Your comment tells me you are new to trading so I will try to explain things as clearly as I can.
My "thinking" is the same thinking I use to buy any stock, which is to purchase from the candidates which meet my entry trigger.
My entry, along with the exit, and money management, make up my system. Now this system has been backtested over several years and hundreds of trades, and different timeframes and market conditions. The results tell me that the probability of a stock that meets my entry being closed out in profit is about 50%. So not much better than a coin flip. This is now how I (will) make my money.
My system, being a long term trend following system, makes money by cutting its losses short and letting its winners run. Average winning trade is about four times the size of the average losing trade.
To perhaps answer your question more directly, how was I to know that 4.43 would have been the top?
Unfortunately, at the time I took the trade, I had no way of knowing what the price will be in a week, a month, or a year.
The price only seems high in hindsight, when looking back in retrospect. Hindsight is a beautiful thing but quite useless when it comes to real-time trading.
OK Nizar your right iam new to shares but im very experienced with gambling and the "systems" used by gamblers.
U trade a "Mechanical system" is that right...is that what its called? u get a trigger to buy and away u go..im just thinking that whatever trigger got u to buy at the top, is a trigger that needs work.
Ive held LGL since July, 2 days before the correction and its was toppy above 4.30 hell it was toppy above 4.05
I understand that a system is used by people to eliminate the human aspect to trading/gambling and thats understandable.
Okay let me teach you something about the way mechanical systems work.
To evaluate the profitability of a system and how much money it will make per year, you need to know 2 things:
1. Its expectancy. This is how much you can "expect" to make per trade. Positive expectancy systems make money, and we know this through extensive backtesting and system validation.
The formula for expectancy is as follows.
Expectancy = (Aw*Pw)-(Al*Pl) where Aw = average win size Pw = probability of a win Al = average loss size Pl = probability of loss.
A system with an 85% hit rate and an average win 1.5x average loss has a much lower expectancy than a system with 35% hit rate and an average win 8x average loss.
2. Trade frequency.
So you can see from the above that my the entry only influences the probability of a win and this only makes up part of a system. Average win in relation to average loss, and trade frequency are also important factors that must be considered.
For example, no use having a system that wins 90% of the time and has an average win being 20 times average loss if the system only traded 4 times a year.
I know somebody who has been trading their system live for the past 5 years and their win% is about 35%. YDue to its regular trade frequency and average win being more than 6 times average loss, the system is very profitable and has made its owner obscene amounts of money.
I started out in trading early 2005 through managed funds.
November 2005 started in stocks through fundamental analysis.
After the 2006 May correction I learnt to use stops!
A few months afterwards I read Michael Covel's book and it was a real eye opener for me into what can be achieved through mechanical systems trading.
In 2009 I started looking seriously at short term automated trading through AmiBroker/IB as this would allow for all the benefits of short term trading (smoother equity curve, faster recovery from drawdowns, etc) without the associated screen time.
4 comments:
Hi Nizar
Noticed u brought LGL at the top 4.43 what was your thinking there.
A good/cheap entry is so important to me.
Hi Darren,
Your comment tells me you are new to trading so I will try to explain things as clearly as I can.
My "thinking" is the same thinking I use to buy any stock, which is to purchase from the candidates which meet my entry trigger.
My entry, along with the exit, and money management, make up my system. Now this system has been backtested over several years and hundreds of trades, and different timeframes and market conditions. The results tell me that the probability of a stock that meets my entry being closed out in profit is about 50%. So not much better than a coin flip. This is now how I (will) make my money.
My system, being a long term trend following system, makes money by cutting its losses short and letting its winners run. Average winning trade is about four times the size of the average losing trade.
To perhaps answer your question more directly, how was I to know that 4.43 would have been the top?
Unfortunately, at the time I took the trade, I had no way of knowing what the price will be in a week, a month, or a year.
The price only seems high in hindsight, when looking back in retrospect. Hindsight is a beautiful thing but quite useless when it comes to real-time trading.
Thanks for dropping by.
Nizar.
OK Nizar
your right iam new to shares but im very experienced with gambling
and the "systems" used by gamblers.
U trade a "Mechanical system" is that right...is that what its called? u get a trigger to buy and away u go..im just thinking that
whatever trigger got u to buy at the top, is a trigger that needs work.
Ive held LGL since July, 2 days before the correction and its was toppy above 4.30 hell it was toppy above 4.05
I understand that a system is used by people to eliminate the human aspect to trading/gambling and thats understandable.
anyway happy trading.
Hi Darren,
Okay let me teach you something about the way mechanical systems work.
To evaluate the profitability of a system and how much money it will make per year, you need to know 2 things:
1. Its expectancy. This is how much you can "expect" to make per trade. Positive expectancy systems make money, and we know this through extensive backtesting and system validation.
The formula for expectancy is as follows.
Expectancy = (Aw*Pw)-(Al*Pl)
where Aw = average win size
Pw = probability of a win
Al = average loss size
Pl = probability of loss.
A system with an 85% hit rate and an average win 1.5x average loss has a much lower expectancy than a system with 35% hit rate and an average win 8x average loss.
2. Trade frequency.
So you can see from the above that my the entry only influences the probability of a win and this only makes up part of a system. Average win in relation to average loss, and trade frequency are also important factors that must be considered.
For example, no use having a system that wins 90% of the time and has an average win being 20 times average loss if the system only traded 4 times a year.
I know somebody who has been trading their system live for the past 5 years and their win% is about 35%. YDue to its regular trade frequency and average win being more than 6 times average loss, the system is very profitable and has made its owner obscene amounts of money.
Nizar.
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