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11

Chapter 12

Risk ;iik! Moijcy M;m;ii;L:,niem

here arc

There, Ive shown ih Ehe basic concept of one way I tra(ie, loss days, too, and Til try to show sorne bclore vere done. However, Ihere arent many of tiiem in comparison with the winning days.

Mow I vvarit to slkow one of the finer [>oints of my iradinrj. It wHI serve to bring this discussion into tfie area ol riyk iind money mana[.;[?meni. The crude oil chart below will serve as the vefiicle.

CL 5 nmiz

Im looking at four days worth of five mcriute charts fiere. Ive blocked off what has turned out to be a very significant area, It should be noticed that prices entered this area at some pomt on every single one of tf}ose days.

But even before I saw all four days, wfien day two dropped into lhat area, I was looking to sell any breakout of the congestjon low of day one. 1 never got my chance, as tfic market closed inside the coi.gustion area. On day three I did short tfio minor congestion at the open of day two, vfuch then went on to take out the low of day one,

As can be setin, diy ihiye wtJS rioi die bu-st of days (or me in the crude Oil, bur it was more or less typical of the kind of trade I end up in. Ill show it more closely on the following [lage.

3850 25 3B00 3775 375G 3?Z5 3700

3675 3650 5

3600 3575 3550 3525 3500 3175 3150 3-125 3400 3375 3350 3325 33G0 3Z75 3250 3225

CL 5 HINUTE

opened ->

<----------->

Tfie above lines sliou

ulieie the congest ion

uas 3 dajs ayo.

I yfit sliort at 3300 Tlie piarStei guL to 331 .

The market opened at - , moved „..... .. .......

of day 1 (3390). 1 vas vaiiing for it at 3389, and got filled at 333B. niy first profit at 3377, and my second profit at 3365. I then field on with one contract to run. ~ "

up sljgtuly, tfien took nut itie low

tO(jk

he Oil nrivnr really ran. It went down to 3-IO,

Mow I fiave devefoped a very firm philosopliy for my "let it run" contract(sJ. I try 10 never give back more than 50% of [he potential profit on my "let it run" conuactfs). So vfien prices fiad reached 3340, I moved my stop to protect one half my profits. At 3340, t fiad 48 points per coritracl in the crude. I nxived rny protective stO[i to 3354, and bought it back tfiere.

Lets review ny money ar.d f>sk managemen; piiiilosoi.ihv, They are (fiff[.r(;m aiid need lf> hii uKpliiHid. / "] hodi ri part at ditr ( points of tradiiK .

35 0 3500 3570 3560 3550 3510 3530 3520 3510 3500 3430 3110 3170 3160 3150 31 3430 34Z0 3110 3100 33% (] 3370 3360 3350



?5 ManaQemeril

rn usually not wjllinc] to nsk more than S 1 50 per contract on anything the stock inOox coniracts anj the bonds. There I will usually risk S2[j0 and 5315 or less per contratjl resf)octivoly.

Assuming the ideal of 3 5 or a multijle of 5 contracts upon initial entfy I warti to set my intual protective stop $150 away fjom nty cntiy fiM, Let me repeat that., $ 1 50 away t:om my entry filj, HOT niy entry pomt.

Why? If my entry point in gold is 360.00 and fitled at 360.20, tho stop goes at 358.70 - $150 lower than my fill.

If i place it at 358.50 ($150 lower than my entry point}, Im not risking SI50, Im then risking Si 70.

Mow I ask rT;ysclf a question, up to 361,00, what is my hsk?

II I get filled at 360.00 and prices move

If anyone said $150, I can tel! right now that person caivict be winning in the markets on a regular tasis. Lots see wfiy.

If } filled at 3G0.00 on a gold contract with my stop at 358.70, and prices move ) to 3G1.20, Im row risking 25 points, or $250.

But. thats not all. Ive been leaving something out. Wfiai about overhead? I also have at stake the cost of commission and fees. They are not perl of rny r:.sk in an accounting sense, yet I have to take them into account wlun J cnmpute losses, and subtract them from my profits.

So lot nie restate my risk management criteria: I wilJ usually not risk more than 51 0 on anything except the stock indexes and Efie bonds.

