How to use money management stops effectively
Stops are enormously important part of a traders arsenal of trading tools. Some traders confirm that stops are the most important part of their trading armour.
So here are three ways to use stops to protect your capital and lock in profits from a trade. These three money management techniques can be used in stock, futures and forex trading.
The important rule is that you do use a real stop in the marketplace. A friend of mine joked with me that that he had never seen a “mental stop” filled electronically or in the pits.
“Saturday Seminars” - Trading the S&P in 3D
Born of a marriage between technical analysis, physics and pattern recognition, the pH-Indicators are elastic and focused on the future, like today’s broadband electronic markets. Static terms such as ‘overbought’ or ‘oversold’ force traders to make decisions with two-dimensional road maps in three-dimensional real time. These new indicators provide equity and forward market traders with tools that accurately reflect the market environment. The indicators help traders construct the appropriate three-dimensional map, showing first where the market itself wants to go and second, how to build a position ahead of and within the trend of those markets. As CAT-SCANs are to X-rays, these indicators offer a brand-new view of market internals. Boundaries imposed upon traditional concepts of momentum are no longer applicable.
In this session, Richard explains his unique outlook on pH-Indicators and how he uses them to achieve financial success. Richard uses these indicators to successfully manage money and he carefully considered the time and place to present them to the public. He chose TAG 20 as the appropriate forum because he felt it is where real traders come together in search of new methods to make real money. Workshop attendees were the very first traders ever to have access to Richard’s unique work; now you can share his insights, as well.
PDF Workbook
Richard Lees is president of Richard Lees Capital Management, a registered investment advisory in Los Angeles’ Studio City area, where his clients include members of the entertainment industry and other high net-worth individuals. He edits and publishes 21 Forward, a monthly investment newsletter and journal that offers uniquely detailed and unusual discussion of markets. The newsletter also gives specific recommendations for implementation of his proprietary pH-Indicators to profit from those markets. Richard was educated at Stanford, the University of Michigan, and Yale, and he has written about financial analysis for industry publications such as Barron’s, always exhibiting his trademark style of sharp wit and truly contrarian commentary. With a degree in psychology and a career as a professional writer, trading—or turning perception into money—came naturally to him. An active trader since 1982, Richard was one of the first to use sophisticated trading analysis software. His methods have shown consistency and sometimes startling accuracy in the stocks, options, and the forward markets.” alt=”null” />Richard Lees is president of Richard Lees Capital Management, a registered investment advisory in Los Angeles’ Studio City area, where his clients include members of the entertainment industry and other high net-worth individuals. He edits and publishes 21 Forward, a monthly investment newsletter and journal that offers uniquely detailed and unusual discussion of markets. The newsletter also gives specific recommendations for implementation of his proprietary pH-Indicators to profit from those markets. Richard was educated at Stanford, the University of Michigan, and Yale, and he has written about financial analysis for industry publications such as Barron’s, always exhibiting his trademark style of sharp wit and truly contrarian commentary. With a degree in psychology and a career as a professional writer, trading—or turning perception into money—came naturally to him. An active trader since 1982, Richard was one of the first to use sophisticated trading analysis software. His methods have shown consistency and sometimes startling accuracy in the stocks, options, and the forward markets.
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Saturday Seminars are just a taste of the power of INO TV. The web’s only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.
Traders Toolbox: Money Management 4 of 4
This is the final portion of the Trader’s Toolbox: Money Management series. This post will recap the 5 main rules discussed. If you missed our previous post please click here for : Part 1, Part 2 or Part 3.
♦ Setting a goal - Decide what your trading objective is (quick profit and steady return) as well as your risk tolerance level
♦Diversification - If possible, allocate your finances between different products to avert the danger of getting wiped out in a single market. Don’t go overboard, though; think in terms of three to five unrelated instruments. Stick to markets you know, rather than risking the unknown for the sake of diversification.
♦Deciding how much money to risk - The total amount you risk at a given time in a particular market group or on a particular trade should be based on a a percentage of your total trading equity. Exceeding your allocation parameters can result in overexposure.
♦Use of stop orders - The name of the game is preservation of capital. Placing conservative stops to cut your losses will ensure you are around to trade another day. Stick to the limits determined by your equity allocation percentages.
