TRO's given everyone the "Holy Grail" of trading!!
Why are their so many doubting Thomases? Why are they so many seeking mathematical exactness like "2+2=4" or perfect symmetry and logical perfection like "A then B then C"? This is picture perfect trading simplicity!
I hope that TRO will forgive my taking liberties in defining some of the theoritical aspects:
1. The actual trading instrument is not important. It can be stocks, bonds, options, futures, commodities or forex.
2. The quantification of the actual instrument traded is not important. The fundamentals or news are non-considerations as they are already factored into the instrument's price. The technicals are acted upon at differing time intervals with one overlapping and effecting another interval.
3. The actual starting point selected is not really important. It can be any point, it just doesn't matter. It is just an arbitrary point of reference.
4. It is important to set the long or short entry points wide enough to absorb and minimize "noise and whipsaw" relative to the time period of trading. One just has to use some common sense based on observations and experience. The closer the entry points to the exit line the shorter period of time and visa versa. Five minutes is different than 15 and hourly is different than daily.
5. When the trade moves in the desired direction, you ride that pony until you just can't stand it any more. Whereas, if the moves against you, you have a defined loss amount. In other words, you know exactly what you can lose (risk) and it is finite but the amount you can gain (win) is infinite (well not really but you understand the point).
6. It is no more than a simple gambling proposition (I just can't resist punching in metaphors from my career). Basically it's a 50-50 chance of an instrument going up or going down and no one knows with any degree of certainty which way it will go. Technicians, fundamentalists and news wary people will attempt to predict what is going to happen in the future. They're kinda like a seer predicting that a 7 will roll on the craps table and they'll be right 1/6th of the time and wrong 5/6ths of the time. There are absolute, undeniable facts, if the price IS moving up then be long and if the price IS moving down you better be short! What TRO's Holy Grail does is to give a person the opportunity to move directionally with the price with an undefined upside and a defined downside relative to the time frame the person chooses to participate in relative to their "betting" limits.
7. Understanding the "gambling" math behind the concept is essential. In order to win you must either win more times than you lose (percentage wise) or you must win more money when you win than money lost when you lose. Either of these events create a positive expectation. The flip side is a negative expectation (read that casino gambling games).
8. Even with a positive expectation you can lose all your marbles! You have to have enough "bets" to carry you through the standard deviations which occur. If you have a 99% positive expectation of winning a bet and you bet all your marbles on one shot, there is a 1% chance that you'll lose that specific time. Does that mean that you'll win the next time - nope! What happened in the previous decision has no bearing on the odds of the event - the odds of 99-1 remain unchanged. You could lose ten consecutive decisions and win the next 990 in a row - but the odds are still 99-1.
There is a mathematical formula created by a fellow named Kelly and called the Kelly Criterian which is a formula to maximize your "bets" relative to your bankroll and your probability of winning. Essentially if it is followed it is virtually impossible to get busted. The essence of the formula is to bet no more percentage than your positive expectation of your bankroll.
For example, you have bought a stock (or stocks) ten different times. You were willing to accept a loss of $100 each time on each transaction. At the end of the last transaction you had "won" a total of $100. You risked $1,000 to get back $1,100. Your advantage at this point would be 10% (1,100 divided by 1,000 less 1). So Kelly Criterian would indicate that your bankroll would have to be $1,000 ($100 max loss divided by .10 advantage) in order to substain a the $100 bet size.
"Technicians never die - they just chart away"
Trade like a Lemming but don't jump off the cliff like the others