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Lex Parsimoniae

|Includes:IWR, QQQ, SPY, SPY, UDN, PowerShares DB USD Bull ETF (UUP)

Trading, a skill mastered working around contradictions. Many are summarized by studying the familier trading catch-phrases. But letting profits ride runs the risk of allowing winners turn into a losers. The trend may be your friend but by the time it ends the position is often back in the red. Don't try to catch a falling knife because if price is falling fast and furious trying to play the hero gets expensive. A new favorite is don't be a dick for a tick which can be as financially damaging, leaving the trader sitting on a thumb while price heads off unless he decides to chase price. Only trade with money you can afford to lose but who can afford to lose anything?

A well known currency trader sends out a weekly letter documenting the alerts sent out with the results of the alert subscription offered. The spreadsheet touts a 400% return since 2008 and a 70% win ratio on profit target #1. Looking over the trade log though the picture gets a little gloomier. The average loser is almost 40% larger than the average winner. We can call it bullshit because it contradicts the 3 to 1 R/R ratio or we can say this trader calls market direction very well and can make allowances on the downside until he is 100% sure the trade is bad.

Similarly a Forex trading contest I took part in a few years ago had an eye opening result. The winner traded this system: His profit target was 1 pip -- his stop loss was a margin call. He won on the basis of the largest 1 month ROI (over 100%) and smallest draw-down. When interviewed by the contest sponsor, another well known personality in FX circles, the winner said he would never trade this way with real money.

Pulling the trigger on a trade requires some idea of where price has the potential of going. That potential might represent three times the risk we took on the trade. But all traders have had price get 2/3 of the way there on a good move and turn around just as quickly. Trades have gotten with in one pip and flung back in this traders face. Having 30 or 40 pips in your pocket only to see in turn around is a really crappy feeling.

Rudyard Kipling refers to triumph and disaster as two impostors in his poem “If”. Triumph is the Ferrari sitting in the driveway and losing, the margin call that causes your wife to throw a frying pan at your head. They are impostors because while we wish for one and dread the other, buying the Ferrari can be and often is a let down. The margin call, if you are able to dodge the frying pan, is often not as bad as you thought. How many traders in the Schwager books haven't recieved on. Not many.

Everything in trading is about potential. Is a trade that doesn't reach its target really a winner? What about a trade that is stopped out to the pip and turns around just as quickly and races to a finish line that is no longer there. Every time the trader sits down at his station he has the potential to be disciplined and follow his plan or the potential to forget everything he knows and screw up.

So if things are not working out, it's best sometimes to sit down and try to simplify even if simplifying bucks standard trading wisdom. Call it shaving with Occam's Razor. In the end the concept of fear is often misapplied. Traders must be MORE afraid of not winning than losing. Read below. It couldn't be summarized better.


by Rudyard Kipling

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don't deal in lies,
Or, being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build 'em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on";

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run -
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son
Diclosure: non