| StockFetcher Forums · General Discussion · Money management question: | << 1 2 3 4 5 ... 7 >>Post Follow-up |
| TheRumpledOne 6,411 posts msg #30189 - Ignore TheRumpledOne |
12/7/2003 5:21:10 PM http://www.optionetics.com/articles/article_full.asp?idNo=8558 Optionetics Articles MARKET INSIGHT: Money Management By Jody Osborne, Optionetics.com 6/19/2003 7:30:00 AM We can find a lot of information about trading in books and on the Web, but most of it details how to pick stocks and what strategies that are available using options. However, one very important aspect of trading is often overlooked and this is money management. I often get the question, “Why did such and such stock move against us when everything was pointing at a good trade?” Trading is not an exact science; if it were, there would not be a market because everyone would know how to win. In sports, a team can often play a great game and still lose. The same thing can occur in trading. We can have all the odds in our favor, yet the stock will move against us. Despite the fact that many trades will lose money, if we manage our trades appropriately, we can still make nice profits. In fact, we can make money trading even if our winning percentage is below 50 percent. In just a moment, I am going to discuss how this is possible. However, before we go into some money management techniques, we need to realize that we are going to have losing trades. Even the best baseball team doesn’t win every game. In fact, a 60 percent winning percentage is considered great in the sport. This is similar to the options game, where a person who wins 60 percent of their trades should come out well ahead of the game. Too many traders enter a trade without any idea of when they will get out. Not only should we have a profit exit set, but we should also have a loss target set. With some strategies, we might be willing to risk the entire capital used, while others we might have a mental stop loss in place. Regardless of where your targets reside, it is important to have them ahead of entering the trade. This is because emotion will dominate our trading decisions if we don’t have an idea of what to do ahead of time. Now, just to show that we don’t have to be right every trade, let’s take a look at a table showing the profits made using various winning percentages. There is an old saying that states “Let your profits run and cut your losses short.” It is this basis that gives us the following table. Winning % Ave Win Tot Win Ave Loss Tot Loss # of Trades Profit 40% $500 $4,000 $250 $3,000 20 $1,000 50% $500 $5,000 $250 $2,500 20 $2,500 60% $500 $6,000 $250 $2,000 20 $4,000 Table 1: Profits Using Various Winning Percentages Notice that by having a 2-to-1 win to loss ratio, we would have profits even if we only win 40 percent of the time. It is also important that we allocate an equal amount of capital to each trade. Many traders will put large amounts of money into trades they think are the best. However, if this trade doesn’t pan out, it can erase the gains made from other trades. There are various strategies to manage your trading account, but the key is to have a plan. The idea is to “plan your trade and trade your plan.” This means knowing ahead of time where our exits lay and keeping a good record of the trades we have made in the past. Though we can’t win every time, we can learn to manage our money better so that the losses aren’t a problem for the long-term performance of our trading account. Jody Osborne Senior Writer & Options Strategist Optionetics.com ~ Your Options Education Site Visit Jody's Forum |
| mika 131 posts msg #30200 - Ignore mika |
12/7/2003 5:50:40 PM Thanks for your replies guys. Many of you have given me your TRADING system and not your MONEY MANAGEMENT system. I'm still waiting though for someone to come up with a mathematical rational or formulae as to what percentage of one's capital is best to risk on one position. Z, alluded to a 10 position basket, but that seems as arbitrary a number as let say 5 or 15. I've always tried to divide my capital into 4 and played my positions accordingly. But that again is an arbitrary number. What I'd like to do is analyze this more scientifically so as to gauge what is the best setup to minimize/maximize risk/reward.. |
| travlr 80 posts msg #30204 - Ignore travlr |
12/7/2003 6:42:35 PM Considering I'm still a student and not trading yet... I was looking at KTO which has some longer term mixed signals, But from a laymn's limited perspective, It could have a good day tomorrow. Do you feel this might be on track. |
| holygrail 72 posts msg #30206 - Ignore holygrail |
