Friday, June 19, 2009

The cancellation betting system and trader capitalization

An Excerpt from a recent post at Traderfeed-
The turning point for me came several years ago when I had a heart to heart and confidential conversation with the founder of a large retail brokerage firm. He expressed interest in my work, because he wanted to see more small traders succeed. He stated, based on his company's research, that over 80% of all traders blew out their accounts well within a year of opening them up. That percentage, moreover, was much greater for small accounts, he pointed out, because those accounts took on too much risk in an effort to generate financially meaningful returns. When I asked the brokerage executive how many small traders (i.e., those with less than $100,000 of cash in their accounts) sustained a living from trading, he said he had never encountered such a situation. Yes, there will always be outliers who make outsize returns for a year or two, but sustaining such performance is far, far, far from the norm.

Summary- Most traders have less then 1 year of experience, are under capitalized, and end up losing there money.

This is not a big surprise. For example, compare trading to roulette, you have a 50.5% chance of losing against the house and given a long enough time (considering the houses' pockets are larger than yours), you will go broke.(with the exception of those physicists that cheated with the computer).

How does capitalization make any difference in trading? Take a look at the Cancellation Betting System. The smaller your starting bank roll, the faster you will go broke, obviously, but the odds are much higher against you because your average betting unit size is a much larger percentage of your starting bank roll compared to that of a well capitalized trader.

This leads to the question, if in gambling, the house has 0.25-0.5% edge over the players with essentially limitless capital and time, what edge does Mr.Stock Market have over Joe Trader?
While there are many similarities between gambling and trading, the stock market has many other variables to consider; moreover, there are certainly setups in the stock market statistically shown to have a much higher favor in one direction, but it is still up to the astute trader to take advantage of such trading opportunities.


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