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I consider this a 4 Star posting! This time of insight is invaluable. I
think that many traders can benefit by paying close attention to this.
Jim McConnon
jmcconno@xxxxxxxxxxxxx
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> From: Timothy Morge <tmorge@xxxxxxxxxxxxxxx>
> To: omega-list@xxxxxxxxxx
> Subject: Money management
> Date: Sunday, March 15, 1998 10:31 PM
>
> 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
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