Traders Toolbox: Money Management Part 2 of 4
Crucial but often overlooked, money management practices can mean the difference between winning and losing in the markets.
-Amount Of Money To Risk- It’s difficult to come up with hard and fast money to risk on different markets and trades. For our purpose, though, it’s best to think conservatively. Although some studies suggest initially allocating equity in broad terms of original margin (40% to 50% of total equity committed to the markets at a given time in the form of original margin, 15% to a particular market, 5% to a single trade, etc.), many traders consider these percentages too high, and do not consider the market to be a accurate measure of risk or a sound basis on which to allocate funds, because a trader can always, technically, lose more than the margin amount. These traders find it more beneficial to think in terms of the actual money amount they are willing to lose on any particular trade or trades, determined by their stop level or through some other calculation. 
Although in specific circumstances professional traders may actually risk comparable or even greater percentages of total equity than those listed previously, on average they risk much less-perhaps 12% to 20% of total capital at a time, and 2% - 4% per trade. Depending on the size of your trading account, these levels might seem overly strict, but again, the idea is to conserve money for the long haul.
In developing your trading goal, determine how much you could accept losing on a trade, both financially and psychologically. Based on total capital and the number of markets in which you are active, allocate your equity proportionally between individual trade, market group and total trading activity levels.
These guidelines protect you from dangers of extreme leverage in the futures markets. Though it may seen attractive to have the change to make big money on a small initial investment, the risk of loss is just as great.
-Determining Reward/Risk Ratios- Another common rule in trading is never to put on a position unless your possible profits outweigh your possible losses by a ratio of 3 to 1, or at the very least 2 to 1. So, if a particular trade has the potential of losing $100, the profit potential should be at least $200 to $300. This is not a bad rule, but like so many aspects of trading, it is somewhat intangible. Once you have formed an opinion of a market, determined your entry point and calculated the maximum amounts you could win or lose on a trade, you still are left with the uncertainty of the probability of your trade winning or losing, and unfortunately there is not secret formula for removing this uncertainty.
Some traders don’t consider probabilities valid at all. The most any trader can do is perform his or her best analysis of the market, and, along with experience and intuition, come up with some rough idea of the probability of success for a given trade. This probability can then be weighed against the reward / risk ratio in selecting trades. For example, would it be better to put on a trade where the reward / risk ratio is four to one and the probability of success is 30%, or would it be advisable to put on a trade where the reward / risk ratio is only two to one but the probability of success is 75%? Using this rule, you’ll be ahead of the game by directing resources to the trades with the greatest chance of success.
Traders Toolbox: Money Management - Part 1 of 4
Crucial but often overlooked, money management practices can mean the difference between winning and losing in the markets.
Plenty of books, manuals, and software packages will help you form and opinion of a market, but not many will tell you how to trade once you have decided to get long or short. The goal of money management is to increase the odds of high quality trades. And as we’ll see, leaving the money management variable out of your trading equation can lead to ruin, even if you’re correct about the market direction.
In a broad sense, money management can encompass those elements of trading outside the initial decision to get long or short in a given market or markets – that is, how many positions to put on, when to get out, where to place protective stops. More specifically, it refers to the strategic allocation of capital to limit risk and optimize trading performance in the long run. Allocation of capital can refer to how much money to put into any one market or how much money to risk on any one trade. These decision directly affect how many positions to put on and where to place stop orders.
Given the negative odds inherent in trading (a successful trader can expect to lose money on 60% of his trades), how do you go about maximizing the profit potential of the few winning trades you can expect to have? The answers vary with the disposition and trading style of the individual trader. There exist, however, basic concepts that can be successfully adapted and modified to individual needs, and when the followed in spirit, can boost the promise of long-term trading profits and take some of the stress and uncertainty out of trading.
-Establish A Goal- Having a clear idea of what you want to accomplish by trading, whether it is a short-term profit on a single trade or the desire for a long-term trading career, can go a long way toward building successful trading habits. Regardless of whether or not the goals are set on a per trade, daily or long-term basis, establishing from the outset basic levels of acceptable risk and financial reward will help curtail avoidable risk and extreme losses. Also, determine a specific time frame in which to trade: Will a position have to be liquidated by a certain time for tax purposes or for same other reason?
