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Average True Range. See explanation of parameters in MetaStock help index.
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> From: Dan Cash <dcash@xxxxxxxxxxxx>
> To: metastock@xxxxxxxxxxxxx
> Subject: Re: Gap risk = critical?
> Date: Thursday, July 13, 2000 10:39 AM
>
> Please define ATR for me. I do not know it.
>
> Thanks,
> Dan
>
> Al Taglavore wrote:
>
> > I agree, John. Would it not be more practical and in tune with the
market
> > to set the exit (I do not use stops) based on the ATR of the stock?
> > Volitility of each issue is then factored into the trade. I know that
> > Chuck Lebeau has done extensive work on ATR, as have many others. Any
> > comments, Chuck?
> >
> > Al Taglavore
> >
> > ----------
> > > From: John Manasco <john@xxxxxxxxxxx>
> > > To: metastock@xxxxxxxxxxxxx
> > > Subject: Re: Gap risk = critical?
> > > Date: Thursday, July 13, 2000 7:26 AM
> > >
> > > 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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