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</x-html>From ???@??? Sun Sep 06 09:53:05 1998
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Date: Sun, 06 Sep 1998 23:28:14 +0800
To: metastock@xxxxxxxxxxxxx
From: Steve Gochuico <stevego@xxxxxxxxxxxxxxx>
Subject: RE: Exit Strategies, Position Management
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--------------you wrote-------------------
Date: Thu, 03 Sep 1998 23:45:57 -0700
From: Al Taglavore <altag@xxxxxxxxxxxx>
Subject: Re: Exit strategies
Manuel Barquin wrote:
>
> Al and John:
> Thank you for your important contributions to this list. I am not in
> the market yet, but I really appreciate practical information from
> memebers with experience, even if I am not contributing to the list.
>
> Manuel Barquin - Spain
>
> ----------
Manuel,
Listen and learn; ask questions and you will get answers. But you must
remember to share with us when YOU have found a nugget that we have not
seen.
Al Taglavore
--------------------------
Well Al, I beleive I have a "little" nugget to share with this list.
Hopefully, it will help others as it has helped me. It concerns how
you manage your position upon entering the market. If you guys are
familiar with Joe Ross' book, you probably know this, if you haven't
read his book, read on. Let's start by reading what John M. wrote.
John Manasco wrote:
> First when you purchase a stock or commodity when do you pull out if the
> position moves against you? Second, how much do you let your position
> fall thinking that it's just a retracement a will continue the move?
> Could someone explain how to use stops properly? Especially trailing
> stops. Do I need em? I am getting mad watching my profits evaporate and
> go into losses.
"I am getting mad watching my profits evaporate and go into losses"
Well John, you are not alone. I too was getting tired of watching my
profits turn into losses. When I enter a position, three things can happen.
One, the position would immediately turn into a loss, which means I
am wrong. The only solution for this will be to get out immediately. You
read the market direction wrong, so the only way to correct the mistake
is to get out. There's nothing we can do here. Second, the position
initially runs in my favor. Here I expect to hold my position for a few
days expecting the move to continue for several days but either later in
the day or tomorrow, the position reverses and it go against me so I'm
forced again to cut my losses. Third, the position becomes profitable
immediately and goes in my favor for several days. In this case, it's all
up to you where you will take your profits. There's no problem here. I'm
more concerned with situation number two. I thought initially that there's
nothing I could do with situation two, until I read Joe Ross' book. I
thought I was doing all right because of my stop loss order. That, there
was nothing I could do beyond placing a stop loss order and that's it.
If it reverses later the stop loss would protect me. When I read Joe Ross'
book, it was like the truth revealed. Eureka! There's a way out of
this situation after all. I don't have to go home with a loss 2/3 of the
time. I could go home with a profit 2/3 of the time! This is how Joe
Ross manages his position: He will enter a position with three lots or in
three sets. He will enter the three sets simultaneously. (Warning: do
not attempt this if you are undercapitalized! If you can't afford to
risk more than one lot, don't do this.) As soon as the position allows
him to cover cost, he will liquidate two lots or 2/3 of the position. The
profit from the first lot will cover his cost such as commissions, slippage.
The second lot would allow him to book a profit equal to his cost. The
third lot or position he will watch carefully. Anytime that the third
position comes back to his breakeven point, he will get out, no ifs or buts.
Since he already covered his cost, his breakeven point is his entry point.
If the market does not come back to his entry point, as soon as the market
allows him, he will trail a stop at around 50% of the paper profits of the
third position. So, either way, he goes home with profits booked. So, instead
of going home with a loss, you go home with a profit equal to your cost, at
the least. That's incredible! He is able to do this because he pays very
low commissions, around $6 per lot. This method is feasible even when
daytrading equities. Combine this technique with Jeff Cooper's day trading
techniques and you are invincible! Visualize this, you enter a position of
around 300 shares. The position moves in your favor 1/4 of a point. Assuming
you trade with a $10 commission, you need to cover $30 as your cost. $10 for
entering a buy/sell for 300 shares, another $10 for exiting 2/3 of your shares
and last another $10 for exiting the last position. As the position move 1/4
of a point, sell 200 shares, you get $50(200 x .25)for this, you covered your
$30 cost plus $20 PROFIT. If the market comes back to your entry price,
just get
out and you have a $20 to show for your effort. If the market does not
come back to your entry point, place a mental stop or an actual stop around
50% of your paper profits on the last position. Either way, the position
works in your favor. This beats just sitting around waiting for the market
to hit your stops. Now, this is not a suggestion to enter a position three
times your comfortable trading size. This position management technique also
assumes you have a good entry technique else all you'll be doing is executing
stop loss orders because the market moves against your position the moment
you enter the market. I think this can help me because I've experienced a
lot of situation where the market moves in my favor initially but reverses
later and I can't do anything but wait for the market to take out my stops,
when in fact I could have exited the position with some profit to compensate
for my effort. Plus, if the position turns out to be profitable, I still have
a third position which I can use to ride the market. But you guys, you
probably thought about this before... :-) This is a revelation for me.
Position management is just one part of the puzzle for successful trading,
but it is I beleive a key ingredient to ones success in trading.
Happy trading to everyone. If I'm wrong in my ideas, please guys
go easy on me. Hold the scuds! Hold the scuds!
Steve Gochuico
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