(Quotes from Ed in Red)

Ed Says

Hi Nick and Ed,

Thank you for sharing your work on delays.

I notice what appears to be a disagreement between your text and the image "System Response to Step in the Target." The caption notes: "The Target steps from 0 to 5 cups per second at t = 2 seconds." The image seems to indicate a step from 0 to 10.

Another caption reads, "At a Frequency of 0.25 radians / (per month) the Outflow Rate tracks the Inflow Rate closely." I notice that the corresponding image labels the vertical axis in US$/month rather than radians / (per month). This last unit suggests a measurement of angular acceleration, as in radians/month/month.

Further down the page, you ask the reader to "Note: at Frequency Factor 1 the cycle takes 6.28 seconds (2 * pi) to complete." I notice that images above and below this note use months rather than seconds on their horizontal scales. I notice some difficulty correlating the text and the images.

We are currently repairing and clarifying these sections.

I hope for you a continuous growing success in the future.

OK.

Consequently, equity can go up or down but every time I need to make orders I calculate the 1% to risk and this make it constant. I wonder if you can clarify the meaning of "1% proportional risk core trading".

Thank you

Core Equity = Total Equity - Equity at Risk.

Hi Ed

I am enjoying reading the Ways of Delays. Today I started with the no feedback simple systems which makes perfect sense to me. Having been a loan officer in the past I could relate to the step function in other practical ways such as a step loan or a step foundation in construction, the ramp as a pitch of a roof, the pulse as an interest only loan and the sine wave similar to a loan tied to an index such as LIBOR.

I wish to thank Nick and you for all your efforts in making system dynamics so clear.

I'll keep reading for clarity and understanding.

OK.

Hello again,

Hereby attached, TTID template to register a new tribe in Amersfoort, Netherlands.

Many thanks

Feelings Without Positive Intentions

Hi Ed,

Is it possible that some feeling have no positive intentions? If so, how do you eliminate the drama associated with those feelings?

You might consider taking your feelings about <nebulous theories without specific examples> to Tribe.

What do you think about it ? What kind of advice you can give us.?

Thank you in advance

You might consider taking your feelings about <beliefs> to Tribe.

This is a problem that causes me significant frustration and sadness. I feel there is sadness lying somewhere beneath it, but I am yet to locate it. Perhaps it's the sadness of not having a guru in my life, and perhaps it is you that I'm trying to employ as my guru.

sadness-12e62sadness-2.jpg

Do you mean "Core equity" or "core capital"?

With Proportional Core Position Sizing, you size your trade proportionately to your Core_Equity.

Take a look on Page 2 of their recent earnings release and their 10Q for more details and the breakdown.

I was looking at a 10 week breakout system applied to IBM from 1970 to present. The system worked well until the late 90's.

This gave me pause. The system would have looked good for 30 years prior to failing.

I am looking at trading different spot FX pairs based on a 20 day breakout for entry and 5 day reversal for exit. This strategy also looks good for a long time historically.

I know it is against the ground rules to ask for specific trading advice. I am not asking for that. I was just wondering if you had any general thoughts on system death. Do you?

If this email violates the spirit of the ground rules, I apologize.

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In the site the time constant is 8.33 and the gain is 0.12 (equals with the level 0.25).

Thank you again for your guidance and I hope to help steer the project.

In this part of the model, there is no formal "time constant."  The "virtual time constant" is an abstraction from the table of rate and level values.

Sir,

"Win or lose, everybody gets what they want from the market."

Many a time, sir, we hear majority of people losing in markets rather than winning, that too in huge amounts. From the above quote, sir, is it true that all those who lose, intend to lose at sub-conscious level ?

If it is so, what type of events, in the life of a person, may have led to register subconsciously to lose.

You might consider taking you feelings about <losing> to Tribe.

Struggle between logic and feeling. For example: Logic says that by some analysis, you need to make some thing this way. And you also know it and also understand that this is the right way. But, for the same time some thing from inside says to do the opposite. And most of the time, man will choose the opposite way from logic. And see the bad result of it.

We can see this on trading for example as we speak before when a man chose day trading instead of long term trading. In spite of that fact that he understands that he makes a bad choice. We say that such a man does not live in right livelihood.

What is the problem? What makes man so? How does he need to change himself ? Maybe the problems are his belief?

I feel I have this problem. And I am not shy to declare it.  I want to treat myself, and I am sure that others do too.

Thank you in advance.

One more thing do you have any tribe group in [Country]? Is it possible establish one??

