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Richard!
WOW!... thank you so-o-o-o-o much for your thoughtful, meaningful reply.
I really appreciate your insights, and I know they will benefit me greatly.
Warmly,
Brian
At 06:20 PM 11/17/2001, you wrote:
>Dear Brian, Rich, Group, et al.,
>
>Brian, your note brought up for me an academic study that I read several years
>ago about taxi drivers in New York City. There, the economics of being a taxi
>driver is that one does not own one's own cab. Instead, one becomes
>associated,
>as an independent contractor and not as an employee (for reasons of
>minimization
>of the risk of legal liability), with one of several taxi companies in NYC.
>Then, whenever one wants to drive a taxi (which, because the driver is an
>indep
>contractor, is entirely in his or her discretion), one reports to the taxi
>company and leases a cab for what I recall is a 12-hour period, at a fixed
>rate,
>something like $75 for the period, on the understanding that the driver
>keeps all
>the fares he or she collects during the period. So, the deal is: A fixed cost
>for the use of the cab during the period + 100% of whatever you
>collect. These
>economics for taxi drivers are similar to those for private traders, such
>as us.
>We put up $$$ for our equipment and real-time data for the day (in fees,
>rent, or
>amortization of expenditure) and keep all the profits (or losses).
>
>What the academics found when they interviewed the drivers was that upon
>leasing
>a cab for the 12-hour day, the drivers largely adopted one or the other of two
>strategies:
>
>1. Drive all 12 hours, in the attempt to maximize their total collections for
>the day.
>
>2. Drive until they collected an amount that each driver, on his or her
>own, had
>predetermined, after which they would turn the cab back in and call it
>quits for
>the day. Here, for example, if the driver's goal was to collect $200
>during the
>day, if he did so before the end of the 12-hour period, he would quit
>early and
>take home $125 for the day, after having paid the taxi company $75 for the
>day's
>lease of the taxi.
>
>The academics then analyzed the statistics of who made what and how. What
>they
>found was that the drivers who drove for the entire 12 hours consistently not
>only made significantly more money on a daily basis but, as I recall, did
>so even
>on the basis of hours driven. (This possibility arises because the
>drivers who
>drove until they collected their predetermined amount necessarily quit
>before the
>end of their 12-hour period if before then, they had collected their
>pre-determined amount). While the academics could not prove it, they
>speculated
>that these results arose because of what they saw as a random fluctuation
>in the
>demand for taxis from day to day --- specifically, they speculated that such
>demand is largely a function of the amount of tourism in NYC: when there
>are lots
>of tourists in NYC, the taxis are full and vice versa. This is random, in the
>sense of being unpredictable, in that no one really knows when the
>tourists are
>going to descend on NYC. Some days, particularly when there are lots of
>conventions or some other big event, like the World Series, they're there;
>other
>times, they're not, leaving the taxis are largely empty. The academics also
>speculated that demand turned as well on the weather, which may be even more
>unpredictable --- when its cold and rainy, people want taxis; when it
>isn't, they
>don't.
>
>What the academics furthermore found was that but for the periods when the
>tourists were in town etc., it really didn't make much difference which
>strategy
>the drivers employed --- they all made about the same money per hour of
>driving
>--- when you drive more, you make more money, as one would expect.. Where the
>difference was clear, however, was when the tourists were in town, it was cold
>and rainy, and taxis were at a premium, which was largely unpredictable. But
>when one or more of these factors did occur, the 12-hour drivers made
>significantly more money than did the "drive to a pre-determined amount"
>drivers,
>which seems to make sense --- one makes make money as a supplier when demand
>increases.
>
>Now, I am assuming that one's purpose for driving a taxi is to maximize
>one's net
>profit per unit of time expended, and not out of a desire for public
>service or
>meeting people or the sheer pleasure of driving around town, by oneself, with
>others, or whatever. Given that purpose, the first basic question facing
>a taxi
>driver is "Am I going to drive today?" If you're not going to "drive"
>today, it
>doesn't make any difference whether the tourists are in town or not, what the
>weather is, or whatever --- you ain't gunna make any money because you ain't
>drivin'. But as long as a driver has made the decision to "drive" today
>in the
>attempt to maximize one's profits on a time basis, and as long as nobody can
>predict when the tourists will hit town, or will it rain and be cold, and if a
>driver has already paid the $75 for today and is now driving, then
>according to
>what these academics found, the driver should continue to drive to the end
>of the
>period no matter how much fares have been already collected today. This is
>especially true if, during the day, the driver believes that the tourists
>are in
>town, it cold, or its rainy. But it also makes sense to continue simply
>in the
>hopes that the tourists will show up, or it will turn cold or rain during the
>remainder of the period. Its makes sense at the margin --- it doesn't
>cost you
>any more to continue driving because you have already paid your fixed cost, so
>all the remaining profits are the driver's without any effective set-off for
>costs. Regardless of whether the driver continues because he is having an
>especially good day or on the hopes that his day will become an especially
>good
>day, it makes sense to continue, because that is when the demand for taxis
>(which
>cannot effectively be predicted) increases and gives the driver the
>opportunity
>to make unusually large profits. This opportunity will be forgone if the
>driver
>call it quits early, after collecting a pre-determined amount, and turn
>his cab
>back in. The nut of this situation seems to me to be that the time it
>takes to
>collect some pre-determined amount of profits doesn't have anything to do with
>the demand for taxis today. If anything, those two variables seem to me
>to be
>inversely correlated. If demand for taxis IS high today, then one will likely
>collect one's pre-determined amount more quickly, and given that
>situation, that
>is the very time when one's expenditure of his or her own time driving
>taxis will
>be exceptionally repaid in profits. As such, this is just the time when it is
>the most economically counter-productive to quit driving --- this is the time
>when one should drive no matter what, in order to maximize one's net
>profits per
>unit time, and resist the temptation to quit early, after having made some
>predetermined amount especially quickly.
