A: The guiding principle of our work is figuring out a way to deal with uncertainty. That’s what we deal with every day—an uncertain future. What’s going to happen on the next pitch is uncertain. We can’t figure out exactly what’s going to happen, but if we can get our arms around a range of possibilities, that gives us a much better chance to at least make better decisions. We’re still going to be wrong a lot, but hopefully we’re wrong less often now than we were 10 years ago. But we’re never going to be in a situation where our analysis tells us what’s going to happen. These are human beings interacting with one another in a highly stressful situation. So we’re never going to be perfectly predictive. But that’s what makes baseball interesting, makes it emotional.
Many think markets can be made safe. They truly believe there is a way to predict tomorrow and thus watch their accounts go straight up over time. Once all of the nasty unsafe stuff is cut, life becomes roses. A great example of the desire for ultimate protection can be seen in the ban of these stamps by the United States Post Office:
“With the Just Move! stamp issuance the U.S. Postal Service hoped to raise awareness about the importance of physical activity in achieving a healthy lifestyle. However, according to Linns Stamp News, the USPS will be destroying the entire press run after receiving concerns from the President’s Council on Fitness, Sports & Nutrition over alleged “unsafe” acts depicted on three of the stamps (cannonball dive, skateboarding without kneepads and a headstand without a helmet). (There’s also a batter without a batting helmet, a girl balancing on a slippery rock, and a soccer player without kneepads or shin pads.)”
Hello Michael, thanks for accepting my friend inquiry. First, I want to say that I am a big fan of your podcast and interviews. Really great stuff. About myself? I have traded for 5 years, but have not traded profitably. I think my largest hurdle is not holding onto the winners. I do not give my entries enough room. Therefore I keep my losers very short, but very often see the position run after stopped out. In a nutshell my strategy is to move the stop to the entry point as soon as the position has a little bit of room. But so many times the position turns around just to touch my stop and then move on. Do you have any advice for me? Would you say that’s just risk management and part of the business? Because I think I miss too many good trades with this strategy. Thanks a lot in advance and have a nice time in Asia.
Frank
My first advice would be to read one of my books. Not a dodge to your question, but my books are filled with the necessary detail not easily put in one email response.
Hey there Mike. I was reading the hedge fund Market Wizards where the Kelly criterion was mentioned. To be honest it shocked me that any professional trader would take it seriously. It seems like it directs the trader to risk far more money than any professional trader would ever dare to risk. It tells the trader to risk as much as 20 to 30% of his trading account Mike! This sounds like trader suicide to me. Even after applying the “conservative” method of cutting it in half as one trader in the book suggested you would still be risking 10 to 15% of your trading account on each trade which again is far more than any professional I have heard of risks on his trades. As best I can tell, the Kelly criterion is a totally useless formula for serious traders and I can’t figure out how it even made it into the book. The only professional I have ever heard of who suggests such large bets is Larry Williams in his book in which he advises risking over 10% for some traders which shocked me when I read that book. I was just wondering what are your thoughts on the Kelly criterion?
Dave Druz and Ed Seykota wrote a good piece called “Determining Optimal Risk”. Worth a read if you haven’t checked it out already. Kelly also discussed heavily here.
For every ten traders that try their luck at day trading nine of them will go broke. It is just the way the game works. Famed trader Richard Dennis had this to say about day trading:
If I’m buying and selling in the same day, it’s always to take a loss. I haven’t made a profit on a day-trade in five years.
Having a plan and sticking with it is also something Dennis stood by in his day trading advice:
“When you have a position, you put it on for a reason, and you’ve got to keep it until the reason no longer exists. Don’t take profits just for the sake of taking profits. You have to have a strategy to trade, know how it works and follow through on it.”
Without a solid plan, and the nerves to stick with it, the markets will exploit you, take advantage of you, and then in a sad quiet fashion…. leave you for broke on the side of the road.
Be sure to read my book, the Complete Turtle Trader, to learn more on how Dennis led the Turtles to great success using the Trend Following method.
The guy who wins the most hands is not the guy who makes the most money in the long run. The guy who never loses a hand is not the guy who makes the most money in the long run.
Think about it. Or don’t.
Note: Shout to Tony Hsieh for the words. My film takes the thought further.
