Thinking ‘Three Moves Ahead’ V

In his chapter on luck, Bob Rice says: “The expression ‘the harder I work, the luckier I get,” is not just cute; it is mathematically correct.” In short, if we follow a plan, and execute it consistently, then we’ll place ourselves in a position to ‘get lucky’. While Bob is speaking about chess and business, the same can be said about trading.

Given the nature of the markets, we are at the mercy of randomness (luck) on a trade-by-trade basis. Our edge operates over a large sample size and we never know what ‘this’ trade will bring. Many ‘newbies’ confuse ‘luck’ with robust trading. In tonight’s blog, I’ll illustrate this idea by telling you two true stories.

For the first, let me introduce Abe. Abe is a ‘newbie’ in the sense that he has not had three consecutive profitable years. I met Abe in Singapore after he had bought the first edition of the “The Nature of Trends”. He told me that as a result of the book, he was now making money hand over fist and he wanted to apply for the mentor course. After the preliminary screening process, I told him he could not afford the course. He argued that since he had made ‘$X’ over the past few months, he could pay it in no time.

I told him he was overtrading and the foundation of his success would prove to be his undoing. “Reduce your size; trade more conservatively and you will survive. Don’t confuse being lucky with being good”. I turned him down for the mentorship.

After that, I saw Abe from time to time – at the presentations I do in the region and at a couple of my seminars. Each time the ‘rags-to-riches-to rags’ story repeated itself. I am told Abe is convinced that I am hiding the ‘real’ secret to trading success.

What Abe doesn’t realize is that success will continue to elude him until he realizes that ‘the secret’ lies in accepting that the market is a probability game; as such luck (randomness) will play its part. Sometimes we’ll be lucky, other times unlucky. When the latter occurs, we rely on our planning to insure that the loss is within tolerable limits. Trading this way does mean we won’t turn $10,000 into $100,000 in 3-months; on the other hand, trading this way does mean, we will accumulate wealth over time, and continue to trade for as long as we are physically and mentally able.

Now let’s turn to Bob. Unlike Abe, Bob is a true newbie and has just started trading. He is one Ana Wang’s first subscribers (www.awanginvest.com). Like Abe, Bob has to learn to formulate and implement a plan rather than trade aimlessly.

In her first recommendation, Ana shorted gold on stop at $912.4. Abe entered at $910.00. The target was around the $850 to $860 zone and the stop around $946.6. When the market rebounded off $876.3, Ana sent out a recommendation to lower the buy stop to $910.00. This was a defensive measure to protect the position.

Abe did not stop out; in fact he may not have had any stop because he wrote to Ana after gold come down from $956.2 to ask if he should hold on to his short at $910. The day before Ana had put out a recommendation to sell gold at $924.6 with a stop at $951.7 and a target of $851.7. A few days later, Bob wrote in to say that he had taken a $4.00 profit on his shorts.

Bob was lucky: Gold may have moved to the Primary Sell Zone at $1025 to $1000 on the first rally off $876.3 – the fact that it did not was the result of luck. Then, having borne an open loss of over $3,600.00, he grabbed a profit of US$400.0. At a risk reward of 9:1, Bob would need to have a win rate of 90% to secure an edge of a measley $0.40 per trade.

I would not like Bob’s chances of achieving that win rate.

The difference between Bob and Abe is Bob is still open to learning and, if he is prepared to accept the role of luck and the need for planning, can still make the grade. It will be harder for Abe. Unless he has changed (and one can only hope), he’ll continue to confuse luck with ability – and he’ll never make the grade’ at least not until he learns this lesson.

More on luck tomorrow.

7 thoughts on “Thinking ‘Three Moves Ahead’ V”

  1. Wish to add to Ray’s post:

    Bob is a newbie willing to learn and is on the right track.

    I refer to some trading advice at awanginvest.com

    * It’s useful to distinguish performance goals from learning goals. We tend to set performance goals; e.g. a specific percentage a month we should achieve.

    * For example, a learning goal will lead to personal satisfaction upon completion, and will contribute to the long term goal of becoming a seasoned trader. Reward yourself after you complete each learning goal.

    * When you become a seasoned trader with advanced skills, you can set out to achieve those high performance goals. But until then,you should focus on skill building, rather than high performance.

    * BE PATIENT BUT WITH A WINNING MIND

    As I advise newbies, I am reinforcing what I have absorbed in my learning process.

  2. MEMO

    A Weekend No-Frills basic seminar for Sep 08 at SMU, Singapore – Ray Barros

    AS the August 08 SMU seminar has sold out by January 08, I have organized another similar basic seminar for September 13 & 14 2008 in view of good demand.

    If you wish to attend,please visit IDkit to read more details to apply at:

    http://www.awanginvest.com or

    email: idkit08@gmail.com

    Thank you.

  3. Dear Ray,If i may offer my own story on luck.I was lucky i started trading in 86/87 bull run.I was lucky i paid attention to the stories of the 1929 crash and also listened to my fathers stories about growing up in the great depression.I also read never confuse brilliance with a bull market.So i also think luck is being aware and not having a huge ego.I was lucky too in that i had a dream,so i sold everything and beat the crash by a few days.I was so terrified after the crash that i had to stop,so i bought a house so that if i ever lost big ,at least i would have something.Now i have seen more of the cycle of life,i trade a lot calmer.Because i know that luck doesnt last forever,hotshots come and go.You can make some serious money in this business but you really must master yourself first as trading will expose every weakness.Furthermore,this blog site contains a great deal of wisdom and i feel very lucky indeed to have come across it.Thankyou Ray

  4. Hi Baz

    Thank you. Glad you like the site.

    Your comment was a gem: “you can make some serious money in this business but you really must master yourself first as trading will expose every weakness.”.

    I hope the other readers appreciate how insightful it is.

  5. Hi Baz

    Are you still living in Brazil?

    Anyway, I have a post at my weblog
    http://www.awanginvest.com

    Please visit to read more on the Brazil Stock Index..
    Quote
    Brazil may be able to weather a recession in the United States since local demand has been the main driver of the economy’s recent expansion.

    But Brazil’s markets are vulnerable to a downturn in commodity prices caused by a U.S. slowdown as the country’s Bovespa index .BVSP is heavily weighted in metals, oil and steel companies. Unquote

  6. Hi Ana,Thankyou. I am currently in Australia and nearly home.Returning to Brasil in about 5 months.It is interesting to note that Gann was flying around there in 1935 checking out crops.Agriculture is big there and i think the U.S. would put a dent in any economy during a downturn.My investment there is limited to the service industry.I think Brasil could survive,they certainly love to party no matter what shape the economy is in.They appear to be happy go LUCKY people. Cheers Baz

  7. MEMO

    When illustrations are made in this blog or even about my own, we need to disguise our characters in order not to be personal.

    Illustrations are meant to show the gist of what happen and to redress the problems arising. Hence, if the allegory is obvious to some, it is not obvious to others.

    By bringing out a true scenario with a disguise as in an allegory is the best example one can learn without being self-conscious of whether it refers to one or not.

    The best lesson to take away is to acknowledge one’s mistakes and to learn rather than to justify one’s actions.

    Be thankful that someone is willing to help be it indirectly using an allegory.

    I am ‘lucky’ that my subscriber referred to as Bob is humble and willing to learn whatever it takes,instead of feeling he is the ‘victim’.

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