Old Pro Trading Insight and Feedback

From a trader who has been at it for a long time:

I am reading your Turtle book for the second time. It’s a marvelous human interest story from my perspective about a group of individuals from diverse backgrounds overcoming the odds and winning in a game that most find an overwhelming challenge. With proper mentoring these unique individuals became winners in a game where statistically 95% of the players are losers overall. As a zero sum game 5% of the players win 95% of the money provided by the unconscious incompetents on the other side of the bets less commissions and fees etc. It’s just a great game. After 30 plus years I feel what separates winning traders from losing traders is not how winning traders approach trading from a method or system point of view. Many successful traders do quite the opposite styles of trading from their competition. Some traders are great trendfollowers and other traders are great trend “faders”. At the end of the day they might both win overall. I believe what separates winners from losers is not how they trade but rather how they THINK about trading while they are trading. Ed Seykota talks about “bet sizing”. Bet of course carries the connotation of gambling. Actually trading is significantly more dangerous than pulling the arm on a slot machine. When the wheel stops the game is over. In trading the game does not stop until the market has gutted many traders. An example was mentioned Wednesday or Thursday on your blog. $141 Million. Now that’s a big number…Richard Dennis mentioned years ago “with a good money management system a trader can make money flipping a coin. Of course a good trading edge simply increases the returns of good money management”. That’s perhaps not a direct quote but I understood where he was coming from. So yesterday my business partner flew in from xxx and brought a friend along. The friend is the CEO of a major corporation traded on the NYSE. He has a mid-range eight figure net worth. Just a wonderful people person type guy. Our guest wanted to view some of my work and learn more about my trading method. Perhaps if I ever go public he might want to invest with me. I showed him a few of my charts. I am a 100% technical trader. Awhile back there was a post on your site regarding technical analysis. The bottom line of the post was “technical trading is dead” or something along those lines. I was shocked to learn that. It makes me wonder what I am doing making money most months with my technical system. I will do some more research. Maybe the money in our account is really a mirage or perhaps just a “loan” from the markets? I told our guest a method is certainly important and I feel it is if it’s properly executed. I went on to tell him I felt that how I now thought about trading was more important than how I actually traded. I had spent most of that 30 years looking for something that does not exist-a Holy Grail if you will. I mentioned Rich’s quote in THE MARKET WIZARDS. His eyes rolled. So then I said “Would you like to see what Rich meant?” Would you like for me to help you design a little trading system in say the Mini ES on say a 5 MIN time frame? We took maybe 15 minutes. All we needed was E-signal and a coin. Of course we have a trading platform with real money. This was going to be real combat with live ammo. The goal for me on some level was to prove to myself what I already know. Trading is a game of probabilities and pattern recognition. Would you like the live fire trading results form yesterday? They are pretty amazing even for this former skeptic. Obviously one day’s data flipping a coin as to whether we buy or sell proves nothing. However money management placed on top of the coin flip significantly diminishes the risk of major loss in any a game. If you choose to post any of this please delete my name. I fear someone might send the guys in the white coats after me. The experiment was just one day’s results and “Past performance is no guarantee of future results”.

Clarification that came in Sunday:

Hey Michael, I failed to mention a very important footnote in my coin flip experiment. I had the option of declaring NO BET within 40 seconds of the flip. For example had the initial flip come up tails thus a SELL I would have had no bet. In fact it came up HEADS and I saw an opportunity for a low risk buy in fact. During the four hours we ran the experiment their were six tosses and four live bets. I am afraid perhaps I was conveying another message in my email. For the fun of it I had a friend help me run the experiment in the replay mode yesterday after lunch. There was zero input regarding a set up and essentially if the coin came up tails we sold and heads we bought with no regards to any chart picture. There were five losers in a row and then two break-even trades and then there more losers. It goes without saying simply flipping the coin with no regard to method would be disastrous. Also had the coin landed in reverse there were several nice winning trades which I suppose makes sense. The two break-even trades were in fact losers had the coin toss been heads instead of tails. Anyway it was a fun experiment that to me at least proves a method is part of the picture for success but overall money management is the real key to trading success.

More.