Quill's Simon III Trading System

By PM, Quill sent me his most recent reversion of his Simon III trading system (whose details I’ll leave for him to post). What follows is just my thoughts on some things I think he under-emphasizes.

Whether one calls oneself an ‘investor’ or a ‘trader’, you’re really just a ‘gambler’ who’s betting that you’ll be able to sell --at some later time and at a higher price-- whatever it is you’re buying right now. That “later time” might be minutes or decades away. But that’s also irrelevant, because market time is fractal, as Mandelbrot has demonstrated. Said another way, no matter your intended time frame, you’re trying to “buy low(er) and sell high(er)”. Period. That’s the game. And it’s just gambling, unless you want to claim that you can predict the future.

But forget about labels for a moment and focus on what really matters, namely, how to skew the odds of your price bets in your favor, and --more importantly-- how to keep yourself out of trouble, which is easy. “Just don’t overbet your hand.” If payoffs are symmetrical --as in a coin flip game-- you have to be right more often than not to be a winner. But if payoffs are asymmetrical and you’re ruthless about chopping left-hand tails, then Right/Wrong ratios as adverse as 20%/80% can offer profits, with the Right/Wrong ratio of typical trend-following system being about 35%. In other words, despite doing endless front-end research and only betting on what charts or financial statements – or stock pimps like the G BoyZ-- suggest might be good opportunities, the reality is that probably only one in three of your bets will be a winner. The other two need to be exited promptly.

So that’s where the rules for your trading system need to begin, not with trying to figure out what to buy, but with stating how you intend to manage your inevitable losses. There are dozens of ways to manage losses, more than I want catalog here. So let me identify just two worth considering.

(1) Exit on a reversal of the conditions that motivated your entry.
(2) Exit whenever a pre-determined loss limit is incurred.

Sample ‘Buy Rule’: Buy when price meets a set of conditions, such as price closing above a MA and/or StochRSI crossing above 20.
Sample ‘Sell Rule’: Sell when price meets a set of conditions, such as price closing below a MA and/or StochRSI crossing below 80 and/or your stop gets hit.

Which set of conditions you choose doesn’t much matter. Nearly anything works some of the time, and nothing works all of the time. What does matter is proper position-sizing relative to your account size and your tolerance for uncertainty. Me? I’m Chicken Little. I never bet big, and I exit at the least hint of trouble. Others, such as Dennis Ritchie’s “Turtle Traders”, would let prices move against them by as much as (-50%) but, nonetheless, ended up being big winners. As for position-sizing, that, too, is more a matter of personality than mathematics. So divide your cash into however many piles makes sense to you with this thought in mind. “How many bets in a row can you lose before you get yourself thrown out of the game?” Second point. Unless you believe you can predict the future, size your bets equally.

Yeah, yeah. TMF’s sales reps like to say that positions should be sized according to your “conviction” about the prospects of the company you’re betting on. But “conviction” is just a backdoor prediction about the future. So unless you truly believe you’ve been divinely gifted with the power to predict the future --a delusion TMF’s staff and writers suffer from, as does the Federal Reserve-- size your bets equally and increase or decrease your nominal bet size as your account grows or declines.