Background

In another chat group, someone asked why I am interested in a small trade on GENETEC that looked risky and small.

• First, he is correct that if you only do 1 trade, then this is risky.  But if it’s risky, why take it?
• To answer that,  it's because it's part of another non-correlated system I trade.
• The trade does not depend on me being correct in GENETEC per se.  
• And the system requires me to trade extremely small and to keep making such trades when the set up arises.
• To understand this, you need to understand how being wrong in a trade many times, can make you monies.

Simplified Illustration how losing most of the time can make monies

Imagine a simplified world, where:​

1. Probability of winning a trade is only 30%, with majority times (70%) you lose monies. 
2. Payout when win is 5 times the Risk.
3. Loss when lose is 1 times the Risk.
4. Imagine Risk = 1% capital.

Question then is - What will happen if I take 100 trades like this?

The trading outcome after 100 trades are:​

1. 70 losses x 1% capital = 70% capital.  This is NOT small loss!
2. 30 wins x 5% capital = 150% capital.  This is NOT small win!
3. In a world of no expenses, the portfolio makes 150% - 70% = 80% capital after 100 trades!

But before you get too excited, let me remind that the point of the illustration is not +80%.  

• The point of this illustration is that you can be wrong 70 times, lose 70% of your capital, and still make money after 100 trades!
• And, I must stress this point - vast majority (maybe 99?) out of 100 readers who attempts this without the commitment to learn, will likely to lose monies.

Why most untrained traders lose monies?

Actually, the 100 trade illustration is called “trade expectancy”.  

• Trade expectancy is the basis behind many trading books and trading courses.  
• The idea is to accept that losses are normal in a VUCA (Volatility, Uncertainty, Change and Ambiguity) world.  
• You can still make monies overall, if your wins offset your losses. ​
• In particular, these systems says that you can’t tell which trade will win in advance.  They say that to find winners, you need to let Mr Market show you who are the winners and who are the losers.​

However, that last sentence is tricky and insufficient.  For your portfolio to win, you need the payouts to be bigger and big enough to offset the losses.  Like many multiples of losses.  And that's partly why most traders cannot trade this system - they tend to take profits too early.  If you take profit equal to 15% and lose 60%, and your win rate is not high enough, you are doing the opposite of this system and odds are your account will lose monies long term after 100 of such trades.   

Other reasons why short term trading lose monies for majority?

Let me just draw your attention to a few obvious and quick ones, but some are often missed.​

1. There is a big difference between showing you the above idea on paper, vs doing it yourself in real life.​
2. On paper, the key parameters shown is fixed (30% win rate, win 5% capital, 70% lose rate, lose1% capital).  In real life, the key parameters are not stable.  Worse, you can’t even calibrate precisely because they keep changing.  So, the numbers I show is just conceptual.
3. Because the parameters are unstable, dynamic and conceptual, you need a different mindset to trade this successfully  For most people change is difficult. ​​
4. The nature of single trade wins vs losses referred to above is not symmetrical in time and quantum in real life.  E.g. prices tend to fall faster than they rise (sometimes).   
5. It is hard to see the bigger picture of 100 trades.  It requires you to see bigger.  If you fail to see bigger, after many trades, you may not like the pattern you see - initially your trades will have losses that occurs bigger and faster, (because you cut loss faster to keep it small).  But the gains (paper gains) grows slower (because on the long side, it growsh slower).  And net net, your Account Value is negative, shrinks or stay low for quite a while.   The negative account experience can be prolonged and therefore is extremely hard for many people to accept when they start trading.  And the future profits are uncertain.
6. So, just because you read it here, doesn't  make it true.  You should be skeptical and you should challenge this idea in your mind.  
7. Beware of our own limitations.  Most people don’t know if what they read, what they were taught, actually worked in real life.  ​The chief problem is because they don’t have the tools, the database, the skills, the resources, the knowledge, the experience to do a proper unbiased analysis.  Furthermore, when a trade finally wins, it’s easy to do “arm chair” or “cherry picked” analysis.  ​
8. “Arm chair”/“cherry picked" analysis are persuasive.  E.g. it’s easy to show a few trades with this setup and then conclude it wins because when RSI is oversold, and if you buy when its oversold, then, price will revert back and you sell and you win!​
9. The real professionals don’t accept these short cuts. And  when I shared GENETEC, I have no such access.  
10. Instead, I transparently lay out my thoughts asking the chief question is - are we really in Wave 4?  If there’s a Wave 5 coming that makes 5 to 10 times the returns, then, it could work.​​
11. My GENETEC trade is not looking for a small % win or a short term trade.  Otherwise, if you take profits too soon, long term you will lose.  
12. My GENETEC trade is not a one-time bet.  Otherwise, it's gambling.
13. My system is based on 100 trades. Over however long it takes - say 5, 10 years.  My system here is based on buying the bottom of Wave 4, so that when Wave 5 comes and I plan to make 100 of such trades in future, my system wins after many years.​​​​​
14. I have no idea if that one GENETEC trade will win or lose.  I can imagine scenarios that it will lose.  If not in Wave 4, we will lose in the short term.  If business model breaks, we will lose.   There are no certainties in Bursa or any stock market.
15. I don't think 1% capital per trade is small, when we could lose 70 of those trades totalling 70% capital!  70% capital in a 7 digit portfolio is HUGE!   There’s this saying - “there’s old traders, there’s bold traders, but there’s no old and bold traders”.​

Summary and Conclusion 

I have a few goals with this article.

1. The first is to stress that I really don't know the outcome of this one single GENETEC trade.
2. The second is to stress that I don't need GENETEC specifically to win, to come out ahead after 100 trades.
3. The third is to let you know that in trading you don’t have to be correct all the time to grow your account.  We can’t escape that in markets, it’s a VUCA world.
4. The fourth is that if you don't trade the system/the way that I do, you may lose monies.
5. The fifth is that if you follow this and run when you have a small profit, and next time, you follow again and lose monies, the sum will cause you to lose monies whilst I make monies.  You lose because you run with a small profit.  
6. Over 100 trades, risking 1% capital is not necessarily small.
   

I hope I sufficiently explained why this risky trade and why so small.

If not, feel free to engage me below in the comments below.

Disclaimer:  As usual, you are fully responsible for your own trading and investing decisions.