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Game of Chicken (and flipping a coin)...

I try my best to pass the foundations of my trading habit to my boys. This is sometimes done by asking their help in developing teaching material. My next class with will be a four session course on money management in options trading.

To demonstrate how being right 50% of the time is profitable if certain rules are kept, I asked my 12 year old to flip a coin 52 times and record the results. I secretly hoped that 26 would turn up heads and 26 would result in tails. By hook or crook, it was close.

Now for the fun part...

Starting with a $5000 account, simulate a trade using 20% of the capital (compounded for each trade) and set categorical exits at either a 10% loss or a 20% gain.

Here are the results:

Results of Coin Flip investment Strategy

A $5000 account becomes $8,198.13 (excluding commissions) in 52 trades. If those 52 trades are over a 1 year period, you just earned a 63.96% annual return on your capital.

The message here is that if we use tight money management principles with categorical exits at a 10% loss or a 20% gain, your account gains, even if you are right only 50% of the time. It should be noted that gains can vary if you get a run of "heads" or "tails," which can and will happen.

It is during times of multiple "tails" that it is tough to not be chicken and give up. Stay consistent in your money management rules and it is difficult to lose.

Much of this went over my sons heads. I try. Hopefully one day he will get it...


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