Ed says,

In matters of Regarding Right Livelihood your own satisfaction is a function of how well you satisfy others.

Thank your for your observation. My feeling is that I make the first impression like gold but seldom don't live up to it when it comes time to satisfy others.

Ok.

Day-Trading = Right-Livelihood ???

Sir,

Day-trading - Is it different from working towards right livelihood ?

Humiliation, Arrogance & Equality

Dear Ed,

In my previous Big Wave report (#7) I describe how my confidence gets undone by occasions where I feel humiliated. I describe how I intend to fight humiliation, by being more assertive.

A day later, I read Ed’s comment to my earlier report (#6) on FAQ. Ed says:

Your judgment about humiliation is consistent with your pattern of attracting drama in which the payoff is that you get to feel humiliation. […]

When you discover the positive intention of the feeling of humiliation, the drama surrounding this feeling is likely to disappear.

After reading Ed’s comment I am totally confused. I even have trouble sleeping at night, pondering the possible positive intention of the feeling of humiliation. (I keep having trouble understanding TTP-logic.) Could it be humbleness, i.e., am I arrogant?

I find it very, very hard to piece this puzzle together.

I think Ed suggests that I avoid deeper feelings by getting angry when humiliated. Maybe avoiding feelings of being unloved, maybe vulnerability, maybe humbleness. As long as I avoid these feelings, and as long as I want respect from everyone, I will continue to attract humiliation drama…

I remember being very afraid of rejection as an adolescent and young adult. Until age 25 or so, I mainly feel sad (not angry) when disrespected. I try to befriend everyone, out of fear that someone might not like me. I am like that dog, tail between legs. I remember an older guy at my first office who habitually addresses me with a slur word (instead of my name).

But then, when I have some success, I turn a corner. I feel I don’t need to be-friend everyone anymore. I feel I deserve some more respect.

This doesn’t mean I am equal now among equals. No. I now feel better than others!

I start to behave arrogant and stuck-up, at least in what I say to myself about others: I reject most people right away …

My arrogance feels like a protective shield, but I deeply dislike it. Meanwhile I am still inviting humiliation drama, only from different people now.

When I get even more successful, I become rude and more arrogant, and I dislike myself even more. Success seems to drive me in the wrong direction; I seem not to be able to handle it well. I quit my job (15 years ago). After that, I never make any serious money again. Maybe better so.

My next Tribe meeting is in 2 weeks. At that meeting I intend to explore my feelings regarding humiliation, arrogance and equality further….

As always, thank you very much for your continuing support.

You might also consider adding your feelings about <intimacy> to the list.

Hi Ed,

I recall your description of right livelihood as a special gift, something one is really good at, something one can share with others.

I notice feeling that the things I'm good at are things that n obody needs. I feel that I'm peddling fool's gold -- it may be interesting and ornamental, but has no real value. It glitters like gold only at first glance. Pyrite costs $4 per ton 100 years ago as a precursor to sulfuric acid and has no commercial value today.

I recall my mother, a geologist, telling me about her fieldwork in remote areas of Central Asia. She says that when locals would hear that they were geologists, they would offer to show them, with some hesitation and secrecy, a "gold find." She says that without exception the find was pyrite.

Actually as I said, I read all your FAQ from the  beginning and find out there is an opinion that Elliott Wave is too subjective. I also see that it has some element of prediction, that is why it is not suitable for us as trend followers.

But when I learn the structure of the wave I find out that it is approximately the same with trend structure. Even when Elliott described his entry place to the market and exit place it is similar to the reversal part of the trend which looked like the head and shoulder pattern. Also the same thing we can see ... when price broke maximum level of A wave by the 3 wave. The opposite direction when Price broke the minimum level of A wave by the C wave.

The same thing we can see when 5 EMA cross with the 34 EMA or the 34 EMA cross the 155 EMA.

For my observation which brings confusion to the trader [is] that after 3 impulsive waves, [the] trader waits for opposite side direction movement. But I think it could be not from 3 impulsive wave it could be 4 or 5 maybe more until trend not broken. For my opinion this expectation bring more confusion. I think there are not 3 impulsive but it could be more.

But dear Ed what do you think about Elliott Wave? What can you say which I don't know about Elliott Wave which could be useful for me and for others.

Thank you in advance.

Risk of Ruin

Ed,

You ask how I use my formulas to manage an account.

I need to know a mean and a standard deviation. I can measure the mean and standard deviation per trade, or per week, or per month, or per year.

