Saturday, September 4, 2010

The Compounding Effect of Success

I would like to offer a brief explanation of the compounding effect of successful trading.  My hope is that you will find this post psychologically helpful, encouraging and maybe even influential on your current trading practices.
The most important foundation for achieving an incredible trading record, and the most difficult period of time, is the beginning time period of your track record.  If one can carefully manage their initial trade profitability, it gets much easier to be 'wildly successful' thereafter.  Let me show you how this is true.
Let's say you begin your annual trading record with $1,000 and a goal of achieving a 400% return for the year.  The goal then is to turn $1,000 into $5,000 in 12 months.  A couple of years ago I began, more or less, this very way and what I learned and experienced taught me an important lesson I hope to make your lesson, as well.
If you are absolutely committed to this goal, you will be ruthless about accepting large losses.  Either you decide with yourself that you will get out of a position once it begins to go against you, so as to minimize your loss, or you decide that you will not accept a loss and commit yourself to patiently wait to take a gain.  In the beginning, there are no other options that will result in your success.
Getting from $1,000 to $1,100 - the first 10% portfolio gain - is the most difficult 10% of the entire 400% goal.  Whether it takes you a day, a week, a month or several months to achieve this, you must get this first 10% and guard it with jealousy.  Do NOT allow it to be taken away from you.  It is, after all, the precious foundation of your trading record.
Assuming you make it to $1100, now it only takes a 9% gain on $1100 to reach the next benchmark - a 20% gain on $1,000, or $1,200.
You have heard the old saying, 'it takes money, to make money'.  Well, it is true!  That is because the compounding effect of success makes it increasingly easier to make more money. As you break each little milestone - the first 10%, the second 10%, the third 10% and so on - you do so having more money - each step of the way - to make money.  In reality, it get's easier to make more money as you succeed.
To carry this just a bit further, let's say it takes you 6 months to achieve a 50% gain in your portfolio value...... i.e. you now have an account value of $1,500.  To reach a $2,000 portfolio value it will take a gain of $500 additional.  But now you are in the market using $1,500, instead of the $1,000 as when you began.  Instead of needing a second 50% gain, you just need a 33% gain of $1,500 to make it to the $2,000 mark.
Once you achieve a 100% portfolio gain, the next 100% - making it to 200% - is twice as easy as in the beginning because you work with twice as much money.  The next 100%, bringing you to 300% is easier yet, and finally the last 100% taking you to 400% is the easiest 100% of them all.  
To apply all this to my personal current situation, here is what my trading record is on pace to achieve since beginning my trading record and this blog on June 11th, 2010:
3 months - 50% gain in portfolio account balance
4.5 months - 100% gain
6.25 months - 200% gain
9 months - 400% gain
12 months - 600+ % gain (June 11th, 2011)
Whether I achieve this or not is not particularly important to me.  I have made this 600% gain in as little as 7 months before, so making it in 12 months would be nice but not a personal milestone.  What is important to me is that I do my best with the opportunity I have.  And as I have mentioned before, I compete with myself, no one else.  
If you have read this far, I hope you leave this discussion with a new appreciation for how important it is to appreciate the smallest of your successes.  I sincerely believe that a carefully constructed foundation is what you need to build your success upon - and that you can do it - if only you will patiently honor its critical importance and nurture it with great care.


  1. My hat's off to you. I follow many of the same stocks that you comment on. I have used your comments as back-up for making decisions based on my own buy-sell signals. In one case (CGC) I stretched my own criteria and bought which resulted in a 1.6% loss. But, what I am pleased about is that I have learned to keep the losses small and don't look back. The other two positions are ANO(+3%) and BAA(+12%). I got a sell signal on BAA so plan to sell on Tuesday unless it gaps up. ANO is very close to giving a sell signal. I would like to experiment with the TSI strategy but I believe my Mac is too old for the software to be compatible. That's why I appreciate your posts. Thanks again.

  2. P.S. Last month you commented on silver (SLV). I have read some very positive articles about why to own silver. It has had a nice run-up. But I'm getting a buy signal to short it. It seems to me that ZSL (the short silver ETF) will probably be a buy within a day or so. I'm seeing a downward sloping 9 month wedge (upward sloping in $SILVER). Looks to me like silver is over extended. The problem is that being over extended can last for quite some time. Here is where I wish I had the TSI software to confirm my thoughts.

