| |
| |
|
Stocks & Mutual Funds Information |
|
|
|
Losses, not Profits, will Stop You from Trading in the Market
Should the market turn against you, it is important that you design a system that will produce as much loss as you are prepared to take. This loss, known as drawdown, is the maximum amount by which your trading float will temporarily drop at anytime. Doing this in advance, will help you avoid nasty surprises in the future. This gives you the confidence to continue trading when the good times start once more. It is very unlikely that you will stop trading if your system is trading profitably. However, if you are in a trading year that takes too big a loss, you are likely to stop trading, even if your system has been tested and shown to make a profit over a longer time period. Therefore, design a system based on the risk you are prepared to take which includes a budget for your drawdown. So how does one pick the best formula for your drawdown time? I will rephrase this question. How many losses in a row should you allow for? First, I will use the simple example of tossing a coin. If I tossed a coin and it landed "Heads Up" 10 times in a row, are you surprised? However, if I tossed the coin 800 times, your outlook on the results are different. Trading uses the same scenario. When testing your trading system over many years, you will find a run of 10 losers or 10 winners in a row. Mathematics provides some answers to the likelihood of this happening. See the examples given in the table below: -----------------------------------------------Probability of Losses in a Row-----------------------------------------------System Win/Loss Ratio 60:40 50:50 40:60-----------------------------------------------5 losses in a row 1% 3% 8% 6 losses in a row 0.4% 2% 5% 7 losses in a row 0.2% 1% 3% 8 losses in a row 0.1% 0.4% 2% 9 losses in a row 0.03% 0.2% 1% 10 losses in a row 0.01% 0.1% 0.6%----------------------------------------------- A typical trend following a system has a 50:50 win: loss ratio. That is, half of the trades are winners and half losers. This is not a problem, because winning trades will make a larger profit than losing trades will make a loss. A 50:50 system has a 1% chance of seeing seven losses in a row. Therefore, most trend following systems should budget between five and nine losses in a row. The good news is that there is the same chance of getting between five and nine winners in a row! I hope you see the importance of making these decisions before you begin trading. Making the proper decisions before you start is what successful trading is all about. -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
MORE RESOURCES:
Stocks-Mutual-Funds - Google News |
|
|
|
RELATED ARTICLES
Price Targets Every day in any financial publication you will find the Wall Street mavens giving their predictions on many stocks. It was issued here and should go there. Lifestyle Funds Provide Greater Security? With the stock market stubbornly refusing to settle down and smooth out, Wall Street has been scrambling to come up with "product" they can sell to gun shy investors.One such new concept is the Lifestyle fund; an extremely diversified package designed to be the single fund in an investor's portfolio. The I Word is Coming to a Town Near You Hello Inflation, it has been awhile, I see you on your way back again. Inflation? What inflation? Oh things like; Energy, diesel fuel, Aviation Fuel, Gasoline, Natural Gas, Milk, Wheat, Corn, Beef, Poultry, Hogs, Soy Beans, Building materials, paper, housing, Auto Prices, Health Care, Insurance, etc. The Surgeon General The Surgeon General of the United States says that smoking cigarettes is harmful to your health. It is printed on every pack of smokes you buy. Catnip of the Stock Market I have watched my cat play with a bag of catnip. At first he is having fun and slowly he becomes drunk with pleasure and then finally he becomes so tipsy he falls over to sleep it off. Its Snowing The Winter Games for the Olympics are coming up soon and many will want to go to see the giant slalom event. That's the one where the skier starts off from the little hut at the top of a long slope, picks up speed and makes his way around poles on the way down. Who Knows? The Shadow knows. Remember him? It seems a shadow has a firm grip on this stock market. Trading vs Investing I often hear from people, "I don't trade. I invest. Shadow Bull As one of my regular readers you know I have been a stock market bear for the past 2 years and have encouraged everyone to put their money into a money market account or a short-term no-load bond fund and for the more adventurous what is called a bear mutual fund that goes up when the market goes down. Just being in cash as outlined in my book would have saved 40% or more of your money. What is the Most Important Indicator of All? Most stock market traders have a favorite technical indicator.The one that they have the most confidence in. Frog In The Pot You remember the story about the frog that was put into a pot of cold water on the stove. Hewas not concerned. Political Investing We have two candidates for president that have really different ideas on how to make the economy grow.Bush believes in the entrepreneurial approach. Is the Stock Market for You? Many people would like to diversify their portfolios to expand their holdings. Making it big in the stock market has been a dream for many people who want to strike it rich. Stock Market Insanity Let's first define insanity. It is doing the same thing over and over and expecting a different result. How to Read an Annual Report Every publicly traded company is required by the SEC(Securities and Exchange Commission) to provide annual reports to it's shareholders, and the general public as well. These annual reports contain very important financial information, as well of summaries of the companies progress made by the CEO, board members, etc. Is Your Garage Full Of Junk? I have a 2-car garage. There are nice shelves on one side and a good practical workbench with a vice on the other side. Commoditizing the world Let's discuss commodities; with the latest Enron situation, it is important to understand the way things work. A commodity is anything useful, especially a transportable agricultural product or mining product. Mutual Fund Honor Roll - Buy High, Sell Low by Chasing Performance Buy high and sell low -- It's not a typo.Millions of investors guarantee their failure by selecting mutual funds and stocks based on quarterly or annual performance records. Small-Cap Stocks: The Beginning of the Journey When an individual investor wants to roll up his sleeves and do some research in the pursuit of the next big winner in the stock market, the place many start is in the small cap sector.As with the other capitulation sizes (capitalization is a stock's market value), no one can completely agree on a precise definition, but corporations under $2 billion are often considered small caps. Adding Funds Someday you may want to retire and continue to live in the life style to which you have become accustomed. According to conventional wisdom you will need less money because you will have fewer expenses than when you had to go to the office every day.
|
Sponsors: Chicago Paving Contractor | Remanufactured VTL | Religious Statues | Search Engine Specialist