I need to express the mean and standard deviation as a percent of my account. Bigger bets will increase these percentages, and smaller bets will decrease them.

For example, suppose I look back at my trading and find that I have a monthly mean of 5% return with a monthly standard deviation of 8%. This is a good trading system. I could double my bets, and then I would have a monthly mean of 10%, and monthly standard deviation of 16%. The mean and standard deviation will move together with a ratio of 5/8. I could cut my bets in half and I would make 2.5% per month with a standard deviation of 4%. I know all this stuff is logarithmic, but for returns in this region, these numbers are close enough.

To apply this to manage an account, let's assume I choose to use the bet size that gives me an average 5% return per month with a standard deviation of 8% of my account.

The probability of losing one standard deviation, or 8% of my account, is e^(-2*0.05/0.08) = e^(-1.25) = 0.287. There is a 28.7% chance to lose 8% of my account from any point on the equity curve. I will spend 28.7% of my time in an 8% drawdown.

Suppose I do not reduce my bets as I lose money. The probability of losing 40% of my account is e^((-2*0.05*0.40)/(0.08*0.08)) = e^(-6.25) = 0.00193. There is a 0.193% chance to lose 40% of my account from any point on the equity curve. I will spend 28.7% of my time in an 8% drawdown. This is the risk of ruin formula for insurance companies, published by D. R. Cox and H. D. Miller. Insurance companies cannot reduce their bets as they lose money. Traders who can only afford to trade one contract have difficulty reducing their bets.

Suppose I do use fixed fractional trading to bet a fixed fraction of my account on every trade, so I do reduce my bets as I lose money. Then the probability of losing 40% of my account is less because it takes more losers to lose 40% because my bets are getting smaller as I lose. The probability of losing 40% of my account is e^((-2*0.05/0.08)*(ln(1-0.4)/ln(1-0.08)) = e^((-1.25)*(-0.511/-0.083)) = e^(-7.658) = 0.00047. There is a 0.047% chance of losing 40% of my account if I use fixed fractional trading to bet a constant fraction of my account on each trade, and have a mean return of 5% per month with a standard deviation of 8%.

You say that I pre-suppose knowing the loss in advance. I pre-suppose knowing the distribution in advance. I do not need to know each loss in advance. I do need to know the mean and standard deviation of my returns. It is easy to measure the mean and standard deviation of past trades. It is not so easy to know that this distribution will walk forward into the future.

If I am managing an account, I can look at the percentages I calculate, and decide if they are acceptable. I can reduce risk of ruin by reducing my bets. Or I can increase return and increase risk of ruin by increasing my bets.

Let's see what happens if I double the bet, to get 10% average return with 16% standard deviation. The probability of losing 40% of my account is e^((-2*0.10/0.16)*(ln(1-0.4)/ln(1-0.16)) = e^((-1.25)*(-0.511/-0.174)) = e^(-3.662) = 0.026. There is a 2.6% chance of losing 40% of my account. I will spend 2.6% of my time in a 40% drawdown. If I am willing to accept that risk, then I can enjoy an average return of 10% per month with a standard deviation of 16% per month.

If I improve my trading system, then I can get a higher return, or a lower standard deviation.

If the standard deviation of the market I am trading doubles, then I might want to reduce my position size.

If the input variables to these equations change, then the output will change. Common sense is still required. The standard deviation of the stock market went up in October 2008. Wise traders will pay attention and bet smaller when the market goes nuts.

With 1% proportional-risk core trading, your account can grow exponentially and cannot go broke.

I notice the tension in my neck loosens, teeth do not grind as much, heart does not pound as much, hands do not make fists when I feel anger, etc. I feel the smile on the face and see it on others'.

I realize that it may take some more practice / focus for me to fully correct my control issues and maybe even more time for others to adjust to my less-controlling behaviors. I feel OK with this. I am confident that this will result in more money, fun, sleep, intimacy with others, sex and less drama.

I will report on my progress.

It’s been fun. A lot of what I had read only started to make sense when I started doing.

I know I need to get more familiar with math, get a back testing program and learn to program code. I just wanted to say thanks for all the free advice.

Ok.

Here are my approximate yearly results and a brief description for these first 10 years.

1999: 0K I start part time stock trading in August '99 with $25K. I more or less break even at the end of the year.

2000: -7K I double my account in first few months of 2000, only to give it all back + some.

2001: - I do not trade in 2001.