12/7/2003 7:13:19 PM http://www.optionetics.com/articles/article_full.asp?idNo=9210 Optionetics Articles MARKET INSIGHT: Money Management, Part III By Jody Osborne, Optionetics.com 10/9/2003 1:30:00 PM We have been discussing money management techniques during the past few weeks, hoping to provide some food for thought for new and experienced traders alike. The fact is that the best technical trader will end up out of the options game if they don’t learn to use proper money management. Today we are going to talk about money management tools and the math we can use to calculate reward and risk ratios and how they work for a trader using credit spreads. We all should understand that our trading account is an accumulation of the wins and losses we experience trading options. However, too many of us focus on one trade and fail to realize that one loss is not a problem unless all our eggs are in one basket. The idea is that we want to be successful over time and realize that losses are part of the game. However, in order to be successful, we need to use proper money management. For an example, let’s look at the make up of a credit spread. Because a credit spread is a low reward strategy, we need to win a lot more than we lose in order to be profitable over the long term. Below are a couple of tables showing the outcome of 12 trades with various reward to risk ratios and percentage of winning trades. Rew/Risk Trade Credit Risk % Wins 1:2 # $167 $333 67 1 Win $167 2 Win $334 3 Lose $1 4 Win $168 5 Win $335 6 Lose $2 7 Win $169 8 Win $336 9 Lose $3 10 Win $170 11 Win $337 12 Lose $4 Rew/Risk Trade Credit Risk % Wins 1:2 # $167 $333 75 1 Win $167 2 Win $334 3 Win $501 4 Lose $168 5 Win $335 6 Win $502 7 Win $669 8 Lose $336 9 Win $503 10 Win $670 11 Win $837 12 Lose $504 Rew/Risk Trade Credit Risk % Wins 1:3 # $125 $375 67 1 Win $125 2 Win $250 3 Lose $(125) 4 Win $0 5 Win $125 6 Lose $(250) 7 Win $(125) 8 Win $0 9 Lose $(375) 10 Win $(250) 11 Win $(125) 12 Lose $(500) Rew/Risk Trade Credit Risk % Wins 1:3 # $125 $375 75 1 Win $125 2 Win $250 3 Win $375 4 Lose $0 5 Win $125 6 Win $250 7 Win $375 8 Lose $0 9 Win $125 10 Win $250 11 Win $375 12 Lose $0 With a reward-to-risk ratio of 1:2, we would need to profit 67 percent of the time to break even. This is reasonable considering that we expect to win 67 percent of the time with a credit spread. However, if we can improve our win percentage by using technical analysis, we could make solid profits. Over time, we need to track our trades and see what our actual win percentage and reward to risk ratio is. We can easily calculate this by taking each trade using a particular strategy and putting it into a spreadsheet. By figuring our average win percentage for credit spreads, we can see what sort of reward to risk ratio we need to grow our account. We also can see if our particular strategy is working for us. A great way to do this is to use Platinum to back test strategies without needing to use real money. For example, a trader could go back and pull up all the stocks that experienced bearish and bullish moving average crossovers and then could see how a credit spread using this technique would have panned out. With the numerous tools available on the Internet and computer, there is no need to wait months to paper trade. Money management can involve very detailed strategies, some of which are best understood by rocket scientists. However, this doesn’t mean that each trader shouldn’t have their own money management strategies in place to keep them in the game longer and ultimately to lead to profits. To search for previous articles in this series, please click here. Jody Osborne Senior Writer & Options Strategist Optionetics.com ~ Your Options Education Site Visit Jody's Forum |
| holygrail 72 posts msg #30207 - Ignore holygrail |
12/7/2003 7:21:47 PM http://www.optionetics.com/articles/article_full.asp?idNo=9218 Optionetics Articles INTERVIEW CENTRAL: Linda Raschke, Part 1 By Jeff Neal, Optionetics.com 10/10/2003 12:45:00 PM Linda Bradford Raschke is a registered CTA and president of LBRGroup, Inc., a money management firm. She began her professional trading career in 1981 as a market maker in equity options. After 7 years on the trading floor, she left the exchange to expand her trading program in the futures markets. In addition to running LBRGroup's CTA program, she has been principal trader for several hedge funds and runs commercial hedging programs in the metals markets. In the early ‘90s she formed a research partnership with Moore Research Center and pioneered work on volatility based trading indicators, which were incorporated into her daily trading programs. Ms. Raschke was recognized in Jack Schwager's critically acclaimed book, The New Market Wizards, and is known for her own top selling book, Street Smarts—High Probability Short-Term Trading Strategies. She has been