The Snow Fight Metaphor and Trading

In Chapter 13 of the second edition of Trade Your Way to Financial Freedom, I discuss the snow fight metaphor in which each aspect of the snow fight represents some aspect of trading. Thus, in this week's tip I'll give you the metaphor… you see if you can determine how each aspect of the snow fight represents trading. And when you view it this way, it helps you see the relative importance of each element.

So the purpose of the snow fight is to destroy the other person's wall of snow that is their security. That's right; you have a wall of snow in front of you that's protecting you from destructive snowballs. Once the wall in front of you is gone, you have no more protection and you'll be ruined. If you start out with a small wall, then you might be in trouble, but a big wall will provide you with a lot of protection. So what does the wall stand for?

Now there are two kinds of snowballs coming at the wall, black snowballs and white snowballs. Black snowballs destroy the wall making a hole in the wall approximately equal to their size. White snowballs, on the other hand, add to the wall, making it stronger. Now, I know I'm stretching this one a little, but I needed black snow to make the metaphor work. What do the black and the white snowballs mean in terms of trading?

Also, both snowballs produce a slight destructive force on the wall just by hitting it. Black snowballs destroy a little more of the wall than their volume because of this destructive force. White snowballs do not quite add their total volume to the wall because of the destructive force. So what does the destructive force stand for in terms of trading?

Everyone would love to only have white snowballs coming at the wall because they would increase the size of the wall. But some black snowballs do come. So what do you think the ratio of white to black snowballs means in terms of trading?

So let's say, your wall is pretty big and you have 20 white snowballs hitting the wall for every black snowball that hits. Are you happy? Or is there something else you need to know?

You shouldn't be happy because you need to know the relative size of the snowballs. For example, you could have 1000 white snowballs the size of a marble hitting the wall and they would not overcome the impact of one black snowball the size of a six foot boulder. So what's most important is the relative size of the black snowballs versus the white snowballs. What do you think this stands for in terms of trading?

Another important variable that's going to tell you something about how long the wall will last is how often the snowballs come. One snowball every second will have a lot more impact than one snowball every hour. What does the frequency of the snowballs stand for in terms of trading?

In the trading arena, most people focus on one of these variables, the ratio of white to black snowballs, and ignore the rest of them. That should give you a good clue what that variable means. But hopefully, even from the metaphor, you can see the importance of the other variables.

And lastly, there is one variable that, in my opinion, could easily be the most important variable in the snowball fight, but I haven't even mentioned it. What do you think that variable is?

And what does it stand for?

Have a good weekend. Next week I'll reveal what each of the variables are, including the missing variable, and talk about how to use those variables to evaluate your trading system. Until then, this is Van Tharp.

Dr. Van K Tharp
TradingEducation.com

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