Greetings Tymen, after a very busy couple weeks I finally caught up to your thread. Though a newbie on this forum, I bring over two decades of trading experience to the table. It took me a bit to catch up because I didn’t want to miss a thing along the way. Your teaching style is amazing. After almost 200 pages of posts you are still able to inspire mystery and excitement. I must admit that even though I consider my trading style 80% technical and 20% fundamental, I have learned much along the way by going through each exercise. I do hope that now that I have caught up, I can give back at least a small percent of what you have so generously donated.
As to your exercise, I remember a similar one done in a training seminar many years ago. Participants were given the chance to fund their demo accounts with monopoly money drawn from one of three sacks, without being able to see what was in them. One sack had $5000 written on the outside. The other two had question marks on the outside. Participants were told that in one of the two question marked sacks was $20,0000 in the other was only $500. They were told that if they drew the $500 they would have very little trading capital to proceed with, and odds were very great they would blow out their demo account.
Out of 20 participants, 19 went for the sure $5000 to be sure to have enough to fund their demo account. Only one guy was crazy enough to risk not having sufficient capital to continue and drew from the question marked sacks. In this case he drew the $20,000 but it was a 50/50 chance and he could have just as easily been terribly under capitalized with only $500 to start the next exercise.
Afterward they went through the math, which I only vaguely remember, and proved that the one crazy guy made the best possible decision. His expected return was about twice that of taking the sure $5000. Of course, I was the crazy guy, and I haven’t changed much since then. I would chose option 1 and control my money management by taking smaller positions, so as to get the best possible expected outcome with a small risk of major draw down.
Without doing any real math, I’d say if I normally trade 10 full lots with a 50/50 win loss ratio, I would in this case chose option 1 and drop my position all the way down to 0.5 lots, or 5 minis. If a trader normally trades 1 lot, I would say he should drop down to to 0.05, or 5 micros for this trade. But that’s just gut feel off the top of my head. I’m sure some quants among us can do better with the math than I.
I always intend to trade in multiples of 5 since I always trade the multiple lot approach you recommend, but I just take it a bit further to reduce risk and increase reward. I don’t always get all 5 lots in, but when I do it’s ooh so sweet. A really good R/R ratio can cover up lots of sins, as it turns out.
So teach, how did I do my first day in class? No worries mate, nothing you say can scar me deeper than the markets have over the last couple decades.
