The coin toss

Coin_jmo2079l_2Let’s say you toss a coin – you know nothing about the direction of the markets; heads you buy, tails you’re short. Let’s add that you will place a stop order 2% away from the transaction price to bail you out of the trade, as well as a limit order to take profits 6% away from that same entry price.

Basically, I’m saying I have no edge, chances are 50-50    anything better, 60% would be an edge. I’m also saying, I will only risk 1/3 of the potential winnings. So, considering slippage and commissions, one win will allow me to trade at least two times.

I’ve called your attention to this very simple system because it underscores several facts, countering the disadvantage of a non edge position:

  • On entry, it’s prudent to also add your exit orders. Of course, this means, you’re not impulsively barging into the trade   market makers will do their utmost to lure you into the wrong trade.
  • A 1:3 proportion of loss to winnings is practical; you must keep your losses on a tight rein and
    allow your winners to blossom.
  • Stop placement is a complex endeavor, which mostly has to do with analyzing the average true range of the underlying, supports and resistances, and your personal risk aversion and
    size of trading funds.
  • The size of your position should also be a prudent percentage of your total trading assets, a
    smaller size allows you to take a greater number of losing trades   betting the
    house on one trade is a sure road to the poor house.

 
Anyhow, I assume we will visit many times in the future stops and position sizing, there’s a lot to be discussed…

 

Happy trading!

Be careful.