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    2008-10-25

    A simple explanation of the 5% rule

    Many asked me about the 5% rule I said in previous post. Let's get some clue from simple examples.

    In short, this is just some analogous version of the notorious doubling strategy used in option trading. In forex market, there could be some sudden move which is highly unpredictable and contradicted to long-term trend. Mostly, such move would be controlled within 2% range, which, take EUR/USD as example, is some 200-250 pips move. That is to say, given a 100 margin ratio, you are going to be eliminated if your position is over half of your asset (I mean the margin you use). What's more important is such move usually happens in less than 5 minutes, maybe without even a look back. For guys like me who can't concentrate on the market all the time, such move is deadly.

    So taken the famous Fibonacci rule, there might be a 30% correction before next major move. So make it safe, let's say 20%. Then if we assume you only buy before the move and at the bottom of the move, an asset allocation about 1:4 would be appropriate. Still in pursuit of simpleness, let's just divide it by two to reflect your risk attitude. That's 5%.

    Of course this analysis is too naive. In practice there are tons of variations to reflect your own strategy and risk tolerance. For me, I would use a 1% per trade at most. And what's more important than this in trading is some other principles like strict stop loss, macro analysis, etc. Anyway, the risk control of this means should be appriaciated.

    Probabilistic trader

    All investment books will tell you some methods to make you a millionaire. But everybody knows this is not the truth. Logically, this is for sure in terms of real money. But this may also been explained by adaptive market hypothesis.

    A trader will create self-autocorrelation by taking his past trading record into consideration. A loss will turn him into hesitation at another several trades. This implicitly creates the resonance, which can be described as some emerging order as in Strogatz's "SYNC".

    Such resonance has a tendency to eliminate any profitable short term trading patterns. That's why trending following is so popular. Finally we need some external stimulus to support our speculation.

    2008-10-24

    Double in Two Days

    This post is to memorize the doubling of my trading asset in two days, first time in my trading life. What's good is this is achieved with strict risk control and without a single crazy bet. Is this a signal that my up trend has begun or just the peak of another cycle? Let's wait and see.

    At least I am going to have a happy weekend. Thank you, Mr. Depression.

    Trading

    Currency trading is pretty much alike real life. Any time, only risk at most 5%, or say, release 5% of your temper. Or else, there is great risk to ruin yourself.

    Remember what Lipschutz says, don't be shaken out by noise.

    2008-10-20

    谢晋

    Death of a director, gone the memory of a generation.

    Fischer Black and the revolutionary idea of finance

    A terrific biography of Fischer Black. Highly recommend to those who want to have a taste of development of modern economic theories.

    2008-10-16

    Best time in 40 years

    Looking back at history, all turmoils are perfect materials for great movies, books, ideas and reforms. Can't wait to see them.