>
>This situation with the taxis sounds to me similar to the situation with
>trading. Who knows when a trend will begin, but for a trader, just like a
>taxi
>driver, the time to be in the market is when it is trending, as it is then and
>only then when the market gives a trader the opportunity to make unusually
>large
>profits, which the trader will forego if he or she call it quits early, after
>collecting a pre-determined amount, and goes on with the rest of his or
>her day.
>
>The concern that Rich expresses in his note, in which you sound in harmony, is
>the inability to predict whether an incipient market move will peter out after
>3-5 points or extend for 10-15. And the concern that you specifically
>express is
>the efficiency of quitting the market after having made some pre-determined
>amount of profits. These concerns sound similar to the questions facing
>NYC taxi
>drivers: Are the tourists in town? Will it turn cold? Is it about to rain?
>Does
>it make sense for me to drive today, and especially to continue to drive
>once I
>have already paid my daily lease fee (regardless of how much I have already
>collected today)? If these concerns are similar, then the results of this
>study
>of NYC taxi drivers suggest that for taxi drivers as well as traders, higher
>profits per unit time expended can be realized by employing a strategy of
>working
>through the day as opposed to quitting after reaching some pre-determined
>amount
>of profits.
>
>I hope the foregoing discussion provides some encouragement for you to
>reconsider
>your decision and see if it best fits your goals.
>
>Sincerely,
>
>Richard
>
>
>
>Brian Keith Voiles wrote:
>
> > Rich,
> >
> > I am in the exact same boat as you. I think it's a personal matter,
> really.
> > My daily goal is to make 4 handles... $1000 less commissions. I break
> > my daily goal into two, two-handle trades. Then I turn off the computer.
> >
> > If I lose 4 points, I call it a day, as well. That's the max I'm
> willing to
> > lose on any given day.
> >
> > As my account builds, it's my intention to trade 2 lots, 3 lots, and
> > eventually 4 lots. (Right now I can't "see" past 4 lots -- maybe when I
> > get there...).
> >
> > I think the reason I've chosen to do it this way is because I don't really
> > perceive myself as a "real" trader. Let me put it differently: trading is
> > not who I am -- it's what I DO to facilitate the living of my dreams.
> >
> > In other words, I don't want to eat, sleep, and breath trading 24-7.
> > I use the $1000 a day (soon to be $2000, then $3000, and then
> > eventually $4,000) to allow me the time freedom and money freedom
> > to live my dreams. Which for me is:
> >
> > 1) being a great "stay at home" dad for my kids
> > 2) writing and studying music
> > 3) writing inspiring stories and books about life
> >
> > Having said all this.... it would be really nice to let the profits run
> > on occasion. I haven't found a "real" answer to your question. For
> > I, too, have had the same experience in the past as you have... that
> > of:
> >
> > "It seems that every time I grab the 3-5 point profit the trade
> > goes on to 10-15 points and every time I let profits run, the 3-5 point
> > profit disappears. I am not particularly found of trailing stops
> > because I have to be willing to give back a fair amount of profit."
> >
> > This is my experience as well. BUT... that's what led me to the
> > decision I've come to: "Make 4 Points Today, Then Go & Play"!
> >
> > I'd love to hear what other feedback you get. Please keep in
> > touch... I'll add you to my list of S&P traders whom I try to keep
> > in contact with.
> >
> > Warmly,
> > Brian Keith Voiles
> >
> > At 08:34 AM 11/17/2001, you wrote:
> > >I am an S&P day trader and keep going back and forth in my mind my exit
> > >strategy. There are 2 schools of thought 1)let profits run 2)don't try to
> > >be a pig on every trade. It seems that every time I grab the 3-5 point
> > >profit the trade goes on to 10-15 points and every time I let profits run,
> > >the 3-5 point profit disappears. I am not particularly found of trailing
> > >stops because you have to be willing to give back a fair amount of profit.
> > >Others use a staggered exit strategy such as take 1 contract off at 3
> points
> > >another at 5 another at 8 etc.
> > >
> > >I would be interested in hearing only from successful S&P day traders
> which
> > >school of thought they follow.
> > >
> > >Thanks
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