Sunday, December 30, 2007

Interview Take-Away

After reading the Comments and a spate of private e-mails coming off of my appearance Traderinterviews I wanted to make one very important point, the single most important "take-away" from the interview.

To me, trading is a series of mostly successful trades that when added together, daily, weekly, monthly, annually, results in a six or seven figure income. A trading "system" that accomplishes this is what we are all after here. After four years of real time, real money trading, I am convinced that I have attained this result.

A guy like Cramer, who buys Google at 450 because he thinks its worth 650 based on earnings momentum, or sales, or chart patterns, or whatever, is just a gambler making a series of coin-tosses and hoping, albeit praying, he wins more often then he loses. This is not trading, this is not a trading system, this isn't even investing.

Let me illustrate what I mean. For the entire calendar year of 2007, Cramer's Action Alerts portfolio, his "charitable trust" as he calls it, is up 8.68%. This compares to an S&P 500 which is also up for the year, 4.26%.

On the other hand, consider a day-trading system that grabs 1% for every winning trade, trades five times a day and wins 4 out of 5 trades. If you do the math assuming no pyramiding and allocating the same amount for each trade, this trading system averages 0.6% per day, or about 12% per month which is 144% per year.

Throw in conservative pyramiding of profits and tighter stops then 1%, and that 144% a year is about a quarter of what is realistic.

Compare Cramer's real life, no-lying-cheating-nor-stealing returns to 144% a year, or four times 144% a year.

Cramer says, "Listen to me and lets get rich."

The Anti-Cramer says, "Find something that works and trade it."

A

8 comments:

Anonymous said...

Hi Allan,even though I have beaten the market over the last 3 year period,I wish I can find a day trading system or any other system for that matter, that is profitable 80% of the time.
Besides your own system,do you see anything out there that has such a high winning percentage?
Thanks,Ron

Anonymous said...

So Allan,

the question becomes are you going to package up your system in a complete form?

please?

Dave

Allan said...

do you see anything out there that has such a high winning percentage?

My sense is that if anyone has such as system, they are trading it, not selling it, so you are unlikely to find it being marketed. Remember, Ron, by defining a winning trade broadly, i.e. 1.00%, you get a whole lot of winning trades. Add some discipline to take profits quickly, and you are winning more then you are losing.

As you know, I occasionally hold onto trades longer-term. Those almost always start out as day-trades where I am only looking for 1-3%. But once there, I only take partial profits, holding on for more substantial profits, like we have with NRTZ, 70-80% in a week. Those have a more compelling reason to hold onto beyond the day-trade, but those are not really part of my system once initial profits are taken. The profits are quickly booked, and a smaller position is held onto for a multi-bagger. Those also get blogged here for all to consider for their own accounts.

A

Allan said...

the question becomes are you going to package up your system in a complete form?

Sounds like a lot of work. Include a week sitting here with me trading every day and you leave proficient and capable of joining me in this business. What is something like that worth? I've taught the system to two friends, who both quit their day jobs to trade it full time. Should they have a say in this? Do I limit the number of people who are trading it? Do I want the headaches? What a pleasure it is not to have to answer to anyone to make a living, to only answer to yourself. And isn't just a little hypocritical of me to sell this after stating pretty clearly that if their systems worked, the creators would be living off of trading profits, not sales of systems?

The question you ask, Dave, is a complicated one.

A

Dave said...

Allan,

True. You have chosen the simple path and the one anyone if us would. Thanks for sharing what you do and we wish you a great 08.


Dave

Anonymous said...

Hello:

I am a buy-side analyst here in NYC, a few members of my team have been following this blog for about a year and a couple have pro-actively contacted Allan about investing in his hedge fund.

I am writing because I heard the interview and he said he does this for his "friends" who must be high net worth people.

When we pro-actively contacted him via, I was told he is only accepting investments in $500K "blocks" from small institutions going forward.

I surmise this is why we have not heard more about this vehicle here.

Frankly, because of the fast timing we have had some difficulty trading the picks on this blog but the few that we do "catch in time" have worked out well. But we are at a disadvantage and hence our investment request.

Can others shed light on the MOST EFFICIENT way to trade this blog w/o an investment in the hedge fund itself?

Do you check it in the mornings then trade later? Or just recheck it lots of times throughout the day? Or do you focus on the longer term picks?

Any advice is helpful.

Philip , New York

Anonymous said...

Phil:

I did not know about the small institution & 500K minimum requirements of the hedge fund and had wondered about how I could get in the fund myself. Thanks for clarifying that.

As for how I trade AllAllan, I look up the picks every AM and keep a EXCEL spreadsheet of what picks are on or off.

I select my own sub-picks from the list and allocate assets based on my own capital balance and models for allocation & risk.

I agree it is somewhat difficult to discern what trades are currently running from the blog and exit strategies are your own, but it has worked out for me.

Also, there really is no way for Allan to improve tghe blog as the nature of the way a blog works would prevent the "bookeeping" aspect of the trades being posted.

Hope this helps.

Mark in Sandy, Utah

David M Gordon / The Deipnosophist said...

Finally had the chance to listen in, Allan.

Good show!

You comported yourself well, were elegantly and warmly available throughout the entire interview, offered meaty insights into (only one of) your methodologies, and came away a winner!

All in all, very impressive!

Best wishes,