Tue, 18 September 2012
It's common knowledge that if you throw a lobster into a pot of boiling water it will scream for its life. However, if you put the lobster in cool water and slowly bring it to a boil the lobster will accept its fate. Michael Covel notes that this is the scene for many investors today: they're like the live lobster in a pot of cold water as it's coming to a boil and they don't know what's coming. Covel presents this idea and several others in the context of gambling, chance, and uncertainty. Gambling can be a pejorative term for many, but Covel relates it to trading. Covel discusses an article entitled, "The Illusion of Control: Dancing With Chance" and relates its ideas to trend following trading. Covel also discusses a TED video from Dylan Evans. Evans talks about three different types of gamblers: problem gamblers, leisure gamblers, and expert gamblers. Covel extends Evans' categorization to traders. These different types of gamblers play for different reasons, handle profit and loss differently, and bet on different games. Are you a problem trader, a leisure trader or an expert trader? Do you trade for fun or for money? While problem gamblers will bet the farm, leisure gamblers know their limits (using a nascent kind of stop strategy), and expert gamblers aim for profit. A problem gambler will bet on anything, but an expert gambler will only bet on games with an element of skill. Covel also analyzes Evans' three ways to make decisions: setting a threshold (how much are you willing to lose?); bet sizing (how much do you bet on each trade?); and the expected value (if you follow your strategy, what is going to be your average winner and average loser?) If you look at the market price of a diversified portfolio of markets, have an entry and exit strategy, and have a bet sizing strategy, then you can make money over the long haul if you have a positive expected value. Please note: Michael Covel quotes Christopher Hitchens in this episode, which contains an f-bomb. Special Offer: receive free DVD delivered to your home or office: www.trendfollowing.com/win.