Like the Casinos Do It

Just picked up some UltraShort Oil & Gas ProShares (DUG) as it broke out above this morning's opening range in order to get up to my max. allocation in that area as part of some overall portfolio rebalancing I'm doing.

Also looking at a spot to pick up some more Canadian Gold iUnits (XGD). This bloodbath may lead to a good technical buying opportunity to bring me to my max allocation for this market.

Speaking of drawdowns, this can be one of the toughest parts of using mechanical systems. It's often not the system that fails, but the trader's discipline.

To that end, I just read something interesting in Way of the Turtle by Curtis Faith - a great book on trading and developing trading systems that a member of the Canadian Society of Technical Analysts was kind enough to recommend. Faith likens the inevitable drawdowns to the wins a casino must occasionally pay to gamblers.

"Casino owners do not care about the losses they incur because such losses only encourage their gambling clientele," Faith writes. "For owners, losses are just the cost of doing business; they know they will come out ahead over the long run."

Same thing with losses in a trading system, he says. "They are the cost of doing business rather than an indication of a trading error or a bad decision. To approach losses in this way, we had to know that the method by which the losses were incurred would pay out over the long run." That seems to be the key.

And to that end, I've just gotten a copy of Robert Pardo's classic Design, Testing, and Optimization of Trading Systems. I hope to review my system some more based on Pardo's techniques. I'll let you know how it goes.