That means for gold and crude oil. my initial protective stop is going to be set at a distance that is $150 away from where get filled including

commissions and fees.

Assuming Joi [laying $18 per round turn in commissions, and that fees amount to $2, then a stop in gold must be placed 13 points away from my fiif. hm stopped out, then I will lose S130 + $20 in commis,sions and fees.

That means in die currencies my initial protective stop goes 10-11 poims away from my entry (20-22 for the Ground).

Im not sayinrj iliat anyone el.e\s stop lias to go thcie. Vni saying my top goes there. If sonieone else is willing to risk moio, tlien hr sliould place his stop further away. The most important tfiing about risk is tnat Im comfoEiable with it. That way I can do "my tiring" without worrying about being annihilated. I . comfortable stops at all times. I vill modify \ concept to a certain extent later en when I talk about average volatility.

If Im fat horn a bunch of big wins. I may be able to or even want to increase my risk. Thats my choice. I cant toil anyone to do it or not to do it. I can only say this: when Im feeling comfy and sleek based on some good wins, arid 1 increase niy risk, that is usually when I take a bath and am brought fiome to reality and my original lower risk. Greed will get me every time. Thats when 1 will vow to never do it again. Those vows never seem to last very long for some reason.

Risk management is a subject that is so broad that the only thing 1 can do is to encourage others to read widely on the subject The best places to look for iidormation on risk management are the books written by successful gamblers.

One of the best books I have found on this subject is The Track Atta.ck, written by Clark Gary, and available through Trading Educators for $89.95. C!ark Gary is > nephew, a professional horseman, and a steady winner at the tracks since he was 15 years old. Why? He is a master at understanding risk. 1 can honestly say that he has never had to have a job. At age 30, he continues to make his living at the track. Now how about that for a nepotis-tic, patroniing plug? In his book you will see some small sections I let him borrow from Trading by the Book. Other than that, the material is all his own.

Traders sliould strive to becoaie masters at risk aanagement.

Money Management

Money managemeru and risk management are part and parcel of each other. They overlap, and yet they are different. Defining that difference is rather difficult. Perhaps they are two sides of the same coin. Risk management says, "t can afford to rLsk only so much." Money management asks "Wiiat can I expect to make lor the rjsk 1 have taken?"

Im willing to risk $150 in gold. Now, what can I expect to make for that risk? I have to have my priorities straight here. To ifie best of my ability, I have limited my risk. Now I can look forward with greedy, beady eyes to how much I msght make. But first things first. BeforR f can make anything, 1 have to cover costs. Costs in this business are made up of several items.

Tliere is slippage, there is comtiiission, there are fees These are obvious, direct cosss. But what about indirect costs? Ive got to cover the cost of my data feed, exchange fees, software, hardware, and my tirne. Surely my trme is worth something.

The brokers time is worth soneihing. I know that every time i see how much l>o hutcfiers my earnings, liow about my time as a trader? Is my lime wortf! sornetfiing? It harl tjctter be. and t had lietter realise that. What about the costs of all the other hooks, systems, jjaraplTernaiia. subscriptions, etc.. thiat one Liuys to suttfjiement liis edLication in trading?

too, cost.

Others iiave made a fortune off of my trading f I dont, it would be because I never learned The real cost of trading is staggering!

lad better do so, low to really count the



Ye\ so manv I talk to, even profcssfonals. call a " ." Hey, \i this is a oanrie, then it is one of tfie most dangerous games in tlie world. My financial life is at stake here. Not only that, my self-resttoct, rny seff image, my whole outlook on life can be destroyed in this so-called "game,"

Trading is a business. The soono: one treats it as sucfi, tfie sooner one will become a winner. If Im not a good businessman, I wiJl not be a good trader. 1 have to understand risk, and I have to understaml fiow to turn a profit.

Here is hov I lypically manage my money, with stigfd variations as to tfie number of contract sets ! liquidate to cover costs:

As soon OS I sec sufficient gain on one or two contract-sets. I liquidate those contract-sets. That covers my direct costs lor tlie ref>iaining contract-sets. Depending upon fiow fetsi ttie market is moving and the angle of ascent, I then move my stop up lo one of two pfaces - ejihcr to breakeven (rny fill price - fve already covered direct costs wdtt the first contract-set), or to a place where Im not risking any more than 5150 {$250 for the stock indexes and S315 for !fie bonds* frord the pla[;e where I exited [he first contract-set.

