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THE MARBLE GAME
In the April 1999 issue of
STOCKS & COMMODITIES, you published an
interview with Van K. Tharp, in which he described a marble
game he uses in his seminars to demonstrate the importance of position sizing.
That simple paragraph is responsible
for completely transforming my trading
I had been actively trading stocks for
two years with sporadic results and minimal success. My system was outstanding in keeping me out of market downturns, so I should have done extremely
well. But in the first quarter of 1999, I
actually managed to lose money while
the Nasdaq went up 20%.
I was intrigued by the game referred
to in the interview, so I duplicated it
using some Chinese checkers marbles.
Partway through my first game, I came
to the stunning realization that I had just
made the same mistake that was sabotaging my performance in the stock
market. After a short run of winners, I
had doubled my position size just in
time to double the magnitude of the one
big losing marble in the game.
While I was dealing with the complexity of trading the market, I didnŐt
comprehend what I was doing. But in
this game with simple rules and fixed
probabilities, it was immediately apparent. I reacted to good gains by trading much bigger, which magnified subsequent losses. And after a few losses I
traded much smaller, which minimized
subsequent gains. I was guaranteeing
results substantially worse than the pure
probability of success using my system.
I played the marble game dozens of
times, charting my performance, until I
had drilled some basic position sizing
principles into my head. In the past
year, since I read that article, my ac-
count has gained 50%, even though I
was out of the market for several months
as a result of major surgery.
That one revelation has already been
worth hundreds of times the cost of a
subscription to STOCKS & COMMODITIES. Thank you, and please thank Dr. Tharp.
KRISTINE ERICKSON, via E-mail