The best trading system in the world

The Best Trading System In The World: That's what I was told when I first came through the doors at Woodies CCI Club. Of course everyone says they have the best trading system in the world but mostly those are people who are selling it too. Funny for obvious reasons. No, Woodies system wasn't being sold per se, just how you needed to use it and what broker you needed to trade it with is all. Which is fine with me I guess, promotion is promotion and business is business and if you can market your brokerage in the guise of a free trading system, then that's their prerogative. That's not what I wanted to mention however. I was going to talk about the Best Trading System In The World (spoken with stadium-sized echo).

When I started trading WCCI a couple years ago one of the big things that was taught was keeping statistics about the markets you trade. How far they move in your favor based upon your patterns, how much on average they move against you before it's a winning trade. This is in fact a wise thing. It's never a bad idea to keep your finger on the pulse of the market, the ones that you trade, to always know how its heart is beating. Combined with money management (that's code for making sure your losses are smaller than your wins), statistics will give you some idea of what to expect and give you an edge, and in trading you don't need much of an edge as long as your wins are bigger than your losses. The problem with the WCCI system is it teaches you to keep your losses bigger than your wins, always. 15 tic stop loss and 10 tic targets on the ER, 25 tic stops and 10 tic target on the YM and so on. No matter how long you trade that way, even if you can win 75% of the time, you're equity curve is going to be heading south. Yet people still trade it believing that the "runner" contract will be the holy grail and make up all the difference when you hit the big 100 tic run occasionally.

As a bit of a math head I'm here to tell you that I have traded it that way, I have written programs to crunch the numbers and I have analyzed it from every angle. The reality is, the big runners AT BEST will get you back close to break even at the end of the month because all along you've been taking larger losses then your wins over and over and over. But here is the true story, the most interesting bit of information:

When I was trading in WCCI, once or twice a month we'd do a little game to demonstrate how effective money management in trading can really help you. He called it the Coin Flip. It was a trading method based on a complete random flip of the coin, but employed money management. At the flip of a coin, we would go long or short into the market (usually the Russell), and not exit our trade until we got stopped out or reached our target. No runners, all in/all out. Our stop was 10 tics, our targets were 20 tics or sometimes more. Once we were out of the market, we'd flip the coin again and re-enter long or short based upon heads or tails. We'd be in the market all the time and then evaluate how well we did by simply keeping our losses to half the size of our wins. We rarely had a losing day, seriously.

Since those days I've written a simulator that does the same thing with various markets. Just a random flip of the coin to enter the market, keep your losses to half of your wins and keep trading. Here's the reality, the Coin Flip system hands down beats WCCI as a trading system, consistently out-winning all the fancy signals with the Sidewinder, Chop Zone Indicator and so on. It's funny because when we would do the Coin Flip in the room and always do well, people would comment "why don't we just trade the coin flip with money management?" and our leader would usually laugh or growl about how absurd that would be, that this is just a demonstration. It demonstrated something all right, that no matter how good your system supposedly is, if you have it in your system to take 15-25 tic losses and only take 10 tic targets, you are going to LOSE in the long run. If you have a crappy or mediocre system and take losses that are half the size of your targets, you are going to do fair to well. These days WCCI doesn't perform the coin flip in the room anymore...I wonder why? Because it clearly shows that it does better in the market than all the fancy WCCI panels and code and surely it became clear that it was embarrassing as a comparison to His own system. It was a good demonstration though and at least got people to think in the most simplest of ways.

So, if you want the secret to the Best Trading System In the World, just look no farther than the coin flip with a 2:1 or 3:1 money management ratio. You can't get any simpler than that and if you don't believe me, paper trade it for a week and you'll soon see the reality.

Some benefits to our high gas prices

As I feel the pinch at the pump as everybody, I've wondered over the last year what benefits, if any, could come from higher gas prices. For years I always thought that the technology surrounding our standard combustion engine vehicles was stagnant. More effort was being put into marketing vehicles with iPod adapters than new fuel efficiencies it seemed. But since high gas prices are here and is creating an enormous ripple effect through our economy, all of a sudden, car manufacturers can't come out with new technologies fast enough. You have Honda now introducing a test vehicle in southern California that is a hydrogen fuel-cell vehicle with zero emissions and runs on hydrogen which is the most plentiful fuel source in the universe.

At some point in the future, gasoline will be extinct. Will vehicles disappear too? No, vehicle manufacturers will miraculously roll out vehicles that work just as well if not better on many other sources of fuel. Of course they could have been rolling them out years ago but the need just wasn't there as it is today. Personally, I'm delighted to see the new alternative fuel based vehicles being pressured to emerge and as long as gas prices remain high and going higher, there's no doubt we'll see more of these vehicles appear with greater frequency. Necessity is the mother of invention and works well in lighting a fire under the butts of those that need a kick start. I just hope, that the manufacturers make these vehicles affordable enough to be feasible to switch over. Right now hybrid vehicles are the rage for people to buy, but they still don't make financial sense until gas prices reach $10/gallon. The average person is not making a hybrid pay for itself just yet by in large. But as we make our way to $10 gas, I'm sure the auto makers will give us even more creative options for pushing the wheels faster than ever.

Here's an interesting link I found about converting your car to burn water & gasoline...click here.