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I understand however that was not my example. Gitanshu had mentioned using
2% of the trade for a stop on the trade only, not on the portfolio. That was
a different discussion. We're just blowin' money here.
John
----- Original Message -----
From: Mark Thompson <mst1@xxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Thursday, July 13, 2000 1:29 PM
Subject: Re: Gap risk = critical?
> No no. The idea is to risk 2% of the PORTFOLIO on the trade. You set the
> risk on the stock seperately and then let the math give you the position
> size of the trade.
> Example:
>
> Portfolio = $100,000 2% risk of protfolio = $2000
>
> Calculated or estimated optimum risk on YHOO= 10%
>
> Position size = $20,000, 200 sh of YHOO @ 100 with a stop @ 90
>
> Mark
>
> ----- Original Message -----
> From: "John Manasco" <john@xxxxxxxxxxx>
> To: <metastock@xxxxxxxxxxxxx>
> Sent: Thursday, July 13, 2000 8:26 AM
> Subject: Re: Gap risk = critical?
>
>
> > Gitanshu
> >
> > On the YHOO trade at $100 entry with a $98 stop that seems like a very
> tight
> > stop for a stock as volatile as YHOO. There have been times in the past
> that
> > $2 was just the bid ask spread. Of course if you're correct in your
> > assessment of direction then the stop won't be hit, as evidenced by the
> fact
> > it gapped open. I guess my real question should be is a 2% risk on a
> > position practical on a stock that can easily make a 10% move in a day?
> >
> > Your comments are appreciated.
> >
> > Regards
> >
> > John Manasco
> > ----- Original Message -----
> > From: Gitanshu Buch <OnWingsOfEagles@xxxxxxxxxxxxx>
> > To: <metastock@xxxxxxxxxxxxx>
> > Sent: Wednesday, July 12, 2000 4:46 PM
> > Subject: Gap risk = critical?
> >
> >
> > > >Based on the comment above aobut risk not being initial margin, how
do
> > you
> > > >define risk?
> > >
> > > Amount of money you will lose on trade without impacting your ability
> > > (financial and psychological) to continue trading after incurring a
> series
> > > of losses in sequence. Amount - at portfolio level - that will keep
you
> > away
> > > from margin calls. Amount - at portfolio level - that will help you
meet
> > the
> > > margin call should the extraordinary happen - without affecting your
> > > lifestyle.
> > >
> > > Take your pick.
> > >
> > > >Yesterday Gitanshu talked about gap risk and extrodinary
> > > >events making hard stops ineffective to define risk. Although i
> > understand
> > > >your point Gitanshu, extrodinary risk is just that, Extrodinary.
Must
> > we
> > > >plan for the worst in all trades since it will only happen once in a
> > great
> > > >while, or shouldn't we use portfolio diversification to lessen the
> > > >probability of catastrophic loss?
> > >
> > > I'm beginning to think this is getting theoretical... but one could,
> > > theoretically, find a market without gaps and trade it. I think the
> > returns
> > > would be dampened since everybody knows there's no risk so why should
> > there
> > > be a risk premium, price volatility in your favor, etc.
> > >
> > > I presume we're still talking specific to equities, so the comments
> below
> > > are in that context.
> > >
> > > Portfolio diversification:
> > >
> > > Different traders have different ways - some don't diversify, and
trade
> > only
> > > one market and one instrument in that market. They have to be very
good
> at
> > > what they do. Turning points, chart pattern recognition, trade
> management.
> > >
> > > Some trade only one chart pattern but different trade sizing into
taking
> > > positions from that chart pattern.
> > >
> > > That's some of us.
> > >
> > > I achieve it by using strategy diversification. But it stretches the
> > > available capital already.
> > >
> > > Portfolio diversification is not how most of us trade since most of us
> are
> > > undercapitalized relative to where we want our account to be - and
need
> to
> > > concentrate resources on 2-3 market/trade basis - nor do we have the
> > breadth
> > > of knowledge or the resource support needed to trade multiple markets
> > large
> > > sized positions or broken down positions like a mutual fund -
> > > simultaneously.
