http://marketingsource.com/articles/ Articles at marketingsource.com Articles Library en-us http://marketingsource.com/articles/book-promotions/finance/a-word-of-advice-do-not-think-react-in-stock-market.html http://marketingsource.com/articles/book-promotions/finance/a-word-of-advice-do-not-think-react-in-stock-market.html Fri, 20 Aug 2010 03:48:12 -0500
a) Stand around and try to figure out “why” a wave of Selling is occurring
b) Start hitting bids instantly to exit his long positions If he is a good floor trader and if he wants to survive, he Will choose b. In other words, he needs to react immediately. Every second he spends analyzing the situation costs him money in stock market.

If a situation arises for which you have already determined exactly what you should do in case of just such an event, react and do it. Don’t think (whoever thought you’d hear that kind of advice?). If a situation arises for which you have not prepared, and you have no idea how to react, and then think in terms of risk control. Ask yourself, “what are my choices and which one is the least likely to result in a huge loss?” Then do that.
]]> http://marketingsource.com/articles/book-promotions/finance/risk-control-method-stop-loss-orders-in-stock-market.html http://marketingsource.com/articles/book-promotions/finance/risk-control-method-stop-loss-orders-in-stock-market.html Fri, 20 Aug 2010 03:46:39 -0500 or exceeds a certain price.

This is often referred to as a money-management stop. The purpose of a money management stop is to attempt to limit your loss on each individual trade to a certain maximum amount. There are several schools of thought regarding the use of stop-loss orders. Some say you should always use a stop loss order and have it placed in the stock market as an open order. Some say you should use mental stops, meaning that you do not actually place the order to exit a losing trade until the market you are trading nears the stop price you had in mind.

The third camp says that stop-loss orders should not be used at all in stock market , because they either interfere with the system you are using or because markets have a way of “running” stops, thereby stopping out a lot of traders just before the stock market goes back the other way. So which approach makes the most sense and which is the most likely to help generate the best results in the long run in stock market ? Before attempting to answer this question, let’s define exactly what a stop-loss order is, how it works, and the implications of using or not using stops in stock market trades
The third camp regarding stops advocates not using stop loss orders at all in stock market, primarily because they can interfere with the system being used to trade. At a certain level this thinking makes a great deal of sense. The underlying principle is simply this: if you have a winning system without stop-loss orders, why bother messing it up by getting yourself stopped out of trades that might otherwise end up winners? Just let the system do its thing. Unfortunately, this “certain level” is the theoretical level. And you will find in futures trading that at times there is a chasm a mile wide between theory and reality. This difference becomes most apparent when you actually start trading and get into a position but it starts to go horribly against you, leaving you with two choices:

a) Stick with it no matter how bad it gets because “my system will be profitable in the long run”
b) Run like hell
The second choice goes against the way most people think in stock market. We are raised to persevere and to fight until the end. However, when engaging in an endeavor that exposes you to unlimited risk, the very qualities that may earn you admiration in other areas of life can cost you large sums of money. The long-term goal in futures trading is to win the war, not each individual battle.

The One Important Benefit of Stop-Loss Orders in stock market---

Earlier we discussed the negatives associated with placing open stop-loss orders in the stock market place. Despite these negatives, this approach offers one significant advantage over other alternatives. Before unveiling that advantage let’s first define what a stop-loss order is intended/and not intended to accomplish. The purpose of a stop-loss order in stock market is not to enhance the performance of your system. Likewise, the purpose of a stop-loss order is not directly to increase the profitability of your trading. The purpose of a stop-loss order is to hopefully minimize your losses on any bad trade enough so that you can still come back to trade again tomorrow in stock market.

Nothing more, nothing less. A wise old trader once said it best when he stated “the purpose of a stop-loss order is to save your sorry assets.”The way to make money trading futures is to stick around long enough to earn enough profits to offset all of the inevitable losses. If your approach to trading stinks, stop loss orders won’t make you a profitable trader. However, if you do have a winning approach to trading the only thing that can derail you is “that one bad trade” or that series of huge losses that knock you out. The only way to safeguard against huge losses is to use stops to protect your Capital in stock market. And the only way to guarantee that y our stop-loss order will be in the market when it needs to be is for your stop-loss order to indeed be there.

In case you are having trouble reading between the lines, this author advocates the use of stop-loss orders.

]]> http://marketingsource.com/articles/book-promotions/finance/margin-to-equity-ratio-in-stock-market.html http://marketingsource.com/articles/book-promotions/finance/margin-to-equity-ratio-in-stock-market.html Fri, 20 Aug 2010 03:44:08 -0500 If you trade “too small” you forego the opportunity to make money that you could make in stock market.

If you trade “too big” you run the risk of experiencing sharp and occasionally painful drawdowns in your account equity, which may cause you to stop trading prematurely in stock market. This not only eliminates the opportunity to make money it also eliminates the opportunity to recoup your losses in stock market. If you trade “way too big” for your account size you run the risk of “tapping out.”While the discussion in Section Two was fairly detailed, there is a simple rule-of-thumb measure that can tell you how heavy you have your foot on the gas. This measure is referred to as the margin-to-equity ratio.

To calculate this ratio simply adds up the initial margin requirements for all of the positions in your portfolio. Then divide this total by the equity in your trading account to arrive at your margin-to equity ratio. Let’s look at a simple example.
Trader A has a $30,000 trading account and at any point in time may have positions in T-Bonds, Soybeans, Crude Oil and Japanese Yen. Let’s also assume that the initial margin requirements for each market are as follows:

T-Bonds $2700
Soybeans $ 750
Crude Oil $1400
Japanese Yen $2650

If we add up these initial margin requirements we get a total of $7,500. In other words, if this trader were long or short one contract of each of these markets at the same time, his
brokerage firm would require him to hold a bare minimum of $7,500 in his account. If we divide $7,500 by the $30,000 that he actually has in his account, we get a ratio of 25%. So this trader’s margin-to-equity ratio is 25%.

