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Electronic Arts Inc. (ERTS) Message Board

  • take2d2 take2d2 Feb 27, 2007 11:43 PM Flag

    ok im tired of waiting

    and I said I would post this if flyerd didn't or couldn't.

    The 6 parts of a complete trading system are:

    Markets - what to buy or sell
    Position Sizing - how much to buy or sell
    Entries - when to buy or sell
    Stops - when to get out of a losing position
    Exits - when to get out of a winning position
    Tactics - how to buy or sell

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    • When I say system I don't mean something you buy on tv or the internet. I mean Markets, Sizing, Entries, Exits, Tactics. You do all of that. The difference between what you do and a 'system' that you haven't quantified or tested it.

      I don't believe in prediction and agree nobody knows. That doesn't mean you can't react and profit.

      Exits protect you from bad entries and big loss. Obviously if your exit strategy is bad then your system will be bad. If you get stopped out too much thats bad, too little thats bad also. Again thats why you have to test. Its too bad for you if you've only seen bad exit strategies - do more research instead of spreading ignorance. You have an exit strategy right? If you think you dont... riding your 15% per position to 0 is a strategy. Its like having a stop at 0.

      Your backtesting statement is off base. Yes unexpected things can happen. That doesn't mean not knowing previous unexpected events doesn't help. Think about this: What is the difference in backtesting up until today then seeing what happens this year, and backtesting up to a year ago then seeing what happens last year?

      There is no system that is the best and as I said it depends on your goals and personality. Just like no car is the best. Maybe your car will drive faster than the next guy but maybe it crashes or breaks down frequently.

    • I'm not arguing at all. I said they "can" work just fine. I just brought up the point that they can go the other way too by continually stopping out in what turns out to be a down mkt. �Nobody� knows if a pullback is a minor/major correction OR a bear mkt until it�s at least 25% into it. Would you actually dispute that? If the answer is yes then maybe you can tell me if this is going to be a 3, 5, 10, or 15% correction. Stop out systems can also stop out on a minor pullback and cause someone to be on the sideline when the stock pops back up during the same day or even hour (not possible?) From what I have seen the typical stop out system is unreliable in a volatile mkt which is what we are entering.

      I already said I don't use those systems and therefore haven't back tested them. Even without doing a backrest I stand by the following statement from the last post:

      "The problem is that if you a) test 5 diff variations of a strategy using that historical data for a given period of time (10 yrs, for example) and rank the results from 1 to 5 then b) test the results for a new 10 yr period you can end up with results that are reversed. That means that for any given period of time you could be using the 5th ranked (worst) method and you would not realize it until AFTER the fact when you were able to put that historical data back in and say "Oh, that's what happened, I was using the 5th ranked method for that period"."

      Are you saying that statement is incorrect (I'd like an answer to that one) and that there is a system out there that would be the best one to have been in regardless of the time period selected. If that�s the case there must be someone out there with the ability to buy the top 50 S&P stocks with pocket change.

    • why are you even bothering to argue with me when you don't understand what you are talking about?

      You are completely off base and any halfway decent entry system would be short with a gain instead of 64-80% down.

      Position sizing and money management is just part of a complete system. If you get stopped out 30 times (the exit part) then there is something obviously something wrong with the ENTRY PART of the system.

      Don't even start talking to me about averaging into a losing position. I'm not going to listen and you need to go backtest it. But first you need to learn how to backetst because you don't understand it and have a very limited view of system optimization. The markets don't change as much as you think.

    • ...continuing from Pt1

      On a side note, I believe that if you examine the data you will find that, Yes, ignorance is bliss. Take a poll from a given data group and I'll bet you would find that people have a lot on their minds and are worried about many of them (Global warming, the mkt this week ;-0, WORK, marriages, FINANCE, politics, WAR, etc.). If you asked them if they would feel more "blissful" if they could be ignorant of those things I bet the results would be overwhelmingly, YES. Therefore, the answer to the question is yes. Weather or not that bliss is a good or bad thing is another question altogether.