  3. John, I'm curious to what kind of position size you must take to achieve x00% within a given time frame. Granted that on margin the small losses will not be so small to true equity but the gains will be equally amplified.

  4. Loren

    Thanks for your kind words. I sincerely hope you stay with the bull at this point and do not try to stand in front of him as he is charging. This is not the time to try and get cute with ZSL, in other words. Just take a good healthy long position and let the bull do the rest for you.


    When I achieved 600% total account gain in 7 months before, I started out with a position size of nearly 100% and as my account grew I dummed it down to 50%....usually holding a couple of positions with my funds simultaneously.

    This time around I am taking much less risk and therefore it will take me longer to make it to 600%, if I do make it. That is because I presently have 7 positions of roughly equal size.

    I guess the simple answer is the more risk you take (few positions using 100% of your funds), the faster you can achieve these results.

    The more broadly you spread out you funds, the less risk you take, but also the more slowly the 600% thing can be achieved.

    I did not use margin the first time, but I am using margin this time - some - as I am more confident now because we are in September of a powerful gold C wave advance. The first time was the market meltdown in fall of '08 and into early spring of '09.

    Thanks for asking a great question that cleared things up, even for me!

  5. John,

    Could you please briefly comment on the psychology necessary to branch out on big position sizes, especially when one's equity quickly expands.

    The notion is always that it's the markets money we're playing with, but it's hard earned money banked nonetheless. I'm interested in knowing how, when say, a trader has grown their equity beyond their expectations within a period, he/she can associate the large dollar positions with the courage/discipline to hold in the face of 'minor' draw down or to hold for further gains. As an example, the present focus is the precious metals markets. We are all familiar with the seasonal pattern that unfolds between now and late January. Sizing the trades can be done in conjunction with seasonal expectations, so we have some kind of ephemeral road map that encourages us to trade big or hold for an expected point in time. It's for the other times when we trade mostly off of technical factors that requires the discipline and courage for pursuit of absolute returns that we need some insight on.

    Presumably we can't always make such large gains through each changing market cycle, so it's this balance of putting the pedal to the metal or hit & run tactics that constitutes the art and science of trading.

    You and your equity have been there. What can you tell us about that. Thanks.

  6. Thanks for the question Frank. I somewhat understand exactly what you are asking, but I am afraid my answer will not be as you might expect. But here goes:

    Call me crazy, but I run flat out all the time. The six weeks that gold dropped beginning late June through all of July, I was 100% "in". I still made money, just not as fast as now.

    And I learned from that experience - that when a gold weekly cycle is coming to an end you would be a lot better off to short gold/silver with impunity than skin mining stocks using the TSI. Next time! (November)

    As far as position size goes and having a larger amount of money to play with after some success, I currently return to the idea that about 10% of my portfolio value is a single position size. After I sell one thing, 10-20% of my money is now available in cash and goes looking for a home (or two) rather immediately.

    As I am permitting myself to use some margin in this current environment, if I am out of cash but think a 10% position could be wisely bumped up, I may buy more the next day or two later and put it on the credit card (margin).

    On each interesting freestockcharts chart I have pre-rigged the chart with the TSI and MFI trend lines drawn and saved these trend lines right on the charts - ready for me at a moment's notice.

    When I know I have money to put back in, I flip through the charts pretty quickly and see who looks like a current player. It's always easy to find something that looks like it will work.

    Of course, I am wrong sometimes - or the gold price takes things down, and then I have to sit and wait for things to change for that particular stock.

    Meanwhile, as I have only 10-20% locked up on the temporary dog and the other 80-90% active, I watch to sell and free up new money somewhere else..... and on and on it goes.

    I make no attempt to buy the absolute bottom nor sell the absolute top. I do make every attempt to put the odds completely in my favor and minimize the risk to my safety with each and every decision to buy or sell.

    I really like how I do it, to be honest. It keeps me having fun - which is the best part - and it keeps me in the loop with what most of the mining stocks are doing. There is usually more to buy than I have money, but that is a good problem, as I am sure you will agree.

    If I have not addressed something you are interested in discussing further, by all means, ask!

  7. Thanks for the added perspective, John.

    Essentially, within the confines of a given cycle, you keep parlaying funds from laggard to leader while employing the money management approach detailed in your post. That is a good way to do it, I agree.