featured in dozens of financial publications, radio and financial television programs, and has served on the Board of Directors for the Market Technician's Association for many years. Ms. Raschke has presented her research and lectured on trading at conferences for the Market Technician's Association, International Federation of Technical Analysis, Canadian Society of Technical Analysts, TAG, Omega World, Managed Futures Association, International Online Trading Expo, AIQ, Futures magazine, Bloomberg, Money-Expo.com, Carlin Equities and has lectured in over 16 different countries for Dow Jones/Telerate. Ms. Raschke continues to manage money and trade her proprietary accounts, while posting LBRGroup's trading activity real time online into the LBROnline Trading rooms, an educational internet based service. Members in these rooms include professional traders from over 18 different countries. Linda has received degrees in both economics and music composition from Occidental College in 1980. Please enjoy the trading thoughts of this very famous market wizard. This is Part I of a two-part interview. Optionetics: How did you first become interested in trading? Linda: I became interested in the markets when I was a kid and my Dad had me go through all his monthly chart books, looking for stocks that were just coming out of bases. I don't think he ever made much money in the markets but I always thought the chart books were pretty cool. When I went to college, my senior year I was on the Board of Directors of a fund that had been set up for students to manage and trade, so I learned more about the market that way. When I graduated, I moved to San Francisco where I found my way down to the floor of the Pacific Coast Stock Exchange – this was back in 1981. I found a trader willing to back me as a market maker in the equity options. I never dreamed that I would start out as a floor trader...I thought I would have to start out as a stock broker but nobody would hire me because I was too young. Optionetics: Do you prefer short-term trading to long-term trading? Linda: How do you define "short term" versus "long term"? Every true professional trader I know who has been able to consistently make a living for the past 23 years trades "short term.” We all like to put positions on; some we sit on for a few weeks or even a month or two. However, we also know that the bulk of our profits on a monthly basis are made up of the short-term trades we lock in and put in our pockets. These may last anywhere from 5 minutes to 2-3 weeks. Remember, we are trading, not investing. The more volatility a market has, the shorter the time frame you can trade it on. Optionetics: What are the things you like best about being a trader? Linda: I guess the independence. I like being my own boss. Also, being off the floor, nobody has to see me during the day...I can hide from the world and play my own game. I've been trading full time for 23 years now and really don't know what the other side of the coin is like. Optionetics: As a trader, how do you treat losses and account drawdown? Linda: I don’t think about them. They are an inevitable part of the game. When you start out as a floor trader and maybe you are making 500 trades a day, a good number of them are going to be losers. You are not going to make it if you can't deal with having losing trades. The sooner I am out of a losing position, the more quickly I am able to make winning trades and make back the money. If I remain in a losing position, it keeps me from making money. Simple as that. As far as account drawdowns, I look at where I stand at the end of each month, each quarter and each year. Just want to keep making higher highs. I got a pretty good record of making back drawdowns in a short period of time. Optionetics: You have done a lot of work in the area of swing trading. What are your favorite technical indicators you like to employ when entering and exiting swing trades? Linda: Price. Price is the number one indicator. When swing trading, all I care about is - where are the previous swing highs and lows, what was yesterday's high and low. Are the swings greater to the upside or to the downside. Is the market making new highs or lows. The only technical indicator you need is price. Optionetics: Given the hundreds of technical indicators out there what would you suggest new technicians do to prevent information overload? Linda: Keep in mind that a technical indicator such as those based on a derivative of price, just tells you what is there in the bar charts already. Learn to read a basic chart. Then learn how to read two or three time frames at once. I would never make a trade off a daily chart without knowing the technical structure of the weeklies. I would never