|
PureBytes Links
Trading Reference Links
|
Someone posted, asking about money management. Now, I don't know how
many people here trade in a variety of markets, and how many on this
list just trade one market or one stock. Personally, I trade many
commodities and so for me, one of the keys was learning to take
'similar' risk in non-similar markets. I tend to use the same methods of
analysis when looking at any market I trade, but you can't trade one
contract of Oats and feel that it is the same amount of risk as one Yen
contract. I developed an equivalent risk matrix about 6 or 7 years
ago[nothing revolutionary there...] that uses average true ranges and
contract specs to make certain that when I trade Oats, I am risking the
same amount of money when I trade yen. Then I can look down the matrix
and see how much money I am risking when I set a stop at, let's say, two
average true ranges in each market.
An even better use for a equivalent risk matrix is when you are deciding
how much to risk on any one trade. Again, for me, it's key that when I
take trades over long periods of time, I use similar leverage risk in
dissimilar markets. So it's important to know that 1 yen equals 8 US
bonds [I'm making these up...] or one orange juice equals three corn.
And I know that if I choose to always only risk two percent of my
capital on any one trade, my stop has to be within x points, and when I
look across all the risk in my trades, those stops are always within the
two percent.
When I look at my market setups for tomorrow, I can look at each trade
and decide where I would stop myself out of a trade, that is, where my
technicals would say I was wrong. Then I look at the matrix and see if
that stop is within my two percent. If the stop isn't within two
percent, I don't take the trade. I don't believe in arbitrary dollar
amount stops in that sense.
I hope that helps someone.
Tim Morge
|