People develop systems and people make mistakes

develop systemsPeople develop systems and people will make mistakes. Some will alter their system or jump from system to system as each one has a losing period. Others will be unable to resist second guessing the trading signals. Whenever I go to a money management conference and sit down with a group to have some drinks at night, I always hear the same story. “My system worked great, but I just didn’t take the gold trade, and that would have been my biggest winner.”

There is a very important message here: People don’t change. That is why this whole game works. In 1637, tulips in Holland traded for 5,500 florins and then crashed to 50, a 99 percent loss. Well, you might say, “Trading was relatively new then; these people were primitive; capitalism was still in its infancy. Today we are much more sophisticated.” So you go to 1929 and find a stock like Air Reduction which traded at a high of $233 and after the crash fell to $31, a decline of 87 percent. OK, you might say, “The Roaring ’20s were crazy times, but now things are surely different.” Move ahead to 1961 and you find a stock called Texas Instruments trading at $207. It eventually dropped to $49, a decline of 77 percent. If you think we have gotten more sophisticated in the 1980s, all you have to do is look at silver prices, which in 1980 reached a peak of $50 and subsequently fell to $5, a 90 percent decline.

The point is that because people are the same, if you use sufficiently rigorous methods to avoid hindsight, you can test a system and see how it would have done in the past and get a fairly good idea of how that system will perform in the future. That is our edge.

Larry Hite

Igor Marinkovic

Electronic engineer, futures trader and property investor and total beginner in making good web sites