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Trading By Tlie Boole - Part Vi

About Managed Accounts

Tliere is notliing wrong per se about managed accounts. I Icnow professional traders who trade regularly and still have an account managed by someone else in addition to their own trading. If there is someone who is successful at daytrading the SSiP, for instance, and I dont have the time or the inclination to trade the S&P, it might be a good idea to hand over an amount of margin money to someone who is doing well at trading the S&P.

The decision here is whether to be a trader or an investor. These are two completely different animals. The economics are totally different. Instead of selecting a market to trade, you must select a or broker to invest with/in. The commissions for a good or broker successfully trading a managed account are typically about $100 per round turn and/or a percentage of earnings, A good or broker who is making you money is worth that. The problem is trying to locate a competent person to trade your money for you. I have known of people searching high and low for such a person and never finding one. All too often, the stories that come from managed money trading are horror stories involving huge losses.

If your account is small, I feel you would be a lot better off being in a commodity pool as opposed to an individual managed account. The problem is where to find one. Personally I know of none that are worthwhile unless you have about a million dollars you wish to put at risk.

Also, instead of full margin to position trade the S&P, you need only a fraction of the margin in a managed pool account. This is because some pools will trade the S&P collectively for you and others with an original investment of much less than you would have to come up with on your own. Id be very careful in selecting with whom to place the money, but once that job is done, you must basically forget about it and let them trade. The worst thing you can do Is to look over their shoulder.

The reason for having a managed account when trading on ones own is, as stated above, to trade in a market that you dont normally trade. Another reason for doing this is to take a rest from the markets. If you are going away on an extended business trip, you can have a managed account working for you while you attend to other things. The same is true for extended vacations. If you place money to be managed, you stay with it for an extended period of time. You dont want to catch a trader only when he is having a drawdown period.

I know of traders who place their money in a managed account when they get into a trading slump. In every instance of managed money, be extra careful to fully check out the track record of the person who will be doing the trading.

About Stops and Risk

One of my primary exit techniques is to watch for / and \/\ as alerts, or ob/os on the daily oscillator. When these occur, I move my exit stops up close to the price action. When /\ or \/\/ occur, I look for the first opportunity to get out. Usually this will occur within a day or two. What will happen is /W or W\. I try to get out at the high or low of that last leg. Most of the time that last leg will occur and I escape at that point. I will not risk that the last leg is a continuation leg. Usually it is not. If it turns out Im wrong, I can always re-enter the market.

Trading By Tlie Book - Part VI

Another exit technjque is to utilize the offset nnoving average, especially when the angle of the trend is sfe°ep. 1 move my stops up closer as prices approach the moving average line. Penetration of the moving average by the Close will cause me to exit at the first opportunity.

I have shown where to place the initial stop trading the breakout of a range. This stop is only "initial," it is only temporary. It gives me some insurance while I observe what the market Is doing. It is much further away from the price action than 1 care to have it. But it will suffice until prices show where they are really going. As soon as possible I move my stop to 1 tick below or above a #3 (III) point if prices look like they may break out of the range. If they turn around and come back, I cancel the stop involved and move the opposite side stop. I juggle these, canceling one and then the other, reinstating either when appropriate, until the breakout occurs.

I have been criticized for placing stops only one tick above resistance or 1 tick below support. However, it has been my experience that if stops are going to be run, they will be hit no matter if they are placed 1, 2, 3, or 4 ticks below support or above resistance. Why risk the extra points?

Also, as soon as possible I let the MA take over to show containment. When I am trading from 1-2-3 highs and lows, the initial stop is placed 1 tick away from the #3 point. Again, this is only the initial stop, it is temporary. It may also be too far away from the price action. I want to get over to using the IVIA as soon as possible for my trailing stops and have it in place, updating daily as I go. The MA is usable when It shows containment of prices.

I have heard of all kinds of methods for placing stops. Some say "x" number of ticks away. Others say a certain percentage away. Some say to risk no more than a certain percentage of account equity. None of these methods makes any sense to me. I can afford to lose only so much on a trade.

In some cases, even though I can afford to lose a certain amount, I am unwilling to lose that much. Why? Because it is too painful. I wiil be unhappy if I lose that much, so 1 set stops according to what 1 can be happy with. Peace of mind and happiness are what I want from the markets. They are the fruits of wisdom, and wisdom is one of my overall goals.

The best stop strategies take into account the volatility of a market, account equity, anticipated winning percent, turnaround time, comfort level, and any other factors one might feel pertain to proper trade management. Certainly a stop method should be based upon sound money management.


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Stop goes above III point because the FJouing average

tfjljA --4 I Dss not yet shou containnent.

II \

stop can go here, or



Figure 1 shows my stop philosophy. If I can afford the loss as i enter the trade, my stop will be 1 tick above the #111 point. If I cannot afford to place it there, on a $x,xxx account, then my stop goes just above the MA. I can then exit on the or when prices take out my stop 1-3 ticks above the MA.

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