The Numbers Game in Trading

20070319 17;15. FKLI trend day up, mirroring the strength of the regional indices. "Bad" news supposedly broke in the morning on the China interest rate hike. However the market made a "news reversal" to end as a classic trend day up.

Many who dwelve into the financial markets, searching for "instant gratification", do so without understanding the numbers behind the game. Read and enjoy this written by K Lien & B Schlossberg, a couple of Forex traders:

In his seminal book on trading Market
Wizards, Jack Schwager interviews one
mysterious currency trader with penchant for
meditation and Sanskirt who is uncannily
successful in making profits for his
employer. The start of the chapter contains
the following exchange:

Schwager:

How do you recognize when (your trading
power) goes away?

Trader:

When I am wrong three times in a row. I call
time out. Then I paper trade for while.

Schwager:

For how long do you paper trade?

Trader

Until I think I?m in sync with the market
again. Every market has a rhythm, and our job
as traders is to get in sync with that rhythm.

The trader?s identity has never been revealed
for certain, but I believe that it was Andy
Krieger who said those words. He was so
phenomenally successful in the heyday of
interbank currency dealing that he managed
to earn 300 Million dollars for Manufactures
Hanover ( which has since merged with
Chemical, which in turn became Chase, which
is now JP Morgan Chase) in just one year.

This small snippet from 300+ page book is
almost a throw away paragraph. Few people
ever recall it. But ever since I've read it
many years ago I've always thought those
words held special meaning. Now, I am even
more convinced that this little exchange is
perhaps the wisest advice ever given to traders.




Losing streaks are universal in trading.
Anyone who has day traded for longer than six
months will recognize that fact. George Soros
lost $1 Billion dollars in the Russian ruble
fiasco, but everyone remembers him as the man
who broke the bank of England. Michael
Steinhardt was decimated in the emerging debt
market meltdown of 1994, but he is revered as
the one the greatest hedge fund managers of
all time. The reason most novice investors
and traders never appreciate the true risk of
the game is because they rarely see it.
Typically, most traders simply look at their
end of the year statements and only see the
end result. Rarely do they realize that their
money may have suffered a 20% loss sometime
during that year.