The cost of £1

After reading about JC’s (NYSE Scalper) tough trading day, I thought I’d share my own tale of woe.

Toward the end of the Wednesday’s trading I had profited by £149. There were no more opportunities but I wanted the extra £1 so I could finish the day with a full £150. I figured I’d place a very small trade on GBP/USD and so long as it moved 4 pips in the money I would close out with my £1 profit. Is that really too much to ask? I had no trading signals to trade off, but I knew that cable moves this much every five minutes, so if I set a comfortably wide stop, GBP/USD should eventually hit my take-profit level. It was just £1, after all.

I was trading with all the wrong motives, essentially taking an uneducated punt on the market. Of course the probability of making my £1 was very high, probably around the 80% mark, but the expected return (probability x payoff) was negative – even though my stop-loss was placed far away from the spot price, if it got hit my loss would be around £49. If the market is random, the expected return of this type of trade is negative because of the commission/spread.

Of course, I was shown the error of my ways when the price immediately moved against me and never came back. Even though the loss is negligible in the grand scheme of things, the experience serves as a useful reminder of what trading is not about.

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6 responses to “The cost of £1

  1. This week the trading blogosphere is not too pretty and I suspect that people are exhibiting their bad nerves from the last ten days….not just your error or JC’s error but long argumentative comments and digs at other trading blogs. It is all too easy to get sloppy, even for one pound, as you exhibit, and with bad nerves it may be even easier (which may result in poor judgment as well). My answer for myself has been extreme caution but I speak only for one, as I am weary of paying the high costs of mistakes. Maybe visit your suggested http://www.lime.com? We do live in interesting times, boredom is at bay.

  2. I hear you nonadamas. I think a lot of players may have got too comfortable with their styles/systems in the climate of low volatility, but no mode is permanent. The change in the market dynamic require adaptation and patience.

    I like your approach of extreme caution. There is nothing like a strong defence.

  3. Caravaggio, first off, great name. My fine-arts prof use to pronounce it ‘Caravaaaaaaagio’, he was completely smitten by the man. Wikpedia: ‘Caravaggio “put the oscuro (shadows) into chiaroscuro.” Chiaroscuro was practiced long before he came on the scene, but it was Caravaggio who made the technique definitive, darkening the shadows and transfixing the subject in a blinding shaft of light.’ You must be looking for those light shafts as a trader, as I am, but I spend far too much time in the shadows.

    Your ‘tale of woe’ resonates, how can we be so stupid! Well, I think most of us trade for the prospective returns, and if so, the carrot is always dangling out there. Ask a business person what the goal is, it’s to make more money; for a scientist it’s to win the Nobel prize. We as traders are like the business person, more money please. So there is no shame
    to try to round the day’s wages to L150, but perhaps you should have aimed higher, not a specific monetary target (a lousy quid no less) but to maxing out for the day and pushing the envelope.

    Thanks for the link to Victor Neiderhoffer’s blog, ‘Daily Speculations’. There’s much to digest there, some of which is edifying, some of which is ludicrous. The ludicrous includes comments from someone named Gary Rogan who, despite years of evidence of massive failure, predicts that Bush will succeed in Iraq! I would ask Gary Rogan to make a prediction about the near term direction of the stock market and I will make a large bet the other way. The fool says that Giuliani is the ‘odds on favorite to win the Presidency’, as if the Democratic nominee will stand no chance. A Republican who is pro abortion and pro gun control is also a future loser.

  4. I mis-spelled Victor Niederhoffer’s name, apologies Vic. Upon further reading of his media coverage items, I conclude that he’s some kind of crazy genius with a penchant for speculating. He uses what he perceives as the realities of horse race gambling as an analogy for his investment approach, but his faulty logic proves only that you don’t have to be right about everything to win as a market speculator. He’s a winner but for the wrong reasons. Victor’s argument re horse racing is that horses at low odds don’t win commenserate with the odds because the trainer will wait for a better opportunity (ie. higher odds, where the trainer can win a big bet). Rubbish. Favorites (low odds horses) win far more than any other odds category, and as I prove in my book Horse Racing Logic (out of print but sells used at Amazon), betting the favorite in every race will likely provide a return that is better than any other method that requires a bet in every race. This is true because the lowest odds horse in a race is often underbet, and high odds horses, on average are way, way overbet. Anyway, Victor is a winner, but he’s a winner for reasons other than his understanding of how the game is played (ie. he is blessed with a knack). We all should be so blessed.

  5. IPDaily,

    I chose the name Caravaggio because he, like so many artists, was a seriously troubled individual, much as I was when I started this blog.

    It’s true what you say about the monetary target. It wasn’t a wise move. I should have pushed at the right time, not for the sake of it. Fortunately, it didn’t cost me too much.

    Re Daily Speculations, some of the contributors are ‘out there’, but there are so many people writing for the site that there is always something to think about. The political angle of the site is it’s worse aspect, in my view.

    My favourite DS writers include Jim Sogi, Haany Saad, VN himself, and the Hobo who doesn’t even talk about the markets, but it’s a welcome diversion. Because the contributors seek insights far and wide, some of them may not transfer over so well to trading, and as you point out about the horses, they are not always correct, but I still think there is much to learn (especially about humility and courage) from the site. It may be worth writing in with your comments – they usually publish good comments or may respond directly.

    All the best, from another trader searching looking for the light.

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