During the 1970’s and 1980’s, professional gambler, Archie Karas, amassed a 2 million dollar fortune. By 1992, he had lost it all but for the $50 he had in his pocket when he landed himself in Vegas to mount his comeback. Fifty dollars was hardly a sufficient stake, and so Karas borrowed $10,000 from a friend and fellow gambler. During the next twenty-four months, in what has become known in annals of gambling simply as, “The Run,” Karas parlayed that $10,000 grubstake into a $40 million dollar fortune. A story made more amazing by the fact that Karas ran the original 10K up to 30K in less than a month, and then he promptly repaid his friend the original 10K stake plus an additional 10K as his friend's cut of the earnings; thus leaving Karas again with a mere 10K from which to start. This is a great story, especially if it ended there. And for the moment, that is where I will end it (but just for a moment).
Trading is itself nothing more than a form of gambling. Now before anyone takes umbridge with that statement, let me explain what I mean: All gambling, by definition, and strictly speaking, involves risking capital on an uncertain outcome whereby one will profit or lose depending upon the actual outcome. Trading is simply placing your bets on uncertain outcomes in the financial markets, whereby you will profit or lose depending upon the actual outcome. The successful trader with an edge is therefore no different than the successful sports bettor with an edge. The unsuccessful trader without an edge who goes bust over and over is like the unsuccesful craps player who goes bust over and over. All four are gamblers, but only two are professionals, while the other two are not even proficient amateurs.
David Sklansky, in his book, Getting the Best of It, notes that most people gamble for one or more of the following three reasons: to have fun, to make a score, or to profit consistently. It is no different with trading. And I agree with Sklansky that any of these reasons is fine, with the only caveat being that any of the three is fine, so long as the trader himself is aware of his own motivation.
While most of those who decide to play the markets do so (at least they say so to themselves and their friends and their wives and husbands) for the third reason, i.e. to profit consistently, most of us know, or have at least witnessed others who trade for the sake of the action alone, or to make the score, e.g. "I'm going to take $700 to $100K or bust in 12 months or less."
It was in response to someone proposing just such a feat on another internet forum that inspired me, so to speak, to attempt "a score" of my own. And if not a score, if not a recreation of Karas's "The Run," at least a run of my own.
The Stake & The Game
The Stake: I am starting with a relatively small stake. I have a couple of sub-accounts at IB in which I keep about two thousand dollars each in order to keep the account open and maintain its margin permissions. I started trading with one of these accounts last week, the starting balance was $2045.
Goal One: A Score - I hope to grow this bankroll several-fold in a relatively short period of time. I will take this account as far as I can take it between now and Friday, January 17, 2014.
Goal Two: Consistent Profitability: I will trade this account as maximally aggressive as I can while avoiding "going broke," which of course means I will not be making bets where I "go for broke."
Goal Three: Have Fun! I've been trading for a good long time, and I love it.
Edge/Odds, Or Meet John Kelly
I will be trading this account using John Kelly's formula for maximizing capital growth. The formula is edge divided by Odds, or Edge/Odds. In expanded form, the formula is: (P*W-L)/P. In this formula, P is the payoff, W is the probability of winning, and L is the probability of losing. Basically, the formula states that for any given stock, …