-Diversification- Just as in the stock market, a portfolio of different instruments can be one of the best hedges against several and unsustainable losses; a loss in one market will hopefully be offset by gains in others. Traders must take caution, though, to truly diversify their portfolios with contracts that are price independent. Spreading your trading among three or four different interest rate contracts that move in a similar fashion is not a good example of diversification, because a loss in one contract is likely to be mirrored by losses in the others. But over-diversification is dangerous, too. A trader can spread his money over too many markets, and not have enough capital in any one of them to weather even small adverse price swings.
A good rule of thumb is to stick with what you are comfortable; do not venture blindly into unknown markets just for the sake of diversification. A balance must be stuck between available resources and a manageable trading scenario. Capital constraints will, of course limit the choices traders can make, forcing those with smaller trading accounts to bypass or minimize diversification.
The 3T’s of Trading
Today I’d like you to welcome Geoffrey A. Smith, from Day Traders Institute. DTI has been a leading the way in trading education for years and I’m very excited to have Geoffrey, the lead instructor from DTI, join us today. Please take time and read the article below on “The 3T’s of Trading”, then visit the DTI to learn more about them as a company and how they can help you with your trading and investing.
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As a trader and instructor, one of the most frequently asked questions I get is “where to take profit”? When I first was asked this, my initial response was “when you are making money”. But after pondering the question for some time, I came to realize that many traders struggle with taking profit hoping that the market would go further in their favor only to get stopped out for a loss. So to help traders with learning to take a profit, we came up with the 3T’s of trading:
Tick
Trade
Trend
Look to trade in thirds, taking 1/3 of your position down at a time. When using the 3T’s, the goal is to first finance the trade and let the last third pay as much as possible. Wouldn’t it be nice to trade with someone else’s money? Well, initially we have to put up the cash to get into the trade and take on the risk of losing money. But if we take enough of the trade off and adjust the protective stop to a point that the trade cannot lose, this eliminates our risk in the trade, relieves the fear of losing, and allows us the legal right to let greed set in.
The first T is the Tick part of the trade. Really it is a scalp, only looking for a small amount. If trading stock, take 1/3 of the position off at $0.30. If trading futures like the Emini S&P, look for 0.50 to 0.75 of a point. This accomplishes two things, it reduces your exposure to the market, and also allows you to pay commission.
The second T is the Trade. Look for twice as much as you got on the Tick part of the trade. Again, if trading stock, look for $0.60 or so. This will elevate 2/3 of the initial position and lock in $0.90. If you adjust your protective stop back $0.50 from current market, then you are on a “free ride”. At this point, you have no more risk in the trade and can concentrate on making money.
Finally is the third T, which is the Trend part of the trade. This is the last 1/3 of the position that we hope will pay the most. Sometimes you will get stopped out on the last 1/3, but other times the market will continue to trend in the direction you are trading and can end up making your whole day.
These price targets are not set in stone but examples of what you might look for. On a stock that is trading at 50, you can’t look for as much profit as one that is trading at 150 because of the price movement. You will need to adjust your profit targets accordingly. I will look at the ATR (average true range) of the stock and set my first target at 10 – 15%, second target at 30 – 40%, and look for the whole ATR on the last third. Some days the stock will get there, other days it will not, but at least the trade was financed on the way.
Give this technique a try and see how you like it. It helps in reducing the fear of losing and allows you to take some profits as the market trends in your direction. It has been my experience that the first target is hit 85% to 90% of the time, with the second target getting filled about 75% to 80% of the time. Not every trade goes in your direction, however, if 1/3 of the trade has been taken out of the market, then the loss has been reduced as well. Remember as traders, we want to make are losses small and our gains big. The 3T’s is one technique to help us get there.
Good Luck!
Geoffrey A. Smith
Chief Instructor – DTI
How to remove your obstacles to being consistently profitable
Today we have a chance to hear from Mo Christiensen of Trading Advice Blog. I asked Mo to teach us how we can do something that aludes even the greatest traders…stay CONSISTENTLY PROFITABLE!!
