Friends,
I intentionaly wrote SECRET. Otherwise no one would have got attracted to the message. :) Stock market is not a SECRET. It is a simple GAME of making MONEY: For my BS views including simple TAs, refer to my homepage. :)
Here is a nice article. Just seeing some messages here and there, I felt like letting you know one of the deepest SECRET of stock market. :)
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For easy reference who would love to read that article, here is the complete article (Part 1):
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Being Right and Making Money Are Not Equivalent
By Van K. Tharp, Ph.D.*
Posted: February 23, 2007
At investment conferences, the hottest speakers are those who provide information about high probability entry techniques. If you say, \\`Trade with the odds on your side\\` and show someone a technique that is right 75 percent of the time, you\\`ll get a large audience. Yet, most techniques of this nature usually have big losers and may not even have a positive expectancy. Nevertheless, being right 75 percent of the time is all it takes to get people to trade using techniques that tout this type of performance.
How important is it for you to be right? Let\\`s say I could guarantee that you would make money by the end of the year -- lots of money -- but you would probably lose money on 90 percent of your trades. Would you like that? Could you tolerate that? Would you accept that?
Most people would probably answer \\`No\\` to all three questions. And, if that is you, you are probably denying yourself the opportunity to make money simply because being right is more important to you than making money.
Some of you might be asking, \\`How could you be wrong 90 percent of the time and still make money?\\` The solution goes back to the golden rule of trading, \\`Cut your losses short and let your profits run.\\`
Let\\`s say that 90 percent of your trades lose money and that your average loss is 0. On the year, you make 100 trades, so you end up losing 90 of them for a total loss of ,000. However, let\\`s also say that your average winning trade is a big R-multiple.
It\\`s an R-multiple of 100 or a ,000 winner. You have 10 of those in a year, so you end up making 0,000 on your winning trades. If you subtract your winnings from your losses, you end up with a profit of ,000 at the end of the year. You make ,000, yet 90 percent of your trades are losers.
My guess is that 99 percent of the trading population could not trade a system that would produce those kinds of results. This is because, using this system, they wouldn\\`t get to be right enough. They\\`d feel they were having too many losing streaks.
Or, for them, the magic number is more than five losing streaks in a row. Most people just cannot tolerate long losing streaks, so when lengthy losing streaks occur, they totally abandon what they are doing.
Using such a system, you could easily have 25 consecutive losses. At that point, you might become certain that your system is broken, and you would try something else.
Let\\`s look at the opposite end. Suppose you got to be right 90 percent of the time. Suppose your average win was 0 and that your average loss was ,000. This means that you\\`d have a total of ,000 in winnings and ,000 in losses. You would lose ,000. Would people trade that system? Yes, they would. They would probably trade it for a number of years until they went bankrupt. Why? Because they got to be right most of the time and that can be very rewarding.
By now, you might be asking, “But, how could people possibly tolerate losses of ,000 after 100 trades?\\` It is easy; they turn losing trades into long-term investments in their mind and say, \\`It\\`s only a paper loss.\\`
For example, I\\`ve had workshop attendees who were probably way above average in terms of sophistication. However, I asked them to raise their hands if they had an investment in their portfolio that was only worth 50 percent or less of what they paid for it. Eleven people raised their hands -- more than a fourth of the class. And, my guess is that, among the overall population of investors, most people are sitting on a number of big losers, hoping they will come back. Why? Because they cannot stand to be wrong on an investment, and they are waiting to be right on those losing trades.
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Gud luk & happy investing! :) |
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