2002: -30K I attempt full time stock trading starting with $50K while out of work. I fail miserably. I go back to my day job.

2003: +50K I get very lucky in 2003 trading options.

2004: -20K I start futures trading, I pay $20K 'tuition'.

2005: +30K I manage to find and develop a testable edge for trading futures

2006: +30K

2007: +200K I diversify my futures trading and go full time.

2008: +400K

2009: +700K Up $700K so far in 2009.


In my first five years of trading I am not serious, I use a web 1.0 based trading interface and I am trading part time mostly. I have absolutely no edge whatsoever. My trading in these years is better described as gambling rather than trading.

I get serious about trading in the middle of 2004 when I open an account with a direct access futures broker and I start doing detailed trading research. I also try to find as many of your trading beliefs as I can from books and the internet and use these as a model for my own beliefs.

I think a beginning trader needs to read as many trading books as he can and have a very open mind. There are many well known trading ideas
he can develop and refine to make his own. I think it is how well he executes these ideas that is more important. Executing a trading plan is very hard but not impossible, and if he can pull it off then he can make a lot of money.

I think that if a beginning trader is going to commit years of his life to trading, he needs to get serious about it, and he needs to make sure he is improving and learning every year. He has to be very hungry for trading success; it has to be a very important part of his life.

OK.

I mention to my wife that during the day we have almost no physical contact. She answers that it was her method to punish me (she uses the word) for not helping enough with house chores. She also "punished" me by eating dinner earlier with the children. As I arrived home, frequently I did not get something to eat at all. She mentions that right now there is nothing to punish. It takes me some hard negotiation, but we agree that the whole family takes dinner daily at 7:00 PM. It works great.

I suppose that in a control-centered relationship both people try to control each other with different methods.

During the workshop I committed to make my marriage work. I do my best and am patient; however, if my wife decides not to give up control and open herself, there is no way to make this marriage work. In this case, well, I just move forward.

I thank you for your support.

Dear Ed,

Thanks for your response to my FAQ: Thursday, August 13, 2009 Riding a Loser

I am worried that it might deprive me of the gut wrenching stress and journey to self destruction I seem intent on so for now I think I'll have to feel this one to the uncle point or that feeling is simply going to have to come from somewhere else before I can move on and I'm worried the events needed to put myself through this without the aid of the financial markets could be even worse.

I have been working on an [Name] crossover 'system' using monthly signals. So far I am pleased with the results, it has turned a profit on 90% of stocks I have tested it on and has out performed the stock on many. There is a 10% loss on any entry and no stock has lost more than 15% since 2000. (I know my back test isn't sufficient). This seems to reinforce the idea that systems work best when signals are not so frequent.

I haven't figured out how I can test them as a portfolio yet.

Testing always leaves me with a hollow feeling, that my system isn't the 'best' and is either not optimal or made 'too optimal' to fit what I'm testing.

Sometimes I think my system can't work as it's too simple and if it was that easy everyone would be doing it. Then I go to work at my firm in [City] and see most people aren't in it for the money alone and a system won't fulfill all their needs. I guess I still fall in to their camp.

Sometimes I wish I never starting trading but I feel when I grow up and learn to take losses I might have some success hidden in me somewhere.

Maybe I just don't want to grow up, I'm drowning financially but this gives me contact with my (divorced) parents and I wonder if it's this need to be needy that keeps me losing.

A weekend of walking and thinking ahead.

Thank you for sharing your process.

Ed,

Thank you for your answer. I tested myself and my wife for willingness in several areas about 10 days ago. Maybe you can accept that I preferred not to report it in detail for FAQ, since it touches very intimate aspects of my wife. We discussed what we both want from our relationship, and how the other person is willing to participate. She mentions that I am doing everything that she needs / wants. She is willing to do many things to improve our relationship, and she can imagine being open for new ideas.

Systems need some time to re-adapt. If I have, let's say, back pain that prevents me to help with housekeeping, I cannot commit to help with housekeeping, but I can commit to go to a physiotherapist to work on my back pain. The "30 minutes in the morning" were part of this agreement. However, we both see that it is artificial and that we prefer a more spontaneous approach. Since we apply it, things work even better.

I see substantial changes in my wife regarding physical contact. For her it is still very difficult to accept my feelings and almost impossible to talk about her own feelings.

But now she knows exactly what I need and what I expect from our relationship, and I know exactly what she needs and that she does not need to change. If she does, it is for love to me.

