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BookingAlpha Option Trading Advisory

Tuesday, June 7, 2016

The Uselessness

I stopped venerating trading quotes a while ago. I just had to. I started to find them so vague, so full of contradictions. More importantly, rarely ever useful.

It occurred to me it'd be fun to take a look at some of them and keep this article light. Not too much brain power needed today. This is just for fun and relaxation. So, I started to compile a list with some of the most famous ones, and my thoughts on them, just for fun.

Here are a few:

Cut your losses short and let your winners run.
Sounds solid, but it carries a hidden truth. You will have many more losing trades than winning trades using this approach. Get ready. Most traders cannot mentally handle it. This dogma also indirectly implies that you should not adopt strategies where the average winner is smaller than the average loser, totally negating any other possibility of making money in the markets.

Nobody goes broke taking profits
A totally accepted quote, which is in frank contradiction with the previous one. How can you let winners run if you are constantly taking profits? This axiom promotes always taking your gains, which by definition means "get out". How can a winner run this way? Be aware that, despite the degree of contradiction between quote 1 and quote 2, the same person may throw both quotes at you with total conviction at different points. This quote promotes the game of cutting winning trades, which eventually becomes the game of making pennies. Although you may not go broke the exact moment you make a penny, the truth is that the size of your winners may not be enough to overcome the inevitable and guaranteed losses down the road if they become too minuscule. The smaller the size of your winners, the more infrequent your losers will have to be. So, although you may not go broke the exact day you close a trade for +$10, in the long run, yes, you may go broke when your winners are not enough to compensate the inevitable losses. You can easily go broke when you put yourself in a situation where you absolutely need 19 winners out of 20 trades in order to be profitable overall.

The Trend is your friend.
No, it's not. It promotes uni-dimensional traders that can only make money one way. The trend is only your friend if you are a long term investor or a trend follower who happened to pick the correct direction. In almost all other strategies something else other than the trend, is your true friend. And even if you make your best effort at making the trend your friend, it is a friend that will disappoint you more often than not.

Bulls make money, Bears make money, Pigs get slaughtered.
No! Who the hell came up with this one?!? Everybody gets slaughtered!
This quote was invented to make everybody feel happy about the markets, as everybody thinks about themselves as either a Bull or a Bear but never a Pig. So, everyone listening to this quote will feel blessed and happy about his life choices.

Well, I take care of my risks and consequently the profits take care of themselves.
It makes sense at a general level. But perhaps a rookie hearing this, thinks, "wow, all his losses are tiny. He never lets a single loss become even 1% of his capital"
However, if you take too much care of your risk, and cut your loss every time a position is losing money, guess what? Profits will never take care of themselves because you will rarely ever have a chance to have a winner given that almost all positions show losses at some point. If you cut them all, afraid of them becoming larger losers, you are removing every chance to make profits as well and just banking tiny losing after tiny losing trade. Also, it you apply too many hedges to protect your positions and nullify your risk, the cost of those positions ends up eating too much of your potential profits. For profits to exist, the existence of risk is essential. There is no one without the other. I have used this quote myself in the past. I don't think it is the most brutal of all. Far from that, but perhaps we should say, "I take care of excessive, or unreasonable risks".

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1
This one can't possibly be serious. I always think Buffet was joking when he said this and everybody incorrectly thought he was being serious. Being as popular as a rock star, cheerleaders adopted this as Gospel.

It's impossible to "never lose money" in the markets. Too much noise and randomness. It's literally impossible to never have a losing position.

These are just a few for a random and boring Tuesday afternoon. We could keep going on, and on, and on.....

Now, not all is bad, there are indeed a few great quotes full of wisdom and humor. I really like this one for example:

“I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.” - Buffet

Feel free to share the ones you hate or like the most in the comments section. Especially the ones you really hate.

See you on Saturday, with a real portfolio analysis this time :)


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