make a trade off a 5-minute time frame in the SPs without know the technical structure of the hourly charts. IN other words, is the market just breaking out of a chart formation? Or has it already had multiple swings up and now makes a lower high? Stick with the basics - where is support and resistance and what is the trend and then learn to process those three components on 2-3 time frames. Optionetics: What is your most memorable trade? Linda: I have lots of them, good and bad, but the one that influenced my career the most was back in 1982 when I was a floor trader, I was short straddles on a stock called City Service and a surprise bid was made where the stock gapped up 100%. It took me a few years to pay back that loss to my clearing firm. I learned how stupid it is to try and predict just how far a market will go to the upside or the downside...they always go further then you think they will. Thanks, Linda, for taking the time to discuss your trading perspectives. Linda is a master swing trader and I encourage you to read her work if you want to add a quality short-term timing approach to your trading. Jeff Neal Contributing Writer & Options Strategist Optionetics.com ~ Your Options Education Site |
| holygrail 72 posts msg #30208 - Ignore holygrail |
12/7/2003 7:22:42 PM http://www.optionetics.com/articles/article_full.asp?idNo=9258 Optionetics Articles INTERVIEW CENTRAL: Linda Raschke Interview, Part 2 By Jeff Neal, Optionetics.com 10/17/2003 12:00:00 PM Linda Bradford Raschke is President of LBRGroup, Inc., a money management firm and registered CTA. She began her professional trading career in 1981 as a market maker in equity options. After 7 years on the trading floor, she left the exchange to expand her trading program in the futures markets. In addition to running LBRGroup's CTA program, she has been principal trader for several hedge funds and runs commercial hedging programs in the metals markets. In the early ‘90s she formed a research partnership with Moore Research Center and pioneered work on volatility based trading indicators, which were incorporated into her daily trading programs. Ms. Raschke was recognized in Jack Schwager's critically acclaimed book, The New Market Wizards, and is known for her own top selling book, Street Smarts—High Probability Short-Term Trading Strategies. She has been featured in dozens of financial publications, radio and financial television programs, and has served on the Board of Directors for the Market Technician's Association for many years. Ms. Raschke has presented her research and lectured on trading at conferences for the Market Technician's Association, International Federation of Technical Analysis, Canadian Society of Technical Analysts, TAG, Omega World, Managed Futures Association, International Online Trading Expo, AIQ, Futures Magazine, Bloomberg, Money-Expo.com, Carlin Equities and has lectured in more than 16 different countries for Dow Jones/Telerate. Ms. Raschke continues to manage money and trade her proprietary accounts, while posting LBRGroup's trading activity real-time online into the LBROnline Trading rooms, an educational Internet based service. Members in these rooms include professional traders from more than 18 different countries. Linda has received degrees in both economics and music composition from Occidental College in 1980. Please enjoy the trading philosophy of this very famous market wizard. This is Part II of a two-part interview. Optionetics: What are some of your favorite technical tools that you utilize in your trading? Linda: I do a lot of statistical modeling... what are the odds of upside follow-through if a market closes in the upper 15% of its range, what are the odds of a down day after the market has traded two days from low to high, What types of days can I buy a breakout from the first hour's range and what types of days will a breakout from the first hour's range fail. I keep track of sentiment indicators—primarily put call ratios, and do a lot of work and studies based off Ticks and market breadth. All of this type of stuff gives me what I call "Back ground" information. Then I go back to price and figure out what would trigger a long or short entry and where is logical risk level? Price is always what determines the trade, not the background indicators. For example, I want to be aware of when bullish sentiment is extremely high, but that in and of itself is not a reason to go short. In a trending market, I find a 20-period exponential Moving average to be a useful tool in helping define where the lower or upper end of a channel might come in. And I will use a basic momentum oscillator to confirm if a market is making new momentum highs or lows. Optionetics: Do you consider yourself a