your practice involves use of leverage, then you're certainly exposed on that level - and even if you attempt to reduce risk by distributing it among relatively non-correlated positions.
P2- i haven't been in the chatroom the past few days because I just don't have the screen space...and it sometimes interupts my software....but I was wondering what you thought about PKI and SP.....hit pretty hard today..and it felt like SP would have retraced some if the market wasn't so bad. Thanks in adv. uptik
"I think that there is little or no chance of me washing out. " Sorry, I missed that post. It looks like you may really have meant, after all, that you are willing to risk losing up to 20% of your account on a single trade or set of correlated trades (i.e., a basket of possible "bottoms" all tied to a single big event - such as Sept 11). It also looks like you are not averse to using leverage to increase exposure when the trade moves against you. Though I don't pretend to know the future, and I certainly wouldn't pretend to know you or your future, I do know that there are some who would hold it to be a a virtual certainty that a trader using the methods you've described - just the high risk and leverage would theoretically be enough, even under an otherwise more conservative approach - would wash out. Some might even suggest that sooner would be better for such a trader than later.
Kymar, If you think P2 will blow up please describe how you think market-makers make money. Try www.traderscalm.com for a "pro" bottom-picker viewpoint... Rgds Q1
Quiet1, I'm not yet entirely clear on the precise parameters of P2's approach, and I'd prefer not to personalize the issue anyway, so, instead of making predictions about P2 "blowing up," I'll just lay out the theory as I understand it. There are two ways that I can can think of to explain why a trader who consistently risks in the range of 20% of his or her entire account and who compounds his or her risk by utilizing leverage in excess of 100% would be deemed "virtually certain" to "wash out": There's the mathematical explanation, and the psychological explanation. Note also that, for purposes of this discussion, "washing out," doesn't mean "impoverished" or even "forced to take a real job." Though poverty or account ruination, or worse, are certainly possible, all "washing out" or "blowing up" really means in this context is "rendered incapable of continuing to trade in the same way." The actual real life result could vary substantiallyfrom one individual or washout to another. The math isn't very difficult to grasp, though might seem unrealistic to some. Put simply, if a trader routinely risks 20% of his or her account, then a bad losing streak would reduce his or her trading capital to a fraction of its original amount. Theoretically, he or she could keep trading until the account fell below whatever maintenance minimum. Routine use of leverage increases the odds that some grouping of losses, or of a smaller number of unexpectedly large losses, would speed up the process. Again in theory, and from a probabilistic perspective, the only way to avoid this eventuality, other than through sheer luck, would be the "pre-emptive washout," of which perhaps the most positive form would be the one in which the trader who has managed to whatever point to avoid the ruinous cascade takes a significant portion of his or her capital permanently out of the action. Though he or she might continue to trade some fraction of his or her total capital "in the old way," the days of huge real returns will have come to an end, even before the impracticalities of trading truly large amounts of capital come into play. In the real world, of course, not even the most maniacal system trading aficionado continues to trade an account in "exactly the same way" all the way down from, say, $100k to $1k (around 22 consecutive 20% losses). Introducing the psychological factor, however, is a two-edged sword, as a common psychological response on the part of a confident trader who is accustomed to success and has a "gambling" mentality, after the equivalent of a fourth consecutive 20% loss has reduced his or her total account to 40% of its previous capitalization, would be to become even more aggressive. The likelihood of this response increases if it has ever succeeded in the past, and increases all the more if extraneous pressures (a mortgage, a reputation, whatever...) intrude, and increases yet again if the individual's identity is in some way tied up with the particular approach. The availability of even more highly leveraged instruments (options, futures, and options on futures) may also at this point come into play, especially if the trader's losses have continued to mount. Finally, the introduction of psychological and other "real world" factors also brings up a range of other threats to the stability of a high-risk, high-leverage, swing-for-the-fences methodology over time - even if it's based on a much smaller than 20% expected maximum loss. Mix one hungover, angry, early post-losing streak, and/or otherwise distracted morning, significant leverage, a seeming "sure thing," the habit of "doubling down" (or similar) on a losing position, some outside-the-usual-envelope event, and simple human nature, and you don't even really need to do the math...
Bottomfishing is not easy. You need to be willing to read the tape and go against the up to that point prevailing trend. Success rate maybe low as compared to other strategies. Lets say it is only 25%. But if you stop out for dimes average but you make over .50 average per win you are way ahead. With prudent money management the overall results are nicely positive. P2 has done overall great trading job. Losses are part of the game.
Firstly, I don't trade pki, that stock has taken about 20k from me over the last 6 months. Enough is enough. I have a list of stocks on a postit on one of my monitors. There are about 20 stocks on that list that I can't trade. Pki is one of them. I did SP today. I got hosed badly. I lost about 3500 or so on it on 3 failed scalps. It just dropped too fast off the open. I am considering putting that one on my list too. I've only once made good money off it. As for blowing up, I really doubt that I will ever blow up. Firstly, I have many accounts. Only 1 is agressively traded for catching knife bottom picking. The other one I actively trade is much larger and used for more conservative bottom buying for longer term trades. The other accounts are longer term accounts and not traded. I have found that I have a tendency to naturally buy bigger and bigger positions as it gets lower. This bottom picking account is kept at only 60k. When It gets to 80k, I sweep the gains out into a seperate more conservative account. It in effect locks in my gains. Therefore, firstly, the most I can loose is a smaller portion of my account on any absolute disaster trade. As I have said before, I really doubt that I could really loose more than say 25% of my account at any one period. I step into the market every day fully willing to blow 15% of my account and not be in the slightest bit upset. I have at least 2 days a month where I loose at least 10k. It happens, and I expect it to happen. Loosing 15k out of a 60k account is only 25% of that account, and more importantly, under 5% of my total accounts. Therefore, it's pretty unimportant for me. It's hard honestly for a stock that's lost 1/3 of it's value to really drop hard from there without me at least stopping out numerous times. I really think that besides what you all think with numbers, I'll be in this game until the day I decide to stop, and not because I've blown my account or anything. After loosing over 60k to PVN over a 2 month period of consecutive failed bottom attempts (it didn't bottom til 2), I have addapted much more conservative bottom picking criteria, and I've begun to use less risk per trade. That was a real turning point for me as per risk control. I think that's a reason that I only lost about 5k on ene total in like 3 failed bottom calls. I was willing to stop out after about 20c instead of over a dollar. Besides intraday halts, I'm really not concerned about anything.
Options are priced according to volatility. Since P2 would be buying options (per your suggestion) at a peak in volatility; that is, a huge move downward. Then it is to follow that he is buying a very expensive option which may decrease in value as volatility deflates. He may very well lose on the long call/volatility even when the price of the underlying may increase. When you think options, immediately think volatility. If you keep your eye on volatility you will be ok. Take your eyes off and you are asking for it.
This is why I don't like NYSE stocks. I lost large (for me) on this one today. Bright says that limit orders are "entered manually by the specialist and his assistants". Because it is manual there is room for "mistakes" as far as I'm concerned. Tharp says that the specialist cannot trade outside of the spread so he can't move the price. Well, the spread on this one this morning was sometimes as high as $25.00. Now I know that the rules require the specialist to print the best bid and ask but something was fishy with this one this morning. I won't trade PKI again. Where's the SEC when you need them.