Money Management 3

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Money Management 2

Date: Sat, 14 Dec 96 11:24:06 PST
From: ramon@world.net
Subject: Re: Tuition and Education
To: dgl@vnet.net

================================================================================
On Fri, 13 Dec 1996 04:04:17 -0500 (EST) Carl wrote:
> I WANT and NEED 'HELP' in my trading decisions!!!
>
>I've "BEEN THERE and DONE THAT" but always,my way-NO DISCIPLINE!!! , seat
>of the pants kind of stuff-------what a rush,a 30,000 + day,and then watch
>the 'screen' in >a sort of trance for a 90,000 ---(minus) day! .....
(of course,day >trade,NO stops, >until my order taker asked for it)
===================================================================================
Hi Carl,
Here are some suggestions and hope they can at least point you in the right direction.

I believe the transition from "mug trader" to "consistent profitability" needs the
learning of three lessons.

1 thinking in terms of probabilities. Ultimately, this needs the development
of a trading plan (including a money management plan).
2 executing that plan as flawlessly as possible and
3 accepting the profits the markets gives a trader as a reward for his
efforts.

The first lesson is firstly technical ie acquisition of the relevant knowledge
and secondly psychological ie application of the knowledge. The other two lessons
are mainly psychological.

Generally I have found that most novice traders fail to have a plan; in other words
they fail at the first gate. To have discipline means to "execute your plan flawlessly";
if you don't have a plan, then how can you expect to have discipline?

So what must a trading plan contain?

* Identification of the timeframe you are trading:

This means you have some means of measuring moves of a like magnitude and identifying
the trend of that timeframe:
up, down or sideways.
It also means you have some means of identifying changes in trend.
Once you have identified the trend and answered the question "continuation or
change", you have established your strategy.

in uptrends: buy
in down: sell
in congestion: buy the bottom end of congestion and sell the top end or
just stand aside until a trend resumes.

Once you have your strategy, then you need to establish

* low risk entry

++ To do this, you need to have some means of establishing support or resistance areas
where the market is likely to stall eg

- you're in an uptrend, a correction is in place, you need to
establish an area where there is a high probability the correction
will end

- you're in an uptrend and given the structure of the market,
you are looking for a change in trend. You need to
establish an area where there is a high probability the trend will
will end.

DGL's are great for this.

++ You then need to define a series of high probability setups. I define
this idea as indications that the support/resistance area are
likely to be effective.

There are three groups of setups. These (with examples) are:

time: Delta, Gann dates, Fibo dates, cycles, etc

volume/price: Wyckoff, Arms etc

price: Candelsticks, 5VBT etc

You can of course mix setups from each group.

++ Finally you need to establish an entry technique and initial stop.

eg the ATR posted here recently.

The principle here is you need some means of identifying rejection away
from the zone.

* trade management

Once you are in a trade, you need to manage it.

++ at its most basic, this involves a trailing stop.

++ however, I have found that the "rule of three" allows you to take
some profits early while retaining the possibility of taking part
in large trending moves - the best of both worlds. I posted
this idea before. If you missed it, e-mail me and I'll resend it.

When the trading plan is in place, you need to establish a money
management approach. This has two purposes:

a how much capital is needed to fund each contract,
b the stop loss for each position

Both questions are determined by four factors:

a financial capacity to lose ie your capital base
b psychological capacity for loss
c the profitability profile of your methodology
d the volatility of the markets you are trading

I won't go into this here - this post is getting too long as it is.
However I did write an article on this topic on the Realtraders
Website, http://www.realtraders.com/.
Go to "trading secrets" and to my "shelf".

regards
ray
-------------------------------------
Name: ray barros
Tel : 61 2 9267 3470
Fax : 61 2 9267 3478
101/25 Market Street
Sydney NSW 2000
Australia
E-mail: ramon@world.net
Date: 12/14/96
Time: 11:24:06
-------------------------------------

In any given market, the sum total of all traders's perceptions is one
collective perception which, at any given moment, creates the price and
hence the reality of the marketplace. Every trader's account is credited
or debited based on this.
If that perception is not in harmony with the collective perception of the
market, that trader will be punished by losing money.
These are not my personal beliefs anymore than the law of gravity
belongs to Newton. This is the way of the market. But, perhaps this is
all wrong given that it is coming from someone who you claim has a 70
IQ. On that last point, I think you may be on to something. Every since
graduating from my third rate alma matar college, I have been working
hard at dumbing down so I could become a better trader. Since arriving
on the CBOE trading floor in 1975, I came to the conclusion that trading
genius lies in the brain of a 4 or 5 year old child. More recently, I had
the opportunity to test this hypothesis and was pleasantly surprised when
my then 4 1/2 year old son produced some extrordinary trading results, i.e.
62% winning trades with a 2.41 to 1 win/loss ratio, and more than $7,000
in profit in about ten trading days. Please keep in mind that for the
purpose of this experiment I provided little or no instruction to him on
the markets. I merely ask him to look at some charts and indicate up, down,
sideways, or that he didn't know. I then took the markets for which he had
an up or down opinion and did a paper trade based on the close price of that
day, i.e. bought if he said up or sold if he said down.
So if IQ measures one's intelligence in relation to one's age, I can see how
it would be helpful for me to perhaps reduce my IQ to about 25 in order to
become a more succesful trader. I thank you for your assessment of me being
at an 70 IQ, as this shows that I have been making steady progress in reducing
my IQ.
Norman nwinski@naples.infi.net

What makes you think that determining market direction and chosing indicators
are relevant in making money trading? If you look for these, you become an
analyst, not a trader.
Joe Ross: "TRADE WHAT I SEE, NOT WHAT I THINK!"