technical or fundamental trader? Linda: Strictly Technical. The less I know about fundamentals, the better. I am not trying to predict what will happen too far down the road. I am reacting to the information that the market gives me, and then using that to forecast the next most immediate play.. Sometimes the best moves come when nobody can figure out why the market is moving, but the market's action is definitely telling you something. I am not into head games such as trying to guess what the market has discounted and what has not. Optionetics: What advice do you have for dealing with the emotional pitfalls inherent in trading? Linda: If you don't know yourself, the markets are an expensive place to find out. Do your own research. Be 100% accountable for everything that happens in your trading. Eliminate outside distractions, noise and other people's opinions. Learn to think for yourself. Follow a consistent methodology. Keep a specific routine or ritual when you do your market homework or approach your trading day. There are dozens of books written you can buy for $10 on Sports Psychology or attaining peak performance. Everything written in them is equally applicable to trading. Start off trading on the lowest leverage possible. Increase your leverage only as you gain in experience. The more experienced you get, the less emotional you become. Optionetics: What mistakes do most people make in the markets? Linda: Well, I am sure there are hundreds of them and most people know them all too well. And I can tell you that I am sure I have made them all at some point or another. Making mistakes is how we learn. The biggest mistake is not learning from your mistakes. I guess that most people tend to underestimate the learning curve involved with the markets...like expecting to become a heart surgeon after one year of medical study......it just doesn't happen so quickly. So, I would have to say the biggest mistake is how much people underestimate the importance of playing good defense. Optionetics: How would you characterize your trading style? Linda: Let the market tip its hand first—don't try to guess. Follow the money flows. Stay out of noise and dull chop. Step up to the plate and trade bigger size when volume increases. In a trending market, keep trading in the direction of the trend. In a trading range, wait for the tests. People get bullish at the upper end of a range and bearish at the lower end of a range. Wait for the small flushes at either extreme and scoop up the bargain prices. If sentiment is too bearish at the top of a range, then the market is going to go through it. My main philosophy—take each day one day at a time. One day I might be a buyer and the next day—I might only work the market from the short side. One day I might be in breakout mode—ready to go with the move, the next day—I am going to look for a consolidation day. I try to keep an open mind and always see both sides of the coin. I do not want to back myself into a corner with too strong of an opinion, because then it makes it hard to change your mind and go the other way if there is a failure. I think I really stick to the basics... keep grinding it out and then see how it adds up at the end of the month. Optionetics: What do you think are the greatest misconceptions people have about the market? Linda: Hmmmm... maybe that they can predict where it will be a month from now or a year from now... If the weather men can't predict the weather for the next day in Florida, which they can't seem to do with any accuracy despite all their fancy scientific instruments, what makes people think they can predict where the market will be a month from now? I think that the greatest misconception about the markets is that you have to be able to call the direction correctly. Wrong. Making money in the markets is all about managing risk. If you understand how to manage risk, you do not have to be so great at making "calls.” Optionetics: Do you ever use options in your trading? If so, how do you come to that determination? Linda: I started out as a market maker in the equity options and traded them on the floor for 7 years. There used to be an arbitrage opportunity. I quit trading them in 1989 when the edge had pretty much been arbed out. There is no edge in trading them any more - not in terms of putting on spreads or doing arbitrage. Nowadays, if you put on a spread, it is simply another way of either making a directional play or making a bet on volatility. You could make the same trades with the underlying stock and if you are a serious trader, you can still get 10-1 leverage deals at prop houses. However, options are still useful for those who are not able to watch the market on an intraday basis—they allow an individual to have a