      We�re having a good conversation here, thanks for the discussion. I enjoy it and hopefully you do to. It�s good to get different perspectives from people to help hone an overall philosophy. It seems like most people on these boards don�t (or maybe can�t) do anything but BASH or PUMP with NO intellectual backing.

      Good investing to all!!

    • ...continuing from Pt1

      On a side note, I believe that if you examine the data you will find that, Yes, ignorance is bliss. Take a poll from a given data group and I'll bet you would find that people have a lot on their minds and are worried about many of them (Global warming, the mkt this week ;-0, WORK, marriages, FINANCE, politics, WAR, etc.). If you asked them if they would feel more "blissful" if they could be ignorant of those things I bet the results would be overwhelmingly, YES. Therefore, the answer to the question is yes. Weather or not that bliss is a good or bad thing is another question altogether.

      We�re having a good conversation here, thanks for the discussion. I enjoy it and hopefully you do to. It�s good to get different perspectives from people to help hone an overall philosophy. It seems like most people on these boards don�t (or maybe can�t) do anything but BASH or PUMP with NO intellectual backing.

      Good investing to all!!

    • Your incomplete system (not me criticizing, just using your words) sounds as good as any (�especially� in a Bull Mkt). I'm not saying a system can't help but I am saying that it can just as easily hurt as help.

      >>�Then you have bigger winners and small losers�<<

      In a Bull Mkt this may be true. However, consider the possible result of 2 different systems I'll call them #1 (ATR/stop based) & #2 ($$ cost avg/TFDTT based) during a DOWN Mkt:
      {For this "example" I'm assuming the average ATR for a stock equates to 1.5% (I'll call this n) of the stocks value. Maybe you can tell me the actual average % that it is for the 14 or 20 day period you use.}

      # 1) It all begins when the stocks in the system stop out at their 2% stop and then are re-entered at a "perceived" better price for a new trade. The process repeats 4-5 times per stock in the system (let's say 8 stocks in system). The result would be 32-40 "separate" 2% stops which would be a combined 64%-80% loss of capital without even considering commissions. I don't think it's a far fetched example because most people do not realize they are in a down mkt until it's too late and therefore would keep re-entering the trade, expecting the turn around. 4-5 cycles is reasonable to assume because at 2ATR the risk is a 2n = 3% stock decrease per cycle. After 5 cycles the stock would be down 14% ($42.94 for a starting $50 stock) which is well within the bounds of a correction.

      # 2) Alternatively, if someone buys 1/4 of a position and then buys another 1/4 after each consecutive 5% Drop he will have a full position very near the bottom. For a $50 stock it would work like this: Buy at $50, $47.5, $45.13, & 42.87. As the mkt goes lower he buys into a complete position with an avg price of $46.38 and is only down the 14% that the stock is down instead the 64-80% down using #1 strategy. Another plus is that the guy using #1 is down 14% but he owns "something". The guy using # 2 is down big and owns "nothing".

      >>"To test you have to use data from the past because data from the future is hard to get."<<

      --True and undisputed. The problem is that if you a) test 5 diff variations of a strategy using that historical data for a given period of time (10 yrs, for example) and rank the results from 1 to 5 then b) test the results for a new 10 yr period you can end up with results that are reversed. That means that for any given period of time you could be using the 5th ranked (worst) method and you would not realize it until AFTER the fact when you were able to put that historical data back in and say "Oh, that's what happened, I was using the 5th ranked method for that period". Unfortunately, it would be too late at that time because along the same lines as "data from the future is hard to get", you can't "go back in time and change your strategy to the 1st ranked method".

      >>"Maybe that 15% max percentage you use should be based on the volatility of the stock, other fundamental criteria, technical details, or perhaps the phase of the moon. Its impossible to know if you don't even test. Ignorance is bliss?"<<

      --Like I've said before, I use TFDTT to evaluate and decide "which" stock qualifies to go up to that level. I only have one (ERTS) at that level right now. Technical and, to a degree, volatility, criteria are incorporated into my TFDTT methodology.