You can fool all of the people some of the time and some of the people all of the time.

The best time to buy is when blood is running in the streets, even if it is
your own.

Neal T. Weintraub in "Tricks of the Floor Trader" said: You will run out of
money before a guru runs out of indicators...

Subject: Re: Poll: Pick your favourite three indicators
In order of priority:
1. Price
2. Price
3. Price

The problem is, the tighter the stop, the more likely noise will stop
you out with a loss even if your entry was good and the trade will show
a profit if you stay in. Therefore the best stops are not stops in the
traditional sense but rather short and long exit signals based on careful
system design and with due respect to the reasons why the system
got you into the trade. Do the justifications for entry still exist?
Bottom line is that exiting a position requires as much thought in
system development as entries do. The better the system, the less often
you will wish you had a stop loss that was not already part of the system
itself. These days, many system writers are looking to volatility as part
of the criteria for entry and exit, but other factors involve partial vs.
complete profit taking, looking at multiple time frames. etc.
James Charles money4u@erols.com

Try looking at a 3/9/15 Exponential Moving Averages and trade multiple
contracts (2 or more). When the 3 crosses the 9 sell one. If the 3 crosses
the fifteen sell the rest. If the 3 doesn't cross the fifteen you will
still have a contract or two on. This can reduce the number of whipssaws.
It will also increase the dollars of profit per trade and decrease the
dollars of loss per trade. POINT IN THOUGHT: has anyone considered in
which time frame you use your moving average? If you trade 5 min charts,
what about putting the MA on the next longer time frame( 20 min)? Comments
or ideas welcomed.
Richard Chehovin GalacticFXInternational@worldnet.att.net

Should you desire to increase this stop loss (1% of cap.), you should reduce
accordingly the size of the position or exposure you have in that market and
at that method at that particular time.
=> adjust stop loss and profit-taking levels
as the profit in a position increases, you should reduce the position size to
maintain a maximum portfolio exposure and, ideally, in effect you will be
investing only the profits generated in the trade (!).

1. I trade a basket of commodities having certain margin requirements.
2. I fund my account at least 2 times margin. I can thus withstand a
drawdown of up to 40% emotionally...
3. I increase my units of trading when I have enough money to cover taxes
and another 2 times margin.
It is simplistic but it works for me. Rumery and Lehman also offer a system.

If you know the approximate drawdown (who really knows???)...you must then
fund your account according to your temperament..., i.e. it sounds as if you
are uncomfortable with the % drawdown....deleverage by having a larger account
size...thus a lower % drawdown... If that is not possible, try to deleverage
by switching to the DJH8 or ESH8...thus accomplishing the same effect.
Tom Stein comfut@msn.com

I use threshold levels to increase my trading size. My formula is:
2x max historical drawdown + margin = equity needed to trade 1 S&P contract.
So a 50% drawdown to me means a real 25% drop in equity.
By drawdown I'm talking about my total net running drawdown. I always
use stops on my individual trades which keeps my max. daily net loss around
3% to 5% depending how many systems trade that day (I use 3 systems). The
recent volatility in the S&P's has forced me to almost double my stops over
the last 6 months which has made the drawdowns deeper.
Bob RRedman144@aol.com

Maximizing use of Margin:
Margin for British Pound is $1552 while Swiss Franc is $1721, both had almost
the same amount of margin requirement to trade one contract. But BP offers
the most bang for the buck in which its average EOD close is at around 100+
points compared to SF which is 50+ points.
BP tick size is $6.25, SF point value is $12.50.
=> Both point values are NOT 12.50. The Pound is 6.25 per point. Both are 12.50
per TICK, but the minimum tick in the Pound is 2 points. So the margin in this
case does accurately represent the "bang for your buck" since the average daily
move in both is $625 per contract.
The tick in the BP is $6.25 per contract but the minimum tick is two
so you are back to $12.50 per contract.

trading plan has three rules:
1) When to get into the market
2) When to get out with a profit
3) When to get out with a loss

