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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
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> 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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