position on without getting caught up in every tick on the underlying issue. They are an easy way for newer traders to lesson risk. They also help newer traders ride out noise. But keep in mind, especially with options, a trader always needs to know in advance at what point he is going to cut a loss. At what point are you going to exit your outright position, spread or long straddles? Options have a way of quickly decaying to nothing for those who overstay their welcome when long premium. Also, you MUST be aware of the commissions that you are paying...especially when putting on spreads. Thanks, Linda, for taking the time to discuss your trading perspectives. Linda is a master swing trader and I encourage you to read her work if you want to add a quality short-term timing approach to your trading. For Part I of this interview, please click here. Jeff Neal Contributing Writer & Options Strategist Optionetics.com ~ Your Options Education Site |
| TheRumpledOne 6,411 posts msg #30210 - Ignore TheRumpledOne |
12/7/2003 9:22:08 PM RISJR: "...That's the frustration alot of the muddy folks, trying to pick the bottom, without getting stopped out. But there looking for more beaten down stocks, 3days or more! I don't have that in my filter, since I'm more patient, can wait, for the bottoms to show themselves in the slow stochs" No, RISJR, that's not accurate. Alot of the Muddy folks at happy taking profits, day after day after day. The frustrated people are those who don't follow the Muddy Method the way it was meant to be followed. Instead of trading a proven profitable method, they try to add something to it and that usually proves to be unprofitable. |
| travlr 80 posts msg #30217 - Ignore travlr |
12/7/2003 11:31:04 PM risjr, your filter is nice addition. It's results lit up alot of other chains. I think the 2 results (3 was an otcbb) look pretty good. I am a bit of a laymen still, so I hope you all might take a minor moment to critque my observations. BTW I'm still inactive this not for trade purposes. ZOMX The longer term techs are a little bearish. Support is sitting on neckline of H&S. could go either way but.. 9/21 had same neckline (larger pattern) and bounced. Candle is also sitting only slightly above TL support. Also sitting on DMA100 all others flat overhead except the 10 X ^ the 15. Daily has a hangman candle supported w/good vol. Daily techs loook great, though CCI flat... no spike(rising a skosh) Hourly DMI is kind of lame .. Stoch and RSI strong... NMPS Daily broke and closed above lBB. Long bull candle but w/bearish shadow in lower vol.. Doji prior. Stoch has a declining cycle but is oversold and crossing @ 19. RSI bearish...CCI flat. all DMA's overheadbut flat. xcept bullish cross DMA 50,100. Weekly Sitting above TL support. Stock has a spikey "Rolling" pattern, which is currently taking a "look see" at it's pivot. This one likes to gap hard so breed caution on entry. Low is = to a doji low on 4/21. Weekly techs look bearish and all MA's over head, but are flat. Stoch good w/ X below 20. Squat bear candle but on very low vol. I dunno could pop. Your brief assistance to my education is appreciated. |
| mika 131 posts msg #30220 - Ignore mika |
12/8/2003 1:13:21 AM Avery, HolyGrail, I've tried to make sense of those figures, and I can't. Here is the scenario: 1 in 4 trades will be unsuccessful. Unsuccessful trades lose 4%. Successful trades win 8%. How many positions should I be trading with a, b, c, and d? a/ $25,000 b/ $50,000 c/ $75,000 d/ $100,000 |
| EWZuber 1,373 posts msg #30221 - Ignore EWZuber |
12/8/2003 2:06:21 AM risjr Looking at the KRY chart I would expect this one to rise and test the old supporting trendline as resistance and bounce down, confirming it as resistance. Or test the 25 DMA as resistance. Notice that also there is a double top pattern in play here between the highs of Sept. & Nov. Recent weakness of the broken trendline does not bode well as this 2X top pattern is starting to play out, IMO. Weekly chart Stochastics are moving into distribution. If you follow this up some weeks later I suspect you will find that this was a critical turning point in the trend. We have a conversion of events that I look for to indicate a change in the trend, a break of the supporting trendline and a -xover of weekly chart stochastics. Friday the stock closed right on 4 day trendline resistance. The 25 DMA is about 8.5% above Fridays closing price and with some intraday overshoot I'd expect about maybe 10% to be made here. I don't particularly like it though it has too many bearish indications. But thats JMHO |
| StockFetcher Forums · General Discussion · Money management question: | << 1 2 3 4 5 ... 7 >>Post Follow-up |
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