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Darrell Zang wrote:
>
> Everbody....
>
> I've got a question that seems to have no easy answer....Maybe somebody
> on the list can help.
>
> >From all I read, it's said that scrupulous money management is
> absolutley necessary to be a successful trader. Things like, never
> trade with out protection stops, etc. It is also said that you
> shouldn't risk more than 5% of your portfolio to make any trade.
>
> HOWEVER, when I try to follow this advice and place my stops within 5%,
> some jerk on the floor goes after my trade and stops me out!!
> I've done a trade at 2:00 and been stopped out at 2:01. That hurts!!
>
> I've tried on close stops, but that doesn't offer much protection if
> your moved against strongly.
>
> My, question.....How does one keep in the market and still practice
> money management?
> How to keep from being stopped out???
>
> Darrell Zang
>
> Darrell Zang
1. Calculate your risk limit. This may be as you say, 5% x acct.
equity.
2. Look at the potential trade. Look for FEASIBLE stop points. (see
below).
3. Calculate the risk (expected entry - stop point).
4. If risk > limit, don't take the trade or do it in a mini contract
(Midam) or possibly with options.
a. possible "feasible" stop points:
Look for where on the chart the trade would be invalid. For example,
if you're going to buy, put stop below last pivot point (where prices
went down but then turned higher).
For "smooth" trends with no close pivot, draw a trendline through
earlier pivots . Or, if no pivots at all, draw a line through the lows
and subtract a certain multiple of the daily (or bar for intraday
trading) range, where the multiple is probably 0.5 to 2 (or possibly
three). Or use the low of x days ago.
For objective stops where you don't have to use subjective drawing, use
yesterdays low (or close) minus some multiple of the range. Or use the
parabolic function. Or you could subtract a money management stop as
you've suggested. However, you must have a minimum multiple of the
(daily) range away from the price action. So again if
$risk_of_(price - n x range) > your_account_risk_limit, you can't take
the trade.
I have a small account (7K). I limit trading to Midam grains, Midam BP,
Canadian$, cocoa, sugar, cattle, and hogs. I like a modified form of
the parabolic so this is what I look at first for a stop level. If this
is more than 5.5% of my account then I look at Midam for the several
where I could go either way (CD, LC, LH - note low liquidity but fills
are pretty good anyway). If this is more than 5.5% of account then I
look at the parabolic applied to the last 3 days or so, typically
putting the stop between the low of 2 and 3 days ago. If this is more
than 5.5% then I will put the stop a little below yesterday's low. As a
backup risk control measure I do not normally consider any commodity
whose margin is more than 10% of my acct. balance. This is an attempt
to insure that disasters that would blow past the stop (overnight moves,
limit moves, etc.) don't wipe me out completely. [5.5% is part of an
arbitrary scale of risk vs. account size that I set up for myself
allowing a bit more risk for smaller accounts and cutting it back
gradually if the account grows. If you have a mechanical system with
statistics, there's better ways to set the %risk.]
I probably lose on 75% of trades. I am rarely stopped out by intraday
price movement. If I am taken out usually there is least a small
reversal. So in one limited sense, I LIKE to be stopped out because I
have lost less than if I stayed in. OF course I'd really rather the
prices go in the direction I've positioned.
There is a serious drawback to the Midams, especially the 1/5
contracts. By the time you figure up to $20 extra stippage, plus your
commissions, it is hard to be net profitable. You don't lose your shirt
on losses, but your task is somewhat harder.
I'm not yet net profitable. This probably means that I don't have
quite the right combination of entry selection and exit/stop points
(plus the extra "baggage" of the small contracts). But I'm convinced
that without a valid exit point for losses, I'd never be around to find
the right combination (given my unfortunate practive of testing my ideas
more in the market than on paper).
Take this answer in the light of my relatively little experience (2
years). I would be very interested in further feedback on the question
(and this answer) from the more exp. members of the list.
Assuming one is imprudent enough to trade futures with a small account,
how to do it?
Conrad Bowers
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