    Looking back, do you think that there is an advantage, in terms of absolute returns, over your approach vs. identifying the leaders early in a cycle and spreading funds across 1 - 3 of the 'best looking' ones, while adding to strength to these same ones as the trend unfolds and quitting all on some type of sentiment/climactic/technical advance?

    As an aside, reading your posts you have mentioned daily cycle values of about 22 for gold and about 40 for stocks. Are the weekly cycle counts you mention a derivative of these values or separate longer cycles themselves? If the latter, could you please share those numbers.

    Thanks again for taking the time to share your thoughts.

  8. Interesting follow-up Frank. Thank you for the opportunity to share a few new thoughts.

    Looking back, I believe I have been better off with my method than picking 1-3 of the most promising and just holding until some such sentiment or TA signal.

    I view my strategy, correctly or incorrectly, as very dynamically managing risk. Whereas a buy and hold maneuver, to me, assumes a lot more risk.

    The latter strategy, buy and hold, is like attaching a note to a helium filled balloon addressed to someone far away, letting go of the balloon, and then just helplessly hoping the balloon lands where it should for your purposes. It might work out, but it might not.

    Again, not saying I am right, but my way of trading is constantly on the look out for a particular technical setup for entry and exit. To the extent that it works, I efficiently have my marbles continually on situation likely to explode in my favor. When I capture what the TSI tells my is the easiest money chuck of change I am likely to get, I sell and move on. And I never look back and kick myself if I sold too soon. I have already agreed with myself that that situation is going to happen once and awhile and that my over all strategy is more important to me than some of the consequences.

    Maybe just my dumb luck, but I have researched a stock and its industry to death, convinced myself that I have found the jewel of the group, bought the stock with both fists and watched it just sink and sink beyond belief - and stay sunk, literally, for years.

    BRNC (nat gas driller) in '06, INTC (Intel)in '04, BAC (Bank of America) in '07 and I could go on and on.

    The point is that NONE of THOUSANDS of stocks are as high today as they were even a few years ago. And guess what? They are not coming back to their previous prices any time soon. The buy and hold thing is fantasy nonsense in a secular bear market which began in 2001 and is no where near over, by a long shot. From here it would not surprise me that we get to SnP 1200 by spring and then begin a terrifying tortuous drop all the way to 400 within 18 months thereafter.

    I have gotten off topic a tad and apologize for the digression.

    One is safe buying and holding mining stocks because their situation is entirely different. They are in a secular BULL market.

    Regarding cycles, these things unfortunately do not always work like the clockwork one would prefer, so my numbers should be understood with that caveat.

    Gold daily 20-24 days
    Gold weekly 20-24 weeks
    Stock market daily 40 days
    Stock market weekly 20-25 weeks

    The last gold daily cycle began 8 days ago
    The last gold weekly cycle began 6 weeks ago
    The last stock market daily cycle began 5 days ago
    The last stock market weekly cycle began 10 weeks ago

    Gold's daily cycle should not peak for at least another 6-8 days and I think will crack 1300 in that time frame. The stock market has so many days on its shot clock that without any doubt in my mind it is going to make new nominal highs - taking out the previous stuff around SnP 1120.

    Sorry I rambled so long. Darn teachers like to hear themselves talk (even while the students snore). :-)

  9. Hi John, have you looked at yukon gold (ygn.v),it was skyrocketing to .65 and has pulled back all the way to .46

  10. John, "dynamically managing risk". I think that hits the nail on the head and is the essence of absolute returns. Thank you.

    I also wholeheartedly believe that buy & hold is only applicable in a secular move. I know your approach is what suits your tastes, but it seems to work very well and as such you have my interest. Thanks very much also for sharing the cycle counts you follow.

  11. Hi Mark -- is yukon gold, not ygn.v

    yeah, it needs to turn north some more to flash the buy sign. it will. i cannot trade (i have chosen not to trade) stocks on the Canadian exchanges. I am sure there are a kazillion great opportunities there. I just have enough to do keeping up with all the stuff on the American exchanges that I am stretched plenty thin.

    use tsi (7,4) and when the stock turns up a little more, along with the mfi getting out of the basement, you should be able to draw a couple of trend line breaks and get a nice buy sign. Good Luck!

  12. What do you teach at your day job?

  13. Music - Violin, Viola, Cello and String Bass