Trading '******** de Jour'

Occasionally whilst sitting waiting for breakfast after working out I will stare aimlessly about and happen to read bits of the paper over someone's shoulder to find out what the ******** de jour is.
I briefly spied a headline that stated that the market had made up all its losses from last year. More important matters – namely toast and vegemite, then promptly distracted me.

The theme of the article stuck in my head so that when I got home I looked it up on line and the basic gist of the argument was that since the annual performance of the ASX was equal to the their losses from the year before.
All was right in the world and babies could sleep soundly at night.
The only problem was that the author had no understanding of how financial mathematics worked.

If I lose, 50% one year then make 50% the next year I am not back, to where I started. I am still in a hole, albeit a slightly smaller hole but it is a hole nonetheless.
As an example, if I start with $100,000 and lose 50% I now have $50,000.
If make 50% the next year on my remaining $50,000 my account balance goes back up to $75,000 not $100,000.
A simple way to remember this is that a 10% loss cannot be replaced by a 10% gain on the remaining equity – it takes 11.1%.
These gains to loss curve gets much worse as it goes along so that if I lost 50% I would need a 100% gain to return to my starting point.

The theme of the original article highlights two important points.
Firstly, the paucity of knowledge of those who report on financial matters. Secondly, that money once it is gone is hard to replace.
This is why we harp on endlessly about controlling your losses.

Amateur traders talk about how much they are going to make, professionals talk about how much they are prepared to lose.
- Chris Tate

 

All wise see the importance of no loss; all quick hand see the cleverness of stop-loss. If taking anything in, the cost is the matter we should count on first. No-loss is impossible tactically but you have to try all for no loss strategically. You could not lose 30% of your capital every year and then still be alive in the market or life financially.

***
Not only the paucity of knowledge of those who report but the scarce of wisdom and knowledge of ourselves who could not tell the difference of rationality and insanity plus the over-simplified skills to deal with this canny Mr Market. We could not hit out every day and let the judge take the hard-earned salary away with the name of tax deduction.

Loss could not be control since once it happens we would act fearfully in bad mood. In most of case it turns back to control us. Human could not do his job properly to lose too much.

***
Amateur traders talk about how much they are going to make, professionals talk about how much they are prepared to lose, the great talk about strategical profit goal when fiddle with the chances and risks under the flag no losses with all of measure.

So amateur become the denominator to support the market by paying the fees and burning the money. Professionals get winning bigger than losing parts based on their skills. Great hits out at the time they should hit out with great back up force to magnify the winning and overwhelm the losses for profit.

Amateur are brave solders and their duty are fighting for the ways; Professional are the officers who monitor the amateur and take some bonus into their own pockets. Greats are strategic players with the bottom-up or top-down views without losing the touch of the roots of the reality.

So in the same market different people play different parts which is voluntary and is matched perfectly between the personal characteristics with the market reality. You can not drive the billionaire car and then what you could drive? No car could be driven by you? You are amateur and solders to fight! You should be very tired, perplexed, and frustrated. It is your fate!

Somebody manipulate the market? No! If we are traded in we manipulate for it as volunteers!

More thought in http://wdongli.wordpress.com/