You could have made it a post but thanks for the detail. I think it reaffirms my new thought process. Just to clear things up I never move my stop any more. $50 risk will remain a $50 risk. So in that sense I always err on the side of extreme caution. But I have been thinking of options the exact way you’ve described. But I will be testing it over a 3 month period before I make a single trade. I am starting to believe that being a buyer of options may be much better than being a seller. Why? Because I think you make much much more. But I agree it may be psychologically taxing to see 9 losers out of 10. But I’ve been training my mind to do it.

In my daytrading, I’m starting to work for home runs and everything else in the middle being pure fluff. However, I do risk size, and my stops are neither too tight nor too loose. I also am starting to feel that these patterns we believe in are pure fluff. They make us feel psychologically better. However, in reality they may not provide us a greater than 50% chance of making money. But here is the caveat; if a greater number of people feel that it may succeed and tip the scales, then it may work in your favor at least for the short term. So it may be better to develop you strategy in a way that focuses on profiting from the greatest of people that may be disappointed. However, you will absolutely risk the chance of loosing 9 times out of 10, but, your P&L may be blacker than someone who wins 7 out of 10 times.

Thanks for the response. I hope to exchange more thought provoking strategies in the next few weeks. Also, I hope the young ones are doing well. Take care of yourself, I hope I can maintain my passions and be as good of a parent as you are when I have kids.

LP

I spent years observing the phenomenon, in myself and others, of seeking out a string of small winners and giving it all back in one big loss. I have a friend who does that to this day with what he considers to be a “conservative” covered-call writing strategy- he makes a little every month for sometimes a year or more, then gives it all back at once. But he considers this “being right 9 times out of 10″, and the feeling of being right is what his ego seeks. And that concept leads to the work of Alan Watts and others… it all kinda hooks together like a barrel of monkeys.

After Taleb, I had to go back and reconsider, especially in options trading, whether I could psychologically handle taking 9 losses for every gain, even if that gain was enough to put me in the black overall. In theory, we all could, of course. In practice, it’s been more difficult. It’s the exact opposite of what I’ve done so many times, and seems to go against human nature. But I’ve managed to pull it off some, and the last year or two I’ve ended up trading more out- of- the- money options with what I considered to be a 1/10 chance of paying off, but a likelihood of returning well over 1000% when they do. And those trades have done OK. My big options losses are still from falling off the wagon and trading “like I used to.”

You’re only headed for a blowup on any strategy if you fail to size your positions in accordance with the risk. But it’s damned hard to buy $50,000 worth of a stock one day and risk $150, then buy ONE puny little Call contract at 1.50 the next day to risk the same amount. Your clicking finger says, “Aw, go ahead and make it 10 contracts… hell, it’s only $1500 total and you can get out if it flips over on you… and besides, think how much you’ll make if you’re RIGHT!”

Anyway, you’ve got more trading experience now than well over 90% of the people who like to “talk stocks.” You’ve already proven that when your account balance disagrees with your impulse to trade more or differently, you have the acorns to back off, take a breath and change things or stop a while when necessary. That (self-discipline) is the most important blow-up insurance, and an important ingredient of long-term success.

I know I’m rambling. Sorry. Think I’ve got a little fever myself. As for your specific example of letting intraday trades ride a little looser in order to be on board for more “big ones,” I’d say be very cautious. I don’t really see that as an extrapolation of Taleb’s methods. If your trading strategies have you in stocks which often make a huge run, but you often miss out on that huge run because your stop was too tight… by all means, loosen up your stops and take a little smaller position size.

HOWEVER, in my experience, for every time I’ve failed to make a dollar by getting stopped out, I’ve failed to lose a dollar about 20 times over (i.e. it hit the stop and then went to hell with me safely on the sidelines). On a net basis, my stops have saved my ass, and loosening them would have simply added to my losses. That may be attributable to poor trade selection on my part, so take it for what it’s worth.

I think Taleb uses a strategy which loses him a dollar each time the coin comes up heads or tails, but on the rare occasion when there are eight heads in a row, it pays him ten thousand dollars. He seems to spread a ton of money across a ton of low-probability, extremely high-return trades, and makes his millions off the few that hit.

I think a decent analogy for us normal mortals might be to develop a screen that kicks out 50 very good potential candidates each day, then spread our million across every one of them that triggers, setting a stop THREE PENNIES below our entry price. Out of 250 trades in a 5-day week, probably 248 would get stopped (albeit for virtually no loss), and the other two would make up all our losses 10 times over. All we need is the capital to spread that thin, and the magic method of finding those 50 candidates…

I am going to ask you a favor a big one at that. Could you give me your opinion about fooled by randomness. What you think of the authors investing strategies and how it may have changed your style of trading. I have found myself to be deeply affected by the book and starting to unintentionally change my style of trading. I find myself trying to find a good intraday stop loss strategy but one that will maximize any potential chances of catching big ones. I find my self willing to lose the full risk of 50 or 100 per trade in order to get the 500 - $1000 gains. Am I headed towards a blow up? The book was amazing and I find myself more drawn towards finding the big ones. I am also growing increasing interested in options but as a buyer and not a seller. Anyway, I’ll be interested in hearing from you. http://www.fooledbyrandomness.com/busweek.mht

LP