Profitability in trading is not so much a function of frequency of getting it ‘right’, but rather a matter of discipline and weight when getting it ‘wrong’. In my most profitable periods, I was generally ‘right’ about 40% of the time or less, but the super-strategy of stop-losses, halving-out profitably, averaging down, and many other techniques, as well as good old-fashioned cutting the position quickly when it no longer smelled ‘right’, made the difference. Again, I suggest that money management…is much more important than the naive reliance upon a system [of so called high accuracy picks].
The Balloonist & the Man on the Ground
A Balloonist was flying in a hot air balloon and realized he was lost. He reduced altitude and spotted a man on the ground below. Lowering the balloon yet further, he shouted: Excuse me, can you tell me where I am? The man on the ground explained, You are in a hot air balloon, hovering 10 meters above this field. I can discern that you are a risk manager, bid the balloonist. Indeed I am… replied the man on the ground. How did you know? Well, offered the balloonist, everything you have told me is technically correct, but it’s of absolutely no use to anyone. The man on the ground postulated, And you must must be a trader. And indeed I am… confirmed the balloonist, but how did you know? Well, deduced the man on the ground, you don’t know where you are, or where you’re going, but you expect me to be able to help. You’re in the same position you were before we met, but now it’s my fault.
A group of traders took it upon themselves independently to measure the height of a flagpole. Accordingly, they equipped themselves with ladders and technical tape measures, and eagerly sought out the flagpole. Yet the flagpole would not admit easy measuration: They kept dropping the tapes and falling off of the ladders. Confusion reigned, and it appeared that failure was imminent. A quantitative analyst and modeller happened upon the scene and immediately discerned what they were attempting to accomplish. He walked over, pulled the flagpole out of the ground, laid it flat, measured it from end to end, gave the measurement to one of the traders and walked away. After the quantitative modeller had left, one of the traders turned to another and laughed, is that not just like a quant? We’re looking for the height and he gives us the length.
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