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Online Share Trading

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risk vs reward

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Not applicable
I have been doing a lot of work trying to replicate the random entry theory lately and my observations make for interesting reading. Virtually any buy condition has around a 50% chance of making 5% as it does of losing 4%. There are very few conditions out there with less than 40% chance of hitting your 5%. Now a huge number of buy conditions give you at least a 30% chance of hitting 9%. However, if you apply the conditions across a basket of stocks, the results are pretty dismal. Moral of the story - 1) stick to the same stocks all the time - jumping from stock to stock significantly increases your risk of loss - and it prevents you from adjusting your entry on your favourite stock (if you apply the 6% rule). 2) stick to your stoplosses, and don't try to predict them getting taken out - you will be wrong 50% of the time -and that 50% could be the big one - the type of trade that really moves the portfolio. I have calculated that the number of times I have psyched myself out of my position, and exited early have cost me at least 20% in profits - and very, very few times has my early exit been right
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18 REPLIES 18
Not applicable
A caveat to the random entry theory - is that the market has an inherent bias to the long side - almost every entry system long, when reversed, produces significantly worse results going short.
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eddy66
Super Contributor
Thanks tjoppie,I enjoyed your post!
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Not applicable
Shorts are short, and longs are long
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Not applicable
Skaaptjop,if you are using MA,s to enter and exit, it is not possible to exit early.Because MA,s are lagging indicators,you will either have the problem to exit late.This you can solve by exit when the price goes through the MA,s.With that you will score a day or two before the MA,s confirm the exit/entry.OMO
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SimonPB
Valued Contributor
great post, and yes market has a bullish bias .. just look at any index chart .. the bias is clearly up (except of course for the DJ which is sideways for a decade, six months and two weeks) ..
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john_1
Super Contributor
You are absolutly right Skaap.. It is the single biggest reason trading is not good for your portfolio...with every trade you are renewing you risk of losing the maximium loss you are prepared to take(stop loss distance is at a maximum at point of entry)... that is why trend following works because once in the trade you try to stay with the trade as long as possible..ie the point of the trade is not to trade. As for anticipatong stops that true also..the thing I have always stuggled with in futures trading is at what point do you move the stop to break even...while still trying to stay in the trade..if most trades will net you a few points.
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louisg
Super Contributor
Would you put that down to inflation?
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john_1
Super Contributor
yes, and the fact that listed companies strive to make a profit.
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Not applicable
John, I subscribe to the rationale that holding a share is almost the same as buying at that point - because the belief (or system) is telling us to go long. The only difference is that once you are holding - transaction costs on the buy are not applicable - so you have a 0.4% advantage over the buyer at that point. Once you move your stop up, you are effectively redeclaring your total portfolio - so the risk is the same as buying at that point.
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TOPIX
Regular Contributor
Now, if you stay in a position for 1 decade, 6 months and 2 weeks, you're not a trader - you're not even an investor. Over the past 3 months the DJ is +18% and STX +12%. Over the past 2 months the DJ is +5,6% and STX +2%. Bias is still up for both but the DJ is very tradeable.
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Not applicable
No, I put it down to a stock market's behaviour in a down cycle is radically different to its behaviour in a bull run. In bear markets investors are inherently biased towards future profit - but are inherently reluctant to sell at the top - because of the belief that shares will go higher
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john_1
Super Contributor
yes and no because once you enter its your capital at risk, once you move into profit its growth at risk, the same but diffrent.
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SimonPB
Valued Contributor
not trading, sure .. investor, of course you are .. what does the industry tell you .. it's mot timing the market, it is time in the market ..
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Not applicable
or as the Thai's would say "Same Same but Different" ;-), that phrase always amuses me when i visit that side of the world....
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Not applicable
Ja John, pardon me for getting philosophical - but you have touched on quite a strong point there - should risk only apply to your capital - or your growth as well. This is important - because the former defines your entry strategy - and the latter your exit. Since the random entry theory implies that your entry is basically irrelevant - the exit strategy starts to take on greater importance
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john_1
Super Contributor
yes I agree and thats when the buffoon benchmark kicks in...he has compounded at 22%, so first point has to be what will it take to compound at 25% and the rest is cream.
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john_1
Super Contributor
your thinking deserves a more carefull reponse assuming the 2% rule how many trades of 5% gain/10% gains/ 15% gains do you need to make in a year to get a compounded return of 25% . Then one can start to plan a stratergy that will fit.
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john_1
Super Contributor
Capital is more NB because there WILL alsways be another trade provided you have the capital therefore the growth will come. That is why we spend time to try to increase the odds of a 50/50 trade..
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