Heres an example: Im long gold at 360.00. My initial protective stop is at 358,50. The market moves up to 3G1.00. I fiquidate one contract-set at 360.90. I tiave nov earned $90 per contract in the contract-set to cover my costs. If f liquidate two contract-sets. I will have also earned a small profit.

Uow its lime to move my s(op(s). I can move my stopts) on the remaining contract-set(s) to 360.00. That is breakeven, I already covered my direct costs wtien I liquidated the first contract-set.

1 can move nsy stops to $150 away from 360.90, placing them at 359.40. That way still risking $ 1 50. Let me repeat that, frii slill risking $150, not the $60 that exists between 359.40 and 360.00,

can do a combination of tfie above. Place a stop at 360.00 breakeven for one contract-set, anti a stop at 359,40 for tlie reniaining contract-set,

if;iS(;s are ley lr.-t die take Dsscs yre a

° So where does the prolit coriie in? If goltl r-noves up nanotlicr $fiG Si 00, I will tssue a market or(Jer to iigtjidate the second or tfiiril cuntractse I was long tiis contract-set at 360.00. Gold is now at 362.00. With a market order fitted at 362.00, I will nsake about $200 po( contrjict ift ttie coniract-set. Now ani I making a profit? Well, maYbc rvTjybi.. jnsi rnayiie, ve covered my indirect costs. A big part of ifiat depenrjs tipori hov/ much in [he fiule I am from prioi losing trades. Afia! Ive tmalty guthn arouruf to ifiat! The truth is. 1 havent nlade a tfiing until 1 covtr \)osi losses. Past part of my ovf:rhcad. Even die IRS will agree wiift that. Tli :hosG past losses off against current income. For sorrte, pas migtdy big h<dc to have to climb out of.

"Yupl". someone will say, "Id have to live lo be a fiuridred and win every day to make up for afl my [ast tosses," Sorry, But its never too late in Slop playing die futures game, dnd start running ones trauiiig as a business. I .Sincerely fiope and pray this book will help my roas.ters !o tlo that.

° So, what aboLit that last contract-set? At 362.00, I liavo $200 of unrealized profit. Where do I put the stop? 7 wa/u ihis baby to bring honte the hiicon. Buy, / /javc a /t?r of fUgfi hopes for (h/s Lisr contn-ic! soh liljbc f shoiikipur (be slop far away so tliis one cnn fHiOy run, riyh!?" Wrong! "hais dfean"iing, t rats playing the game. I want to do this in a b;.SiiiesS manner. I dont want to gamble. Ill put the stOf) in a place whce, if to be stopped OLit, 1 wi I have at feast something for the risk Ive taken, put the stop at 361,00 and lock in a guaranteed prcfi of at least 5100 [ contract on tfiis last contract-set. Ill never risk rnore than 50% nJ niy unrealised profits,

Okay, Now, what if my tasi stop doesnt gel taken uoi tt4> next lirne the market reiraces Then I can keep moving my stop up. There are severa ways to do it. I can maintain a stop that is always M BO away from tho most recent high that tfiis market has aiado. 1 can mo\e my stop up $50 every time the niarket moves up $100. 1 can keep moving iny stop to jirst below the low of tiio last market retracement prior to its coiitinuing tc move in a profitable direction, f can trail my stop at one or two ticks on thti othior side of a moving avorntjC tliat is showing containment of pnc.es. Where I do liiis is a rrujiler of cfioice.

1 a ve

Al S90 for die first contract-set, have I made a profit? No! How

ve cone is covered direct costs.

ft so

about at $100, S 1 20? No and No! A

my costs in commissions and fees were 560, I now iiavo S3Q teR over Ive made a profit rigfit? Wrongt Wfiat about that data feed, software, books, systems, aruJ subscriptions? What about my time? 1 havent made a thing yetl



[start] [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [ 11 ] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41] [42] [43] [44] [45] [46] [47] [48] [49] [50] [51] [52] [53] [54] [55] [56] [57]