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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: mappingworld who wrote (3162)	8/21/1999 6:07:00 PM
From: Bilow	Read Replies (2) \| Respond to of 18137

Hi Olga Kits; Regarding short selling fundamentally flawed companies, and the book by Kathryn Staley. It's a fascinating book, with it's best lesson about how long short investors have to wait. I believe that it is possible to short such companies, but the thing you have to have is the financial ability to wait an incredibly long time. PRST is a great example of a overhyped company that made money for the short sellers, but what a ride. (Look at 5 year chart to appreciate what I mean.) The fact seems to be that Wall Street takes a long time to come to its senses. It gets back to the most important rule of trading. The cardinal rule of trading is to put 1% or at most 2% of your equity at risk on each trade. This is the only way to avoid Niederhoffering yourself, over the long term. It was so sad to see him have to sell off his collection of silver trophies &c. I should mention that the vast majority of the traders that have wrecked their account didn't do it on a single trade. Nor did Niederhoffer. His accounts were down for the year before that late October day in 1997. Perhaps he put too much at risk because he "wanted to make it back." Anytime a trader gets the feeling that he "wants to make it back," it is time to close his positions and walk away for a while. Every trade is a new trade, and you have to forget your wishes. Let the market tell you when to get out, not your memory of what happened yesterday or earlier today. Most traders that destroy their accounts put too much risk on a series of single trades (i.e. overtrading) and get flushed out of the markets when they have a series of bad trades. As a scalper, I generate huge amounts of trades, and therefore, huge amounts of statistics on trades. My trading is very streaky, and my guess is that most scalpers are the same way. The long term traders are presumably also streaky, but it would take too many trades (say 100), over too many different market conditions in order to get decent confidence limits on whether they are streaky or not. For those who really care about their trading, the book Mathematics of Money Management has statistics in the first chapter that will allow you to analyze your own streakiness. Basically you take the number of trades, the number of "streaks", the number winning, the number losing, and compute out a number that approximates a normal distribution. You then compare that number to a table to figure out whether you can reject the null hypothesis (that your trading produces random length streaks). I am explaining it a lot more complicated than the book, which is for traders, and is not mathematically difficult. If it turns out that your trading is streaky, than it is profitable for you to increase your share size when you are in a good streak, and decrease it when you are in a bad streak. This is something that you can backtest against your own trading results, especially for a scalper who closes one trade before he goes on to the next. -- Carl