V.18:8 (8-16):Letters

Letters to S&C

The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communication with our readers. Is there something you would like to know more (or less) about? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist.

Address your correspondence to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499, or E-mail to editor@Traders.com. Letter-writers must include their full name and address for verification. Letters may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine. -Editor

THE MARBLE GAME

Editor,

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 results.

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