Now, I want you to use your wonderful imagination because in this vessel, we have 100 1 Rand coins yeah, see them, right now on every decision, on every trade the are two decisions one; is the damn thing going to go up or is the darn thing going to go down Barry already alluded to the concept of going short which might be new to some of you but you can take a bet that the markets are going to fall and if it does fall, you're gonna make some money, so what's the first decision so the man in the green, heads or tails? tails, markets gonna fall, the bear in the green we've got a hundred coins, the second decision ladies and gentlemen, is how much do you wanna bet you can bet one coin, you can bet five coins or in the parlance of the commodity futures market you can bet the farm the whole bloody lot farmers love betting the farm, okay so the man in the green says the market is going to fall, tails how many would you like to bet madam? one?
five? twenty? 75?
20. okay, so let's trade what we're doing is we are simulating a trading system that is right fifty percent of the time that makes us twice as much when it's right than it loses when it's wrong I assure you that if you are a day trader in the forex market you would sell your granny for that system okay, your granny because most intra-day systems will risk 30 to make 50 and if the vendor is honest it is not right that much more than 50 percent of the time so the man in the green, are you feeling lucky lad? okay, don't take it too personally man that's not a great throw pound coin is much easier sorry mate, it's going up you lost, sorry he bet that it was going to go down so 20 gone and we've good 80 left the man in the red, heads or tails?
you sir, you will never wear that red pullover again mate heads or tails? pardon? heads we've got 80 coins left the man with a cold head, with a cap on remember John Wayne's last movie where he sees a guy coming over and he says "is your head cold" we have got 80 coins left how many would you like to bet?
pardon? 40 he says, okay this trade is totally independent of any other trade that you're ever going to take in your life this is the first of the 10,000 trades that you're gonna take between now and death you said heads? hey man let's see if I can get this right that is an awful throw pound is much easier that is better heads is correct so we get 80 and 80 plus 80 = 160 we are ahead of the game now folks, the man in the red was lucky unfortunately what is the probability of a bad one?
a half 1/2 Now, what is the probability of two bad ones in a row? a quarter, 1/2 times 1/2 which is 1/4 now, in a 50% system unfortunately, you get two bad ones every four trades ladies and gentlemen if you were to bet 50 percent of your coins on any one trade you go bankrupt every four do you understand that? gets worse what is the probability of three bad ones in a row in a 50% game?
1/2 times 1/2 times 1/2 which is 1/8 that means throw a few coins when you get home that means that in 8 throws of the coin or 8 trades in a 50% system you have a cluster of 3 bad ones in a row that means ladies and gentlemen that if you were to bet 1/3 of your coins on any one trade you go bankrupt every eight okay and most people go bankrupt because they bet far too much on any one single trade now, the bet size is the difference between your entry point and your stop loss, right so if you buy a share a R10. 00 and you've got a stop loss at R8. 50 if it falls from R10 to R8.
50 that's the bet size okay, am I correct GT gentlemen? I think I am so unfortunately there's massive paradox here because you do the fundamental analysis you do the technical analysis and you're sure the damn thing is going to go up yes, that is why you are putting the trade on in the first place so if you're sure it's going to go up why not have a big bet let's accelerate the process of wealth accumulation so you decide to trade far far too big and then all of a sudden you're gonna get run of these bad ones now, if you don't believe me here is what I want you to do tonight go to Monte Casino, who goes to Monte Casino? anybody?
all right, you get to the casino tonight lads you go to the roulette wheel it's a 50% game equal number of blacks and reds and there's a little white ball which is GT's **Broker** cut that's the house edge, okay and you look at the scoreboard down at the end and you're gonna see long runs of red and long runs of black those clusters are real and it's this clustering effect that makes playing the game so difficult because you get long runs of good trades where you think you're God and long runs unfortunately of bad ones where you feel like something that's under your shoe, okay now, the first objective ladies and gentlemen is to live through the clusters arithmetically that you don't go broke in them okay, because you can quite easily have a cluster of five bad trades am I correct? sure 5 bad trades happen on 50 percent system every 32, all right so if you were to bet 20 percent of your loot on any one particular trade you go bankrupt every five and there is a big problem here so there's a chap called Ralph Vince and he's written a long series of books called "Effective Portfolio Manager for Traders" thick thick thick thick books they've got them in Investec they've got them at Absa but not bedtime reading I assure you the gist of all of this is that, you should not risk any more than one to two percent of your kitty on any one trade so, if you've got a R100 000. 00 in your account and you're new to this you should not bet you should not risk any more than one to two percent of that in any one trade so the maximum loss ladies and gentlemen that you ever have on any one trade should never be more than R2 000.
00 and that will keep you alive okay that will keep your alive but there's a big problem because we have runs of good ones and runs of bad ones now between your ears there's a thing called the pituitary gland and that pituitary gland pumps out muthi when I'm in England I have to tell them what muthi means that pumps out, all sorts of hormones into your bloodstream and these hormones are actually responsible for every emotional state that you have so when you fell in love with that young lady of yours those hormones were just pumping around your system, all right when I leave the gym folks, I'm no longer 63. I am 17 again and back in the raw marines and as I say, i can be quite stroppy when I leave the gym okay, now similarly when you have one good trade two good trades, three good trades that pituitary gland is hard at work, okay and it's pumping this muthi into your bloodstream and you change completely I know people that after one good trade they're a different person, okay certainly after two, after three winning trades they are in the bar buying drinks and the sods never bought him a round their life what happens is that after a series of winning trades we become euphoric and if you look in the oxford dictionary the definition of euphoria is invincible so what happens is that, you say sod all that position sizing let's have a big bet and risk managers in the City of London are actually taught these days by the FCA to in fact, that's the equivalent of the FSB here to actually look at the traders under their control and assess their susceptibility to euphoria now you're going to find that once you get the one or two percent into your head it's in fact not the runs of bad trades that cause you to go broke it's a run of good trades because in a run of good trades you actually trade far far too big, so just be careful about euphoria now, our job is to find an edge in markets Barry's analysis of all you need is one pattern that's all, you just need one pattern to be successful the head and shoulders pattern could be your pattern he put a chart up of lots and lots and lots of patterns I love my wedges, falling wedges and rising wedges those of you who are trading Forex there's a textbook falling wedge in the EURJPY daily chart the moment also I'm very fond of my Fibonacci levels and harmonic patterns which are my own personal edge in both the stock market and the forex market but you need one little pattern you need to practice really really good money management and that just means not losing any more than 1% of your loot or at the very most 2 percent of your loot on any one trade and then the third thing is to build the discipline to just do it over and over and over again many of you will see those ghastly adverts that Allan gray put up you know those long and boring adverts Allan gray are great they've got a process that Allan gray was taught by old Templeton a lifetime ago and they do the same thing over and over and over and over again I went to one of their lectures the other night in London it is called August across there where they actually put on a case very simple similar to your case where they justified fundamentally based on value that Honda was a much better buy than Tesla okay, wonderful presently but they've got a process and they stick to that over and over and over and over again and your process doesn't your trading edge does not have to be complicated at all finding a share that's undervalued that's growing earnings aggressively and safely that's in the throes of a good trend I like always for a share to be above an 89 day moving average 89 works for me and then you need some little pattern to finesse the entry it could be a triangle it could be an ascending triangle there's a heap of them and that simple book of charting will get you most of the way and then don't lose any more than 1 or 2 percent of that on any one trade and then you need to build the discipline ladies and gentlemen can discipline the built or is it God given? of course it can why is an old man like me in the gym this morning at half past six?
why? twice a day, okay did it take any discipline to get me to the gym this morning?
