THE MARBLE GAME

By -vegas INTRODUCTION
God does not play dice. Albert Einstein

For the longest time I weighed whether or not to release this article to the trading public. It deserves a high price tag, but ultimately I decided its value should be shared. This is a mental exercise, designed to arrange your thoughts in a pattern. For many of you, trading is either a new and strange arena of investment, or a frustrating and painful financial experience. For those of you who fall into the latter camp, I am here to tell you it doesnt have to be this way. The purpose here is not to layout the Xs and Os of The Vegas BFSG Algorithm. That is for another time and place. What I want to accomplish is to get you thinking like a winner; someone who knows how the proverbial game is played, and what your role in it is. I can hear your screams of anguish as you finished reading the last paragraph. Oh vegas, I dont need another person telling me all I need to be successful is a positive mental attitude. Or, vegas, just give me the nuts and bolts, and I can do the rest. Save the pep talk for rookies. But, your brain is jumping forward too quickly, and you are making assumptions that are false. Slow down a minute, and think about what I am saying. This is not meant to be a pep talk, or getting you in a positive state of mind [although that is not a bad thing to be in anyway]. It is to build a philosophical framework for trading. You would not dare attempt to build a house without an architectural blueprint, so why would you put your hard-earned money at risk without a solid philosophical plan backing you up? I dont mean this last question to be rhetorical. It is a serious flaw losing traders share, and it is the single biggest reason their account balances go lower by the month, week, day, hour, and minute. They cant get the answers to their questions, because they dont even know what the correct questions to ask are!! There are those of you who just want the nuts and bolts; you cant wait to get your hands on The Vegas BFSG Algorithm because you need money fast. Besides, who needs all this talk anyway? You probably are reading this only because 1) it looked semiinteresting and had an intriguing title, and 2) there was a link on the website and you found yourself downloading and reading this.

As a personal favor, I am asking you to slow down, sit back, and think critically. Lets strip the emotion from this discussion [i.e. stop thinking about the money you need] and instead look at human behavior. When the time comes for you to click the mouse on a buy or sell order on your MT4 [MetaTrader 4] electronic trading platform, in your heart and brain you must know it is the right and only thing to do; that it will make you money; achieve your dreams of financial independence, and make you a winner!! When I was a pit trader in Chicago, as new members of the exchange were let loose onto the trading floor [with their shiny new badges with red dots on them], invariably some would come up to me on their very first day of trading [20 or 30 minutes before the opening of trading] and the following conversation [paraphrasing of course] would take place somewhere in the pit. NEW TRADER: Hi, my name is ****, and from what I hear you make a lot of money trading. In fact, you are one of the very best. ME: Sometimes. NEW TRADER: Well, if its OK with you, I would like to stand near you and just do what you do. You know, when you buy, I buy. When you sell, I sell. Why reinvent the wheel so to speak. ME: You own the membership [or lease], you can stand wherever you want and do whatever you want. NEW TRADER: Well great, thanks. [Older members stand and not so graciously laugh themselves silly when they would see this. They know what is coming.] [END OF THE TRADITIONAL TRADING DAY, SOMETIME AROUND 3:20 P.M. 3:30 P.M., AFTER THE MARKETS ARE CLOSED.] ME: Hey *****, I made roughly $11,000 today, howd you do? NEW TRADER: [Head slightly bowed with no eye contact.] I lost about $500. ME: Gee, how did that happen? I thought you were going to do what I did. You know, buy when I buy and all that. NEW TRADER: Well, blah blah and blah blah, etc., etc. [Ad infinitum until I would just walk away leaving him/her to talk with anybody who was dumb enough to listen.] Buying fear and selling greed is not easy my friends. It is not an intuitive human genetic trait. It is hard work and requires great discipline.

Those New Traders would leave angry, frustrated, and confused. After all, they stood next to the legendary Barry Haigh [sorry for the indulgence Grandma, please forgive me] and still lost money. What the hell happened? My friends, they saw with their eyes and tried to make their brains understand, but their heart ultimately betrayed them. Was it fear, greed, or something else? Does it matter? They thought they knew what trading was all about, but that reality only existed in their head!! What they lacked, and clearly did not understand or grasp, is the absolute need for a philosophical framework in which to make trading decisions. This is the guts of what is underneath your buys and sells. It is what compels you to trade when you are supposed to, and leaves you sitting on your hands instead of doing something stupid. It lets profits run and makes your losses short and manageable. It allows you to focus on implementing the Algorithm, and not worry about what the market is doing. Your job is to implement the Algorithm, not to try and figure out where the market is going!!

HEY, LETS PLAY THE MARBLE GAME

What, me worry? Alfred E. Nueman

First, some definitions are in order. Many people use the terms system, model, and algorithm to mean the same thing. They very definitely are not. System means a wagering plan [or money management plan] to overcome a negative mathematical expectation. Anything related to making money while gambling in Las Vegas is a system. Model means a philosophical framework or plan, that when implemented in an algorithm, should give us positive [profitable] results in the real world [trading environment]. Algorithm is a precise set of instructions to be carried out under certain conditions. There is no guesswork or flying by the seat of your pants. So, if youve been paying attention [instead of watching Season 1 on DVD of The Sopranos for the 49th time while reading this], you realize that what we have here is the model for The Vegas BFSG Algorithm. Lets suppose you run into a friend or business colleague, who just returned from Las Vegas with the most fascinating story. He says they have this game in Las Vegas called The Marble Game. Here is how it is played.

