The Axiom of the Small Edge, 11/04/05
From 1997 to 2003 I was addicted to optimal f.
Still, I spent 2003 studying money management and in 2005 came to cast it all away for a simpler vision based on an axiom and a postulate:
The Axiom of the Small Edge:
A trader's long run edge is smaller than he thinks; it is much more akin to a card-counting blackjack player's edge of 1% due to variance, ever-changing cycles, and fear-induced losses.The Postulate of Trading the Small Edge:
Given The Axiom of the Small Edge, what really matters in money management is that a trader always be prepared, always be able to hold a position with a positive edge that goes against him, and always be able to take the next trade:
ImagineThe worst trading day you've ever had. The seconds ticking by, the disaster scenarios playing vividly out.ImagineThe blackjack player. His edge is 1% or 2 hands/100.ImagineThe pressure.ImagineThe public speaker. Stammering, nervous, unpracticed and unprepared.ImagineThe blackjack player, the public speaker and the trader as one.ImagineOnce per month being unprepared: 12 hands Once per quarter succumbing to the pressure: 4 hands Once per quarter not taking the next trade, not betting the correct size: 4 handsImagineThe blackjack player giving up 20 hands to the house:Imagine
His edge is now -18%The blackjack player and the trader as one.
"His edge is now -18%."
The Axiom of the Small Edge and The Postulate of Trading the Small Edge say that what really matters in money management is that a trader always be prepared, always be able to hold a position with a positive edge that goes against him, and always be able to take the next trade.