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Trading By The Book - Part VI CHAPTER 2


Now what do I mean by that? I mean I dont "play" the "game" of trading. 1 wanl to be like the baseball manager. The players "play" the gamie, but the manager is all business. He has firmly in mind the percentages for or against making any move that strategy may dictate.

Sound management in placing stops says that I can risk no more money on a singk trade than is a multiple of the number of successive losses I can expect from the method of trading i use.

If I have a $10,000 trading account and with my method of trading I can expect nc more than 10 trading losses in a row, and If Im willing to see it go down to $5,000 before Ive had all the pain I can take, then I can afford to risk $500 total per trade made,

iji,,, When I am trading within a congestion area, I use very close stops. I have to tbrow out the MA on these trades. My stops are mostly mental throughout the trading

period. However, I do give my broker a stop placement just in case something unexpected happens and Im not able to monitor the trade. The stop I give my broker is

usually too far away - at least further away than my mental stop.

About Commissions

Since i make all of my own decisions and require nothing of my broker other than to call my trades to the trading floor, I do not feel that 1 should have to pay full commission. If I daytraded all the time on large contract lots, I would expect to pay well under $20 per round turn. Since I usually do not daytrade, i feel that $20-$35 per trade is a fair amount to pay. 1 feel that i should use a reputable broker, one who is a clearing memben I am happy to recommend any of my own brokers to anyone should they be interested.

About Placing Orders

Correct order placement is crucial to good trading. There are many times I will not enter a trade on the CBOT because they do not take a variety of orders. If the type of order placed can make the difference between a winning trade and a losing trade it is bes to bypass a trade that would have been good with one type of order but bad with another. Here is an example: Recently I wanted to enter the Wheat market at 402.75, no higher and no lower. Wheat was at 399.00 at the time. Although I didnt know it, the government was to release the crop report the next day. What i wanted was a stop limit order at 402.75. If I bought Wheat at 402.75 on a buy stop, and then it gapped up over my order, I would have been filled at the Open. So, because I couldnt get the kind of order i wanted, I didnt place any order at all.

As it turned out, due to the government crop report, wheat opened at 408.00 and then shot up to 409.50. If my order had been in there it would have been filled at or around 409.00. I then entered the market later that day at my price of 402.75 as the market traded down to 390.50 and closed at 393.00. Over the next few days the market traded back up to my goal at 418.00, and I was out. An alternative to this, which I was sorely tempted to do, would have been to place the order at the Minneapolis Grain Exchange. There, all orders are accepted. The trade-off is a lower Open Interest, and so less liquidity. As it turned out, that is what I should have done.

The Business of Trading

Trading futures is a business. To my mind, it is the best business in the world - for a great many reasons! It has a very high profit potential against a very low overhead. Risk can be tremendously reduced by taking only high probability trades, In fact, futures trading is a relatively low-risk business when approached with the right attitude and the right planning.

Trading is eclectic. I can pick and choose which market to be in, I can choose when to be in it, and generally under what circumstances my entry will be. If Crude Oil is making money, I can make money in it too. If 1 want to trade the Bonds because they are moving, I can. Any trending market is making money for someone, so I can have a piece of the action too. I can be a bull or a bear as the mood suits me. I can be a happy bull or bear if Im going with the trend.

I earn my living in what is probably the last vestige of true capitalism in the world -a "free" marketplace, 1 can live by my wits, and reap the fruit of my labor.

I have no customer problems; no customer relations, no customer complaints. No customer theft, no customers returning anything.

There are no employee problems other than myself. No unions to contend with, no negotiations, no strikes. No employee benefit plans other than what I give to myself. No employees stealing from me. No collective bargaining, and no stockholders.

There are no merchandising costs, no damaged goods, no vandalism, no service calls, no repairs to make and no guarantees to honor.

I dont have to advertise, and 1 have no marketing headaches. There is almost always a buyer if I want to sell, and almost always a seller if I want to buy. No purchasing and procurement problems, and no salesmen making mistakes.

There are no manufacturing problems, no production schedules to meet, no shipping, no receiving, and no product liabiiity.

I dont have storage problems either. No warehouse, no spoilage, no items to discontinue or mark down. No bills of lading, no freight or freight damage, no trucks to load or to unload.

Im free of invoicing, accounts payable, payroll, inventories, accounts receivable, billing, dunning, bad checks, and bad debts.

There are no salesmen who call on me, although occasionally an investment salesman will call on the telephone. As soon as I tell them that I am a professional trade doing quite nicely in the market they quickly excuse themselves and hang up. This only reinforces my perception of them as wolves waiting to tear apart some poor unsuspectir suck... whoops... prospect.

I have no competition, What? How can that be? Yet its true. I have only to dec with someone who is of a different opinion than I am. We settle our difference of opinic with money. If Im right, then he pays up, if Im wrong, I pay up. We resolve our difference of opinion in polite and courteous fashion, by putting our money on the line according to the rules. We dont know each other. The exchange acts as the neutral party.

The person on the other side of my trade cant cut prices as a competitor can. Ht cant offer better service, he cant scoop me in the marketplace with a new innovation an existing product or get one-up on me with an entirely new product. He cant steal m customer lists, because I dont have any. He cant lure away my best salesman either. He cant even plant a spy to discover my trade secrets, because i dont have any to hid. and because he doesnt know who i am. He cant seduce my top research scientist, an I can never be the victim of a hostile take-over. I never worry about corporate spies.

Now I ask myself, "Self, where else can you find a business like this?" The answ is an overwhelming "nowhere"l its the most perfect business in the world!!

About Charts and Charting Services

Everything ! do on my computer can be almost as easily done by hand, using todays financial section and a good set of charts. There are many of these charts around. As long as i ignore their moving averages, oscillators, and such, ! can do quite well. All that is needed is a chart that is "markable." Is that a word? It is now! I just put a dot where todays MA is, and write in the number. I draw my envelope lines with ruler, which is quicker than drawing them line by line with a computer.

When ! was using a chart service, I just put a dot where the high, low, and close were. Usually I didnt even bother drawing a connector between them unless that was the market I was currently trading. Open Interest and Volume are there on the chart. Ive never plotted them.

I do think that it is important to trade a chart from the perspective that Im used tc Whatever the vertical and horizontal scaling is, I stick with it. Most of the time, I can make any market look like its in a trading range if I set the vertical scale large enough, I can obliterate the fact that it is in a range by setting the vertical scale small enough.

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