The Profitable Art and Science of Vibratrading by Mark Andrew Lim

Description

ne of the key aspects of trading (and the most frustrating) is that it’s impossible to predict the future. Since no trader can possess any absolute knowledge as to the future direction of price, one obvious option is to employ a ‘‘Martingale’’ strategy which keeps you increasing your bets until you eventually win. Unfortunately, since we don’t know exactly how long any particular losing streak will last, and since most of us lack unlimited funds, this strategy is destined to fail, resulting in the total loss of our capital.

If we could work out exactly when that streak would end, of course, we would never lose, because we would know well in advance the precise amount of funds required to survive the streak and eventually produce a win, or a gain in capital. Even though the risk to reward ratio may be extremely low, especially on the very last bet, the trader would still come out on top.

Imagine if traders could enter the financial markets knowing exactly where the Martingale ‘‘limits’’ reside. Even if the price remains below the traders’ entry level indefinitely, they would have the ability to coast through the losing streak to success.

I have adapted the high-risk and high-investment method of scaletrading to a safer, more powerful and adaptive tool: Vibratrading. Vibratrading is based on generating returns in the market from price oscillations, or vibrations. It is also implemented with reference to the concept of boundedness, which helps the trader or investor understand the type and degree of risk associated with any particular trading technique or mechanism. Trading according to the rules of boundedness is what separates vibratrading from conventional scale trading. Boundedness is all about capital preservation, which includes the strict avoidance of all capital depleting mechanisms like stop losses, long options or initiating net short positions. More specifically, boundedness is defined as the condition in which the final account equity will be equal to or greater than the initial account equity, should price retest the initial price entry level. For example, a ‘‘vibratrader’’ enters the market at a certain price. After a number of trades, the market returns to the initial price level. If the methodology caused equity to fall below its initial value, then that methodology is said to be unbounded. All trading strategies and mechanisms are categorized as either bounded or unbounded. The vibratrader has a choice to implement either trading mechanism within the vibrational construct, but this must be done with full understanding of the risks involved in choosing an unbounded methodology. These strategies can be used in conjunction with various diversification techniques to accomplish what most traders and investors previously thought impossible.