Essential Thinking and Success

BarroMetrics Views: Essential Thinking and Success

What is Essential Thinking? Stripping down a concept or activity to its core components.

In trading, for example, what are the essential components?

The core objective is to make money over a large sample size. How do we do that? In two ways, via

  1. our win rate and
  2. the relationship of our average dollar win to average dollar loss. The larger the skew to the win, the more likely it is we’ll make money.

There is an inverse relationship between the win rate and dollar win: the larger the win rate, the more likely it is our dollar win rate will drop. For example, the highest win rate tends to be among algo traders, the majority of whom, tend to be scalpers (or at least very short term traders).

The longer the timeframe, the more difficult it is to eliminate losses. Focusing on reducing the average dollar loss is probably a more worthwhile endeavour.

So, the essentials for the longer timeframe trader in his quest to make money from his trading is to have a positive expectancy. To do this, he’d be better off focusing on reducing the average dollar loss.

How to do this?

Well, first off is to have a set of rules for both our Method and Money – then to ensure we execute our a high degree of consistency. Consistent execution (provided we keep psych and equity journals) provides the data for improvement.

Our Money rules provide us with our optimal position sizing. My ideas here are perhaps different to most. I adjust my position sizing according to whether I am in Ebb, Normal, or Flow State – with increased size during Flow and decreased size during Ebb. Within the State size, I also increase and decrease my size depending on the setup I am using.

For example: My normal size for FX is around 2M. But, when in Ebb State the size drops to no more than 600K. So, my best setups in Ebb State will carry 600K; but, different setups will have different position sizes. It’s important to track the effects of adjusting the size. I do this by keeping accurate records and doing ‘what if’ scenarios. Here Edgewonk is very helpful.

Essentials so far:

  • Our objective is to make money over a large sample size.
  • Consistent execution of our Method and Money is a must.
  • To optimise our ROI, we need a set of position sizing rules. I prefer to vary my rules according to firstly my State and then my setup.
  • Journal keeping is essential because it provides the assessment data.
  • We also need……

More tomorrow

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