The following is from one of Larry Williams' newsletters Commodity Timing:-
THE FARMER, THE GAMBLER AND THE SPECULATOR.
It's An easy game, this business of making money trading.
There are only three or four rules to follow. But . . . you and me . . . we
overdo the game . . . and end up pouring money in, good after bad.
How come? what can we do about it? At last weekend's seminar in Florida,
Jake Bernstein shared a very telling story. lt goes like this:
Several years ago Jake was speaking to a brokerage firm gathering of farmers,
ranchers and a few speculators. After his speech he was asked if he’d like to
meet the one customer who made money. They said he wasn't very bright, but
made money. Always.
The old farmer and Jake hit it off pretty well, so the gent asked Jake if he'd
like to learn his system. "Sure," Jake replied. "l'd like to see what you do.”
With that, the crusty, aged trader opened up his chart of pork Bellies and
brought out a pendulum on a string . . . held it over the belly chart and advised
Jake, "lf it swings up and down on the page, I buy ‘em . . . if it swing cross ways,
I sell 'em. There it is, ,Jake, now ya seen my system.”
Jake stepped back, thought for a minute, and then asked, “That’s all, there’s
nothing else to it?"
"Mmmm," mumbled the market wizard. “There is one other thing, but it
don't mean much, I think. lf I got a loss at the end of the day, I get out of them
things."
I mulled over this wisdom on the delayed flight home (a bomb threat forced
us to switch to another airline) and, while driving up l-5 listening to Country Western
music at 1:15 r.v., heard-l mean really heard-Kenny Rogers, song “The
gambler." lt struck me that everyone else has focused on his words, "Know when
to hold them, know when to fold them" . . . but the real message I heard was in
the refrain, "You gotta know what to throw away, know what to keep.”
That dumb old farmer must have written Kenny's song. A gambler knows
what to throw away . . . bad cards. Traders might want to listen to the farmer’s
and the gambler's work the next time they want to play speculator.
Proving the Point
To drive this point home I tried an interesting experiment. . . my thought was to
develop a trading system for bonds that had three simple rules.
Rule one was to buy today's close if it was greater than the close 8 days ago.
No magic here, just a demand the market is trending higher. The next step was to
know when to throw them away . . . so I placed a stop of $850. Anything beyond
that would be bad cards.
Finally, all cards . . . trades . . . would be held until a profit of about three
times the stop was tested. The best was a profit of $3,500.
With just those rules, one could have made $36,500 trading one Bond since
they began trading. The worst drawdown was a little large, but the average profit
per trade, after $50 commissions and slippage, was an attractive $l60.
This "system" was not based on magic or fancy math. The only strategy was
that of money management. Kenny Rogers was right.
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