Gieno Trading Pyramid - System Parameters |
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In the market there are two types of risk. There is the risk of losing money and there is the risk of losing a lot of money. As there are no free lunches you can expect the trading vehicles(options and futures) which we are discussing to offer a balance against these two types or risk and this is what we find. To using those vehicles, there are something you must know before you do anyting.
There are of course two sides to trading. The first is the theory, and this is where the simple rules come in. The second is the practice and this is where the human brain (including all emotional and instinctive input) comes in. The formula is simple: Simple Trading Rules + Human Brain = Chaos and Confusion Anyone who has ever traded knows the truth of this formula. So here come the simple rules. If your trading approach lets profits run and cuts losses short and if it achieves a 50 per cent hit rate then overall you will win. This is clearly so. For each profit there will be a loss, but as profits are allowed to run they will average a larger sum than the losses, which are always kept small. The purpose of analysis (technical or fundamental) is not to analyze markets, it is to build your system/trading approach. This is not to denigrate Technical Analysis because building your system is an essential step to success. The reason I know that you need a system is because of that formula I just mentioned before. A system does produce simple trading rules. Anything else is going to be more complicated. I might summarize this as:
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