This value can and will change over time. Clearly, as the equity in his account rises or falls this value will change. Also, margin requirements that are set by the exchanges can and do change from time to time based on the fluctuations of individual markets. Finally, as the number of positions you hold rises, your margin-to-equity ratio rises, and as the number of positions you hold declines, your margin-to-equity ratio declines. The obvious question is “what is the right margin-to-equity ratio to maintain?” If your only goal is to maximize your profitability there seemingly is no reason to limit your margin-to-equity ratio. However, the other side of the coin is risk exposure. While the margin-to-equity ratio does not measure your actual dollar risk, it does give you a quick and easy way to get a handle on the relative level of exposure you have in the market place at any given point in time. In other words, if your margin-to-equity ratio is 10%, clearly you have less exposure than if it were 30%. The ultimate goal is to maximize your profitability while minimizing your exposure to risk. If Investor A and Investor B both make 20% a year, but Investor A uses an average margin-to-equity ratio of 10% while Investor B uses an average margin-to-equity ratio of 30%, clearly Investor A is the more efficient trader as well as the one less likely to run into trouble along the way.

As far as what is the “right” margin-to-equity ratio, for this there is no absolute right or wrong answer. The general rule-of-thumb regarding a prudent maximum margin-to equity ratio is 30%. In other words, most traders would be well advised to maintain a margin-to-equity ratio below 30%. Trading with a margin-to-equity ratio greater than 30% should be considered an “aggressive” approach to trading futures.
]]> http://marketingsource.com/articles/book-promotions/finance/risk-control-method-no-2-proper-account-sizing-in-stock-market.html http://marketingsource.com/articles/book-promotions/finance/risk-control-method-no-2-proper-account-sizing-in-stock-market.html Fri, 20 Aug 2010 03:41:59 -0500
However, if you experience a drawdown that is within the realm of what you had expected going in, it is a far different situation to deal with emotionally than if you figured you would never experience anything worse than a 15% drawdown and now you are 30% in the hole. Or even worse, if you really had no idea what to expect in terms of drawdowns in stock market when you started out, and you suddenly find yourself deep in the hole in stock market. Under such circumstances it can become almost impossible to maintain confidence in your approach.
Following the steps in Section Two can give you some idea
as to what you can realistically expect from your trading approach, both in terms of profitability and drawdown as a percentage of your trading capital. By properly sizing your trading account you take an important step toward minimizing your risk even bef
]]> http://marketingsource.com/articles/book-promotions/finance/risk-control-method-no-1-in-stock-market.html http://marketingsource.com/articles/book-promotions/finance/risk-control-method-no-1-in-stock-market.html Fri, 20 Aug 2010 03:40:36 -0500
Generally, when starting out it is best to settle on one type of trading approach and to focus your efforts there. As Traders progress and as their account equity grows, it Makes a great
deal of sense to consider trading using more Than one method. Be aware that you need to have a Certain level of experience and expertise in order to apply This approach, since the complexity level rises also. The primary purpose of using multiple trading methods is To attempt to smooth out the equity fluctuations in your Account. What you hope to accomplish is to apply a second Method which will, in highly technical terms, “zig” while Your other method “zags.”

Ideally, while one method is experiencing a drawdown, the other method will be generating profits to offset all or at least part of those Losses.

The first step is to develop a second trading method that Has a realistic probability of making money in the long run In its own right in stock market. There is no point in diversifying into a
Method that is going to be a drain on your trading capital simply for the sake of diversification. To understand the potential benefits of trading in different time frames, consider the following example of a trader using both a short-term trend-following method and a long term trend-following method to trade two contracts of each market in a diversified portfolio. Each system uses some method to identify the current market “trend.” However, one system is looking at the short-term trend in stock market while the other is looking at the long-term trend in stock market.

For example, one system might use a 10-day moving average of prices to identify the trend and the other system may use a 100-day moving average. At times the two systems will be “In sync.”However, because the two systems are looking at the Same market in two different ways, at other times one method will say the trend is “up” and the other system will say the trend is “down,” or perhaps “neutral.” So if the trader trades one contract of a given market based on each system, the possibilities are as follows:

Short-Term Trend Long-Term Trend Net Position
UP UP Long 2
UP NEUTRAL Long 1
UP D O W N Flat
NEUTRAL UP Long 1
NEUTRAL NEUTRAL Flat
NEUTRAL D O W N Short 1
D O W N UP Flat
D O W N NEUTRAL Short 1
D O W N D O W N Short 2

Note the effect of various stock market conditions on the positions held by this trader. The best situation for a trend-follower is for a strong trend to develop—no surprise there. If the short-term and long-term trends in stock market are both up or both down, the trader will have his maximum long or short position of long two or short two contracts. Under any other circumstance this trader will have either a reduced position, long one or short one, or no position at all. If the two trends are not “in sync,” or if they are both neutral, the trader will have no position, i.e. no exposure in the stock market place. This makes perfect intuitive sense. If the trends are not in sync or if both are neutral, why would a trend-follower want a large exposure in the stock market place anyway?
This is only one example of how trading time frames and methods can be combined in stock market. Other examples might be to combine a trend-following approach with a counter-trend approach, or a technical approach with a fundamental approach, etc. Assuming both approaches have positive expectations, the combined equity curve may be far less volatile than either one would be if traded separately.
]]>