> > >
> > > Portfolio diversification increases complexity of account management
and
> > > dampens returns while giving us the fool's paradise comfort of
thinking
> > that
> > > we are also reducing risk. The risk remains the same - or more - and
for
> > > that, we trade in our superior potential returns achievable from
> > > concentration.
> > >
> > > We're not a zillion dollar mutual fund to need diversification - most
> > people
> > > on this list trade under $1 million. You put $100k in 10 stock trades,
> > > that's enough diversification already. On each of those $100k trades
set
> > > your stop at 2%, $2,000 - and you are a genius if you can catch all 10
> > > entries perfectly and not get stopped out for a significant period of
> > time.
> > >
> > > I kind of find it difficult to believe that traders - repeat -
traders -
> > > diversify too much beyond that, because the trends are just not
there -
> > the
> > > moves these days are magnified within compressed time, agility is the
> > order
> > > of the day and therefore focus is desired, not the machine gun spatter
> of
> > > pick any stock, it will go in your favor - that existed in Fall 99.
> > >
> > > Re: Extraordinary risk offset by diversification:
> > >
> > > HOW DO WE KNOW that the "once in a while" is not right after we're in
> the
> > > trade? How is that answer any different from each trade we take,
whether
> > it
> > > is adding to a position or to a new trade while having an existing
> > position?
> > >
> > > I like to take care of each position against the fat tail event. I
like
> to
> > > go into a trade thinking I know what I am doing, but knowing that I
> cannot
> > > possibly know it all and therefore ought to defend my stance against
> > myself.
> > > This applies only to stuff I carry home - and again I think the
> questions
> > > are theoretical.
> > >
> > > Over time I have come to employ a variety of strategies - let me
> rephrase
> > > that - over time, I have sequentially worked through, used, learned,
> > > eliminated, modified and finessed my choice of instrument and strategy
> to
> > be
> > > direction-neutral and make money to defined goals as opposed to
getting
> > > married to my belief in recognized chart patterns. When a direction
> > happens
> > > in the price action, my position takes me into it. There are times
when
> > this
> > > strategy loses money - typically in tight congestions that last over 3
> > > weeks. That is known. Hence I trade some other strategy in equal
dollar
> > > amount where I seek and find tight sideways markets with breakout
> > > protection. This sometimes makes me sit out the breakout move from the
> > > sideways market - sometimes, it is the move of the year - but I am so
> > > focussed on preserving the thing on my position sheet that by the time
I
> > > realize it is the move of the year, it is over already.
> > >
> > > Case in point is the spring crash - I made some money, but I know I
> > > should've made a lot more. The fact that a lot of people lost big
money
> is
> > > meaningless to my P&L - or my ego. Being protected against a crash and
> > > coming out of it unscathed by dollars or emotions is only half the job
> > done.
> > >
> > > Thus, strategy diversification.
> > >
> > > I have come to view my trading as a profession that will last my
> lifetime.
> > > It is too much fun to want to do anything else. Therefore I am more
> > > concerned that my capital lasts that long and that I don't screw it up
> > with
> > > one or two extraordinary disasters each year.
> > >
> > > I've been there, done that, and don't want to go back/do that. That's
my
> > > experience of what it takes - 1 or 2 bad trades a year that are real
> > > bloopers - and it takes 5-6 months to bounce back. It gets compounded
> > > because you trade small on the comeback trail - so even if your
win/loss
> > is
> > > good you're making money back slower. But your psychology won't allow
> you
> > to
> > > trade larger.
> > >
> > > Too many 5-6 months bouncing back, and I might as well buy an Index
Fund
> > and
> > > find a paying job...
> > >
> > > Since this discussion is primarily for directional oriented traders,
all
> I
> > > can say is this:
> > >
> > > It takes many many incrementally successful trades (high % won/lost
AND
> > high
> > > amount won/amount lost) to build an account of some size. It only
takes
> > one
> > > extraordinary event to wipe it all out, especially if you're using
> > leverage.
> > >
> > > I like to believe that I do not have the consistency of direction
> picking,
> > > and therefore like to think that my next trade may be a loser -
> regardless
> > > of how many accurate calls I may have made in the recent past.
> > >
> > > For eg, I know that YHOO put in a textbook key reversal bar yesterday.
