Whilst it does not qualify for email of the week status an email received last week at blog central does provide an interesting talking point. The gist of the email was that this individual had $40,000 to trade, was risking $600 per trade in the hope of making $250.
So I am risking $600 to make $250 – think about that for a moment. Each time I am wrong I need to be right the next 2.4 times to get back to where I started. The flaw in this should be apparent to everyone – the system will have a negative expectancy over most ranges of trading outcomes. It will on average lose money each time it trades unless I am correct more than 70% of the time. The chances of that occurring are minimal.
To give you a sense of this I have generated the following table of returns based upon the numbers above.
As you can see the system is a dud and it is a dud based simply upon the money management system being used. The system has larger losses than wins and this brings the system undone. In this situation it doesn’t matter what magic indicator system you use or have been sold. If your losses are larger than you gains then the system is stuffed and will eventually send you broke.
The interesting thing about this email was apparently this person had a trading mentor who had not spotted this most basic of flaws in the system.