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Money management to me, regarding my commodity trading, involves the usual
methods of scale buying and selling, maximum positions in any one commodity and
maximum postions overall. My maximum position in one commodity is about 25%
of my equity. My maximum position overall (all positions)is 50% of my
equity. I will exceed this on occasion. Last week I went to 80% of my equity
in order to trade the S&P but that was for only overnight.
The most important part of my money management is scale buying and selling.
While my maximum position is 10 contracts on most commodities I position myself
by buying and selling usually 2 at a time. My first position is usually taken
when the MACD is close to signaling a buy or sell and the news is what I
consider favorable, ie on a long position I like to hear some bad news. I'm
driven more by news than any indicator. The worse the news the more I'm
willing to buy. If the position responds favorably I add to my position to the
extent I have a strong feeling about the fundamentals. Most of the time my
positions are 2-5 contracts. I have to really feel strong about a situation to
go to 10 contracts.
As for stops, because of the way I buy (when the news is bad) the market is
usually pretty washed out so I don't really need stops. If I'm not happy
with the action I just get out and take the loss. I'm constantly comparing
the action of the commodity against the news and if it doesn't respond to good
news I will eliminate my position.
An example of buying on bad news is the Yen. A couple of weeks ago I posted I
thought the Yen was in a good buying position because of bad news. I bought a
10 contract position because I felt strongly about it. But the move has been
slower that I expected and I've been fluctuating between 5,000 up and 10,000
down on my position. But I've noticed that in spite of all the bad news about
Asia and Japan the Yen has only moved sideways, not down. Because of this
action I've kept my full 10 contract position. The Yen is close to breaking a
downtrend line and the MACD and OBTR are now in positive territory. But the
main reason I haven't cut back on the position is the news. TA is OK but only
part of the picture as far as I'm concerned.
As for the random walk theory that came out of the U of Chicago, I don't know
of any successful trader that believes that. There are many inefficiencies
in the markets as far as I'm concerned. Success in commodities is usually the
result of experience, hard work and the right temperment. I'm a far better
commodity trader than a stock trader. Losses don't bother me at all. I've
just lost a few chips off the table.
With the way the markets trade now you have to trade commodities 15-18 hours a
day. It is damn hard work. I start at 7:00 Chicago time and go to bed at
about midnight. Have some time off from 3:30 to about 7:00 and then have to
watch the action in Asia. In all this time I might enter only a couple of
orders. Since July I've only taken 20 positions. It doesn't take a lot of
trading to make a lot of money in commodities. One year I made over $20,000
trading 1 lots. But you have to watch the trading to keep the feel of the
market. After about a couple of month of trading I drop all my positions and
take 2 or 3 weeks off to refresh. If I don't stop when I get tired I start to
lose.
A few last points on trading commodities - don't overtrade. Pick your spots.
Make money for yourself not your broker. You should be paying less than $20 a
round turn in commissions. This is a zero sum game. All we are doing is
shifting money from the unskilled to the skilled less the cost of trading.
Keep your cost low. Do not depend on anyone but yourself. Remember over 80%
lose. Mainly because they don't want to do the hard work it takes to learn the
business. If you are new read, read, read and paper trade. Also remember you
have a better chance with the Chicago markets than the ones in NY. Since the
FBI sting in Chicago the pits here are much, much better than they used to be.
I have many more problems with the NY markets.
One addl tip: When you commodity account gets up to $30,000 or more start
using Tbills to secure your position. I keep about 50% of my equity in
TBills. On a 100,000 dollar account you should have at least 50,000 in bills
earning about 5%. Thats 2,500+ a year in your pocket rather than your brokers
pocket. If your broker charges too much to buy the bills for you, buy your own
direct from the Federal Reserve and transfer them to your broker. Your broker
will give you credit for 9,000-9,500 towards your margin requirements for every
10,000 bill.
Bob Doeden
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> Bob,
>
> Intuitively, I agree that good money management is essential to
> successful trading. Having said that, I have to admit that I don't have
> a clear sense of what money management really is. You express yourself
> well, and I was hoping that you could explain just what "money
> management" means to YOU.
>
> For example, there are those who consider stops an essential part of
> money management, yet it appears that you no longer use them.
>
> I would also be interested in your thoughts on my personal theory
> (unproven) that one could pick stocks by having a monkey with dirty feet
> walk across the Wall Street Journal. Then buy on the right paw, sell on
> the left, those issues selected by the monkey's footprints. (Stay with
> me for a moment longer, I'm serious about this!) Then, with correct
> money management, one could, over time, do about as well as he could
> with more conventional methods of TA or fundamental selection.
>
> In other word, I'm proposing the notion that purely random selection of
> stocks/commodities, with rigorous money management, will beat the
> greatest stock picker who manages poorly, every time. I hope I'm wrong
> in this view because if I'm right, then TA may be hardly more than a
> fascinating exercise in random selection.
>
> What do you think Bob, should I get a monkey or the latest version of
> Advanced Get?
>
> Leo
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