      Pt 2 will adress the "Ignorance is bliss?" part of your quote.....

    • how about this. Lets say 1 unit is 69 shares which is 1% risk per ATR. You buy 1 unit with a stop 2 units below your purchase price (for 2% risk). Then as the stock moves up you buy 1 more unit for each ATR it moves up and increase your stop to maintain 2% risk. Do this 4 times maximum. Then you have bigger winners and small losers.

      However besides this not being a complete system, who says 1 unit or 2% or 4 times is even the best numbers to use. You would have to test with different options to know. To test you have to use data from the past because data from the future is hard to get. You shouldn't dismiss the process especially if you haven't done it or don't know how to do it properly.

      Maybe that 15% max percentage you use should be based on the volatility of the stock, other fundamental criteria, technical details, or perhaps the phase of the moon. Its impossible to know if you don't even test. Ignorance is bliss?

    • >>what the hell are you talking about?<<

      That's what I'm talking about, now we're communicating!! I like your passion.

      >>Who cares if a $50 stock has the same ATR as a $500? So what if the shares are the same. Obviously if you have only 2 variables in an equation and you keep them the same then you will get the same answer.<<

      I was referring to the fact that if the $500 stock had the potential to double the return of the $50 stock you would want to be more exposed to it but if you apply the formula to both you get the same risk exposure to each. However, I have now concluded that in order to increase my exposure to the doubling potential of the $500 stock I would just up my risk tolerance to 2% so that solves the question..

      >>About your 15% how do you know that 16% or 14% wouldn't be better returns?<<

      I don't (in the same way that I don't think you can know that if .5%, 1%, or 1.5% would give better returns unless you evaluate each of them against past performance and I don't agree with putting as much weight on past performance because, as you know, if the number 22 comes up 2 consecutive times it still has the same chance of coming up on the third spin.

      15% is just a number I decided upon that works for me. Some may go lower and some may go higher (not much higher though because it would expose a portfolio to excessive risk if someone decided to use 25% for example).

    • Good answer. I know, "oh my god, did he just say that?"

      >>because you can turn a discretionary system into mechanical once you understand its rules. Not doing that is either ignorance or lazyness.<<

      -I'd say laziness in my case.... I just haven�t made time to do more than casual research into most mechanical systems because I already feel like I run out of time each day just researching companies. It�s amazing how much time can be spent per stock doing research and I try to follow quite a few of them. That's one of the reasons I like reading what you�re doing because it�s a little bit of research from someone who uses a mechanical system. I could, and eventually may, try using my TFDTT system in the context of a mechanical system, I just haven't yet.

    • You could basically sum that up by saying the 6 parts of a complete system are common sense but I'm sure somebody made some money by selling that message to people.


      Markets - what to buy or sell ((Yep, you have to tell your broker what you want to trade))
      Position Sizing - how much to buy or sell ((Yep, you have to tell him how much you want))
      Entries - when to buy or sell ((Yep, you have to decide when to click the mouse))


      Stops - when to get out of a losing position
      Exits - when to get out of a winning position
      ((I group these two together. Yep, you have to know your upside/downside parameters. You should know what to expect in regard to these based on TFDTT))

      Tactics - how to buy or sell ((Yes, you have to tell the broker if you want to buy equities, sell equities, buy/sell options, sell short, straddle, strangle, etc...

      Basically, you can't execute a trade without going threw those processes (with the exception of your stops and exits "parts") even if you�re NOT calling it "the 6 parts..."

      I'm not trying to discredit your post so don't take this personally. I agree that for some people it's useful to see the process they need to go threw laid out in front of them in a "step by step" method but IT IS the same steps (weather consciously or unconsciously) you go through when investing general.
      Good investing to all!!

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