I
> > go
> > > long YHOO sometime yesterday - for simplicity sake, lets take my entry
> at
> > > $100.
> > >
> > > So my stop would be $98, if I want to risk 2% on the trade.
> > >
> > > Looking at the chart, $98 is pretty good to stop myself out at, it is
2
> > > points below the most recent swing low. The last time price traded $98
> was
> > > 11/15/99, when it broke out on a range expansion bar through $98 on
its
> > way
> > > to the $250 zone. Below 98, there is really nothing to stop it until -
> > say -
> > > $60, so I'd rather lose the $2 and tell myself I'm wrong - than lose
$30
> > and
> > > double down.
> > >
> > > Question: It gaps up in my favor at $120. Where do I trail my stop?
$120
> > is
> > > above the highs of the last 3 bars on the daily. So going by the
concept
> > of
> > > higher lows being the new uptrend, I start by trailing it at the lows
of
> > > each of the bars (113, 115 and 121 - rounded) it busted through before
> the
> > > open today. Moving averages are out, since YHOO is below both the 50
and
> > 200
> > > mas in the $130 area and the 20 is below the 50.
> > >
> > > Lets fire up a 5 minute chart. So far it is a trend day, about to hit
a
> > > brick wall called the 50 day ma on the daily. Shall I exit? Shall I
> stay?
> > If
> > > I exit, I will be naked without a position if it busts through the
> > overhead
> > > resistance.
> > >
> > > Will it? Its overbought - but 4 days ago it was oversold, and it still
> > > dropped $30.
> > >
> > > The distance between my stop and current price is much more than the
2%
> I
> > > was initially willing to lose when I entered the trade. So should I
> widen
> > my
> > > stop given the additional volatility? Should I narrow the stop given
the
> > > large range? Should I simply let myself be stopped out at the gap's
> lower
> > > boundary?
> > >
> > > How can there be a single answer to this set of events?
> > >
> > > Next question:
> > >
> > > Let us say you saw YHOO breaking down from the 50 and 200 ma's on a
> range
> > > expansion bar on 6/22, You went short the next day at the open ($129),
> you
> > > set your stop $1 above the prior bar's high ($142) and trail it down
> each
> > > day using the falling 200/50 mas as your stop out. So far you'd still
be
> > > short, having enjoyed a $60 round trip. If you used trailing prior
bar's
> > > high for a stop, you got stopped out prematurely in the congestion
after
> > the
> > > first thrust down and missed the real acceleration down move.
> > >
> > > Price accelerated in your favor until yesterday. You are an eod
trader,
> > > looking at eod charts and placing orders accordingly. You see
yesterday
> > that
> > > price may have made a key reversal BUT the next real support is at
$60 -
> > so
> > > you phone in your order to cover if price trades 1 tick above prior
> bar's
> > > high at 110 instead of the trend following ma at $130. The broker will
> > only
> > > execute in the day session since the broker does not accept night
orders
> > > (lets just assume this for the moment).
> > >
> > > You wake up and are stopped out of your short at $120 - which is $10
> worse
> > > than your protective stop. Your profit went from $24 to $9. Your risk
> grew
> > > (typical of trend following methods) as the trade went in your favor.
> > >
> > > Your reward grew if you overrode your rules and covered at the close
> > > yesterday because of the key reversal bar.
> > >
> > > YHOO too much of a bronco for comfort? Lets take slow and stodgy PFE.
> > >
> > > Next question: You were also short ARBA because of the same chart
> > patterns.
> > > Now it opens up $25 tomorrow morning. Boom. Two days in a row, your
P&L
> > went
> > > from x to x minus significant y.
> > >
> > > Forget the internet stocks.
> > >
> > > Take stocks of your choice, and post some examples of your questions.
> Take
> > > some real life cases, put them out here on the list for comments, and
> see
> > > what you learn. Better yet, why don't you tell us what you would do in
> the
> > > above examples, or other examples of your choice - given the benefit
of
> > > history...
> > >
> > > Without practical application, all this is just so much bandwidth on a
> > > charting package's list.
> > >
> > > Gitanshu
> > >
> > >
> > >
> >
>
>
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