If I flip a coin N times, then the odds that I will never flip a head
are 1/(2^N). This is true no matter how high a value I give for N. So it
seems plausible that, if I flip a coin a countably infinite number of times,
then the odds that I will never flip a head are 1/(2^countable infinity)--in
other words, one over an uncountable infinity. This result seems reasonable,
since the problem can also be looked at as "If I somehow picked a random
infinite string of coin flips from the set of all possible infinite strings of
coin flips, what would be the odds that I would pick the set with all tails?"
There are an uncountably infinite number of infinite strings of coin flips, and
I'm looking for exactly one; so, assuming that I'm really picking randomly (so
I'm no more or less likely to pick one string than another), the odds of
picking the all-tails string should be 1 over that uncountable infinity.
Now, _if_ I'm restricting myself to the real numbers, I then proceed to
say "Well, any finite number over any infinity must be zero"--so I say that
the probability is zero. If I'm allowing myself to use infinitesimals, then
finite numbers _don't_ get zeroed out by infinities in this way, so I simply
leave the result as it is--1 over an uncountable infinity. That's not a valid
real number, but it's a valid infinitesimal.
Yes, this is counterintuitive; but then, so is infinity itself. And
think about this: If we exclude infinitesimals, then the odds that an infinite
string of coin flips will contain at least one head are "1-but-just-maybe-it-
won't-happen." The odds that an infinite string of coin flips will contain
at least ten coin flips are "1-and-I-really-really-mean-it-this-time." We're
using the exact same probability figure--1--to describe one event that's
certain to happen, and another event that's not. Doesn't that defeat the whole
purpose of probability figures? Doesn't that suggest that, in problems like
this, we're making an error by restricting probability figures to real numbers?

Risk Trailing Stop:

maximum profit is calculated from the point of entry using the highest high if long, or the lowest low if short.
The dollar amount of profit per contract or per position you are willing to risk is then subtracted and the trailing
stop is placed at that point.

Multiple Entries:

Average all entry prices (factoring in any profit for any entry) and divide by the number of contracts.
This average, minus a market move that represents an additional $500 loss, is the stop price, a level where once the
position is exited you would lose $500.

Let's look over the shoulder of an experienced gambler (you will learn much more on Money Management on Gamblers' websites than on Trading websites!!!):

Here is what a lifelong gambler told me.

You buy in for $100 at blackjack.
Maximum bet is $2 until you start winning.Then you increase your bet size.
Increase your bet 50% on a win. Go back to $2 on a loss.
If you lose the $100 you walk!
If you get to $175, YOU PUT $150 in your pocket,never to see daylight again!
Now you play the $25 left. You lose it, you walk.
You are now betting $2 again. Increase your bet 50% as you are winning.
When you lose back to $2.
If your chips total on the table $50, you put $25 again in your pocket
never to see daylight again !!!
This goes on until you lose the $25 stake once and then you walk!!!
No drinking and you must be disciplined.
You must follow basic strategy perfectly or use the card.
Sit at third base. Only shoe games. Never take insurance.
Once in a while put out $1 for them, especially when you have a big bet out there. You have to be comfortable. If there are
obnoxious players, cigarets or cigars or dealers that bother you, change tables. If you are tired and up money, do not play anymore.
Never play at a casino that does not let you double down after splitting.
Never play at a casino that does not let you double down on any two first cards.
If you want to bet $5 minimum, you must start with $250; 50 times minimum bet!
billhere@att.net

==> You minimize the casino advantage by knowing when to split and when to double.

What I mean here is that using ONLY WINNINGS or "house money" I follow a classic
Martingale betting progression in an attempt to win MORE money, i.e. even when
I am only winning LESS than 50% of the hands I am playing. If the table is
"choppy" (win-lose-win-lose) or even if it becomes slightly dealer-biased so
that I'm only winning, say, one out of three hands, this STILL allows me to
slowly win more money than I'm losing.
IF it happens (as it does quite often) that my chasing the losses all fail and
I end up back at my starting basic buy-in money (20 units), I will then give up
on the progression and basically start over, flat betting my own money and
basically pretending that I just arrived in the casino once again.

Negative progressions tend to increase the frequency of winning small amounts
but expose you to occasional large losses. Positive progressions tend to
increase the frequency of losing small amounts but give you a shot at
occasional big wins.

First, gambling is not a continual game resting purely on chance. Individuals
can materially affect their odds by knowing what those odds are and making
choices to maximize their odds.
Second, no one gambles with unlimited funds thus stop losses and strategies
for money management are important to the game. Third, if you increase your
bets when you win but always hold a little back (never betting the entire
winnings) you will be better able to take advantage of winning streaks.
Probability operates in the long term over many trials. Most
individuals bet for short periods of time. The imbalances that occur in the
short term correspond to what people call "luck" and can be very good or
very bad without necessarily evening out for the periods people generally
play (hours or days vs. months). It is entirely possible to win in the short
term and many people do.

I plotted histograms of the actual results. There was the familiar "bell-shaped"
normal curve. For regressive betting, it had a long relatively flat tail on
the negative side (the small number of big losses) but the bulk of the curve
was on the winning side. For progressive betting, the curve was centered on
the losing side but had a long flat tail on the positive side (the small
number of big wins).
(A distribution with a significant positive skewness [the more extreme values
are greater then the mean] has a long right tail. Investors prefer returns
and positive skewness and dislike risk and negative skewness)
A measure of the (a-)symmetry of a (return) distribution. Positive skewness
would indicate a greater probability of large high returns relative to low
returns.

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