|
PureBytes Links
Trading Reference Links
|
At 12:00 PM 2/27/98 -0800, Tom Stein wrote:
>Ron wrote:
>
>"So Tom.. What do you recommend as one (or more) of your
>favorite sources for the study of money management?"
>
>Most of my money management comes from my own experiences......IF I had to
>give someone some quick quips it would be.........
>
>1)Never risk more than 5% of your account on any 1 trade
>
I would suggest a 1% parameter per trade. If you have a winning method,
the only way you can lose is by running out of money. Why take the chance?
5% is way too much. Secondly, I would suggest trading long term to cut
down on the costs of slippage and commission. Roughly 20% of an average
account is spent on those costs per year. More aggressive techniques can
be found in books by Ralph Vince. Van Tharp, iitm.com, has some material
available.
If you want to be more advanced, I would devise a sliding scale of initial
risk that was quite small when the original starting capital is at risk and
increases if one has profits over a self-chosen Mendosa line of acceptable
returns. (ie At the beginning of the year or when down for the year while
original capital is at risk, the risk would be .5%. Profits between 1-10%
would be risked at a 1% rate. Between 10-20% 2% etc. The numbers used are
for example only.)
In a long term trading situation where the market often gets away from the
stop creating unenviable situations, I suggest peeling off contracts, but
never below 1, to smooth volitility. (ie $100,000 account. Buy 5 Silver
at 5.00 on the entry signal. Original stop is 496, 1% risk. At the close
several weeks later the price is 600, but the stop has only moved up to
580. The account is now worth $125,000, and the risk, close to stop, is
$22,500 or 18.0%. My 'peel off level' is 3%, this is higher than initial
risk because it is dealing with open profits. I can risk $3,750. The risk
per contract is $1,000; therefore, I can only have 3 contracts. I cover
two.) This will smooth volitility without adversely affecting returns in
the long run. It will hurt returns in massively trending markets, which
number one or two a year, but it will help returns on an 'average' move.
It will cut the volitility by over 50%.
By combining the sliding scale of initial risk and a sliding peel off %,
both per trade and depending on the initial risk, one will see that money
management has much more to do with returns than entry exit decisions.
However, the best money management in the world will not work if one's
methods do not have an edge over the market.
sb
|