But it is like with me: I can say "I do the work - I give up control" and keep on hiding and making excuses just not to change things. She can do the same: she mentions that she is willing to move towards me, but maybe she does not. I have seen that a couple of times before and reacted mostly with anger. Now, I can calmly observe if she is just cheating and yield a proactive answer.

In my weekly report I describe how she mounts a majestic drama as I talk about my feelings of sadness. After a huge struggle she can accept them.

You write "Perhaps you like the drama and are unwilling to trade it for intimacy". No. I do not. I am sick and tired of this drama. I love my wife, she is great. During the workshop I committed to make my marriage work. I am willing to be patient and to see if she can also commit to and create an intimate relationship. If she does not, I cannot make my marriage work. Then, we go separate ways. It is not nice, but it is not a tragedy. If I accept the drama and stay by her, I just that I lack the balls to be happy.

I sincerely thank you again for your help and guidance.

Thank you for sharing your process.

As I said before I do not [want] to be a lucky trader, I want to be a professional trader who understands the differences between right and not right livelihood.

OK.

Ed,

I have a strong feeling that I need to be at your upcoming workshop. I'm starting Grad School at [Name] University next Monday for agricultural economics and was wondering if you're willing to help me by finding a workshop price that works for both of us? (Since tuition just took a giant chunk from my checking account).

For example, one of the functions of the Workshop price is to help select participants who are ready and willing to participate - and who already demonstrate a level of financial mastery in their own lives.

and consulting textbooks I see how men can ruin the sexuality of women: how a husband can cause female headaches, lack of desire, boredom, sexual aversion, even panic attacks during sex . Uff.

After talking with friends and associates, I see that the frequency of sex is very different and ranges from once a week to twice daily. However, they all touch, cuddle, embrace and kiss their partner several times a day. My wife usually refuses physical contact during the day, and she is too tired at night. She is also afraid that I can see physical contact as an invitation to sex.

I talk about the issue with my wife. I ask her if she agrees with the idea of reserving 30 minutes every morning to share physical contact. I mention that some sources suggest that it could improve our sexual life. She likes the idea, also the fact that I put no pressure on her, that we have a time limit, and that she can decide what we both do. In other words, that she controls the situation. It is not that I am giving her 30 minutes of my time for physical closeness: she is sharing her time with me, and during it she is free to act and I fulfill her wishes.

In fact, I would prefer an embrace in the night, a "good morning, darling" and a kiss as we wake up, just to feel the touch of her hand. Sometimes this can lead to sex. However, the time limits and keeping it in control is important to my wife.

If I act as if I own my wife, I want to stop it. But I am asking her about her opinion, I am doing what she wants, I only do what she agrees with. I feel rather that we are both investing time and effort to improve our relationship. I don't think that I act as if I own my wife. But it would not be the first time that I am wrong.

I am open and thankful for your advice and guidance.

Willingness testing is a pretty good way to end the drama.  Perhaps you like the drama and are unwilling to trade it for intimacy.

My guess is all of the above and some more that deep I haven't discovered them yet.

I'm not ready to cut this loser yet, I must want to feel more stress or lose more money. I'm not sure why though.

I hope all is well with you.

If you like, I can write a summary of these formulae for you to place somewhere on your website. I find them useful to get my position size at the right heat for me.

I enjoy your Whipsaw song. I listen and smile.

I wonder how you actually employ your formulas in managing an account.

Addicted man can treat himself only by one way. To willing to change, understand really situation and not to afraid to look at reality how it is hard.

Ed could you say me what man need not to do for trading for living?

The report does not indicate how much of the income associates with what you refer to as "day-trading."

Ed,

[Your Whipsaw Song video on YouTube] is an absolute riot. Great work!

I am on a warpath to build the baddest set of systems ever known to man. I still really want to meet you and wish you would take the initial interaction on good faith. I have gotten over my pouting.

By the way, check out [Trading Instrument]. Does that qualify on your systems as a breakout? :)

We picked it up long ago and have been "Vampiring" it short for two days.

Right livelihood is difficult.

MadisonStarinieri/lonely.jpg

I remember you asking me during the workshop to lecture about control-centric and intimacy-centric relationships. I remember not knowing what you were talking about and improvising a speech about how we can use our feelings as allies and the under-Fred network.

I feel that in the months after the workshop I am fulfilling your request with my contributions to FAQ and also fulfilling my intention, to help and support other workshop participants.

I wonder about the strange ways that we use to reach our goals.

Thank you for sharing your process.