12. Frequency is the factor that decides everything…

Even though it now seems you’ve understood “how to set a stop-loss line”, ever-worrying you discovers after a while that this is completely abstract, and is once again something that is completely useless. Why?

Soon you will discover that this “daily volatility” completely depends on what timeframe or scale you are observing. Look at the %K line by the hour, minute, day or month… and you’ll reach different conclusions. So at the very least there is another factor to consider, which is how frequently you make trades. Do you make trades daily? Or are you trading all the time? Maybe you should chose to trade once per quarter? This is not an easy decision, and it also doesn’t have a standard answer.

Some people are trading every moment, but they worry that they have “low efficiency”, so they depend on writing programs to engage in “quantitative trading”, making a futile attempt to capture every opportunity for profit in the market. Some people don’t even trade once per year, while some people trade once every few days… Let’s first not worry about what decides these trading frequencies — what’s important right now is: What results are influenced by “trading frequency”?

There’s an “elephant in the room” — one of those phenomena that is obvious but that people ignore:

The higher the trading frequency, the closer it is to a “zero-sum game”.

Wise people have repeatedly reminded us of this, it’s just that they have had different ways of saying it. The words are different, but the meaning is the same:

"In the short-run, the market is a voting machine… but in the long-run, the market is a weighing machine.”

— Benjamin Graham

So if leeks want to turn things around, I’ll say it a million times, there is only one road to take:

Reduce trading frequency… Reduce, reduce, reduce.

Don’t disbelieve this: as long as you’re frequently trading, you are still nothing more than a “leek”. Reducing the frequency of your trading is easy to say but hard to do. Many experts try to convince novices to reduce the frequency of their trading, but even though their reasoning makes a lot of sense the novices don’t care:

The result of frequent trading is an accumulation of trading fees, which will accumulate until they eat up all of your profits and principal…

We already know that the mistake that almost all novices make is to assume that they are participating in a “zero-sum game”, and so the vast majority of them become “leeks”. However, what the vast majority of them don’t realize is that, as their trading frequency increases, they are really getting closer and closer to “tirelessly playing a true zero-sum game”.

Most terrifying is that, from a macro perspective, exchanges are the only winners in the “zero-sum game” of the trading markets — everyone else loses. Even though the players are “gambling” (trading) amongst themselves, the exchange is “skimming off the top” (taking fees) no matter who wins. When you win, a bit gets skimmed off the top, and when you, lose a bit gets skimmed off the top, so no matter who wins or loses both parties have a bit skimmed off the top… and what’s the conclusion?

There's simply no “zero-sum game” in the trading markets at all.

The hallucination of leeks is that with their behavior they show that they believe and persist in believing that they can use their intelligence and strength to completely defeat fees… They never know that “skimming off the top” is the only sustainable business model in human history, and that it’s truly not something that can be defeated by an individual. Take a look at brokers around the world and you’ll understand.

The huge benefit of reducing trading frequency is evident in another area.

When your trading frequency is higher, it is hard to reduce your risk/reward ratio, because in such a short period of time it is extremely unlikely to “suddenly” have huge returns. Even though sometimes you will see “tremendous increases or decreases” in a market with huge volatility, trying to capture these tremendous increases or decreases is precisely the most risky behavior — it’s like trying to take coals from a fire.

When you actively try to reduce trading frequency (notice that I say “actively”, while “unconsciously increasing trading frequency” is the passive behavior that traders have been pushed into by the market), you will discover that this is actually equivalent to actively increasing your risk/reward ratio, because you actively decreased the denominator (return), without decreasing the numerator (risk).

When I first started, my trading frequency was also high. It was only after I understood, and started to actively reduce my trading frequency, that I realized that the amount of the return I required to satisfy me was constantly rising. I even gave myself the following rule:

Before it increases 10x, treat it as if it doesn’t exist.

10x! This is a level of return that I never even imagined when my trading frequency was relatively high. Maybe I will change this multiple in the future, but this is a number that could only appear in my mind after I had actively reduced my trading frequency many times over the long term. I couldn’t have imagined it before.

It’s counterintuitive that in the market:

• The shorter the term of the prediction, the closer it is to flipping a coin.
• The longer the term of the prediction, the closer it is to logical reasoning.

So the essence of reducing trading frequency is refusing to flip coins and insisting on logical reasoning.