Chapter 7
The Principles of Boundedness
It is universally acknowledged that the majority of directional traders lose sooner or later. In the short term, the lucky may experience some level of profitability. As stated in the introduction, loss in the long term is mostly attributed to the single most damaging mechanism ever introduced to directional trading: the stop loss.
A depletion of equity or capital bleed is experienced every time a stop loss is hit. The constant application of stop losses for short term protection reverts, functionally-speaking, into a “stop profit” mechanism instead. If the rate of income is less than the rate of loss, there will come a time when the account will inevitably be obliterated. Normally, the profit preclusion effects of a stop loss overwhelm the shorter term profit protection. Traders have absolutely no control over the win-loss percentage and distribution, which are determined by market action alone. Expectancy itself is, irrefutably, a non-controllable or non-actionable performance parameter in light of those effects. Hence, in the majority of cases, expectancy is “expecting” the win-loss percentage to remain higher than the expected value in order to remain positive. This is highly unlikely as the market, being mostly unpredictable, will express itself in all manners imaginable and in the process result in the unavoidable mismatch between methodology and market action. When such mismatch occurs, the account will experience periods of drawdown. ...