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We’re receiving a lot of emails these days from people asking for guidance and help unraveling their trading. With all the variables involved, people want advice figuring out where they’re going wrong, or where they can improve.
So here are some suggestions:
Start by taking this free self assessment. It will help you to evaluate your trading around some of the primary success factors for consistent trading.
Second, go through the list of success factors below step by step. Evaluate each one. You’ll be able to either tick it off as ’satisfactory’ or you’ll want to dig deeper and find a solution.
Find a trading method you can be confident in
This is THE basic requirement for every trader. With everything else you need to focus on as a trader, you want to know that your trading method has positive expectancy. That doesn’t mean each trade is going to be profitable- but it does mean that you can rely on a regular flow of signals that if you execute correctly will lead to overall profitability.
For new or struggling traders we always advise finding a system with simple entry and exit signals that don’t rely on a lot of interpretation in the heat of things. Plain, no nonsense signals that say ‘get in’ or ‘get out’ are best. That’s the beauty of MarketClub’s Trade Triangles - there’s no guesswork involved.
Are you executing correctly?
Many new and struggling traders face the challenge of managing their emotions, which get in the way of precise and focused action when it comes to placing an order in the market. This is almost entirely fear based and is usually caused by a lack of confidence in the system they are trading. Second guessing is the mortal enemy of consistent profitability!
Again, this is where Trade Triangles excel - the signals are so clear that you can see with absolute clarity what you are meant to be doing. So if you don’t take the signals, you know immediately that what you need to work on is your execution. Both MarketClub and Ino TV have a rich selection of videos with more on this subject.
Money management
Are your profit targets appropriately balanced with your risk? In other words when you analyze your trades, and compare the profitable ones to the losing ones, does the amount of each profitable trade exceed the amount of each losing trade - preferably by 2 or 3 times?
This is important. Many new traders make the mistake of thinking that their consistent profitability will come about by having more winning trades than losing trades. They get despondent when they have a string of losing trades and begin to doubt their system. Yes ideally your system will have more profitable trades than losing ones. However even if you have 10 winning trades and 10 losing trades, or even 5 winning trades and 15 losing trades, if each of your winning trades is significantly more profitable than your losing trades, then you will be consistently profitable over time. The reverse is equally true, so make sure your winners are bigger than your losers.
Manage those emotions
What’s your favorite? Fear, greed, jealousy, guilt? They’re all bubbling away in there somewhere and affecting the way we think and act. Here are two pieces of counsel for traders:
The first is clear, clear, clear and clear. Find a method that you can use to clear your emotions! This may sound a bit touchy ‘feely’ to you, but believe me it will translate into such significant improvements in your trading, and in your life in general, that you’ll forever consider it to be one of the most practical things you ever did for yourself. We recommend two methods that are particularly effective.
Second and in closing this post, I want to come back to MarketClub. Adam recently recorded a video on the number one account killer: emotion in trading, and what he says is spot on. Trading Triangles will help you take the emotion out of your trading. Even if you have challenges managing your emotions, if you can just marshall your focus and use the simplicity of the Trade Triangles, over time you’ll build the confidence that will allow you to succeed.
Mo Christiensen is co-editor of the popular tradingadviceblog.com which specializes in trading advice for new and struggling traders.
Gold follow up … was it a good or bad trade?
Hello,
I am not sure if you watched my earlier video on gold, but I wanted to put together a quick follow-up video in light of what has taken place in the last 24 hours.
A few days ago we released a new video on gold. It showed that we had a sell signal using our “Trade Triangle” technology. I thought it would be interesting to follow-up on this video as this signal did not work out as we expected it to.
Now many of you may think this was a bad trade. I happen to think it was a good trade and here’s why…
One of the keys to being a successful trader is to be disciplined and follow your trading plan, or in our case follow the “Trade Triangle” technology. While our last signal resulted in a loss, our previous “Trade Triangle” signals resulted in a very large profit.
I want to share with you a trade that did not work out and show you how you should react when in a negative trade.
It is a very short video, but I think it will teach you a valuable lesson about trading and how the markets really work.
Every success in life and in trading.
Co-founder MarketClub.com