Obviously, you are in a casino where the house takes the other side of what you are doing and makes all the payouts to the winners, and collects from the losers on the proposition at hand. There is a table, much like a blackjack table, where people sit and make their bets. There is a dealer who holds, and controls, a large leather bag. In the bag are 100 [one hundred] marbles. 94 [ninety four] of the marbles are red, and 6 [six] of the marbles are white. Behind the dealer are 2 [two] large wheels, that when spun will come to rest between 2 [two] metal posts. One wheel is the Winners wheel, while the other is the Losers wheel. The Winners wheel consists of the numbers 1 [one] through 10 [ten] symmetrically balanced around the wheel in a circle. When the dealer spins this wheel, each of the numbers has an equal chance, or probability, of coming up when the wheel stops spinning. The other is the Losers wheel. This has the numbers 1 [one] and 2 [two] symmetrically placed around the wheel in a circle. When the dealer spins this wheel, either 1 [one] or 2 [two] has an equal chance, or probability, of coming up when the wheel stops spinning. To play, the dealer first has everyone place their bets on the table. Now, he shakes the leather bag vigorously to thoroughly mix up all the marbles inside. He stops after a few seconds, places the bag on the table, sticks his/her hand into the small opening of the leather bag, picks a marble and pulls it out of the bag. If the dealer picks a red marble, everyone is a winner. Now, the dealer turns around and spins the Winners Wheel that is located behind him/her. Whatever number hits when the wheel comes to rest [1 (one) to 10 (ten)] is multiplied by the bet placed. Whatever that amount is, that is what you have won. However, if the dealer instead picks a white marble, everyone is a loser. Now, the dealer turns around and spins the Losers Wheel that is located behind him/her. Whatever number hits when the wheel comes to rest [either 1 (one) or 2 (two)] is multiplied by the bet placed. Whatever that amount is, that is what you have lost. The picked marble [red or white] is then placed back into the leather bag, and the game is played again. Is there any among you, given that this game exists, wouldnt quit your job in a heartbeat, go to the bank and drain your checking account [or hit up Uncle Eddie for a loan], then immediately hop in your car and drive to the airport to fly to Las Vegas to play this game? Why? You instinctively know that the mathematical expectation of each game is hugely positive and in your favor. You would make thousands of dollars, perhaps millions; the casino would be bankrupt rather quickly.

Whatever algorithm you use to trade, you are simulating The Marble Game. If you are consistently losing money, then the white marbles outnumber the red marbles and you have switched wheels. If you have experience with large losing trades, replace a few white marbles with yellow marbles and these represent losing 50% of your account when they are picked. Get the idea? In The Marble Game, we were dealing with strict mathematical certainties. In trading, there are no mathematical certainties, but there is a history, and it is this history that gives my model the necessary philosophical framework for me to be confident in its results!! Lets take a closer look at why The Marble Game is constructed the way it is. First of all, why the 2 [two] wheels and the different numbers on them? Your average winning trades should always be larger than your average losing trades. Second, over time your largest winning trade should always be larger than any single losing trade. ALWAYS!! From Futures Magazine, July 1987, page 63 [reprinted in PDF Adobe format on the Downloads Links page of this website], you will see an ad by me for my videotape Confessions of a Floor Trader. In this ad, you will see a table on the right side of the page. Over a span of 3 full] years, 94% of ALL trading days yielded a profit. My percent return was approximately 1,400 %. This was confirmed and audited by a Big 8 accounting firm that tracked my trading every day for 3 full years!! So, 94 [ninety four] red marbles and 6 [six] white marbles were not some numbers I just picked out of my nose for giggles. They have meaning. As for the 1,400 %: spin the wheel and do some math.

CONCLUSION
Hey, lets play two today!! Ernie Banks, Chicago Cubs

Many people assume incorrectly that whatever model they choose to incorporate into an algorithm, all they need to do is back test some numbers and see what works. Nothing could be further from the truth. It is not the sizzle of profits that will make or break your ultimate algorithm. It is not knowing what the major limitations are for your algorithm! In other words, under what trading conditions does my algorithm hurt me? Given the trading history of what I am trading, what is the worst that can happen? Define and then understand financial hurt, and you are a long way towards getting yourself into a position of sustained profitability. Every model, and by way of implication its subsequent algorithm, has at least one major flaw or limitation that produce losses. No algorithm can produce 100% winners indefinitely. Anybody who says different is a liar and a fool. Know and understand them thoroughly.

The mathematics behind The Vegas BFSG Algorithm is fairly sophisticated, but the model is simple and straightforward. The hard work comes into play when transitioning between the two. Even after 30 plus years of trading, when I think I know better than the algorithm and do something stupid like ignore a signal, or worse, fade a signal, the market is as unforgiving of my ignorance and stupidity as it ever was. Oh yea, I have gotten away with a few, but the majority were losers. It is better to suspend brain activity and just follow the damn algorithm. A long time ago, in the very early days of my trading career, I watched with horror as a very respectable and veteran trader got his head handed to him during a trading day. Losses had to be over a million dollars in just a few short hours. He bought the first break, bought the second break, bought even more on the third break, and was the final break lower in prices. After trading was finished for the day, as I stood by, I heard him talking with a friend of his in the pit. His friend pointed out what a damned fool he was for bucking the trend lower in prices, and then finally capitulating and selling at the bottom. Why didnt he show more discipline? Where was his game plan? What the hell happened? The exhausted, sweat soaked trader took all his friend had to say without moving a muscle. When his friend had finished and demanded answers, the veteran trader stood there for a few seconds before looking up with a sheepish, goofy grin. He finally spoke. Well, I sleep with her every Saturday and Sunday night. Today is Monday, and I thought maybe it was time for a change; you know, sleep with somebody else for a while. She didnt like it much did she? Truer words have never been spoken. Just follow the damn algorithm!! God, I hate weekends and Holidays because the markets are closed. Somebody turn the machines back on!! *** End